Unilever: Key Trends to Watch in 2015
Unilever (NYSE: UL) is one of the world’s largest consumer packaged goods companies and operates in Personal Care, Home Care, Foods, and Refreshments segments. Its market capitalization of about $125 billion is next only to that of Procter & Gamble (NYSE: PG) in the CPG (Consumer Personal Goods) industry. Unilever’s shares have gained 8% year to date, primarily on account of a 7% uptick after the company announced mixed results for fiscal 2014 (Read: Unilever’s Revenues Decline in 2014 on Emerging Markets Slowdown, Profits Jump on Cost Savings).
In 2014, Unilever’s revenues took a hit from severe currency headwinds and a slowdown in emerging markets, resulting in a decline of 2.7% in revenues. Year on year, the revenue comparison was also negatively impacted by disposal of a number of businesses in the foods segment during 2014. On the other hand, acquisitions in the personal care segment were not large enough to have a meaningful impact on overall performance. Unilever’s bottom lines fared slightly better as operating profit expanded 6% year on year on account of cost savings, despite a decline of 20 basis points in gross margin.
In view of the above, it can be surmised that the key trends that are likely to have the most impact Unilever’s performance in fiscal 2015, are:
- Acquisition-fueled growth in Personal Care segment
- Divestments in Foods business
- Cost savings
In this report, we take a look at the each of the above trends and how they may impact Unilever’s performance.
We have a price estimate of $40 for Unilever, which is about 10% lower than its current market price.
See our complete analysis of Unilever here
Acquisition-fueled Growth in Personal Care Segment
We believe that the most important factor to watch out for in 2015 will be Unilever’s inorganic expansion strategy in the Personal Care segment. Unilever’s CEO Paul Polman has repeatedly stressed the company’s strategy of initiating acquisition-fueled expansion in the personal care business, specifically in the premium segments. [1]
However, so far the company has been slow on the draw and has made only a few minor acquisitions. Recent acquisitions include the purchase of Camay and Zest soap brands from Procter & Gamble (Read: P&G Unloads Camay and Zest Brands to Unilever), and the British skincare brand, REN Skincare. [2] The combined incremental revenues from the aforementioned acquisitions will be less than $300 million. In comparison, Unilever’s revenues from the Personal Care segment amounted to nearly $29 billion in 2014, putting the incremental revenue from the above acquisitions at just over 1%. Therefore, these acquisitions are relatively inconsequential additions to Unilever’s Personal Care portfolio.
The lack of a groundbreaking move in Unilever’s attempts to consolidate its position in the global personal care industry has made investors restless. [3] This is despite Mr. Polman’s specific announcement in the fourth quarter earnings call that more acquisitions in the personal care brand is one of the company’s top agendas in 2015. [4]
In light of the above, it is highly likely that Unilever will accelerate its acquisitions drive in the premium personal care segment in 2015, making it the top factor to watch out for this year. We conservatively estimate that Unilever’s share of the global skin and hair care market will expand from 10.5% in 2014 to 10.7% in 2015.
Divestments in Foods Business
The flip side of Unilever’s expansion in the personal care business is its growing disinterest in the Foods business. The company has been divesting components of its Foods business since as far back as 2008, and it upped the tempo in 2014. Last year, Unilever announced the sale of seven slow-growth food brands, including the Ragu, Bertolli, and Royals pasta sauce brands, and the Jack Link’s meat sauce business. It also announced that it will split its spreads business into a standalone company. (Read: Personal Care Companies Shed Weight In 2014)
Unilever has said that it will continue “modest pruning” of its non-core brands in 2015, [4] indicating that some more of its foods brands may be up for sale this year. Consequently, we believe that Unilever’s market share in the global Grocery market will decline from 41.2% in 2014 to 37.2% in 2015.
However, the move is also paying off dividends as profitability of the Foods business improved substantially in 2014. Thanks to sale of under-performing and low margin businesses, the EBITDA margin of Unilever’s Foods segment expanded to 32.7% in 2014, compared to 25.8% in 2013. Continued disposal of more low-margin brands is expected to further improve margins of the Foods segment in 2015.
We estimate that the Foods division’s EBITDA margin will expand to 37.7% in 2015, from 32.7% in 2014. Since the Foods business still accounts for over a quarter of Unilever’s total revenues, improvement in its margins will have a considerably expand the overall bottom lines as well.
Cost Savings
In 2014, Unilever improved its core (non-GAAP) operating margin by 40 basis points despite a decline in revenue as well as gross margin. It was able to achieve this feat by a combination of across the board price hikes and wide-ranging cost savings. The deceleration in revenues was primarily because of unfavorable currency movements, while the decline in gross margin occurred due to commodity cost inflation from higher import costs. Unilever countered these adverse macroeconomic factors by cutting overhead costs and achieving efficiencies in advertising costs.
The company has stated that it expects unfavorable currency movements to persist in 2015, although commodity costs may provide a low single digit tailwind. [4] Since price hikes can offset foreign exchange headwinds on revenues only to a limited extent, Unilever needs continue cutting costs to prevent margin erosion. Therefore, the quantum of cost savings that Unilever actually generates in cost savings and the resultant impact on bottom lines will be a closely watched factor in 2015. We forecast Unilever’s overall adjusted EBITDA margin to expand by 1 percentage point to reach 20.9% in 2015, compared to 19.9% in 2014.
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More Trefis Research
- Unilever CEO says eyeing higher-priced personal care brands, Reuters, 4 December 2014 [↩]
- Unilever to acquire REN Skincare, Unilever Press Release, March 2, 2015 [↩]
- Frustrated Unilever investors call for shake-up, Financial Times, March 1, 2015 [↩]
- Unilever Q4 FY 2014 Earnings Call Transcript, Seeking Alpha, January 20, 2015 [↩] [↩] [↩]