Unilever LSE:ULVR, the London-based consumer goods company, is a bit like Marmite to some – you either love it, or hate it.
The multinational manufacturer of Hellman’s mayonnaise, Magnum ice-cream and Dove soap, as well as hundreds of other household brands, published its 1H22 results today (26th July) and saw revenue grow 8.1% in the first half of 2022 to top GBP 25bn, ahead of previous guidance, while profit margins dropped 180 basis points to 17%. Rising input costs weighed on margins, but higher sales meant underlying operating profit grew 4.1%.
A fall in the volume of goods sold was offset by 9.8% product price growth. Growth was entirely driven by an increase in pricing, as volumes declined 1.8%.
It is this increase in pricing which has divided opinion amongst analysts.
Charlie Huggins, head of equities for Wealth Club, said: “Today’s results from Unilever, look ok under the circumstances. Inflation remains very high, and this is putting pressure on input costs. In response, Unilever has continued to raise prices which inevitably is having an impact on volumes. In fact, volumes fell across every category and region in the second quarter.”
Inflation and growth worries
“Unilever has delivered a first-half performance which builds on our momentum of 2021 despite the challenges of high inflation and slower global growth,” said chief executive Alan Jope.
The company has been trying to push rising costs driven by inflation onto consumers worldwide. However, Matt Britzman, equity analyst for Hargreaves Lansdown, thought: “There’s a limit to how much someone will pay for a Magnum, and we’ve heard from supermarkets that shoppers are now starting to slide down the value chain in an attempt to keep shopping lists intact.”
“Juggling higher prices and weaker consumers is a tough act to nail, so far Unilever looks to be doing a decent job and if restructuring savings of around EUR600m can materialise, that’ll take some pressure off,” Britzman said.
Sales guidance for the full year has been raised, now expected above the previous range of 4.5% to 6.5%. Underlying operating margin guidance remains at 16%, within the previous range of 16% to 17%.
Alex Smith, global sector lead: consumer, for Third Bridge said: “Inflation will continue to erode Unilever’s margins for the next 12 to 18 months although margin pressure has been partly mitigated by price increases in H1. We see further price increases in the second half of the year.”
Unilever’s shares were trading at 4,012p mid-morning, up from 3,916.5p when the markets opened. The company has offered a year-to-date return of 1.56%, one-year return of -3.34% with a market capitalisation of GBP 99.8bn.
Boardroom appointments
Unilever appointed activist investor Nelson Peltz to its board last May. It was hoped this would lead to a shake-up at the company, whose share price has been languishing since chief executive Alan Jope took over in 2019. Investors had also reacted poorly to Jope’s attempts try to acquire GSK’s consumer health division, now spun off as Haleon, for GBP 50bn.
Smith said: “Peltz’s addition to Unilever’s Board can transform the company’s culture and create a more challenging environment. Divestiture of Nutrition and recreating a more homogeneous personal care division is seen as high on the agenda.”
Costs have been the real driver of Unilever’s uninspiring performance. Since the start of the year and the global growth of inflation, prices for the commodities Unilever relies upon – especially palm oil, natural gas and kerosene – have risen sharply, with no sign of abatement.
Britzman said: “It’s no surprise to see inflation and global uncertainty called out as headwinds, but importantly for Unilever work done raising prices is keeping sales and profits moving in the right direction. The operation’s becoming less efficient as inflation pushes a host of costs higher, and that comes through in the lower margins, but crucially they’re staying in line with guidance.”
Size has it advantages, and Unilever is one of the biggest companies on the London market, but the bigger a company gets, the less agile and flexible it becomes. The company needs to speed up decision-making, and this inflexibility remains one of Unilever’s biggest risks.
It always seems one step behind and has had patchy success in acquisitions and divestments. That said, Unilever has some amazing brands, generates high margins, strong returns on capital and has some fabulous positions in emerging markets. Smith argued that Unilever needs cultural change, and probably more disposals, for value to be unlocked. Shareholders will be hoping that Nelson Peltz can be the secret recipe to make that happen.
