Unilever margins in spotlight as inflation surges

3 minute read

The logo of Unilever is seen at the company's office in Rotterdam, Netherlands August 21, 2018. REUTERS/Piroschka van de Wouw/File Photo

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  • Q3 results due Thursday, Oct. 21
  • Q3 underlying sales seen up 2.2% - company poll
  • Focus on margin guidance as input costs soar

Oct 20 (Reuters) - Unilever's (ULVR.L) battle with rising costs will take centre stage at its third-quarter results on Thursday, with investors focused on whether the consumer goods giant will cut its profit margin forecast for the second time this year.

Crude oil prices hit three-year highs on Monday, vegetable oil prices are at multi-year highs, and packaging, transport and labour costs are also rising as economies recover from the pandemic - a headache for central bankers and companies alike.

Tide detergent maker Procter & Gamble (P&G) (PG.N) on Tuesday hiked its full-year forecast for commodity and freight costs by about $400 million, or more than 20%. read more

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Analysts warn Unilever could be particularly exposed because, unlike household goods specialist P&G, it also has a big food business selling products including Knorr soups, Magnum ice-cream and Hellmann's mayonnaise.

That means exposure to edible oils, milk and crude derivatives, such as caustic soda (used in making ice-cream), whose prices have also surged over the past three months.

Unilever also makes about 60% of its turnover in emerging markets, where inflation is fiercest.

"Since the second quarter, inflation has continued to creep up and another (margin) revision is possible," Barclays analyst Warren Ackerman wrote in a note.

In July, Unilever cut its operating margin forecast to "about flat" from "slightly up." read more

In contrast, packaged food rival Nestle (NESN.S) kept its full-year operating margin guidance on Wednesday, helped by strong coffee sales and price hikes. read more

Analysts expect Unilever to report a 0.2 percentage point drop in full-year underlying operating margins, according to a company-supplied consensus. That margin was 18.5% in 2020.

Unilever has tried to offset costs by raising average prices by 2.2%, but Ackerman said that was hard in places like South East Asia where pandemic-hit consumers are switching to cheaper brands and local competition is tough.

JPMorgan Cazenove analysts estimate Unilever may need to raise prices by as much as 13% over the next two years to offset raw material and packaging pressures, which they say could reach 16% this year, at constant currencies and including hedging.

Packaging and raw materials represent about 70% of Unilever's total annual cost of goods of about 23 billion euros ($26.7 billion). A 15% increase translates to about 3.5 billion euros in additional costs.

Despite the pressures, Unilever said in July it was confident of delivering full-year underlying sales growth within its mid-term target range of 3-5%. read more

Some analysts are less bullish, though, saying recent lockdowns in Indonesia, Vietnam and Thailand will have curbed spending. Jefferies cut its third-quarter underlying sales growth forecast to 2.1% from 3.7%. Analysts on average expect a 2.2% rise.

There are other potential catalysts for Unilever's shares, as it works to sell a big part of its 2 billion euro tea business and is also reportedly in the sights of a top activist investor.

But for now, the attention is on whether it can transfer rising costs onto customers.

"The shares have been weak, suggesting the market does not think Unilever can pass them all on and that therefore the margin is at risk," said Tineke Frikkee, head of UK Equity research at Unilever shareholder Waverton Investment Management.

($1 = 0.8608 euros)

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Reporting by Siddharth Cavale in Bengaluru Editing by Mark Potter

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