Deflation In Europe And China Destocking To Weigh On Unilever Q4FY14 Sales
Unilever (NYSE:UL) reported weak third quarter sales that were at the lower end of consensus estimates, at €12.2 billion. Sales in Q3FY14 were negatively impacted by a slowdown in underlying sales growth during the quarter, indicating waning interest for fast moving consumer goods (FMCG) in its key markets, particularly Europe. The company posted underlying volume growth of 0.3% year on year during the quarter, compared to the average consensus estimate of 1.8%. Pricing, however, benefited moderately from hyperinflation environments in Latin America markets, reaching 1.8% for the quarter compared to the average estimate of 1.9% year on year. Currency headwinds were milder than consensus estimates during the quarter, at negative 2.6%, which held up overall quarterly turnover at the lower end of the estimate range.
In relation to these weak numbers, the company issued a warning for sales going forward. Unilever shares have declined over 5% between October 22 and October 24, impacted by weaker than anticipated sales. The company’s Personal Care and Home Care business units posted year on year underlying sales growth rates of 3% and 5.7% respectively, buoyed by expanding volumes and selling prices. However, its Foods and Refreshment segments continued to drag overall sales, with year on year underlying sales growth rates standing at (-0.5%) and 0.5% respectively for Q3FY14. Both these segments witnessed a contraction in underlying volumes, indicating lower consumption from customers.
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Asia/AMET/RUB and Europe to Weigh on Results
Sales from Unilever’s largest geographic segment, which includes Asia, Africa, the Middle East and Turkey (AMET) and Russia, Ukraine and Belarus (RUB), registered a marginal increase from a prior year comparable period due to milder exchange rate impacts. However, underlying sales growth in these regions slowed down sharply, contracting from 6.2% in Q3FY13 to 3.1% in Q3FY14, driven down primarily by a deceleration in volume growth. Underlying volume growth for Q3FY14 stood at 0.5% compared to 4.5% in Q3FY13. This sharp decline in volume growth was a combined result of uncertain economic situation and weak consumer sentiment in the Middle East and the RUB region.
Additionally, a sharp slowdown in market growth rates in China for FMCG products, particularly in hypermarkets in tier 1 cities, triggered significant adjustments in inventory stocks across Unilever’s extended supply chain including retailers, wholesalers and distributors. [1] This trade destocking within China alone contributed to nearly 2% in decline in growth from the Asia/AMET/RUB geography for Unilever in Q3FY14. In absolute terms, the China destocking across Unilever’s supply chain network resulted in a 20% year-on-year decline in underlying sales from the region. [1] The company expects this weakness to continue at a similar level going into Q4FY14, which should weigh on results for Unilever.
Furthermore, Unilever’s European business segment continued to underperform. Through the quarter, Unilever registered sales of €3.41 billion from Europe, 4.4% lower than sales from Q3FY13. Underlying sales, which exclude currency fluctuations and inorganic growth contributors, registered a year on year decline of 4.3% during the quarter. Selling prices were down 2.7% from a prior year period as Europe continues to struggle with a deflationary environment.
Additionally, volumes declined 1.7% due to unfavorable weather conditions and weakening consumer sentiment. Unilever’s Icecream business, which is a major contributor to overall sales, declined over 10% last quarter to add to the existing weak market environment. [2] Poor weather in July and August 2014 evened out Unilever’s gains for the nine months in FY14 in its Icecream business, and resulted in 2% of the 4.3% decline in quarterly underlying sales for Unilever from Europe. [3] For the upcoming Q4FY14, Unilever expects significant weakness in sales from the European market, which is already declining in value at 2% year on year.
Cost Savings Should Prop Up FY14 Margins
Despite the declining sales from weak consumer sentiment in developed markets and slowing emerging markets, Unilever has been able to deliver stable margin performance. The company has resorted to gradually streamline its supply chain operations and absorb any associated costs, which have ranged within 1% of its core operating margin historically. Additionally, Unilever has laid off close to 1,400 support and management roles this year to contain overhead expenses and maintain margin levels. [3] On an annualized basis, Unilever is on track to meeting its Project Half savings target of €500 million through FY14. [3]
The company has increased its focus on using various digital marketing channels to advertise its products as opposed to traditional advertising channels. This has cut agency fees and production costs as a percentage of media expenses by 4% to 20%. [3] Furthermore, the move to digital advertising has resulted in better returns on marketing investments, particularly on mobile platforms, and digital ad spend currently accounts for 20% of total ad spend for Unilever. [3] We believe these cost savings initiatives should boost margin performance for Unilever going forward, although sales are likely to remain under pressure.
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More Trefis Research
- Unilever Q3FY14 Trading Statement, Unilever IR, October 2014 [↩] [↩]
- Unilever plc, Q3 2014 Sales/ Trading Statement Call, Seeking Alpha, October 2014 [↩]
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