👀 Ones to watch: Undervalued stocks to buy before they report Q3 earningsSee Undervalued Stocks

Inflation turns up heat on Unilever even as it backs down on M&A

Published 02/10/2022, 02:44 AM
Updated 02/10/2022, 08:11 AM
© Reuters. FILE PHOTO: Unilever logo is displayed in this illustration taken on January 17, 2022. REUTERS/Dado Ruvic/Illustration
BARC
-
PG
-
GSK
-
UL
-

By Richa Naidu

LONDON (Reuters) -Unilever warned of a hit to profitability this year as it struggles to lift prices enough to offset soaring costs, sparking fresh concern among investors after a failed bid for GlaxoSmithKline (NYSE:GSK)'s consumer health business last month.

Consumer goods companies are grappling with a surge in commodities, energy, transport and labour costs. Unilever (NYSE:UL) is particularly exposed because of its reliance on emerging markets and food - where inflation is especially high.

The maker of Dove soap and Ben and Jerry's ice cream raised underlying prices by 2.9% in 2021, including a 4.9% jump in the fourth quarter. That helped ease the pressure on margins, with sales volumes staying flat in the final quarter.

However, the company warned that, despite planning more price increases, it expected underlying operating margins to drop by 140-240 basis points this year, following just a 10 basis point fall in 2021.

Finance chief Graeme Pitkethly said it faced a 2 billion euros-plus ($2.3 billion) hit from inflation in the first half of 2022, falling to about 1.5 billion euros in the second half.

Bernstein analyst Bruno Monteyne was surprised by the scale of the forecast decline in margins.

"Is this the major margin reset we have argued for? Or does it only cover the commodity costs? If it is all about covering the higher commodity costs, what happened to pricing power?" he said.

"If there really is so little pricing power, what does that say about the long term future?"

Unilever's shares were down 1.3% at 1230 GMT.

The company said the fall in margins was also due to investments in advertising, R&D and operational capital expenditure and that it expected them to be "restored after 2022, with the bulk coming back in 2023 and the rest in 2024."

LISTENING TO INVESTORS

Unilever has recently lagged rivals such as Procter & Gamble (NYSE:PG) and Nestle, raising questions among some investors when it made a surprise 50 billion pound ($68 billion) bid for GlaxoSmithKline's (GSK) consumer health arm last month. Critics said it was a risky and costly bid at a time when Unilever should be focusing on improving performance.

"We have engaged extensively with our shareholders in recent weeks and received a strong message that the evolution of our portfolio needs to be measured," Chief Executive Alan Jope said, ruing out major deals for the foreseeable future.

"There was a moment in time where we felt, and still feel, that a transaction around GSK's consumer health business would have created value for Unilever," Jope said. It would have helped "accelerate that course into health and wellbeing for our company," he added.

Instead, the Hellmann's mayonnaise to Sunsilk shampoo firm said it would buy back up to 3 billion euros of shares over the next two years.

"The buyback reassures that they are committed to shareholder returns but, on the negative side, they see fewer investment opportunities within their own business," said Waverton Investment Management's Tineke Frikkee, whose fund invests in Unilever.

"The pressure on Jope and the board is already quite high," she added.

Shortly after the spurned approach to GSK, it was reported that https://www.reuters.com/business/finance/activist-hedge-fund-trian-builds-stake-unilever-ft-2022-01-23 activist investor Nelson Peltz's Trian Partners had built a stake in Unilever. Trian has not commented on the reports.

In late January, Unilever announced https://www.reuters.com/business/retail-consumer/unilever-cut-1500-management-jobs-strategic-overhaul-2022-01-25 a business revamp to focus on five product areas and 1,500 management job cuts.

"The 3 billion euro buyback isn't that big. The proceeds for selling their tea business were 4.5 billion euros, so they're not even giving back the full proceeds from that money coming in," Barclays (LON:BARC) analyst Warren Ackerman said.

"But, certainly, I think the signal is the right one, and they have listened to shareholders on the acquisitions."

Jope said the company remained "absolutely resolved" to move its portfolio towards the beauty, health and well-being product categories. "But I would say we're more patient on how we get there. Bolt-ons remain part of the strategy," he told analysts.

Unilever reported a 4.9% rise in fourth-quarter underlying sales, driven by higher prices, beating analysts' mean forecast for 3.8% growth in a company poll.

For the whole of 2021, underlying sales growth was 4.5%, the strongest for nine years. The company forecast growth of 4.5-6.5% this year.

© Reuters. FILE PHOTO: Unilever logo is displayed in this illustration taken on January 17, 2022. REUTERS/Dado Ruvic/Illustration

($1 = 0.8755 euros)

($1 = 0.7370 pounds)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.