Unilever’s Q2, Fiscal First Half Results and Future Outlook

by Trefis Team
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Unilever Group
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Unilever‘s (NYSE: UL) underlying sales grew 1.9% year-over-year (y-o-y) in Q2, which came in below consensus estimates. The company reported that the Brazilian transport strike and weaker pricing weighed on sales during the quarter. To add to that, the company’s ice cream sales also slowed down in Q2. However, the company’s underlying gross margin and earnings per share topped the market estimates in the quarter.

In the fiscal first-half, Unilever’s turnover revenues decreased 5% year-over-year (y-o-y), primarily due to a negative currency impact of 8.9%. In addition, the company’s diluted earnings per share for the first half grew slightly y-o-y to about €1.10. Unilever’s organic growth of 2.5%, mostly comprised of volume growth of 2.2% in the first half. Excluding spreads from the results, Unilever’s organic sales grew 2.7%, led by volume growth of 2.5%. The company was not able to generate significant growth from the spreads business of late, which resulted in the divestiture of its spreads business to KKR. This transaction was completed on July 2, so Spreads will no longer be consolidated in the company’s results going forward.

Our $60 price estimate for Unilever’s stock is slightly ahead of the current market price. We have created an Interactive Dashboard for Unilever which outlines our takeaways from the company’s fiscal first-half results. We have also estimated the company’s full-year fiscal 2018 results in this dashboard (in U.S. dollars). You can modify our forecasts to see the impact any changes would have on the company’s earnings and valuation.

Emerging Markets Lead The Way

Emerging markets play a vital role in Unilever’s business, as almost 60% of its total revenues came from these markets in fiscal first half. Unilever’s emerging markets grew 4% in the first half, whereas developed markets remained broadly flat. Within emerging markets – Turkey, China, and India performed well, while the Indonesian market remained soft. In addition, sales in Brazil were severely impacted by as much as 9% y-o-y, due to the trucker strike.

Future Outlook

Going forward, Unilever continues to forecast underlying sales growth of 3% to 5% for 2018 and an improvement to 20% in the underlying operating margin, which will keep it on track for its 2020 targets. For the full year, the company also expects to be at or around its 2x net debt-to-EBITDA ratio.

In the fiscal second half, the company expects price growth to pick up as commodity inflation increases. Also, the company plans to annualize the implementation of GST in India, which has had an adverse impact at the global level of around 30 basis points on pricing.

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