Unilever Says Profitability to Drop as Sales Miss Estimates; Shares Slide

Unilever, the world’s second- biggest consumer-goods company, reported first-quarter sales that missed estimates and said profitability will drop in the first half, prompting the biggest stock decline in more than eight months.

Underlying sales growth, which excludes the effect of acquisitions, disposals and currency fluctuations, was 4.3 percent, Unilever said today in a statement, as revenue fell in western Europe. That missed the median estimate of eight analysts surveyed by Bloomberg News for a 4.4 percent gain.

The maker of Magnum ice cream and Dove soap raised prices 1.8 percent in the period to help offset higher costs for commodities such as crude oil, which dragged on volume. Unilever, which predicts a margin improvement in the second half, now expects the impact of rising input costs to be around 500 to 550 basis points of turnover this year, up from a February forecast of 400 basis points.

“The group’s outlook statements underscore the uncertainties regarding its margin performance this year,” Richard Withagen, an analyst at SNS Securities in Amsterdam, wrote in a note today. “Margin pressure will be more intense, while price increases will result in lower volume growth.”

Rivals’ Faster Growth

Unilever’s performance trailed first-quarter sales gains posted this month by rivals Nestle SA, the world’s largest food company, and Danone, the world’s biggest yogurt-maker. Nestle’s sales grew 6.4 percent and it said profitability will improve in the second half as it sells more expensive products. Danone’s like-for-like revenue rose 8.5 percent. Both results exceeded analysts’ estimates.

Unilever’s shares slid as much as 3.9 percent, or 89 cents, to 22.07 euros in Amsterdam, and were down 3.3 percent at 22.19 as of 11:01 a.m. Today’s intraday decline is the biggest since Aug. 5.

Commodity cost volatility is “unprecedented” this year, Chief Financial Officer Jean-Marc Huet said today on a conference call with journalists. Crude oil has risen to about $125 a barrel from about $100 since the company’s annual results, he said, particularly affecting the company’s health and personal-care business, which “has a lot of exposure to chemicals, be they petrochemicals, or natural.” Increasing costs of edible oils including palm oil are also hurting the spreads business, he said.

‘Volatile Year’

The volume of goods sold rose 2.5 percent while the median estimate of analysts surveyed was for volume to increase 3 percent and pricing to rise 1.4 percent.

Total sales advanced 7 percent to 10.9 billion euros ($16.2 billion). Analysts had estimated revenue of 10.8 billion euros.

“This year is a volatile year,” Huet said, adding that Unilever will still deliver “modest sustainable margin improvement” in 2011 as ongoing price increases and increased cost savings offset the impact of cost inflation. “As long as there is innovation, as long as we are the market leader, as long as we do it judiciously” the company will be able to increase the cost it charges for its goods, he said.

The company now expects to save about 1.3 billion euros through its cost-savings plan this year, higher than a previous forecast of more than 1 billion euros, Huet said.

Western Europe

Sales in western Europe fell 2.7 percent as Unilever lifted prices 0.1 percent. The company has increased prices ahead of its competitors, Huet said today, depressing volumes, which fell 2.8 percent. Economic circumstances in southern European countries are “very, very difficult and will continue to be difficult,” Huet said.

“Unilever needs to prove it can return western Europe to even modest growth, as this remains a key obstacle in our view to a more exciting group performance,” Graham Jones, an analyst at Panmure Gordon in London, wrote in a note today.

Unilever increased volume and prices across its other units, leading to an 8.9 percent rise in sales at its Asia, Africa and central and eastern European division and a 4.1 percent increase in the Americas. The company is expanding in emerging economies and the health and personal-care businesses to offset a slowdown in developed markets including Europe and the U.S. About 56 percent of sales come from developing countries including India and Brazil, according to Huet.

Organic Growth Focus

Chief Executive Officer Paul Polman has pledged to double Unilever’s revenue after a decade of stagnant growth. He has disposed of food units and bought health and personal-care businesses including Sara Lee Corp.’s shower-gel and European detergents unit, and Alberto Culver Co., adding Nexxus and TRESemme hair-care products. The Sara Lee integration is “well on track,” Unilever said today. The company is 99 percent focused on driving organic sales growth, Huet said when asked about further acquisitions.

Unilever reported sales growth across all categories in the quarter, driven by new products. The company started selling Dove Hair Damage Repair in Indonesia and Japan, and said a “strong program” of innovation in its spreads unit, including Flora Cuisine liquid margarine, will help it raise prices to offset commodity costs. The Savoury, Dressings and Spreads unit showed the slowest growth of the divisions.

To contact the reporter on this story: Clementine Fletcher in London cfletcher5@bloomberg.net.

To contact the editor responsible for this story: Celeste Perri at cperri@bloomberg.net.

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