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Unilever Posts Strong Q2 But Warns Full Year Margins To Be Squeezed by Surging Commodity Costs

The warning dragged shares of the FTSE 100-listed company down 4.4% Thursday.

Image source: Unilever Half Year 2021 Results presentation, July 22, 2021

By Siddharth Cavale

Unilever Plc warned on Thursday that surging commodity costs would squeeze its full-year operating margin, overshadowing strong second-quarter sales growth fueled by the easing of pandemic-related curbs in many of its markets.

Underlying sales for the maker of Dove soap maker rose 5% in the three months ended June 30, above 4.8% forecast by analysts. 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 earlier and flag greater uncertainty surrounding that forecast.

The warning dragged shares of the FTSE 100-listed company down 4.4% by 0830 GMT, wiping off nearly 5 billion pounds ($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."

Half-year sales rose 5.4%, a touch above the 5.3% forecast, propelled by 8.1% 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 at double-digits, with strong consumption also 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% growth range," Chief Financial Officer Graeme Pitkethly said on a media call.

Image source: Unilever Half Year 2021 Results presentation, July 22, 2021


He played down, however, expectations for margin growth, blaming higher logistics and first half increases in palm oil prices that squeezed margins in its Beauty & Personal Care unit and petrochemicals used in manufacturing its Home Care brands including Lifebuoy soaps and Omo detergents.

Chief Executive 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 U.S. 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 pound ($153.93 billion) company is not the first to flag margin pressures.

On Tuesday, mixer maker Fever-Tree warned of rising transportation and warehousing costs biting into full-year margins while food company ConAgra said earlier this month that commodity costs would dent its profit more than previously estimated.

Unilever also said it had completed the review of its tea business, and anticipates either an initial public offering, sale or partnership before the end of October 2021.

Underlying earnings per share came in at 1.33 euros while turnover was 25.8 billion euros ($30.44 billion) for the first half, both ahead of estimates.

($1 = 0.8476 euros)

($1 = 0.7276 pounds)

Reporting by Siddharth Cavale and Indranil Sarkar in Bengaluru; Editing by Tomasz Janowski and Keith Weir.


Source: Reuters

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