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Unilever-price hikes underpin revenue beat

First quarter sales adjusted for the impact of exchange rates rose 7.3%...

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First quarter sales adjusted for the impact of exchange rates rose 7.3% to €13.8bn, above expectations. This was driven by an 8.3% increase in prices, most notably in Home Care. Higher prices caused a 1% decline in volumes, though food solutions and out-of-home ice cream continued to improve as pandemic restrictions eased.

Inflation is expected to increase costs by €2.1bn in the first half and €2.7bn in the second half. Unilever plans to raise prices to combat this, which is seen hurting volumes.

First half revenue growth is now expected at the top end of guidance for 4.5%-6.5% and operating margins between 16-17%. In the second half, margins are forecast to be at the bottom of that range due to the impact of inflation.

The group spent €750m of the €3bn earmarked for share buybacks and announced a €0.4268 quarterly dividend.

Shares were broadly flat following the announcement.

See the latest Unilever share price, charts and how to trade

Our View

From Magnum to Domestos, Unilever's responsible for some of the world's most recognisable brands. This familiarity and consumer trust is Unilever's superpower, and the reason it's been able to charge a premium for its products.

But price increases to cope with inflation are starting to send customers down the value chain, and the group's walking a thin line between protecting margins and losing long-term customers.

There aren't too many companies boasting yearly sales over EUR50bn. As an integral part of the global consumer supply chain, some level of revenue is pretty much guaranteed. This is why Unilever has long been considered a relatively defensive play.

Protecting the brand is Unilever's number one priority, so and that comes at a hefty cost, with upwards of $7bn earmarked for advertising each year. That's all part and parcel with the group's strategy of locking in long-term customers with well-known, trusted brands. This part of the business is a non-negotiable, so if revenue starts to weaken margins will come under pressure.

Price increases will go a long way to cushioning the blow, but there's only so much you can hike before customers walk away. Luckily there are other levers to pull. The group is shifting its organisational structure to focus on product rather than geography. It thinks this will give it more focus and achieve annual cost savings of EUR600m. This comes as a result of more severe restructuring and streamlining efforts as Unilever tries to outpace years of sluggish performance.

Free cash flow just shy of $6bn and net debt that's 2.2 times cash profits (EBITDA) adds weight to that argument. That helps underpin the dividend, with a prospective yield of 4.0% on offer, please remember though no dividend is guaranteed.

The challenges posed by inflation add to our growing concern about Unilever's proposition . If people become accustomed to buying generic, they might not return even if they can afford to. However if the group's able to strike a balance between raising prices and cutting costs, there may well be room for further growth. The group's valuation has come down below the long-term average, reflecting the market's uncertainty. This could prove an attractive entry point if management can navigate through this turbulence effectively.

Unilever key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

First Quarter Results (underlying)

Sales in Beauty & Personal care rose 7.1% to €5.7bn. This was driven by a 7.4% increase in prices, which caused a 0.3% volume decline. Price hikes helped skin cleansing deliver high single digit growth, though the market continued to contract. Growth in Prestige Beauty was in the double digits and Hourglass and Living Proof turned out a strong performance, as premium hair and makeup gained momentum.

A strong performance from Fabric cleaning helped Home Care sales rise 9.2% to €3.0bn. This was led by a 12.5% increase in prices, which offset a 2.9% volume decline. Home and hygiene saw modest growth as price increases were offset by volume declines and the group lapped last year's strong performance.

Double-digit growth from Hellmanns helped Foods & Refreshment sales rise 6.5% to €5.1bn. This was driven by a 7.1% increase in prices which more than offset a 0.6% volume decline. Growth in plant-based food in Latin America and the benefit of Veganuary in Europe helped the Knorr brand continue to evolve and Magnum's latest "Remix" innovation underpinned strong growth momentum.

Prices rose across all geographies. The Americas led the way with prices up 10%. Volumes declined across the board except in Asia, Africa, Middle East, Turkey, Russia, Ukraine and Belarus where volumes were up 0.5%.

eCommerce sales now represent 14% of sales.

Unilever's previously announced reorganisation into five business categories is on track to launch from the middle of the year. It should yield cost savings of €600m over the next two years.

The sale of Unilever's global tea business is expected to complete in the second half of the year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 28th April 2022