UN Unilever NV

Consumer-goods giant Unilever PLC (UN,UL) Thursday beat expectations with its first-quarter sales, volumes and margins, but warned investors not to get carried away as there is still a tough year ahead.

The Anglo-Dutch company said sales before acquisitions, disposals and currency movements grew 4.1% in the first three months of the year, ahead of expectations of 3.5%, and up from a 1.8% rise the previous quarter.

This figure is closely watched because it's a directly comparable measure of how the company's products are selling.

"We show strong momentum across all geographies with continued strengthening of our competitive position," said Chief Executive Paul Polman.

The maker of Ben & Jerry's ice cream, Dove soap and Lynx deodorant said the first-quarter sales increase was driven by a 7.6% rise in volumes with prices down 3.3%.

Shore Capital analyst Clive Black described the update as "fabulous" and "very reassuring." Volume growth was very strong, he said and "of the highest quality we can expect." On a conference call with analysts however, Polman warned against reading too much into the positive update. "We continue to believe the recovery will be long and drawn out," he said.

Huge amounts of deleveraging were needed in the developed world, which will likely limit consumer spending for some time, he said, while developing markets have returned to growth but not at 2007 levels.

"We do not expect the environment to get better and we do expect competition to get tougher," he said, "so please don't run ahead of yourself."

"Don't smoke too much pot, and stay realistic," the Dutch CEO added.

All the same, the market welcomed the update and by 0821 GMT, Unilever's shares were up 65 pence, or 3.4% at 1981 pence.

Volume growth has been Polman's top priority since taking the helm in January 2009. Consumer goods companies always have to strike a balance between volumes and prices when driving sales and profits. Prior to Polman's arrival, Unilever was criticized for allowing volumes to slip as it aggressively raised prices.

Polman said prices would begin rising again, but only at the end of 2010 as the competitive environment toughened.

He said he would have liked to have seen some price rises in the quarter but that increased competitive activity, particularly in emerging markets, had limited Unilever's ability to raise prices.

He said that in the longer term, Unilever could beat new entrants in emerging markets."Battles over time are won by branding and innovations," he said, "we know how to deal with it."

Unilever's operating margin was up 0.6 percentage points in the period to 15.2%, helped by the sharp drop in commodity prices in the past year, which has allowed Unilever to increase investment in marketing while still growing sales and margins. Polman said commodity costs would be broadly neutral in the second quarter but would begin to rise again in the second half. He said the group's full-year guidance for a 2%-3% commodity cost increase would remain unchanged.

Shore's Black said the commodity cost outlook and the warnings of sluggish economic activity were "all factors to keep our feet on the ground."

Total sales grew to EUR10.14 billion from EUR9.51 billion while net profit was EUR973 million, up from EUR731 million.

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@dowjones.com

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