Unilever announced that its facing inflationary pressure resulting in the group predicting that costs will be higher than expected in H2 2022 and may hamper annual margins on Thursday.
Unilever’s revenue climbed 11.8% year over year to €13.8bn from €12.33bn in the first quarter of 2022 as currency had a positive impact of 3.5% and acquisitions net of disposals contributed 0.6%.
The group’s underlying sales increased by 7.3%, with prices up 8.3% but volumes down 1.0% as Unilever said “all divisions grew strongly”.
Unilever’s Board has declared and maintained a quarterly interim dividend for Q1 2022 of €0.43.
Unilever Performance
Beauty & Personal Care
Beauty & Personal Care’s underlying sales increased 7.1% to €5.7bn, with 7.4% from price and offset by 0.3% from volume as Unilever continued strong growth in Prestige Beauty and vitamins, minerals, and supplements.
Deodorants grew by double digits, thanks to Dove and Rexona’s technology-driven developments, as well as Axe’s excellent start to the year. Skin cleaning saw double-digit growth, with Dove, Lux, and Lifebuoy leading the way, although volumes fell in a shrinking market.
When the health and beauty channel reopened, Prestige Beauty enjoyed another quarter of double-digit growth, on top of a very strong prior year comparative.
Hourglass and Living Proof had a solid start to the year, helped by a rebound in the luxury hair and make-up segments.
Home Care
In the wake of a very strong prior year comparative, market volumes are decreasing which impacted Unilever’s Home Care division’s where underlying sales rose 9.2% to €3bn, with 12.5% from price, however, it was offset by 2.9% from the volume,
Fabric cleaning had a good start to the year, with double-digit, price-driven growth in most regions and very minor volume declines.
In India, OMO continued to lead the liquids industry, while novel forms such as capsules saw considerable growth in both China and Europe.
Fabric enhancers grew in the low single digits, boosted by a strong start to the year in India, China, and Turkey, but hampered by reductions in the United Kingdom and Southeast Asia.
With a strong prior year comparative, home and hygiene witnessed a modest increase, with high pricing being offset by negative volumes.
Foods & Refreshment
Foods & Refreshment underlying sales grew 6.5% to €5.1bn, with 7.1% from price and (0.6)% from volume said Unilever.
In all key geographies, Foods produced high single-digit growth with strong pricing. Hellmann’s grew by double digits against a solid baseline in the previous two years, thanks to a successful “Superbowl” marketing.
In the first quarter, ice cream sales grew by double digits in the out-of-home channel, while in-home sales fell marginally. The loosening of limitations in Europe and the sell-in ahead of an expected greater ice cream season, as well as a solid performance in China, boosted out-of-home sales. Magnum’s strong growth momentum was aided by the introduction of its fundamental “Remix” innovation, a spin on the iconic Magnum stick.
Performance by Geography
With volumes slightly negative, emerging markets climbed by 9.5% to €8.3bn, with a 10.1% contribution from pricing whereas developed markets rose 4.1% to €5.5bn and a 5.7% contribution from pricing.
Latin America’s pricing was particularly strong, at 16.4%, despite a 5.7% drop in volume. Developed markets climbed by 4.1%, with prices up 5.7% and volume down 1.5%.
The Americas sales increased by 9% to €4.5bn due to price and volume increases, while European sales increased by 0.7% to €2.7bn due to price gains offset by volume declines and Asis sales rose 9.1% to €6.6bn in the first quarter for Unilever.
Outlook
Input cost inflation is expected to be roughly €2.1bn in the first half of 2022, but the commencement of the war in Ukraine and the resulting increase in raw material inflation has elevated Unilever’s cost prediction for the second half.
Input cost inflation is expected to be roughly €2.7bn in H2 said the group.
As a result of this unprecedented period of inflation, the group will have to take additional pricing action, which will have an impact on volume.
In 2022, Unilever expects underlying sales growth to be in the upper half of the previously advised range of 4.5% to 6.5%.
For the first half, Unilever estimates the underlying operating margin to be in the 16% to 17% range that the group had forecasted for 2022.
Unilever presently expects the full-year underlying operating margin to be at the lower end of that range as a result of the expected rise in costs in the second half as costs are unknown and volatile.
As market conditions normalise, Unilever plans to restore margin through pricing, mix, and savings delivery in 2023 and 2024.
Russ Mould, Investment Director, AJ Bell said, “The true definition of a company with pricing power is one which can push up its selling prices without dampening demand. Unilever has managed the first bit but not the second. Each of its three core divisions has seen a drop in sales volumes in its first quarter as a result of raising prices.”
“While Unilever talks about another solid quarter of sales growth, pressure on costs means its profit margins aren’t suddenly going to fatten up because people are paying more for a jar of Marmite or a box of Magnum ice creams. In fact, it is guiding for operating margins to be at the bottom end of its previously guided range.”
“In the UK, consumers are starting to trade down to supermarkets’ own-label products because they are cheaper. That presents a real threat to Unilever’s earnings in the near-term if people shun its higher priced items. There is a risk this trend spreads to other geographies.”
“The inflationary pressures have taken the spotlight off chief executive Alan Jope for a while, but a resumption of normal trading conditions will inevitably revitalise the debate over whether he is the right man to keep running the business, given poor returns for shareholders under his leadership.”
Unilever shares were trading down 0.2% to 3,569p after the group warned investors of increasing costs in the second half of 2022 which will impact margins.