Unilever Earnings Preview: Emerging Markets To Drive Growth

Unilever (NYSE:UL), the European consumer goods giant, has enjoyed a largely successful 2012. In light of Unilever’s upcoming Q4 2012 results, investors should keep in mind that the company’s overall performance can be largely attributed to the performance of its two largest divisions – personal care and foods – which together contribute nearly 85% of its stock value. It is also important to remember that the company generates around 55% of its total revenues from developing economies, making it one of the most well established consumer goods giant in emerging markets. Indeed the company has big plans for its future in these regions as Unilever hopes to earn more than 75% of its total revenue from developing economies by 2020.

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For the nine-month period ending September 2012, the company saw sales grow by 11% over the previous year, marked by an underlying volume growth of 3%, mainly driven by emerging markets. The company’s segment-wise performance and our expectations for Q4 2012 have been summed up below.

Personal Care Division

This division comprising of product segments such as soaps, shampoos and deodorants, went from strength to strength, gaining volume sales across the globe. The company’s well established, deep penetrating sales channels have allowed it to leverage robust growth in demand for personal care products in emerging regions such as India and Indonesia. Meanwhile, in developed regions, the company has been able to turn the general economic downturn to its advantage with the help of lower pricing and innovative product packaging. Hence, displacing competitors such as Procter & Gamble (NYSE:PG), who generally sell at prices higher than Unilever’s.

For the nine-month period through September 2012, Unilever registered overall sales growth of 8% in personal care driven primarily by a 6% growth in volume. We expect the company to gain significant strides in the fourth quarter results as well, again driven by factors similar to previous quarters. Unilever’s prospects are further bolstered by some key product roll outs in the past few months. Unilever’s integration with Sara Lee’s personal care division (which was acquired in 2010), helped the company roll out several brands in the low-priced tier in Europe during Q3 2012. These products are expected to do well considering the present weak economic conditions in the region. Complementing the company’s focus on the low-price tier, Unilever has also launched some key products at higher price points to hedge itself against a general economic upturn in the region. With demand continuing to surge in emerging markets, a strong sales performance in this segment seems more or less guaranteed.

Foods Division

Unlike the personal care division, most of the food division’s sales come from developed economies. Flagging demand in the U.S. and Europe, has taken its toll on this division’s total sales, and Unilever has responded by selling off several unprofitable (or non-core) brands over 2012. A major divestment made by the company in the last quarter was the sale of its entire frozen foods portfolio in North America to ConAgra, a key competitor. The company’s nine-month revenues in this segment reflect the general stagnation, total sales rose by only 2%, markedly lower than personal care. In fact, Unilever’s underlying sales in the division actually shrank by 0.4% during the third quarter.

As the company continues to shift focus towards a more streamlined portfolio consisting only of its most famous and profitable brands in the segment, we can anticipate sales revenues to dry up further in the final quarter. However, this strategy should have a positive impact on the division’s bottom line. In fact, this is one of the key areas we will be watching to see if the company’s strategy here can be considered a partial success for investors, given the dire economic circumstances in the relevant regions.

Other Divisions

The two other divisions the company operates in are home care and refreshment.

Home Care consists largely of detergents and surface cleaners while refreshment includes iced teas sold under the Lipton brand and ice creams sold under Wall’s, Cornetto and Magnum. Together, these two divisions account for around 15% of the company’s stock value. These segments have managed to perform very well over the first nine-months of 2011, at least in terms of sales. Both saw robust volumes growth, particularly because of Unilever’s aggressive pricing and constant product launches, mostly directed at emerging economies.

There is little reason to expect any significant change in the overall trend in these two segments. We believe the company will continue to witness robust growth in volumes, while intense price competition will take a toll on net margins.

Unilever’s top priority at this stage is establishing its brand value and driving volume sales in emerging markets, something which it seems to be doing very well, and should duly reflect in its upcoming results.

We currently have a Trefis price estimate of $39 for Unilever, which is in line with the current market price.

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