Unilever lifts margin target as industry pressure mounts

By Martinne Geller

LONDON (Reuters) - Unilever lifted its annual profitability target on Thursday after cost cuts led to a big improvement in the first half of the year, showing it can boost returns after rebuffing a $143 billion takeover bid.

The savings at Unilever come as the packaged goods industry's biggest names, including Nestle and Procter & Gamble, are being targeted by shareholder activists pushing for better returns.

Unilever, whose own margins came under scrutiny in the wake of February's shock takeover bid from Kraft Heinz, said on Thursday that such investor pressure was becoming the norm.

"It's something that we keep on our radar screens here ourselves," Chief Financial Officer Graeme Pitkethly said. "We all have to deal with it and we're realistic about that."

The Anglo-Dutch conglomerate, whose products range from Hellmann's mayonnaise to Dove soap, stepped up its savings.

It now expects its underlying operating margin to grow by at least 100 basis points this year, up from the target of at least 80 basis points given in April when it announced the results of a review sparked by the Kraft bid.

Unilever shares were up 1.2 percent at 1430 GMT. They remain roughly 30 percent higher than before the bid on expectations of more aggressive earnings growth.

Some analysts speculate that Kraft could return with another bid, once the six-month cooling off period required by the UK takeover panel expires next month.

"Unilever know they cannot relax and investors expect them to raise their game," said Steve Clayton, fund manager at Hargreaves Lansdown Select, whose funds are 5 percent invested in Unilever.

MARKETING AND MARGINS

Unilever's underlying operating margin improved 180 basis points to 17.8 percent in the last six months, helped by an acceleration of cost-savings programmes, and a 130 basis point drop in brand and marketing spending. Its goal is to reach 20 percent by 2020.

Analysts welcomed the margin improvement, but voiced concern that it was driven by reduced marketing, which can hit sales.

"Quantity good ... quality less so," RBC Capital Markets analysts wrote.

Unilever said marketing spending would rise in the second half, as new product launches were skewed to that period, adding that full-year spend should match the previous year.

Unilever saved more than 1 billion euros in the first half of the year, bringing it closer to its target for 6 billion euros in three years.

Cuts include reducing the number of laundry powder formulations by 65 percent, reducing employee airline flights by 30 percent and lowering middle and senior management headcount by 13 percent.

NO VOLUME GROWTH

Underlying sales rose 3 percent in both the second quarter and the first half, excluding currency fluctuations and acquisitions. That was slightly below analysts' average expectations for growth of 3.2 percent for the quarter and 3.1 percent for the half, according to a company-supplied consensus.

Growth for the six months was due entirely to pricing, as volume was flat. But volume should accelerate in the back half of the year, Unilever said, helped by new products.

The company stood by its full-year forecast for growth in the 3 to 5 percent range.

Underlying earnings per share rose 14.4 percent to 1.13 euros per share.

Regarding the sale of its margarine and spreads business, CFO Pitkethly said Unilever planned to distribute details by the end of autumn. The firm is carving out the whole business, which operates in some 60 countries, but could sell it in pieces.

Pitkethly said industry players might be able to add value to the emerging market business, while developed markets might be more interesting to private equity players.

"We don't have to sell it in one block and will only do that if it's a superior value solution," Pitkethly told Reuters.

(Reporting by Martinne Geller; Editing by Edmund Blair and Keith Weir)