Unilever (NYSE:UL) released its Q1’17 earnings on April 20th, and went on to surprise the market with growth in both organic sales and net sales, which has been a rare event over the past 2 years. Organic sales (Underlying Sales Growth) grew by 2.9% led by higher pricing, especially in the refreshments business, which saw an underlying price growth (UPG) of 5%. This was again led by premium ice cream brands like Talenti, GROM, and Magnum. The company doesn’t give out its detailed financials on a quarterly basis, but it has guided for an 80 bps rise in its operating margin for the full year 2017, which is because it has started reaping the benefits from its ‘Connected 4 Growth’ initiative started last year, that includes simplification of supply chain, innovation, and cost saving initiatives such as zero-based budgeting.
The food division, excluding the spreads business, finally showed the symptoms of growth which actually sent out a positive message for the investors worried about this struggling segment. Another positive being that geographically, the growth was led by emerging markets like Africa & Asia from where Unilever derives around 55% of its sales.
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Food Division Will Get Leaner, And New Acquisitions Can Boost Its Growth!
Including the spreads business, the food division showed a dismal performance with flat organic sales and negative volume growth. However, excluding spreads, the organic sales growth returned to a positive territory along with better volumes. Also, on the same day the company has announced that it will buy Sir Kensington’s for $140 million. Sir Kensington’s produces natural non-GMO and eggless mayonnaise, and this is a clear indication that the company is turning away from the artificially processed food products after it had a bitter experience with spreads and margarine. This provides a better growth opportunity, as well, because the natural food market is expected to grow a lot faster than the artificially packaged food market. Technavio estimates the healthy food market to grow at 6% CAGR till 2020. Apart from this, it is a positive sign that the company may look forward to re-invest the cash it will receive after the divestiture of the spreads business, to buy such high growth companies that can add to its valuation.
Emerging Markets Are Likely To Lead The Way
The improvement in macro conditions in emerging nations played a vital role in Unilever’s net sales growth. The improvement in the currency situation of countries like India and Brazil provided a 2.4% tailwind to Unilever’s net sales which rose by 6.1%. Going forward, Unilever projects that the economic slowdown in the developing countries might have bottomed out. This is another factor which can have a major impact on the future performance of the company as the revenues from emerging nations make up the majority of its top line. However, the performance in developed markets like North America and Europe continued to disappoint because of weak market conditions.