Soaring commodity prices put Unilever’s margins in the spotlight


(Reuters) – Unilever’s first-half results should give a sign of how the consumer goods giant is dealing with soaring commodity and transportation costs – if it has managed to raise prices without affect sales volumes, or if margins are squeezed.

FILE PHOTO: The Unilever logo can be seen at the head office in Rotterdam, the Netherlands, August 21, 2018. REUTERS / Piroschka van de Wouw / File Photo

But Thursday’s results will also compete for attention with an ongoing dispute over the decision by American ice cream brand Ben & Jerry’s to stop marketing its products in the Occupied Palestinian Territories – a move that has sparked a backlash in Israel.

Analysts expect soap and mayonnaise maker Hellmann’s to report a 1.2 percentage point drop in its underlying operating margins from a year ago, according to a consensus provided by the society. Pantry storage and an increase in in-home meals during pandemic shutdowns last year allowed Unilever to cut back on in-store marketing and promotions, increasing margins. But soaring commodity costs for everything from plastics to tea and nuts in the first half of 2021, has put a question mark on its annual goal of increasing margins “slightly” from last year. .

The company said underlying operating margins of 18.5% in 2020. Jefferies analyst Martin Deboo expects Unilever’s raw material costs to rise 9.8% at first half year, up from its initial forecast of 7.4%, mainly due to higher prices for plastics, ethylene oxide and palm oils used in the manufacturing and packaging of its products. beauty and personal care. Raw material and packaging costs account for 40% of Unilever’s overall sales.

“We continue to view 2021 as the year of the biggest cost challenge for the industry since 2011,” said Deboo. As Unilever raised prices by 1% in the first quarter, in areas such as tea and high-inflation Latin American countries, analysts say the impact is only expected to be felt later this year. , leaving it with a heavy raw material bill in the first half of the year.

Unilever is expected to raise prices further, but its first hikes are already weakening sales volumes in countries like Brazil, Morgan Stanley analysts noted in a research report earlier this month. Emerging markets, including Brazil, India and China, represent 60% of the group’s sales. “Although these higher input costs are known, the exact real impact on margins will have been difficult to estimate, which represents an additional risk to future results, not only for the impact of this quarter, but also for what it means for the second half of the year, ”said Tineke Frikkee, head of UK equity research at Unilever shareholder Waverton Investment Management.

Despite the pressures, Unilever said in April that it was confident it would generate year-round underlying sales growth within its medium-term target range of 3-5%, with the first half of the year around the top of the range.

Some analysts are less optimistic, however, citing reduced consumption of ice cream outside the home due to a cold April and a humid May in northern Europe.

Before the pandemic, take-out ice cream sales accounted for 8% of the group’s total, much of it in the second quarter.

(Graphics: Unilever’s assessment lags behind most of its peers 🙂

FUNDAMENTALS

* Analysts forecast Unilever’s second-quarter revenue to grow 0.6% to € 13.38 billion ($ 15.77 billion), with underlying sales growth of 4, 8%, according to estimates provided by the company.

* H1 operating income per share is estimated at 1.24 euros, down 8.8% over one year.

* Underlying operating margins for the first half of the year were 18.6%, down 1.2 percentage points.

* Unilever shares have lost 1.6% year-to-date, while the UK benchmark FTSE 100 has gained 6.5%.

* The stock, which rose 1% in 2020, is the weakest among consumer packaged goods stocks, including Nestlé and Procter & Gamble, this year.

* 12 out of 21 analysts rate the stock “buy” or similar, while three rate it as “hold” and six rate it as “sell” or similar.

* The median price target is 48 pounds from Tuesday’s close of 43.2 pounds.

($ 1 = € 0.8487)

Additional reporting by Indranil Sarkar in Bangalore; Editing by Mark Potter

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