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Unilever (UL)

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WHAT HAS CHANGED?

  1. Latest Earnings

Unilever released its half year reports on 25th July 2019. The revenue was reported at $29.7 million for the first 6 months of 2019, down by 5.1% y-o-y. The fall was primarily due to the conversion of euro to dollar. The earnings were reported nearly flat at $1.31 for the half year. Operating Margin improved by 50 basis points. Emerging markets saw an underlying sales growth of 6.2% with volume 2.5% and price 3.6% For the full year the company expects underlying sales growth to be in the lower half of the multi-year 3-5% range and an improvement in underlying operating margin.

  1. Disposal of Spreads Business

Unilever sold its spreads business to KKR for about $8 billion (€6.825 billion) on a cash-free and debt-free basis in 2018. Unilever was planning to divest the spreads business for some time, largely to boost shareholder returns after refusing a $143 billion takeover from Kraft Heinz in February 2017. The company was not able to generate significant growth from the spreads business, which explained this move in large part. Unilever also started reporting its Foods business results along with the Refreshment business, after the disposal of its underperforming Spreads business.

  1. Focus on Personal Care Division

Personal Care is Unilever’s largest division, having overtaken the Foods division in 2011 to take the top spot. The company’s shifting priority is evident from the fact that the revenue share of its Foods unit had fallen from 30% in 2011 to 23% in 2017, while the share of its Personal Care segment grew from 33% to 39% over the same period.

In its 2013 annual report, Unilever stated that it is utilizing cash flows from its Foods business to fund acquisitions in the Personal Care and Home Care categories. This marked the beginning of Unilever’s enhanced focus on the Personal Care category, which was refined further in the subsequent years. More recently, Unilever named the expansion of the segment through acquisitions as one of its top priorities. Some of the recent acquisitions in the space include Quala, Carver Korea, Sundial, and Schmidt's Naturals.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Personal Care EBITDA Margin: Unilever's Personal Care EBITDA margin has steadily increased from 21.8% in 2014 to 24.3% in 2018. This was largely due to the growing business in this segment from related acquisitions. We expect the segment's EBITA margins to stabilize at 24.7% by the end of our forecast period. Our price estimate for Unilever can increase by 5% if Personal Care Ebitda margins grow and reach 28% by the end of our forecast period.

BUSINESS SUMMARY

Unilever N.V. (NYSE: UN) is a public limited company registered in the Netherlands. The company's shares are and depositary receipts for shares are listed on the Euronext Amsterdam and New York Stock Exchange.

Unilever PLC (NYSE: UL) is a public limited company registered in the UK and Wales which has shares listed on the London Stock Exchange, and American Depositary Receipts, on the New York Stock Exchange. The two parent companies, NV and PLC, together with their group companies, operate as a single economic entity, the Unilever Group.

Business Information

Unilever is a market leader in mass skin care products and deodorants, and the second largest player in daily hair care products. Principal brands in personal care include Dove, Lux, and Rexona (including Sure and Degree), Sunsilk (including Seda / Sedal), Axe and Pond’s. Other important brands include Suave, Clear, Lifebuoy and Vaseline, together with Signal and Close Up in oral care. Personal care accounts for 40% of Unilever's revenues and 33% of its operating profit.

Unilever is also a global major in savory products and dressings. The company manufactures soups, bouillons, sauces, snacks, mayonnaise, salad dressings, olive oil, margarine, spreads and cooking products such as liquid margarine, and some frozen foods. It markets them under key brands such as Knorr, Hellmann’s, Becel/Flora (Healthy Heart), Rama/Blue Band (Family Goodness), Calvé, WishBone, Amora, Ragú and Bertolli.

Unilever is also a leading manufacturer of ice cream sold under the international Heart brand, including Cornetto, Magnum, Carte d’Or, Solero, Wall’s, Kibon, Algida, and Ola. Other popular brands include Ben & Jerry’s, Breyers, Klondike, and Popsicle. Unilever is a leading manufacturer of tea beverages. Principal tea brands are Lipton, Brooke Bond, and PG Tips. The ice cream and beverages business segment, as reported by the company, also includes weight management products, the principal one being Slim-Fast. It also includes nutritionally enhanced products that are sold in developing markets. Foods & beverages account for 40% of Unilever's revenues and 56% of its operating profit.

Unilever's home care business includes laundry products, such as tablets, traditional powders, and liquids for washing clothes. Tailored products including soap bars are available for lower-income consumers. Unilever's brands include Omo (‘Dirt is Good’ platform), Surf, Comfort, Radiant, Skip and Snuggle. Unilever's household care products include surface cleaners and bleach, which are sold under the Cif, Domestos and Sun / Sunlight brands. Home care accounts for 20% of Unilever's revenues and 11% of its operating profits.

Unilever's strategy for growth has been to strengthen its existing popular brands through innovation and by improving its products rapidly to suit the latest consumer preferences. Unilever has also accelerated changes in its production & distribution systems to make its supply chain more cost-competitive and to deliver its products faster across multiple markets. "One Unilever" program is one such example. Unilever's business is highly diversified and it makes conscious efforts to have a workforce that is equally diverse so that it can cater to its consumers in international markets more efficiently.

SOURCES OF VALUE

Trefis believes that Unilever’s Personal Care business, specifically the Skin and Hair Care segment, is the most value accretive division of the company. This is because of the following reasons:

- Led by globally renowned brands like Dove, Lux, and Sunsilk, the Skin and Hair Care division accounted for 27% of Unilever’s total revenues in 2017. The division reported an EBITDA margin of 22% in 2016, which is almost 10 percentage points higher than the EBITDA margin of Unilever’s Fabric Care and Home Care divisions.

- The company is currently pursuing an aggressive acquisition strategy in the personal care business, specifically in the premium category. It acquired a subscription-based men's grooming brand 'Dollar Shave Club' for $1 Billion to enter into shaving market. The strategy is aimed at consolidating Unilever’s market share in the global personal care products industry and shoring up its defense against Procter & Gamble’s increased focus in this sector. As a result, we believe that the revenue share of Unilever’s Skin and Hair Care division is likely to increase in the medium term. Consequently, Unilever is likely to derive an increasingly higher proportion of its value from the Skin and Hair Care segment in the future.

- It is worth noting that the Skin and Hair Care division’s revenue share in 2014 was the same as that of Unilever’s Food division. Food division's revenue share fell to 24% in 2016. This is because Unilever has been shifting its focus away from the Food business in recent years and is giving more emphasis to the personal care business. This is clear from the fact that it has been divesting its foods brands since 2008. In 2014 alone, the company sold the popular Ragu and Bertolli pasta brands and announced that it will split its spreads business into a separate, standalone company. This strategy is in stark contrast to Unilever’s acquisitive expansion strategy in the personal care business. Therefore, although the foods business may currently form a substantial part of Unilever’s operations, we believe that its importance for Unilever is likely to decline over the medium term.

KEY TRENDS

Heavy focus on premium personal care segment

Unilever is pursuing an acquisition-driven strategy for its personal care business, with a specific focus on the premium segment. In calendar 2015, it has acquired several relatively small premium skincare brands like REN Skincare, seventh generation and Murad, among others. In the fiscal 2015 second-quarter earnings call, Unilever stated that it plans to bring up the revenue share of its personal care business to 50%. This demonstrates the extent of the company's focus on the personal care sector.

Aggressive expansion across emerging markets

While P&G has set a target to add 1 billion new customers this decade, Unilever has set an ambitious target of doubling its sales by 2020. Both consumer giants have been pursuing aggressive expansion across emerging markets of Asia, Africa, and Latin America by entering new country-product categories with huge investments in distribution and marketing.

Emerging markets are the next frontier of growth for the personal care products industry. Growth in the developed markets is expected to remain in the 1% to 2% range over the medium term due to sluggish consumption and market saturation. On the other hand, expanding GDP of a number of emerging market countries is expected to help the personal care products industry to grow by mid-single digits over the medium term.

Though Unilever trails P&G in terms of global sales, it has a larger presence in emerging markets. While P&G generates less than 40% of its total revenues from emerging markets, Unilever earns over 55% of its sales from these markets. By 2020, Unilever expects developing markets to account for 70% of its total sales, with about two-thirds of that coming from growth in the overall size of those markets and the other third from an increase in Unilever’s share of those expanding markets. It is also likely to benefit from P&G's recent decision to put its expansion in emerging markets on hold to divert focus on reclaiming market share in its core country-product categories.

Unilever has stronger distribution networks in emerging markets compared to P&G (whose emerging markets expansion has turned out to be hugely expensive) and also gets strength from a strong "shakti women" network for sales in rural and remote markets of Asia and Africa. Unilever also succeeded in keeping its prices more competitive than its rivals and introduced smaller pack sizes, which has helped it grow volume market share in these markets.

Overhaul of the supply chain and business operations ensure improved efficiency and operating margins

Unilever is gradually integrating its supply chain and business operations to reach a large number of consumers across multiple markets in a more cost-effective way. Although restructuring charges related to streamlining of existing production and distribution infrastructure may negatively impact Unilever's operating margins in the short term, cost savings from increased efficiency is expected to drive margins higher in the long term.

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