Unilever Warns Of Inflation Hit Even As It Backtracks On M&A

Unilever is unable to raise prices for its products enough to offset the rise in its expenses and as such was forced to issue a warning of a dip in profits this year. This announcement caused investors to get worried again following a failed deal for GlaxoSmithKline’s consumer health unit last month.

Commodity, energy, transportation, and labor prices have all risen, putting pressure on consumer products companies. Unilever is particularly vulnerable due to its reliance on emerging markets and food, both of which are experiencing rising inflation.

In 2021, the creator of Dove soap and Ben and Jerry’s ice cream increased underlying pricing by 2.9 per cent, with a 4.9 per cent increase in the fourth quarter. With sales volumes remaining steady in the fourth quarter, this helped to relieve pressure on margins.

Despite its plans for additional price rises, the firm cautioned that underlying operating margins would decrease by 140-240 basis points this year, after falling by only 10 basis points in 2021.

Finance head Graeme Pitkethly stated that inflation would cost the company more than 2 billion euros ($2.3 billion) in the first half of 2022, before reducing to around 1.5 billion euros in the second half.

The magnitude of the expected margin reduction startled Bernstein analyst Bruno Monteyne.

“Is this the major margin reset we have argued for? Or does it only cover the commodity costs? If it is all about covering the higher commodity costs, what happened to pricing power?” he said.

“If there really is so little pricing power, what does that say about the long-term future?”

The firm stated that the decline in margins was also attributable to investments in advertising, R&D, and operational capital expenditure and that it expected them to be “restored after 2022, with the majority returning in 2023 and the remainder in 2024.”

Unilever has recently underperformed rivals such as Procter & Gamble and Nestle, prompting some investors to question its surprising 50 billion pounds ($68 billion) bid for GlaxoSmithKline’s (GSK) consumer health sector last month. Critics argued that it was a risky and expensive approach at a time when Unilever ought to be concentrating on performance improvement.

“We have engaged extensively with our shareholders in recent weeks and received a strong message that the evolution of our portfolio needs to be measured,” Chief Executive Alan Jope said, ruing out major deals for the foreseeable future.

“There was a moment in time where we felt, and still feel, that a transaction around GSK’s consumer health business would have created value for Unilever,” Jope said. It would have helped “accelerate that course into health and wellbeing for our company,” he added.

Instead, the Hellmann’s mayonnaise to Sunsilk shampoo company announced plans to repurchase up to 3 billion euros in shares over the next two years.

“The buyback reassures that they are committed to shareholder returns but, on the negative side, they see fewer investment opportunities within their own business,” said Waverton Investment Management’s Tineke Frikkee, whose fund invests in Unilever.

“The pressure on Jope and the board is already quite high,” she added.

Soon after GSK’s bid was rejected, it was revealed that activist investor Nelson Peltz’s Trian Partners had amassed a position in Unilever. Trian has not responded to the reports.

Unilever announced a corporate restructuring in late January that will focus on five product sectors and result in 1,500 management job losses.

“The 3 billion euro buyback isn’t that big. The proceeds for selling their tea business were 4.5 billion euros, so they’re not even giving back the full proceeds from that money coming in,” Barclays analyst Warren Ackerman said.

“But, certainly, I think the signal is the right one, and they have listened to shareholders on the acquisitions.”

(Adapted from USNews.com)

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