What To Expect From Unilever’s Q2 Earnings

by Trefis Team
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Unilever Group
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Unilever (NYSE:UL)┬áis scheduled to announce its second quarter results on Thursday, July 20. The company reported better-than-expected first quarter results, as growth trends continued to reflect in both organic sales and net sales, which has been a rare event over the past 2 years. The company’s organic growth of 2.9% was led by higher pricing, especially in the refreshments business, which saw underlying price growth (UPG) of 5%. This was again led by premium ice cream brands like Talenti.

Unilever has guided for an 80 bps rise in its operating margin for full year 2017, primarily due to the benefits from its ‘Connected 4 Growth’ initiative (started last year), which includes supply chain simplification, innovation, and cost saving initiatives such as zero-based budgeting. In addition, the company also expects 3% to 5% underlying sales growth for the full year.

Food Division In Focus

Unilever’s food division has been one of the most profitable divisions for the company. Food is the second largest contributor to the company’s revenues and accounts for almost 23% of its total valuation, per our estimates. However, the division has been facing some heat for a while now, due to some underperforming brands and slow economic growth in certain geographies.

In Q1, Unilever’s food division (including spreads) witnessed a disappointing performance with flat organic sales and negative volume growth. However, the company reported a 3.5% growth, along with better volumes, after excluding spreads from the results. The company intends to divest its spreads business going forward, and accordingly began reporting its food sales excluding spreads in the first quarter. Moreover, the company also bought Sir Kensington’s in April, which is known for producing natural non-GMO condiments. These events┬áindicate that the company is moving away from artificially processed food products and is looking for high-growth products that can add to its valuation. In fact, the natural food market could provide a bigger growth opportunity to the company, as the global organic food market is expected to grow at a compound annual growth rate (CAGR) of over 16% through 2020, much faster than the global packaged food market, which is expected to grow at 4.5% by 2020.

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Unilever’s food division’s contribution to the company’s total EBITDA has declined significantly, from 41% in 2010 to 27% in 2016. However, we expect the company to recover from the sharp decline due to its heavy focus on cost saving programs, and the likely divestiture of its spreads business.

See our complete analysis for Unilever here

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