Unilever 2015Q4 Earnings: Premium Products and Spreads Business in Focus
Global consumer processed goods giant Unilever (NYSE:UL) reported strong revenue growth in the fourth quarter results released on January 19th. [1] The commendable underlying (non-IFRS) sales growth of 4.9% was primarily due to a resurgence in Home Care volume growth and a higher mix of premium products in Refreshments. The Personal Care segment trudged along with moderate volume and price growth in the fourth quarter, while volumes fell in the Foods business due to sluggish demand for spreads. Geographically, double-digit price growth continued in Latin America in the fourth quarter due to volatile currencies in the region, while deflationary conditions continued in Europe. On the bottom-line front, Unilever’s non-IFRS operating margin improved marginally due to higher pricing and skewing of the product mix towards the premium, high-margin category.
Unilever’s fiscal 2015 performance snapshot:
- Revenue grew by 10% (4.1% in constant currency terms) to $57.8 billion (Based on 2015 annual average USD/Euro exchange rate of $1.0852 per Euro)
- Core (non-IFRS) operating margin improved by 30 basis points to 14.8%
- Core (non-IFRS) EPS was $1.98, compared to $1.89 in 2014
Our price estimate of $46 for Unilever is about 10% higher than its current market price.
See our complete analysis for Unilever here
Results Driven by “Premiumization” of Unilever
In the fourth quarter, as well as through most of 2015, Unilever shifted its attention to the premium category products in its Personal Care, Home Care, and Refreshments segments. Its innovation efforts and new product launches revolved around the premium category, causing the product mix to become increasingly skewed towards the high-priced, high-margin premium category products.
This “premiumization” drive at Unilever was instrumental in the Home Care and Refreshments divisions’ underlying sales growth of 8% year on year in the fourth quarter. The launch of new “premium” innovations brands like Omo, Cif, Magnum, and Ben & Jerry during the earlier quarters of the year helped drive the growth in the fourth quarter. Consequently, revenues from the Home Care division as well as the Refreshments division expanded by 8% year on year in the fourth quarter.
It is worth noting that the Home Care division’s revenue growth was driven by 480 basis points contribution of volume expansion. On the other hand, the growth in Refreshments’ revenues was primarily due to the 720 basis points contribution of higher pricing. This provides an early indication that the Home Care division’s “premiumization” may be successful in terms of customer adoption as well, which could lead to long term revenue growth. On the other hand, the growth in Refreshments could be primarily due to a lower price comparator in the previous year, due to the higher proportion of premium products in the 2015 mix. In such a case, Unilever may not be able to maintain the current level of growth in Refreshment’s as comparators begin to catch up in 2016.
Spreads Dragging Down Foods
The underlying sales growth of Unilever’s Foods division was 1.7% year on year in the fourth quarter and 1.5% for the full year 2015. However, savory products, which account for over 40% of Unilever’s Foods business, grew by 5% in 2015. [2] Yet the broader Food division’s revenue growth was so low because of the struggling spreads business.
Unilever’s baking, cooking, and spreads business was separated into an independent unit in mid-2015. The company’s spreads business has been taking fire in recent quarters and is almost solely responsible for the unending woes of the broader Foods business. In 2015, a 5% year on year decline in spreads managed to almost completely offset the 5% growth in savory products and 7% growth in Hellman’s dressings brand. The company attributed the decline in the spreads business is attributed to poor market demand and a decrease in butter prices. [2] The sustained poor performance of the spreads segment has raised calls for its sale or discontinuation. [3] Nevertheless, it hasn’t even been a year since the separation of the baking, cooking and spreads business. Unilever claims to have identified potential areas for cost cutting and better capital allocation. [2] Therefore, given that the Foods division, which includes spreads, is already a cash cow with the highest EBITDA margin in the company, we believe that calls for a sale or discontinuation of the spreads business may be premature.
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More Trefis Research
- Unilever Investor Relations [↩]
- Unilever Fiscal 2015 Fourth Quarter Earnings Call Transcript, Seeking Alpha, January 19, 2015 [↩] [↩] [↩]
- Unilever Needs to Lighten the Load, Bloomberg, January 19, 2015 [↩]