Inflation fears hover over Unilever’s strong start to year
Unilever Plc. warned on Thursday that surging commodity costs would squeeze its full-year operating margin, overshadowing strong second-quarter sales growth fueled by the easing of pandemic-related curbs in many of its markets.
Underlying sales for the maker of Dove soap rose 5% in the three months ending on June 30, above the 4.8% forecast by analysts.
It maintained its 3-5% sales growth forecast for the year, but rising prices of everything from crude to palm and soybean oil made the company cut its operating margin outlook to “about flat” from “slightly up” earlier and flag greater uncertainty surrounding that forecast.
The warning dragged shares of the FTSE 100-listed company down 6.2% by 1:45 p.m. GMT, wiping off nearly £7 billion ($9.65 billion) of its market value, and making it the top loser on the index on Thursday.
CFO Graeme Pitkethly said he expected cost inflation to be in the high-teens in the second half, above the mid-teens rise anticipated earlier.
He said that since the company issued its guidance in the first quarter, crude oil prices had risen 12%, soybean oil 21%; while freight and transportation costs had risen 4% and 7%, respectively.
Unilever said that besides accelerating price hikes, it was introducing pack changes and narrowing promotions in the second half in response to rising costs.
The company raised prices by 1.6% in the second quarter. In June those were up to 2.2%
“It is that eternal triangle of the competitiveness of our growth... landing the pricing and managing the cost inflation,” Pitkethly said.
CEO Alan Jope said the lag between the impact of commodity costs and the benefits of increased product prices had created “a higher than normal range of likely year end margin outcomes.”
Investec analyst Alicia Forry called the message on costs slightly disappointing.
“They had been confident of passing through cost inflation at the first quarter stage... now they change their tune.”
Half-year sales rose 5.4%, a touch above the 5.3% forecast, propelled by 8.1% growth in its Foods and Refreshment division, as living restrictions began to ease in many markets.
In Europe, sales of ice cream eaten out of home grew at double-digits, boosted by markets like Italy where its new Magnum lines honoring Dante – Inferno, Purgatorio and Paradiso – sold well. Sales of teas also saw strong volume growth.
Jope also said the company was “fully committed to staying in Israel” after the company was embroiled in a controversy earlier this week over its US subsidiary Ben & Jerry’s move to end ice cream sales in “Occupied Palestinian Territory” which caused a backlash against the brand in Israel. (Reuters)