Unilever’s Volume Growth Slows in Q2, As Personal Care Set to Take Center Stage Going Forward

UL: Unilever logo

Consumer processed goods giant Unilever (NYSE:UL) reported its fiscal 2015 second quarter results on July 23rd. [1] The company’s volume growth slowed in the second quarter amidst difficult macroeconomic conditions worldwide. Slowing growth in emerging markets, deflationary conditions in Europe and heavy competitive pressure in North America contributed to Unilever’s middling performance in the second quarter. [2] Nevertheless, we believe that Unilever’s underlying growth factors, including sustained volume growth through a strong innovation pipeline, remain strong. We expect that the structural changes that Unilever is currently putting in place can provide a strong growth momentum once the global macroeconomic conditions improve.

These structural changes consist of an increased importance of the Personal Care division for the company, especially in the premium category. Unilever has stated that its premium category products are growing at a faster rate than the overall product category, [2] which lends credence to the company’s new premium-focused strategy. Secondly, Unilever is also implementing a fundamental change in focus areas of innovation by allocating more resources to product discovery and design (development of new products) rather than delivery (supply chain mechanism). [3] We believe that these and other long-term strategic moves could help Unilever achieve sustainable top-line and bottom-line expansion even in the current macro environment. They are also likely to place Unilever in a strong position to benefit from an improvement in the global economic scenario in the future. (Read: Here’s How Unilever Plans to Revive Growth)

Our price estimate of $39 for Unilever is about 10% lower than its current market price.

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See our complete analysis for Unilever here

Poor Macro Environment Drags Down Underlying Sales Growth

Unilever’s underlying sales growth  was 2.9% in the second quarter of 2015, which is considerably lower compared to 3.8% in the same period previous year. The company attributed the lower sales growth to historically low growth rates in the emerging markets, deflationary conditions in Europe, and heavy pricing competition in North America. Underlying sales growth in Europe contracted by nearly 1% due to a slump in pricing. On the other hand, Latin America outperformed the rest of the regions and achieved double-digit underlying sales growth driven by volume growth as well as higher pricing. [2]

On a divisional basis, the Home Care division outperformed the rest with 5.9% underlying sales growth, driven by strong volume growth from introduction of new innovative products. Personal Care, which is the largest division, achieved moderate underlying sales growth of 3.3% driven nearly equally by volume and pricing. The Foods division was flat year on year as the minimal volume growth was wiped out by price deflation. [1]

While the underlying sales growth was lower compared to the same period previous year, we believe that Unilever’s underlying growth factors remain strong. The bulk of Unilever’s underlying sales growth was derived through volume growth rather than relying on price hikes, which is an encouraging indicator of the potential for top-line growth. That the company was able to achieve volume expansion in three of its four divisions even in an adverse macroeconomic scenario underscores the strength of Unilever’s product portfolio. The company expects volume growth to continue in the second half of the year while pricing growth is expected to slow down. [2]

Personal Care Set to Take Center-Stage

Going forward, Unilever’s focus is set to be heavily tipped towards the Personal Care business. In the second quarter, the Personal Care division accounted for 36% of the company’s total revenues. Unilever intends to bring this proportion up to 50% over the next few years, [2] underscoring the importance of the division for the company.

Further, Unilever has stated that having acquired four personal care companies since March, it will now pause its acquisition spree to focus on the integration of the newly acquired companies. The company believes that its Prestige business is now rapidly approaching €500 million in revenues, which is sufficient critical mass to begin growing the premium personal care segment organically. [2]

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More Trefis Research

  1. Unilever Fiscal 2015 Second Quarter SEC Filing [] []
  2. Unilever Fiscal 2015 Second Quarter Earnings Conference Call Transcript, Seeking Alpha, July 23, 2015 [] [] [] [] [] []
  3. Unilever at Deutsche Bank Conference, June 11, 2015 []