UN Unilever NV

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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