One-Off Factors Lift Unilever’s Q3 Revenues

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Consumer processed goods giant Unilever (NYSE:UL) reported strong results in fiscal 2015 third quarter earnings released on October 15th. [1] One-off factors related to ice-creams and Latin America provided a strong boost to Unilever’s revenues, which expanded by 9.4% year on year despite easing of currency tailwinds. A strong innovation program and steady release of new, innovative products also contributed to revenue growth. Still, the company is unlikely to be able to replicate the performance in the fourth quarter since as much as 6 percentage points of the revenue growth in the third quarter was attributable to non-recurring factors. [2]

The one-off factors that are unlikely to be present in the second quarter include:

  • Strong ice-cream season in Europe and a competitor’s product recall in North America
  • Advance sales prior to price increase in Brazil
  • System upgrades in Mexico

In absence of these factors and due to the planned price increase in Brazil, volumes in Latin America are likely to contract year on year in the fourth quarter. Additionally, third quarter revenue growth also benefitted from a soft prior period comparator in China due to last year’s trade destocking. The benefit in China is expected to be present in the fourth quarter as well, but may be offset by the weak volumes in Latin America.

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Our price estimate of $42 for Unilever is slightly lower than its current market price.

See our complete analysis for Unilever here

External Factors Obscuring the Real Picture

At first glance, it appears that Unilever achieved outstanding volume growth across all categories. Even its Foods business, which stayed flat or contracted in the last two years, achieved volume growth of 1.6% year on year in the third quarter. However, the company admitted in the earnings call that, excluding the impact of the aforementioned non-recurring factors, underlying (non-GAAP) sales growth 3.5% to 4%, which is par for the course for Unilever. [2]

Therefore, while Unilever’s performance in the third quarter was certainly strong, it is by no means an indicator of a long term revival of revenue growth. In fact, macroeconomic conditions continue to remain adverse in most emerging markets as well as Europe, further underscoring the difficulties lying ahead for Unilever. The beneficial impact of currency tailwinds appears to have tapered off to some extent given that foreign exchange contributed just 2.9 percentage points to revenue growth, compared to over 10 percentage points in the previous two quarters. In the third quarter, the reduction in currency tailwinds was offset by the one-off external factors but that may not be the case in the future quarters.

The only respite is likely to come from Unilever’s step up in innovations. The company has been rapidly releasing new products in recent quarters, with a majority of them being in the premium segment. The sustained introduction of new products during the year is likely to have contributed to volume growth in the third quarter. But due to the heavy impact of non-recurring factors, the extent of the success of Unilever’s innovations cannot be determined.

Trouble in Most Geographical Markets

In both the second and third quarters, price hikes contributed 10 percentage points to revenue growth in Latin America. Such sustained and steep increase in prices in is likely to eat into volumes going forward. On the other hand, deflationary conditions continue to exist in Europe. The extent of price contraction in Europe is worsening with each quarter – price changes negatively impacted revenue growth by 1.9, 2.1 and 2.5 percentage points year on year in the first, second, and third quarter respectively.

Separately, Unilever expected to benefit from commodity cost deflation in the emerging markets during the second half of the year. To the contrary, the currency deflation in China and other region-specific factors has led to an uptick in commodity prices. [2] To counter the same, Unilever expects pricing to be higher in most regions (excluding Europe) in the second half of the year. This may further have a negative impact on the volumes going forward.

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Notes:
  1. Unilever Investor Relations []
  2. Unilever Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, October 15, 2015 [] [] []