Unilever’s Revenues Decline in 2014 on Emerging Markets Slowdown, Profits Jump on Cost Savings
Unilever (NYSE: UL) reported a year-on-year decline of 2.7% in 2014 revenues and an expansion of 5% in net profit in full year when it released its results on January 20. Full year revenue of €48.4 billion were higher than the consensus estimate of €43.3 billion. [1] Non-GAAP EPS was €1.61, beating the consensus estimate of €1.42 [1] by a comfortable margin.
Although Unilever does not provide earnings guidance, the company has stated that it does not expect any meaningful improvement in market conditions in 2015. As a result, next year’s performance is expected to be in line with 2014, with a weak first quarter but improvement in growth over the rest of the year. [2]
We are currently in the process of updating our price estimate of $47 to reflect the fourth quarter results.
See our complete analysis of Unilever here
Underlying Sales Growth Overshadowed by Currency Headwinds and Disposals
The decline in revenues during the year was primarily due to unfavorable currency movements and the disposal of a number of businesses during the year. Currency headwinds alone lowered revenue growth by as much as 4.6 percentage points. Year-on-year growth was also lower because of higher base of the previous year, due to sale of major brands like Ragu and Bertolli pasta sauces in 2014. In contrast, non-GAAP revenue growth excluding the impact of currency changes and acquisitions/disposals (‘underlying sales growth’) was 2.9% compared to the previous year. This indicates that the company managed to grow revenues on a like-for-like basis despite adverse macroeconomic conditions.
Still, underlying sales growth was lower than the 4.3% growth in 2013. Unilever’s global sales suffered in 2014 because of slowdown in the emerging markets like China, Thailand and Africa, and faltering consumer spending in Europe. Particularly in China, plunging demand resulted in the continuation of destocking measures through the fourth quarter, resulting in a 20% fall in sales. The slowdown in these regions negated double-digit growth in other regions like Latin America, India and Indonesia. As a result, the underlying volume growth decelerated to just 1% compared to 2.5% in 2013.
On the other hand, Unilever battled adverse currency movements and the resultant higher commodity costs during the year by raising prices across all its businesses. The increase in pricing was predominantly focused on Latin America to counter unusually high inflation in Venezuela and Argentina. Consequently, underlying price growth was 1.9% compared to 1.8% in 2013.
Cost Savings Prop Up Bottom Line as Gross Margin Falls
Unilever’s gross margin declined by 20 basis points in 2014 to 41.4%, compared to 41.2% in 2013. The decline was a result of commodity cost inflation in emerging markets due to adverse currency movements. However, gains on sale of businesses, amounting to €960 million (net), boosted operating profit operating profit by 6% year-on-year to reach €8.0 billion. The increase in operating profit trickled down to the bottom line also, which expanded by 5% to reach net profit of €5.5 billion.
Adjusting for the impact of acquisitions/disposals and currency movements, non-GAAP operating profit (‘core operating profit’) was flat while the core operating margin improved by 40 basis points. It is important to note that Unilever was able to maintain the same level of core operating profit despite a lower revenue base resulting from sale of businesses. The company was able to achieve this by across-the-board pricing growth, wide-ranging cost savings and characteristic margin-accretive innovation. Savings from Project Half accelerated during the year and helped reduce overhead as a percent of sales by 60 basis points, while efficiencies in cost of producing advertising resulted in additional economies. Unilever also sped up the roll out of low-cost business models in emerging markets, which further helped curtail overall costs to a limited extent.
Foods Business Continues to Drag Down Overall Performance
Unilever achieved positive underlying sales growth in all its businesses except the Foods division. Growth was led by the Home Care division with a commendable 5.4% underlying sales growth, followed by the Refreshments division and Personal Care division with 2% and 1.2% underlying sales growth respectively. In contrast, the Foods division registered a decline of 0.6% in underlying sales growth due to a drop in volumes.
Growth in the Home Care division was led by introduction of new products in nascent markets like Saudi Arabia, Africa and the Gulf. The household cleaning sub-segment outpaced the market and delivered strong growth on the back of marquee brands like Cif, Domestos and Sunlight. This allowed the overall Home Care division to clock in a commendable underlying volume growth of 5.8%.
The 3.8% underlying sales growth in the Refreshment division was led by market share gains in the US ice cream market, which returned to growth territory in 2014. The company implemented a strong innovation program which helped eke out a 2% volume growth for the year, despite poor performance in the second and third quarters.
The Personal Care division also outpaced the market with 3.5% underlying sales growth, although this was led primarily by increased pricing. The company was able to achieve volume growth of 3.5% despite weak markets and strong competition, thanks to strong performance of key brands like Dove, Lifebuoy and Sunsilk. Unilever also continued to utilize margin-accretive innovation for developing new products for specific markets. [3]
In contrast to the above growth stories, the Foods division continued to be bogged down by slump in sales of spreads due to lower demand for margarines in Europe and North America. Poor performance of spreads wiped out growth in savories, dressings and cooking ingredients, leading to a 1.1% fall in volumes.
However, Unilever announced the separation of the European and North American Foods business into a separate, stand-alone company during the fourth quarter. This move is expected to be completed by the middle of 2015, thus freeing the company of a consistently poor-performing business and thereby improving overall performance in the future.
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- Based on 2014 average rate of Euro per USD of €0.75 [↩] [↩]
- Unilever Investor Relations, January 20, 2015 [↩]
- Personal-Care Firms Uncover New Markets, Wall Street Journal, May 19, 2014 [↩]