Unilever Q3 Preview: Can a Premium-Heavy Product Mix Match Historical Growth Rates?
Unilever (NYSE:UL) is slated to report its fiscal 2015 third quarter earnings on October 15th. [1] The company is in the midst of a “premiumization” drive wherein it is increasing its focus on the premium category products, especially in the Personal Care and Refreshments divisions. (Read: Why is Unilever Rushing Towards Premium Personal Care Brands?) Investors will be keen to see if the changing product-mix, which is becoming increasingly skewed towards the premium category, will be able to achieve historical growth rates. The indications have not been good so far as underlying sales growth of three of Unilever’s four divisions slowed in the first half of the current fiscal year. (Read: Unilever’s Volume Growth Slows in Q2, As Personal Care Set to Take Center Stage Going Forward) The company’s margin expansion is also likely to be minimal at best and negative at worst due to the step-up in investments in innovation and marketing. [2]
It should be noted that there are a few factors in the third quarter that may help Unilever beat the odds and achieve strong growth and margin expansion. The chief among them is that the company scaled back its acquisition drive in the third quarter after a phase of rapid acquisitions during the first half of the year. Consequently, management is likely to have devoted its focus to improving the organic growth and integration of the acquisitions. Secondly, Unilever made heavy investments in innovations in the first half of the year, the benefits from which may begin trickling in from the third quarter onward. Lastly, the revenue share of the Personal Care segment is expected to have increased even further in the third quarter. Personal Care has historically achieved consistent underlying sales growth, and thus its increased revenue share may prop up the overall revenue growth of the company.
Our price estimate of $42 for Unilever is almost the same as its current market price.
See our complete analysis for Unilever here
Price Likely to Contribute to Revenue Growth Due to Changing Product-Mix
As mentioned above, Unilever’s product-mix is undergoing a major shift with premium category products commanding an increasing share of revenues. This is likely to result in a positive pricing growth in the third quarter. On the other hand, Unilever is likely to have scaled back on price hikes by passing on the benefit of currency tailwinds to its customers. Nevertheless, we believe that the impact of the change in product-mix could be substantial enough to offset the easing prices, thereby resulting in positive pricing growth.
As far as volume growth is concerned, it depends upon the adoption of Unilever’s premium products and the success of its innovations. The company expects volume growth to improve in the second half of the year primarily due to the investments that it made in innovation in the first half of the year. The shift of focus from acquisitions to integration and organic growth is also likely to have helped. Unilever is also rapidly expanding the geographical footprint of its Home Care business, which may further add to volume growth in the third quarter. [2] On the other hand, a look at the performance of the company’s Personal Care division in the first half of the year suggests that its premium products may not be growing as fast as the company’s historically diversified product portfolio. Therefore, the extent of volume growth in the third quarter will depend upon which of these factors have the maximum impact on Unilever’s sales.
Margin Expansion Likely to be Subdued
In the second quarter earnings conference call, Unilever’s CFO Jean-Marc stated that the company will be stepping up investments in the second half of the current fiscal year. Unilever had already increased its marketing expenditure in the first half of the year and the incremental investments are likely to hurt margins in the short term.
However, Unilever’s cost saving initiatives and its Maxing the Mix program have been yielding notable benefits and could partly offset the increase in investments. The company exceeded its cost saving target of €500 million in the first half of the current fiscal year. If Unilever continued to implement a similar level of fiscal discipline, it may have achieved a nominal increase in its non-GAAP operating margin in the third quarter.
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More Trefis Research
- Unilever Investor Relations [↩]
- Unilever Fiscal 2015 Second Quarter Earnings Conference Call Transcript, Seeking Alpha, July 23, 2015 [↩] [↩]