Unilever Still Optimistic Despite European Headwinds And EM Slowdown

by Trefis Team
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Trefis
UL
Unilever Group
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Unilever (NYSE:UL), the world’s leading consumer goods company, posted strong results in Q2 2013 with 5% y-o-y underlying sales growth. [1] This growth was achieved through a combination of 3% growth in underlying volumes and 2% increase in underlying prices.

Emerging markets continued to compensate for developed markets where underlying sales declined by 1.3% y-o-y, although Europe displayed a better performance than in Q1 2013 as volumes grew sequentially. [2] Investors had concerns surrounding the performance of the European business earlier, which we believe will subside to some extent following the improvement in the second quarter performance. However, the outlook for the region is not so bright and could weigh on the company’s results in the future. (Read: Unilever’s Emerging Markets Business Will Continue To Shoulder The European Burden)

Despite increased competitive pressure, the Personal Care and Home Care segments outperformed as underlying sales grew by 7.7% and 10.2% respectively as the company experienced broad-based market share gains in these categories across the world.

The food business, which performed relatively poorly in Q1 2013, also showed signs of resilience as the company worked towards stronger innovation and focused on fewer, bigger brands. Underlying sales expanded by 1% y-o-y as growth in Knorr and Hellman brands was offset by a decline in spreads, which constitute close to 7% of the company’s total revenue, although the decline was less than Q1 2013. The management is optimistic that the business is back on track and expects the trend to continue in the remaining part of the year as the company skews its attention towards emerging markets, concentrates on fewer and bigger brands, and works on improved pricing, taste and naturalness of its products.

See Our Complete Analysis Of Unilever

Gross Margin Improvements Will Stay Due To Structural Changes In Business

Unilever’s gross margin increased by 1.2% during Q2 2013 due to cost efficiency programs and ‘Maxing the Mix’, a program undertaken by the company to deliver innovative products, focus on higher growth opportunities and low cost business models, forego less profitable businesses and make effective promotions. By adding benefits for consumers, innovation played a big role in improving gross margin as it allowed the company to justify premium pricing for its products.

With more than 75% of the company’s future innovations expected to deliver above average gross margins, management is confident that the improvement is not a one-off event but is now built into the business structure. [3]

Emerging Markets Continue The Growth Story But Slowdown Expected In Near Term

Unilever derives close to 60% of its revenues from emerging markets. Despite the slowdown, these markets continued double-digit growth in Q2 2013. Underlying sales grew by about 10% y-o-y in emerging markets, which outpaced overall economic growth in these markets. However, currency translation losses dragged revenue lower by about 3% and contributed to the company reporting flat revenues for the period. [2]

Currency devaluation in emerging markets has been a major problem for Unilever in the past, and it has partially compensated for it by continually launching new brands and working on lowering costs. Some important markets for Unilever such as Brazil and India have seen their currencies devalue rapidly recently. The company intends to offset some of the impact by increasing prices for its products in these countries and keeping up with its new products. Although this could help, there are more challenges ahead such as lower economic growth forecasts for Brazil, Russia, India and China, which will likely affect demand

The following table summarizes Unilever’s underlying sales growth in emerging markets in last 9 quarters:

Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013

Q2 2013

10.6%

13.1% 12.3% 11.9% 11.0% 12.1% 10.8% 10.4%

10.3%

We are in the process of updating our price estimate of $40 for Unilever.

Notes:
  1. Includes growth in sales from continuing operations excluding acquisitions, disposals and currency movements []
  2. Unilever Q2 2013 Earnings Call, Seeking Alpha, July 25, 2013 [] []
  3. Unilever Q2 2013 Earnings Call, Seeking Alpha, July 25, 2013 []
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