Currency Tailwinds Expected to Lift Unilever’s Q2 Results, But Will Volumes Grow?

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Global consumer processed goods behemoth Unilever (NYSE:UL) will report its fiscal 2015 second quarter results on July 23rd. [1] The company had a strong first quarter, in which poor volume growth was obscured by price hikes and significant currency tailwinds. (Read: Currency Tailwinds Help Unilever Post Strong Q1 Results) Unilever is banking upon favorable currency movements to boost its earnings in the second quarter as well, along with a little help from higher pricing. [2] However, our focus remains upon the poor underwhelming volume growth achieved by the company in the last few quarters. Expectations remain ripe for another good quarter at Unilever, but it remains to be seen whether volume growth will finally pick up in the second quarter.

On a strategic level, Unilever picked up its acquisition activity in the premium personal care space during the second quarter. Financial terms were not disclosed for any of the transactions, so it cannot be determined if Unilever will get the bang for the buck its paying for the purchases. Nevertheless, investors will be keen to get updates on Unilever’s trigger-happy acquisition strategy.

Our price estimate of $39 for Unilever is about 15% lower than its current market price.

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See our complete analysis for Unilever here

Personal Care Business in Focus

Unilever’s acquisition strategy revolves around the premium personal care products segment. It is part of the company’s portfolio optimization component of the long term growth plan. (Read: Here’s How Unilever Plans to Revive Growth) Consequently, Unilever has been on an acquisition spree in the premium personal care industry. Over the last one month alone, it acquired three skincare brands: MuradDermalogica, and Kate Somerville.

Unilever has given no indication of how long the acquisitions will go on and how much budget has been allocated towards such purchases. The company had previously stated that cash flows from the Foods division are being utilized towards the Personal Care segment. However, it has not specifically indicated how these and the future acquisitions are being funded. While the purchases so far were relatively small in size, indiscriminate use of debt could pile on pressure on Unilever’s financial strength.

It is unlikely that any major strategic plans will be unveiled in the second quarter earnings call, but nevertheless, investors will be keen to get some questions answered on the matter.

Can Price-Driven Growth Last?

In the first quarter of 2015, Unilever achieved underlying sales growth (non-GAAP revenue growth) of 2.8%. Of this, 190 basis points were derived from higher pricing, while volume growth contributed a mere 90 basis points to the top-line growth. In fact, only the Foods division achieved meaningful volume growth of 3% in the first quarter. Volume expansion in the Personal Care and Home Care divisions were negligible, while the Refreshments division declined in terms of volume. [3] Even in the Foods division, the volume growth was achieved because of an early Easter compared to the previous year. [2]

The above breakdown of underlying sales growth (USG) in the first quarter posts an unflattering picture of Unilever’s growth strategy. Its USG is being driven primarily by price hikes, which is not sustainable over the long term. An indiscriminate uptick in pricing is likely to drive customers away to cheaper alternatives offered by competitors. Still, Unilever plans to continue price hikes in the emerging markets, although pricing may be negative in Europe due to deflation. [2]

Looking at the short term, the Foods division was almost fully responsible for the volume growth in the first quarter due to the early Easter. This implies that in the second quarter, like for like sales are likely to be lower since the comparable period previous year benefited from Easter. Therefore, unless Unilever is able to drive the volumes higher in the other divisions, it is possible that overall volume growth of the company could be minimal or even negative in the second quarter.

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Notes:
  1. Unilever Investor Relations []
  2. Unilever Fiscal 2015 First Quarter Earnings Call Transcript, Seeking Alpha, April 21, 2015 [] [] []
  3. Unilever Fiscal 2015 First Quarter SEC Filing []