FX.co ★ Unilever says No to M&A, but inflation puts more pressure

After Unilever announcement of a possible decline in profitability this year, raising prices to offset rising expenses, investors got really worried after a failed offer to buy GlaxoSmithKline's consumer health products business last month.

The biggest problem for consumer goods companies is the rapid rise in the commodities, labor, energy, and transportation costs. Unilever depends on emerging markets and food, where inflation is especially high. As a result, there is a greater risk for the company.

In 2021, the maker of Dove soap and Ben and Jerry's ice cream raised its prices by 2.9%, with a 4.9% increase in the fourth quarter of the year. Eventually, the pressure on margins weakened a little and sales volumes kept stable in the last quarter.

The company expects underlying operating margin to fall 140-240 basis points this year, after falling just 10 basis points in 2021.

Graham Pitkettli, the CFO, says inflation will cause more than 2 billion euros damage in the first half of 2022, dropping to about 1.5 billion euros in the second half.

Analyst Bruno Montein was puzzled by the extent of the estimated margin drop.

"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?" he said.

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

Unilever shares dropped 1.3 % at 12.30 GMT.

The company connected the drop in margins to investments in advertising, R&D and operational capital expenses, with the expectation that they would " restore after 2022, with most of it coming back in 2023 and the rest in 2024."

Investors' opinions matter

Lately, Unilever has fallen behind such rivals as Procter & Gamble and Nestle. Some investors were puzzled when it made an unexpected £50 billion ($68 billion) bid to buy GlaxoSmithKline's health-care arm last month. It was a risky and expensive bid, critics said, when Unilever should be aiming at improving its efficiency.

"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," CEO Alan Jope says.

"There was a moment in time where we felt, and still feel, that a transaction around GSK's consumer health business would have created value for Unilever," Jope says.

It would have helped "accelerate that course into health and wellbeing for our company," he concluded.

Meanwhile, the Hellmann's mayonnaise and Sunsilk shampoo retailer said it would buy out shares up to €3 billion over the next two years.

"The buyback reassures that they are committed to shareholder returns but, on the negative side, they see fewer investment opportunities within their own business," says Tineke Frikkee, whose fund invests in Unilever.

"The pressure on Jope and the board is already quite high," she added.

Soon after GSK was turned down, it was reported that the activist investor Nelson Peltz's Trian Partners set up a share in Unilever. No comment was made by Trian on the news.

At the end of January, Unilever declared a reorganization of its business to shift its focus on five product lines and 1,500 management jobs being cut.

"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," analyst Warren Ackerman says.

"But, certainly, I think the signal is the right one, and they have listened to shareholders on the acquisitions."

According to Jopes, the company remains "absolutely resolved" to push its portfolio in the direction of the beauty, health and wellness categories. He says as well, "But I would say we're more patient on how we get there. Bolt-ons remain part of the strategy."

The company's underlying sales were up 4.9% in the fourth quarter, due to higher prices, exceeding analysts' average estimate of 3.8%.

2021 sales data show underlying sales rose 4.5%, which is the highest rate for the past nine years. This year growth is expected to be 4.5-6.5%.