Reckitt Benckiser Group PLC (LSE:RKT, ETR:3RB), the maker of consumer products ranging from Durex condoms and Nurofen painkillers to Cillit Bang and Harpic bathroom and toilet cleaners, and Unilever PLC (LSE:ULVR), the group behind brands from Vaseline and Dove to Knorr and Magnum, are at the centre of the inflation narrative.
Not only are both in the same sector, but both are Anglo-Dutch members of the FTSE 100 and conveniently put their results out just a week apart.
Though there are some important differences in their situations, the reactions to both sets of numbers tell us a little about the market’s perception of them.
This morning, RB reported higher like-for-like revenues, which beat expectations, though operating profits were down and it flipped to a statutory loss from the £2bn profit a year ago.
It announced a flat dividend, with free cash flow having more than halved to £1.3bn.
RB’s shares jumped over 4%.
A week ago, Unilever saw its shares drop as it reported the fastest sales growth in almost a decade, with operating profits up and nudged the dividend higher and unveiled a €3bn share buyback.
Unilever’s shares fell on the day.
One of the big similarities was connected to inflation – with both conglomerates able to pass on the “significant commodity inflationary pressures”, as RB called them, to customers, with turnover growth coming more from increased prices than volumes for the pair of them.
And one of the big differences was that RB said it is “targeting growth” in operating profit margins for 2022, “underpinned by multiple levers”.
RB’s margins were down 160 basis points (bps) in 2021 to 22.9% but management said the company is “on track” to drive this up to the “mid-20s by the mid-2020s”.
On the other side of the coin, Unilever, which already has lower profit margins, warned that operating margins are expected to be down 140-240bps in 2022, still between its 16% and 17% ongoing target.
Unilever also said margins are expected to be “restored” after 2022, with the bulk in 2023 and the rest in 2024.
Also, the Ben & Jerry’s owner, which has the added pressure from its recent failed tilt at GSK’s Consumer Healthcare arm and legendary US activist investor Nelson Peltz’s Trian Partners on the shareholder register, insisted strong cash flow delivery “will continue”, buyback approved for next two years.
Could RB’s confidence be misguided, however, as surely there is a limit on how much both companies can continue to pass on price inflation before losing consumers move to budget supermarket brands or switch supermarkets to discounters like Aldi, Lidl and B&M European Value PLC.
Part of the expected margin boost for RB, however, comes from the move out of the pandemic and the potential shift in the type of products being sold in its health arm, said Danni Hewson, financial analyst at AJ Bell.
“During the pandemic, people stuck at home haven’t caught as many colds or flu-liked illness because they haven’t been mixing in public as much.
“But now life is getting back to normal, Reckitt is likely to see stronger sales of higher-margins products to help fight colds and flu.
“There is also the theory that many people think the big brand products in healthcare are more effective at fighting illnesses, despite them having the same active ingredients as supermarket own-brand versions. So, we could potentially see less trading down in the healthcare space compared to the food and drink categories sold by Unilever.”