Unilever has posted robust first-half figures after benefitting from the easing of pandemic-related restrictions in many of its key markets. However, the consumer foods giant warned that surging commodity costs would squeeze its full-year operating margin.
During the first six months of the year, Unilever’s underlying sales grew 5.4% to €25.8bn, with 4.0% volume and 1.3% price. During the second-quarter period, growth was 5%, ahead of the 4.8% forecast by analysts.
The group’s performance over the half-year was driven by its Foods & Refreshment division, which saw underlying sales growth of 8.1%. Despite increased demand for its products sold in supermarkets, the unit recorded a rise of just 1.3% during 2020 due to weakness in its food solutions and out-of-home ice cream businesses which were impacted by the shutdown of the hospitality sector.
Unilever highlighted that in Europe, sales of ice-cream eaten out-of-home grew at double-digits during the latest period as trading conditions started to return to normal. However, it stressed that sales were not back to pre-Covid levels. The group also saw strong consumption in markets like China and India, with improved performance in food solutions and low single digit growth in at-home foods despite lapping the spike in demand in the prior year.
Unilever’s Beauty & Personal Care unit saw underlying sales grow 3.3%, with an acceleration to 4.2% in the second quarter after people increased their consumption of personal care products as they began to socialise again.
In the Home Care division, sales rose 4.5% after an improvement in demand for fabric cleaning products in emerging markets and new product developments. However, sales of household cleaners declined as the business lapped a prior year spike when people were focused on hygiene at the height of the pandemic.
Meanwhile, Unilever’s underlying operating margin slipped 100bps to 18.8%. It said this was driven by investment behind in its brands and input cost inflation.
With the rising cost of logistics, packaging, and raw materials used in its products such as palm oil, the company today cut its operating margin outlook to “around flat” from slightly up earlier and flagged greater uncertainty surrounding that forecast.
“We have seen further cost inflation emerge through the second quarter. Cost volatility and the timing of landing price actions create a higher than normal range of likely year-end margin outcomes,” said Chief Executive Alan Jope.
Graeme Pitkethly, the group’s CFO added: “We came into the year expecting inflation obviously – we thought it was going to be at levels we had last seen in 2011 or even 2018, and we’re really focused on our pricing actions, which we think are landing well. But inflation has been even higher than we anticipated.”
The warning dragged Unilever’s share price down by over 5% this morning, wiping off around £5bn of its market value.
“This is slightly disappointing, as they had been confident of passing through cost inflation at the first-quarter stage,” said Investec analyst Alicia Forry.
“Now they change their tune … This margin issue will overshadow the strong underlying performance in H1.”
Unilever had previously targeted an operating margin of 20%, but Pitkethly said it was no longer aiming for this figure after coming close to it last year, instead simply seeking to increase profits faster than sales.
Meanwhile, Jope stressed that the business was making good progress against the strategic plans outlined earlier this year, including the development of its portfolio into high growth areas. Its Prestige Beauty and Functional Nutrition activities “grew strongly” and it recently announced the acquisition of DTC skincare brand Paula’s Choice. He highlighted that Unilever’s e-commerce business had grown 50% and the channel now represents 11% of group sales.
The company also said today that it had completed the review of its £2bn tea business, and anticipates either an IPO, sale or partnership before the end of October 2021.
