Unilever Warns Of Hit From Inflation, Rules Out Big M&A

Unilever warned of a hit to profit margins this year as it struggles to pass on higher costs to consumers, and ruled out big acquisitions following recent investor criticism of its failed pursuit of GlaxoSmithKline's consumer health business.

Consumer goods companies like Unilever are grappling with a surge in raw material, energy, transport and labour costs.

The maker of Dove soap and Ben and Jerry's ice cream is particularly exposed because of its reliance on emerging markets and food - where inflation is especially high.

While predicting strong growth in sales this year as it raises prices, the company also forecast a sharp decline in its underlying operating margin of 140-240 basis points, following a 10 basis point reduction in 2021.

Finance chief Graeme Pitkethly said it faced a 2 billion euros-plus ($2.3 billion) hit from inflation in the first half of 2022, though he saw that as the peak, with inflation costs falling to about 1.5 billion euros in the second half.

Unilever said it expected its margins to be "restored after 2022, with the bulk coming back in 2023 and the rest in 2024."

This raised more questions than answers, Bernstein analyst Bruno Monteyne said.

"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?" Monteyne said.

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

Unilever shares were down almost 3% in early trade.

'EXTENSIVE' TALKS WITH INVESTORS

The Hellmann's mayonnaise to Sunsilk shampoo firm said it had listened to investor concerns about its thwarted 50 billion pound ($68 billion) bid for GlaxoSmithKline's consumer health business, and had instead decided to buy back up to 3 billion euros of shares over the next two years.

"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 in a statement.

Some investors, including Fundsmith LLP's Terry Smith, had criticised the bid as a costly and risky distraction from dealing with pressing challenges for Unilever, such as surging inflation and weakness in healthy foods.

Shortly after the failed bid, it was reported that activist investor Nelson Peltz's Trian Partners had built a stake in Unilever. Trian has not commented on the reports.

In late January, Unilever announced a reshaping of its business to focus on five product areas and 1,500 management job cuts.

"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."

Unilever reported a 4.9% rise in fourth-quarter underlying sales as people continued to eat more at home. That beat analysts' mean forecast for 3.8% growth in a company poll.

For the whole of 2021, underlying sales growth was 4.5%, the strongest for nine years, with 2.9% from higher prices. The company forecast growth of 4.5-6.5% this year.

($1 = 0.8755 euros)