With investors focused on whether the consumer goods giant will cut its profit margin forecast for the second time this year, on October 21, Unilever’s (ULVR.L) battle with rising costs will take center stage at its third-quarter results.
On October 18, crude oil prices hit three-year highs, while vegetable oil prices are at multi-year highs, and packaging, transport, and labor costs are also rising as economies recover from the pandemic. This scenario is proving to be a headache for central bankers and companies alike.
On Tuesday, tide detergent maker Procter & Gamble (P&G) (PG.N) hiked its full-year forecast for commodity and freight costs by about $400 million (over 20% increment).
Just like household goods specialist P&G, Unilever also has a big food business selling products including Knorr soups, Magnum ice cream, and Hellmann’s mayonnaise. Analysts now warn that the company might be particularly exposed.
That means exposure to edible oils, milk, and crude derivatives, such as caustic soda (used in making ice cream), whose prices have also surged over the past three months.
“Since the second quarter, inflation has continued to creep up and another (margin) revision is possible.”
Unilever cut its operating margin forecast to “about flat” from “slightly up” in July.
With the help of strong coffee sales and price hikes, packaged food rival Nestle (NESN.S), in contrast, retained its full-year operating margin guidance on Wednesday.
According to a company-supplied consensus, analysts expect Unilever to report a 0.2% drop in full-year underlying operating margins. That margin was 18.5% in 2021.
Despite Unilever trying to offset costs by raising average prices by 2.2%, it was hard in places like South East Asia where pandemic-hit consumers are switching to cheaper brands and local competition is tough, according to Ackerman.
To offset raw material and packaging pressures, which they say could reach 16% this year, JPMorgan Cazenove analysts estimate that Unilever may need to raise prices by as much as 13% over the next two years at constant currencies and including hedging.
Taking into context Unilever’s total annual cost of goods of about 23 billion euros ($26.7 billion), packaging and raw materials represent about 70%. A 15% increase translates to about 3.5 billion euros in additional costs.
In July, Unilever said it was confident of delivering full-year underlying sales growth, despite the pressures, within its mid-term target range of 3-5%.
Nonetheless, some analysts are less bullish and are saying that the recent lockdowns in Indonesia, Vietnam, and Thailand will have curbed spending. Jefferies trimmed its third-quarter underlying sales growth forecast to 2.1% from 3.7%. On average analysts expect a 2.2% rise.
As the company strives to sell a big part of its 2 billion euro tea business, it is also supposedly in search of a top activist investor. Hence, there are additional potential catalysts for Unilever’s shares.
For now, however, the attention is on whether it can transfer rising costs onto customers. The head of UK Equity research at Unilever shareholder Waverton Investment Management, Tineke Frikkee, said:
“The shares have been weak, suggesting the market does not think Unilever can pass them all on and that therefore the margin is at risk.”
($1 = 0.8608 euros)