2nd UPDATE: Unilever Profit Up But Commodity Prices Hit Margins
03 Februar 2011 - 12:04PM
Dow Jones News
Unilever PLC (UN, UL), the world's third-largest maker of
branded household products, Thursday posted a jump in profits
driven by sales and volume gains in emerging markets, but warned
mature economies remain sluggish and escalating commodity prices
are putting pressure on margins.
The Anglo-Dutch maker of Ben & Jerry's ice cream, Knorr soup
and Bertolli olive oil spreads and household products such as Dove,
Lynx and Cif is stepping up its investment in the face of
intensified competition to build its brands in developing
economies, where it records over 50% of its revenues, such as Asia,
Africa, Latin America and the Middle East.
Still, the company--which sells goods in 170 countries and
competes with U.S.-based market leader Procter & Gamble Co.
(PG) and Switzerland's Nestle SA (NESN.VX)--is facing rising
commodity costs and a challenging consumer outlook in its developed
markets, where discretionary income is under pressure from
austerity measures such as tax hikes and public spending cuts as
governments rein in borrowing.
"Emerging markets really is the motor of growth and this will be
the same going forward. (However), developed markets remain
sluggish. We do not expect a rapid recovery in either the U.S. or
Western Europe in the short term," said Chief Financial Officer
Jean-Marc Huet.
Unilever's fourth-quarter net profit increased 15% to EUR995
million, or EUR1.04 billion including non-controlling interests, as
underlying sales growth--which strip out acquisitions, disposals
and currency movements--accelerated to 5.1% year-on-year. This
measure of sales, which compares with a rise of 1.8% in the same
period last year and a 3.6% increase in the previous three months,
is closely watched as a directly comparable measure of how the
company's products are selling.
However, the company's underlying operating margin in the
quarter was down 20 basis points, hit by soaring costs as prices
for commodities such as palm oil, wheat, soy beans and corn
continued to rise. Fourth-quarter pricing rose as the consumer good
giant tried to pass on higher costs to customers, while it shrank
advertising and promotional spend and plans a further EUR1 billion
of supply chain savings this year.
"We see this trend of rising commodity costs accelerating
sharply this year, as we have seen in the fourth quarter. (The
second half of the year) becomes less clear (than the first six
months). The markets are more volatile today," said Huet, adding
that higher commodity prices are expected to affect margins by 400
basis points in 2011.
Chief Executive Paul Polman also warned consumers, "We expect
prices to be comfortably higher in 2011."
Still, Polman said Unilever has no plans to protect margins by
reducing the size of its products. His comments were made in
response to reports that rival Kraft Foods Inc. (KFT) has cut the
size of its Cadbury Dairy Milk chocolate bar in the U.K. due to
rising ingredient costs.
Last week, U.S. rival P&G stuck by its financial targets,
but said its commodities bill will cost $1 billion for the fiscal
year that ends in June, more than double what it had expected.
Unilever's total sales in the quarter rose 12% to EUR10.82
billion compared with a year earlier. Group underlying volumes in
the quarter rose 5.1%, up from 5% growth recorded in the same
period last year and a 4.8% increase in the third quarter.
At 1010 GMT, Unilever shares were up 7 pence, or 0.4%, at 1864
pence, while the FTSE 100 Index was down 0.3%. Analysts said while
the numbers impressed investors, the company faces major headwinds.
"With Unilever struggling for margin in the face of what we think
are only the foothills of input cost inflation, we expect even
bigger challenges when it faces the peaks to come," Investec
Securities analyst Martin Deboo said.
Underlying sales in Western Europe rose 1.1%, affected by the
tough economic climate with markets in Southern Europe remaining
difficult.
By contrast, sales rose 8.5% in Asia, Africa and Central and
Eastern Europe on 8.8% volume growth, while the top line in the
Americas rose 4.6%, driven by a strong performance in Latin
America.
The group reiterated its guidance of profitable volume growth
ahead of its markets, steady and sustainable underlying operating
margin improvement and strong cash flow.
By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410;
simon.zekaria@dowjones.com
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