Essity Earnings: Solid Progress on Restoring Profitability

No-moat Essity ESSITY B delivered solid third-quarter results, including a substantial sequential improvement in EBITA margin to 12.2% from 10.7%. This is the fourth consecutive quarter of margin improvement, with Essity well on track to reach pre-inflation margin levels and even surpass them as it leaves behind the peaks in input cost inflation and continues to engage in methodical portfolio management. Organic sales growth in the quarter tracked our forecast, but net sales continued to benefit from a significant currency tailwind as a result of the weak Swedish krona. Incorporating the third-quarter results into our model and increasing our 2023 adjusted operating margin forecast to 11.2% from 10.6% leads us to increase our fair value estimate to SEK 280 per share from SEK 260.

The significant year-on-year operating margin improvement was driven by the gross margin line due to higher prices, lower raw materials, energy, and distribution costs, mix management, and cost savings. The professional hygiene and the health and medical segments saw the largest operating margin improvement of around 600 basis points year over year. This was supported by portfolio measures that saw Essity restructuring the professional hygiene segment and exiting unprofitable contracts in different areas of the business on top of the aforementioned gross profit drivers.

The 6.9% price/mix and negative 3.1% volume contribution to net sales growth tracked our expectations, although with a slightly different segment breakdown. Pricing growth decelerated substantially in the consumer goods segment (4.6% in the third quarter compared with 13.6% in the first half) as cost inflation no longer justified taking further pricing actions in a difficult competitive environment with cash-strapped consumers. The other segments continued to see a solid price/mix contribution, mainly as a result of carryover from previous quarters, of around 10% on average.