An Overview Of Unilever’s 2017 Performance

by Trefis Team
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Unilever (NYSE: UL) has had a better-than-expected 2017 so far, as growth trends continued to reflect in both organic sales and net sales, which has been a rare event over the past 2 years. In fact, the company’s stock is now trading almost 40% higher than its price at the beginning of the year. In the first nine months of 2017, the company’s organic growth of 2.8% was led by an underlying price growth (UPG) of 2.8% and flat volumes. During this period, Unilever’s turnover increased 3% year-over-year (y-o-y), primarily driven by growth in all categories. The company’s overall growth is fairly impressive given the tough market conditions in some international markets.

Our $54 price estimate for Unilever’s stock is slightly lower than the current market price.

Sale Of Underperforming Spreads Business

Unilever recently announced that it will be selling its spreads business to KKR for about $8 billion (€6.825 billion) on a cash-free and debt-free basis. The deal is expected to close by the middle of 2018. Unilever had announced its plans to divest the spreads business in April, largely to boost shareholder returns after refusing a $143 billion takeover bid from Kraft Heinz in February. The company is cutting costs, buying back shares, and increasing dividends to appease its investors. It has not been able to generate significant growth from the spreads business of late, which explains this move in large part.

Food is the second largest contributor to Unilever’s revenues, accounting for almost 23% of its total valuation, per our estimates. However, the division has been facing some heat for a while now, due to the underperforming spreads business and slow economic growth in certain geographies. Accordingly, Unilever was looking to sell off the spreads segment and was reporting its food sales excluding spreads from the first quarter of this year. In the first nine months of fiscal 2017, the company’s food division (including spreads) saw organic sales growth of 0.9% year-over-year with negative volume growth. However, the company reported 2.2% growth, along with better volumes, after excluding spreads from the results.

Boost In Refreshment Business

Unilever’s refreshments business includes brands such as Lipton, Slim Fast, and Ben & Jerry’s. The segment contributes close to 20% of the company’s total revenues and accounts for 18% of its value, per Trefis estimates. Unilever is the leader in the global ice cream market and accounts for 22% of the total market. There has been a strong growth in luxury products such as gelato and dairy-free products made with soy milk, for instance, which helped Unilever’s Refreshments business grow of late. It should be noted that the segment witnesses increasing competition from organic food brands and alternative diet products, as consumers have become more health conscious. As a result, the company is also building its presence in the premium tea category with brands such as T2, Pure Leaf, and other specialty teas, in order to boost growth in the beverage market as well. Factors such as growth in premium products and growing consumption in emerging markets (India and China) could help the company pick up its growth in this segment. Going forward, we expect this segment to become Unilever’s fastest-growing segment and reach nearly $14 billion in revenues by 2020, up from an $11.4 billion forecast for 2017.

Emerging Markets Lead The Way

Emerging markets play a vital role in the company’s health, as almost 55% of its total revenues come from these markets. The market conditions remained challenging in the first half of 2017, driven by virtually flat volumes, driven by economic conditions in Brazil and weak trade stock levels due to the implementation of the Goods and Services Tax (GST) in India. However, the macro conditions in these economies improved in the third quarter. On the other hand, Unilever’s performance in developed markets such as North America and Europe continued to disappoint because of weak market conditions.

Future Outlook

For the full-year, Unilever expects its underlying sales growth to be in the range of 3% to 5%, along with an improvement in
the underlying operating margin of at least 100 basis points. The company is expected to benefit from its ‘Connected 4 Growth’ initiative (started last year), which includes supply chain simplification, innovation, and cost-saving initiatives such as zero-based budgeting. Going forward, the company expects increased investment in brands and marketing, which could help grow volumes in the Personal Care segment.

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