Unilever PLC yesterday said that surging commodity costs would squeeze its full-year operating margin, overshadowing strong second-quarter sales growth fueled by the easing of COVID-19 pandemic-related curbs in many of its markets.
Underlying sales for the maker of Dove soap maker rose 5 percent in the three months ended June 30, beating analysts’ average forecast of 4.8 percent. However, 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, and flag greater uncertainty surrounding that forecast.
The warning dragged shares of the FTSE 100-listed company down 4.4 percent by 8:30am, wiping off nearly ￡5 billion (US$6.87 billion) of its market value, and making it the top loser on the index in morning trading.
“This is slightly disappointing, as they had been confident of passing through cost inflation at the first quarter stage,” Investec analyst Alicia Forry said. “Now they change their tune... This margin issue will overshadow the strong underlying performance in H1.”
First-half sales rose 5.4 percent, a touch above the 5.3 percent forecast, propelled by 8.1 percent 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 by a double-digit percentage, with consumption also strong in markets like China and India.
Sales of teas, including Lipton and PG Tips, also drove strong volume growth.
“We believe full-year outlook will land well within the 3-5 percent growth range,” chief financial officer Graeme Pitkethly said on a media call.
However, he played down expectations for margin growth, blaming higher logistics and first-half increases in palm oil prices that squeezed margins in its beauty and personal care unit, and petrochemicals used in manufacturing its home care brands ,including Lifebuoy soaps and Omo detergents.
CEO Alan Jope said the uncertainty around commodity costs and when it might see the benefits of increased prices for its products created “a higher than normal range of likely year-end margin outcomes.”
Unilever did not comment about a controversy over its US subsidiary Ben & Jerry’s move to end ice cream sales in occupied Palestinian territories that has caused a backlash against the brand in Israel.
The ￡112 billion company is not the first to flag margin pressures.
Unilever added that it had completed the review of its tea business, and anticipates either an initial public offering, sale or partnership before the end of October.
Underlying earnings per share came in at 1.33 euros, while turnover was 25.8 billion euros (US$30.4 billion) for the first half, both ahead of estimates.
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