UN Unilever NV

Unilever PLC (UN, UL) Thursday posted a rise in sales driven by volume and pricing gains in emerging markets, but the world's third-largest maker of branded household products warned that mature economies remain sluggish and first-half profitability will drop as escalating commodity prices put greater-than-expected 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, the Middle East and Eastern Europe.

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 both rising input 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.

The commodity markets remain "volatile", the group cautioned, led by the soaring cost of crude oil which has doubled in price over the last year. It is also feeling the effect of rising prices of vegetable oil, palm oil, wheat, soy beans, corn, plastics and petrochemicals.

Unilever now expects the impact of commodity cost inflation to be around 500-550 basis points of sales in 2011, up from 400 basis points reported in February.

The company said its underlying operating margin is set to fall in the first half, as price increases lag costs, before improving in the second half. "This year is a volatile one. We don't know where the markets [will go], but we will continue to support our brands," said Chief Financial Officer Jean-Marc Huet.

At 0829 GMT, Unilever shares were down 54 pence, or 2.7%, at 1936 pence, the second-biggest faller on the FTSE 100. The update was "uninspiring," Espírito Santo Investment Bank analysts said. "We were hoping for something a bit better."

Unilever said first-quarter underlying sales growth, which strips out acquisitions, disposals and currency movements, rose to 4.3% year-on-year. This measure of sales, which compares with a rise of 4.1% in the same period last year and a 5.1% increase in the previous three months, is closely watched as a directly comparable measure of how the company's products are selling. Unilever's total sales in the quarter rose 7% to EUR10.9 billion compared with a year earlier.

Group underlying volumes in the quarter rose 2.5%, down from 7.6% growth recorded in the same period last year and a 5.1% increase in the fourth quarter. First-quarter pricing rose 1.8% as the consumer goods giant tried to pass on higher costs to customers.

"We have continued to deliver volume growth, albeit at a lower rate than in recent quarters reflecting the pricing action taken and the sluggishness of the developed markets," Chief Executive Paul Polman said.

The company said it has accelerated its cost reduction programmes and expects full-year savings to be around EUR1.3 billion.

It reiterated its guidance of profitable volume growth ahead of its markets, steady and sustainable underlying operating margin improvement and strong cash flow. It declared a dividend up 8.2% year-on-year to EUR0.23

-By Simon Zekaria, Dow Jones Newswires; +44 207 842-9410; simon.zekaria@dowjones.com

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