Cost inflation hits profit margins at Unilever

Soaring costs for raw materials, packaging and transport have hit profit margins at Unilever, despite a series of price rises from the UK’s biggest consumer goods maker.

The maker of Domestos bleach, Hellmann’s mayonnaise and Magnum ice cream said its underlying operating margin in the six months to June dropped 100 basis points to 18.8 per cent from a year earlier after cost inflation accelerated in the second quarter.

The company, which said the margin dip was also down to investment in its brands, is the latest in the sector to report a squeeze from surging transport and commodity prices. The UK mixers maker Fever-Tree said on Tuesday it expected a hit to full-year margins from rising costs.

“Inflation has been even higher than we anticipated,” said Graeme Pitkethly, chief financial officer at Unilever, adding that steep rises in palm oil prices were affecting the group’s personal care division.

Together with the cost impact of Covid-19, the squeeze makes Unilever’s operating margin target of 20 per cent — originally set in 2017 as a goal for 2020 — still more of a stretch. The company said it expected its underlying operating margin to be flat across the whole of 2021.

Underlying sales growth at the group was 5.4 per cent, slightly ahead of expectations, bringing turnover to €25.8bn, up slightly from the previous year. Net profits fell to €3.4bn from €3.5bn a year earlier. 

Price rises accounted for sales growth of 1.3 per cent, the company said, with the remainder down to higher sales volumes. “We’re very focused on our pricing actions, which we think are landing well,” said Pitkethly.

He said the group had pushed up prices quickly in countries such as Brazil and Argentina, while increases in Europe were being implemented more gradually under its contracts with retailers.

James Edwardes Jones, analyst at RBC Capital Markets, said the inflation impact was less severe than feared.

“We had been concerned, following Fever-Tree’s warning on Tuesday, that full year margin expectations would be significantly reduced. That has not happened, with Unilever guiding to ‘around flat’.” The group had earlier signalled a “slight increase” in margins for the year.

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