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With this report we provide factual feedback on the TMICC CMD With this report we provide factual feedback on The Magnum Ice Cream Company''s (TMICC''s) CMD that took place on 09th September in London. TMICC overview TMICC is the #1 global Ice Cream player with a retail market share (21%) close to 2x its nearest rival (Froneri at 11%). It owns 4 of the top 5 brands (the Heartbrand, Magnum, BandJ and Cornetto) and generates ~30% of its sales in emerging markets. TMICC owns ~3m ice cream cabinets which is comparable to the #2, 3 and 4 players combined. 10% of TMICC''s sales are generated from licenses. Key elements of guidance While we provide a more comprehensive guidance summary within, the key expectations are average annual LFL sales growth over the mid-term (from 2026) of +3-5% and average annual adj. EBITDA margin expansion over the mid-term (from 2026) of +40-60bp. Market growth expected at +3-4% The Ice Cream market is worth an est. EUR75bn (2024 at retail) and has consistently grown at ~+3-4% per annum (through both volume and value) and is expected to continue to do so. Key future market growth drivers include: snacking occasions; premiumisation and availability (the latter being a function of outlet density, cabinet penetration and digital commerce). GLP-1s are expected to have a limited impact Even if GLP-1 penetration were to increase to 8-11% of the US population by 2030, TMICC estimates that this would have only a ~(0.5)% impact on US Ice Cream consumption. TMICC noted that Ice Cream will be relatively less impacted than many other snacking areas.
Unilever PLC
What happened? Unilever''s soon-to-be-demerged Ice Cream business (The Magnum Ice Cream Company ''TMICC'') has issued a press release and presentation ahead of its CMD which will be taking place later today. The key elements of the release/presentation are outlined below: . Average annual LFL sales growth: +3-5% in the mid-term from 2026. Note: TMICC expects market growth of +3-4%; . Average annual EBITDA margin improvement: +40-60bp in the mid-term from 2026; . FCF: EUR0.8-1bn in 2028 and 2029; . Productivity: Cumulative gross savings of EUR500m over the mid-term (supply chain: EUR350-380m of savings; overheads: EUR70-100m of savings and tech-enabled productivity: EUR30-50m of savings). Note: the programme has already delivered savings of EUR150m over the last 18 months; . Investment: Capex to increased to ~5% of sales over the mid-term before stabilising at 4-5% of sales over the long-term. Note: AandP was 12.4% of sales in FY24 and is expected to increase to ~13% over the long-term; . Dividend: Pay-out ratio of 40-60% of adjusted net income, with the first dividend to be paid in 2027 for FY26. . B/S: Initial ND/adjusted EBITDA of 2.4x. Plan for a mid-term ND/adjusted EBITDA ratio of 2.0-2.5x, while maintaining a solid investment-grade credit rating; . Timing: Process on track to complete by mid-November 2025. . Retained stake: Unilever will retain 20% stake in TMICC for up to 5 years. The stake will be solid down in an orderly and considered manner (this had already been disclosed by Unilever);
What happened? The Indian Government has announced the approval of a material reduction on GST (VAT) rates on various FMCG products, with the new rates being effective from the 22nd of September. For Unilever''s Indian subsidiary, HUL (c.11% of Unilever''s FY24 sales), this means that GST rates will reduce as follows: . Home Care (c.37% of sales): Old rate: 18%; New rate: 5% . Personal Care (c.36% of sales): Old rate: 18%; New rate: 5% . Food and Refreshment (c.25% of sales): Old rate: 5/12%; New rate: 5% What does it mean for HUL? My Indian colleague (and HUL analyst), Kunal Vora (whom we hold in high esteem), has written two informative notes on the topic (see GST rate cut arrives - Boost for FMCG companies and GST 2.0: Strong push for domestic consumption). Having discussed with Kunal, the impact on HUL is likely to be as follows: . Positive for LFL sales growth: We believe that the change should be positive for LFL sales growth. As to why: i) it will make HUL''s products more price competitive vs. unorganised competition; ii) it is unlikely that all of the GST reduction will be passed on to the consumer (i.e. there will be effective price increases); iii) for price marked packs, it is likely that there will be an increase in grammage (volume); . Positive for margins: While GST gets deducted before reported revenue is struck, we believe that the change will likely be positive for margins as a consequence of effective price increases (as not all of the GST reduction is likely to be passed on to the consumer). Conclusion While HUL shares are exhibiting a relatively muted price reaction, we note that the potential for GST change had been well telegraphed domestically (but less so outside India). We view the Indian GST development as being a modest positive from a wider Unilever perspective. P.S. For those of you thinking about wider staples read across implications, we note that there is no GST on alcohol.
What happened? The Financial Times is reporting that through a continuation fund, Goldman Sachs is poised to buy some of PAI''s stake in Froneri (the #2 global ice cream player after The Magnum Ice Cream Company) at a valuation of EUR15bn (EV). Based upon Froneri''s FY24 financials, we estimate that this equates to a valuation of c.16.2x EV/EBIT and 12.6x EV/EBITDA. Note: We have excluded amortisation of acquired intangibles from Froneri''s definition of EBIT bei. BNPP Exane View: Assuming that the report is correct, this is a positive valuation marker for The Magnum Ice Cream Company ahead of its demerger from Unilever. Note: for further relevant research, see Ice Cream: a demerger reference guide and Ice Cream: a demerger reference guide: part II.
Summary of Q2/H125 results Q2 LFL sales at +3.8% were c.20bp ahead of co. cons, as was volume growth. The only issue is that excluding Ice Cream, Q2 volume growth at +1.1% was light (Bbg cons: +1.6%). Turning towards the bottom-line, the H1 delivery was strong with a high quality 50bp EBIT margin beat, EBIT c.2% ahead of co-consensus and EPS (FD, adj.) c.5% ahead of co. consensus. Q2 DPS at EUR0.4528 was sequentially flat. News We highlight that based upon current FX rates, Unilever expects to grow EPS in FY25. Earnings We revise our FY25e/FY26e/FY27e EPS by c+2% (primarily reflecting increased margins). Investment thesis We believe that LFL/volume growth should meaningfully accelerate in H2 and sentiment towards the Ice Cream demerger can only improve. Rating / target price Our Unilever PLC TP remains unchanged at GBP54. Our Unilever ADR TP moves from USD73 to USD71. We maintain our Outperform rating on Unilever. 15 questions from management Why are you retaining up to a 20% stake in The Magnum Ice Cream Company?
BNPP Exane View Two things of note: targeting 2% vol growth excluding IC in H2 and at current FX levels, are committed to delivering hard FX EPS growth for the year (co. consensus is currently modestly down YOY). As to the stock, a flattish reaction strikes us as being fair (we had worried pre-call that the market would take an uncharitable view). QandA highlights . H2 excl IC: Are targeting vol growth 2% for the remaining company, are confident of that in H2. Market volume growth was 1.2% in Q1 was 1.4% in Q2. Some competitors reducing investment. Have a very strong innovation plan (hitting between April and September in most markets). Expect significant contributions to growth from Indonesia and China; . MandA: Convinced on bolt-on''s, especially BandWB. We like American brands, digitally native with the capacity to travel internationally, Dr Squatch fits this. Wild deo is making a strong entry in the US; . Latam: Strong comps and mkts under pressure. Had to increase prices (FX). Mkt volume growth was +7% in H124, +3% in H224 to flat in H125 to negative in Q2. Are gaining share apart from Laundry Brazil (priced too far in powders, have corrected it and are rolling our Wonder Wash in Q3). Expect a significant improvement in Brazil (and the region), and expect markets to improve by the end of the year; . Asia: Q2 5% in APAC. India: mkt growth improving; some of the Foods drag sequentially getting better; feel confident on the Indian growth trajectory. Indonesia: have made all stock corrections; have price stability; cost base reset; confident on positive vols in H2 (slightly negative in Q2). China: Are comfortable with progress, close to flat vols in Q2 (remain co), but the mkt is challenging (confident of China in growth in Q2); . USA: 4 consec. Qtrs of volume growth 4%, reflects the portfolio and US for US innovation. BandWB and PC will be 75% of the US post the IC demerger. Liquid IV and Nutrafol both approaching USD1bn. Weak in Hair Care, saw...
BNPP Exane View While headlines are all good (Q2 LFL/vol beat, H1 EBIT/EPS beat, FY margin upgrade), there is one issue, namely that the Q2 top-line beat was driven by Ice Cream. Excluding Ice Cream, we estimate that Q2 volumes would have been +1.1% vs. Bbg consensus at +1.6%. Given heightened sensitivity to volumes this reporting season, we would describe Unilever''s results as being good, but probably not good enough. We call the stock down LSD. Headline figures . Q2 LFL: +3.8% (co. cons: +3.6%; Bbg cons: +3.6%) . Q2 Vol: +1.8% (co. cons: +1.6%; Bbg cons: +1.6%) . Q2 Price: +2.0% (co. cons: +2.1%; Bbg cons: +2.0%) . Q2 LFL excl. Ice Cream: +3.1% (Bbg cons: +3.4%) . H1 EBIT mgn YOY: -30bp (co. cons: -80bp, Bbg: -80bp) . H1 EBIT: EUR5,806m (+1.8% vs. co. cons; +1.4% vs. Bbg cons) . H1 EBIT mgn: 19.3% (co. cons: 18.8%; Bbg cons: 18.8%) . H1 EPS FD: EUR1.59 (+5.3% vs. co. cons; +4.7% vs. Bbg cons) . Q2 DPS: EUR0.4528 (flat vs. Q1) Q2 top-line drivers We note that Ice Cream volumes were relatively strong at +5.0% in the quarter, excluding Ice Cream we estimate that Unilever volumes would have been +1.1% (cf. Bbg cons. at +1.6%). Relative to expectations (Bbg cons.), we note that Personal Care volumes at +0.2% were relatively weak (Bbg cons: +2.1%). Taking a geographical perspective, we note that volumes were particularly weak in Latin America (-6.1%). H1 bottom-line drivers The -30bp EBIT margin contraction reflects: GM: flat; BMI: -40bp and Overheads +10bp. Other . Magnum: Unilever will retain a 20% stake in the business for up to 5 years (the retained stake will be sold down in an orderly manner). Expect leverage of ~2.4x for Magnum. A share consolidation will follow completion of the demerger; . Savings: Ahead of plan, delivery of EUR650m expected by the end of FY25 (EUR150m remainder in FY26); . China / Indonesia: Both countries expected to further accelerate in H2; Guidance . LFL sales growth: +3-5% with H2 H1 (Note: H1 LFL was +3.4% and co....
Feedback from the Magnum Ice Cream Company in Istanbul Yesterday we attended the Magnum Ice Cream Company''s (MICC''s) pre-CMD in Istanbul. While management commentary was rather restricted by the actual CMD being scheduled for 9th September (guidance will be given then), we were impressed with their very obvious enthusiasm and the many opportunities that they see (both top- and bottom-line) to improve the business. To quote the CEO ''it is like a giant start-up'', ''Unilever is a great company, but not a great ice cream company''. As to the impact upon Unilever itself, we are hopeful that this event, when coupled with subsequent MICC management roadshows, may start to shift what currently appears to be very negative investor sentiment towards Unilever''s Ice Cream business. Below are some key observations on MICC in its entirety and also its Turkish business. The Magnum Ice Cream Company . Headline financials: MICC revealed FY24 financials of EUR7,947m (Unilever had disclosed Ice Cream at EUR8,282m) and EBIT of EUR964m (Unilever had disclosed Ice Cream at EUR981m). The variance vs. Unilever''s disclosures relates to the removal of some countries which are not in the carve-out perimeter (e.g. Russia (exited) and India (which will follow later given Indian regulatory complexities)) and other minor adjustments; . Geographical spread: c.39% of FY24 sales were generated in Europe and ANZ (which had a 14.6% EBITDA margin vs. MICC overall at 16.9%), c.36% of FY24 sales were generated in the Americas (14.7% EBITDA margin) and c.25% of FY24 sales were generated in RoW (23.6% EBITDA margin, so c.35% of group EBITDA); . The Ice Cream market: The market was valued at EUR75bn in FY24 (based upon MICC''s analysis of Euromonitor), has consistently grown over the past 10 years and is expected to continue to grow at a c.+3-4% rate (1/2 price and 1/2 volume). The key drivers of market growth are availability, snacking occasions and premiumisation; . Key brand sizes: MICC...
We have adjusted our estimates to reflect some modest operational tweaks. We do not consider the changes to be material; our rating is unchanged.
Initiation of ADR coverage With this report we initiate coverage of Unilever PLC ADR, in coordination with our pre-existing coverage of Unilever PLC. We initiate coverage of Unilever PLC ADR with an Outperform rating and USD73 target price. We derive our Unilever PLC ADR target price with reference to our Unilever PLC target price (GBP54) which is derived via c.20x FY26e EPS. Recent research on Unilever PLC can be found here: Ice Cream: a demerger reference guide and Ice Cream: a demerger reference guide: part II .
We intentionally made an omission; with hindsight we should not have We recently published what we considered to be a comprehensive guide to Unilever''s impending Ice Cream demerger (see Ice Cream: a demerger reference guide). There was however one thing that we omitted, namely explaining the mechanics of how a demerger process works. Since several investors have asked us for such a guide, we explore this specific topic in this report. A demerger is very different to selling an asset A demerger is very different to selling an asset. Under a demerger, a business gets separated into two component parts and the share certificate also gets separated into two component parts. Consequently, all else being equal, while in a demerger headline earnings for the demerging business will mechanically decline, it is not the case that this will mechanically trigger an increase in valuation multiples. Within we take you through a simplistic demerger of Unilever''s Ice Cream business Within we work through a simplistic demerger scenario for Unilever''s Ice Cream business to explore how the demerger mechanics could work. We also explore a potential share consolidation, which, in our experience, is often something that companies engaging in a demerger choose to separately undertake.
An Ice Cream demerger reference guide Keeping in mind that Unilever will be demerging its Ice Cream business later this year, in this report we explore the Ice Cream industry, Unilever''s business, how it benchmarks vs. the competition and other relevant considerations ahead of the demerger. While there is a wealth of information within, below we outline some key thoughts. There appears to be a very big margin opportunity at Unilever Ice Cream We estimate that on an apples-to-apples basis, Unilever Ice Cream''s key comp., privately-owned Froneri, generated EBIT/EBITDA margins in FY24 that were around 490bp higher. We see no structural reason why this should be the case, beyond Unilever Ice Cream having historically had a cost mindset more in keeping with a Beauty company. Valuation matters, but it is arguably more important there is no continuing EBIT drag While the valuation of Ice Cream is important, frankly speaking the likely EV (we look for EUR12.5-13.5bn) is not that big in the context of overall Unilever. What is arguably more important is that there is not any post demerger drag on continuing business EBIT and it is here that we have gained comfort. Exiting Ice Cream should add around 30bp to Unilever''s growth profile We estimate that exiting Ice Cream should add around 30bp to Unilever''s LFL sales growth and give it a c.5% LFL sales growth profile. Should consensus shift to join this view (BBG cons. currently looks for +4.4% in FY26 excl. Ice Cream), we see scope for a meaningful re-rating at Unilever. We believe that investor views on Ice Cream will become less negatively orientated While most investor conversations that we have on Unilever Ice Cream tend to be negatively orientated, should we be right on our view on margins, we believe this will change.
Summary of Q125 sales An in-line start to the year for Unilever with +3.0% LFL sales growth coming modestly ahead of co. consensus (+2.8%) and volumes at +1.3% coming modestly below (co. cons: +1.5%). As to the drivers, we note that strength in developed markets (Europe and North America were both materially ahead of Bbg consensus), helped to compensate for weakness in emerging markets. News We highlight that HUL is guiding to a 22-23% EBITDA margin in FY26 vs. FY25 at 23.5% (March y/e). Earnings We revise our FY25e/FY26e/FY27e EPS by (1)%. Investment thesis We believe that Unilever''s promised FY25 growth hockey stick will be realised and this will help to close the valuation gap vs. key peers. Rating / target price We maintain our Outperform rating. Our TP moves from GBP52 to GBP54 (we increase our target multiple from c.19x FY26e P/E to c.20x to align with relevant peers). 15 questions for management You are guiding to a reduction in HUL''s EBITDA margins in FY26 (to 22%-23% from 23.5%). Given the relatively high profitability of this business and the disruption we are seeing in the Indian market, why should margins not continue to glide down beyond FY26?
BNPP Exane View There was nothing earth shattering from the call. Unilever''s tone was one of considered confidence. Importantly, it committed to driving profits growth in hard currency. We heard nothing on the call to materially impact the shares'' modest positive reaction. QandA highlights . LFL acceleration: Landing strong innovation plan. Comparative issues will help. China and Indonesia are pleased with programmes, expect will contribute to growth in H2. Pleased with DM performance, expect to be a feature of competitiveness going forward; . Flexibility: Won''t take decisions based on FX swings, but committed to profit growth in hard currency; . GAP acceleration: Short-term: landing innovation plan, investing competitively, shifting resources, divisionalisation of the sales force, separation of IC, productivity programme. Long-term: about building desirability at scale, building new models of reach of persuasion. Spent a lot of time with top marketeers and social media; . Wellbeing: Very strong growth. Not seen any significant slowdown (Liquid IV, Nutrafol, Olly growing DD). . Margin guide: No change in stance. Committed to modest expansion; . India: A lot to play for. No new headwinds on the macro, potential tailwinds. Seeing competitive intensity go up in some markets - will not blink in defence. When grow moves up we know how to drive earnings ahead of growth; . Powerbrands: The rest (25%) has improved Q after Q. Around EUR2bn we plan to dispose. Powerbrands in Beauty, PC and IC significantly ahead of rest. Foods: Powerbrands are 60% but 90% of UFS. HC: Shares from strength to strength in Europe. Brazil: retailer destocking, believe will improve. Expect HC EM to improve. India saw an international competitor taking significant discounts especially in liquids, we have responded. Dove: +8.8% (is 40% of PC business); . Beauty: +3.5% excluding China and Indonesia. Also saw some destocking in Brazil. Dove strong, Vaseline DD. Prestige: not immune...
BNPP Exane View A clean in-line print from Unilever with developed market strength helping to compensate for weakness in EM. We expect an in-line share price reaction. Headline figures . Group LFL: +3.0% (co cons: +2.8%; Bbg cons: +2.8%) . Vol: +1.3% (co cons: +1.5%; Bbg cons: +1.6%) . Price: +1.7% (co cons: +1.2%; Bbg cons: +1.3%) . Group excl. Ice Cream LFL: +2.9% (implied Bbg cons: +2.9%) . DPS: EUR0.4528 (sequentially flat) Top-line drivers Delving into the detail, the main point of note is that the developed market regions are generally ahead of consensus expectations and the emerging market regions are below. Note: India grew at +3% (+2% vol), Indonesia declined -6.6%, China declined HSD and Latin America grew at +1.5% (Unilever comments on retailer destocking in Brazil driving a slight decline in that market). Bottom-line drivers N/A - only a sales update. Other . Productivity programme: Ahead of plan, delivering EUR550m by end 2025. . Ice Cream: CMD on 9th of September ahead of demerger in Q4. . FX: Saying expect around a -3% to -5% on FY revenues and -20bp on margins. Note: the FY margin guidance is in current money. . Financials: Capex 3% of sales, restructuring 1.4% of sales, net finance costs around 3% of average ND, underlying effective tax rate around 26%, leverage around 2x ND/EBITDA. Guidance . LFL sales: 3-5% (expected improvement in Indonesia and China in H2 resulting from decisive actions taken) . Margin: modest improvement. Note: Unilever now comments that margins will be more balanced in H1/H2 than in 2024 (it has previously commented that the margin improvement would be more H2 weighted which to our mind pretty much amounts to the same thing as the new comment given the high H124 comp). The direct impact of tariffs on profitability is expected to be limited and manageable. Likely revisions of consensus We would expect to see c.-4% revisions to FY26 Bloomberg consensus earnings (FX). Sector read across DM strength and...
BNPP Exane View: an impressive call. To quote ''there are no skeletons in the closet''. Notes from new CEO fireside chat . Why the mgmt. change: Hein did a really good job, the Board fully endorses his path. It is a forward looking decision, the Board believes that for the next phase, making Unilever world class, my skill set and track record is a better fit. As to timing: the question for the Board was why wait, the faster the better? . Relationship with Pelz and the Chairman: Have good relationships with all Board members. Nelson and Ian have a tonne of experience and their insights tend to be spot-on, I listen to them a lot. However I am not a Nelson or Ian person, I am a Board person and my own person; . Slow Q1: There are no skeletons in the closet, we reaffirm our guidance for the FY and the mid-term. The GAP is working. Called out a slow start (markets, subdued pricing, confidence down, tariffs) as did many companies. Are landing one of the best innovation plans in a long period between March and April. China and Indonesia will contribute to growth in H2. The Indian government has taken significant measures to stimulate the economy. . Unlocking long-term value: About creating a machine of demand creation. Score us 6 on a 1 to 10 scale and 10 does not exist. Want to build a marketing shift, with a decisive shift to premium, desire to scale. Are committed to revolution in our sensorials, aesthetics. The US and India should be our long-term anchors; . Pace of change: Have been in the company 37 years and have never met an employee that says we are going too fast, usually the opposite. Believe we have great talent and want to shift the company forward and that everyone in Unilever is focused on creating demand, that is how I have run businesses for 20 years; . Past experience: Like to concentrate resources where I see a significant profit pool and where we have the right to win. Believe in productivity as a habit and not as a programme, there...
What happened? Unilever has announced that its CEO, Hein Schumacher, will be stepping down as CEO and as a Board Director (by mutual agreement) with effect from 01-Mar-25. He will be replaced by the current CFO, Fernando Fernandez. An internal and external search process has been initiated to find a new CFO and in the interim, the Deputy CFO and Group Controller, Srinivas Phatak, will be acting CFO. BNPP Exane View: While the market will likely be pleased with the appointment of Mr Fernandez as CEO (he is well liked and was widely viewed as a potential future CEO), it was likely not prepared for CEO change at this juncture. Although Unilever stresses that there is no change to its 2025 nor mid-term guidance, the unexpected timing will likely un-nerve, particularly coming on the back of the FY24 results outlook commentary serving to underwhelm. While Unilever''s relative valuation offers some cushion, we nonetheless expect to see a modest negative share price reaction today (est. LSD negative).
Summary of Q4/FY24 results Q4 LFL sales at +4.0% were broadly in-line with consensus expectations, albeit volume growth at +2.7% was modestly below (co. cons: +3.0%) and pricing slightly above (+1.0%). Turning to FY margins, +170bp YOY expansion (to 18.4%) was c.10bp ahead of co. consensus and this in turn helped to drive a c.1% EBIT beat (vs. co. cons). FY FD EPS at EUR2.98 was c.2% ahead of co. consensus. Finally, we note that the quarterly dividend increased by 3% to EUR0.4528. News We highlight that Unilever expects a sequential slowdown in growth in Q125 and for growth to then ramp up. Earnings We leave our FY25e/FY26e/FY27e EPS broadly unchanged. Investment thesis We see scope for a further re-rating for we believe that Unilever''s valuation is still not commensurate with a c.5% mid-term LFL sales growth profile (excl. Ice Cream). Rating / target price We maintain our Outperform rating and GBP54 target price. 15 questions for management How big is Liquid IV now and how much did it contribute to Group and North American LFL/volume growth in FY24?
BNPP Exane View We did not learn a great deal that was incremental. This said, Unilever did comment that Q1 will be impacted by the timing of the Chinese New Year, Easter, trading days and also FX volatility in Latin America (many of these were cited by a beverage peer yesterday). While the share price reaction feels harsh, there is likely a degree of switch into a certain Swiss name. Highlights: QandA . Market: Saw slower growth in Q4, see it continuing in Q1. BandWB and PC see mkt growth close to MSD. See softer growth in HC and see that continuing. Nutrition also subdued. IC commodity costs putting pressure on vol. Will be pricing through the year. Market shares are not dipping, see an opportunity to grow ahead of the market. . Margin: GM now ahead of pre-Covid levels. 45% is the new base to grow from. BMI: now a lot more competitive, will probably stay around 15%. Seeing some return of inflation (palm oil/surfactants, cocoa, tea), expect around EUR0.7/0.8bn of which 1/2 is FX related. Expect related pricing actions to materialise from Q2 onwards. . Vol/price: Believe that FY25 with commodity pressures will be more balanced. Price will be more back weighted. . Europe: Improved shares, esp. HC, but also PC. Not negative about Europe. Will continue to improve mgns. . Ice Cream: The NL will be the primary listing location. . Liquid IV: Confident can serve consumers. Very bullish on it and will continue to invest behind it. . COGS in FY25: Impact around EUR0.8bn. . Q125: Do see a sequential slowdown, then expect growth to ramp up. . Margin: 45% GM is a good base. Expect the full productivity programme to end by FY25. . North America: A very different business to what we had a few years ago, much better quality than previously. Will continue to invest, pricing will be required to offset commodity inflation (always a lag). . Mkt shares: Improved in H224 as expected. Neutral in Q4. Gaining if you include the 1/3rd not measured (expect to continue in...
BNPP Exane View The debate today will be less on results and more on Unilever''s comments on subdued market growth in the near-term and a slower start to FY25. We expect this to be the focus of the call. As things stand, we call the stock in-line to modestly down. Headline metrics . Q4 LFL: +4.0% (co. cons: +4.1%; VA cons:+4.0%) . Q4 Vol : +2.7% (co. cons: +3.0%; VA cons:+2.9%) . Q4 Price: +1.3% (co. cons: +1.0%; VA cons:+1.1%) . FY Margin YOY: +170bp (co. cons: +160bp; VA cons: +170bp) . FY EBIT: EUR11,179m (+1.0%/0.7% vs. co. cons / VA cons) . FY EPS: EUR2.98 (+2.1%/2.0% vs. co. cons / VA cons) . Q4 DPS: EUR0.4528 (+3.0% sequentially) Q4 top-line drivers While Asia Pacific Africa with +3.1% LFL (VA cons: +4.5%) is light, this is no great surprise given the recent India print. It has been offset by strength in North America with +7.0% LFL (VA cons: +2.9%). FY bottom-line drivers The +170bp FY margin expansion reflects GM: +2.8% (H1: +4.2%), BMI: -1.2% (H1: -1.8%) and Overheads: +0.1% (H1: +0.1%). Other . SBB: EUR1.5bn to complete by the 6th of June (at the latest). . Ice Cream: Incorp. in NL and listed in UK, NL and NY. Jean-Francois van Boxmeer to be Chair. . Savings: Achieved EUR200m and 4.3k FTE reductions (ahead of plan). Outlook / guidance . LFL: +3-5%. Market growth slowed throughout 2024. We anticipate a slower start to 2025 with subdued market growth in the near term. We expect the market and our growth to improve during the year as price increases, reflecting higher commodity costs in 2025. We expect a more balanced split between price and volume. . Margin: Modest improvement, to be realised in H2. . Financials: Capex 3% of sales, restructuring c.1.4% of sales, FX to be minimal, net finance costs c.3% on average ND, underlying tax rate c.26%, leverage of c.2x ND/EBITDA. Likely revisions of consensus Could see some modest positive revisions to FY25 consensus earnings. Read across Nothing of major note apart from the above...
Playing offence rather than defence What a difference a year makes. Just over a year ago, Unilever''s CEO, Hein Schumacher, outlined his ambitions and strategy (see Q323 sales and 15 questions for management) and, frankly speaking, we felt a little underwhelmed. In contrast, Friday''s CMD felt very different. We have never seen Unilever''s management team present with such clarity and confidence. To summarise, we would say that Unilever projected itself as being firmly focused on playing offence, rather than defence (a refreshing contrast to its historical playbook). New points of financial substance We highlight the following: . ROIC: Having previously guided to maintaining a mid-teens ROIC over the mid-term (FY23 was 16.2% as per Unilever''s definition), Unilever is now guiding to maintaining a high-teens ROIC as part of its 2030 Value Creation Plan. Note: i) excluding Ice Cream, Unilever estimates that its ROIC would have been +90bp higher in FY23; ii) Unilever commented that while it intends to undertake around EUR1.5bn of bolt-on acquisitions pa., transformational deals are off the table. . Volume: While Unilever maintained its mid-term guidance for mid-single digit LFL sales growth once Ice Cream has been exited, it clarified that within this it expects underlying volume growth of at least 2%. Note: Given that volume growth has historically been somewhat of a nemesis for Unilever, we view this commitment positively. New points of strategic substance We highlight the following: . Go-to market: Excluding Ice-Cream, 24 markets account for c.85% of sales and these markets will be managed on a Business Group basis i.e. with the Business Group''s having full end-to-end autonomy within each market. The remaining 15% of the business (100+ markets) will be managed on a 1 Unilever (Unilever wide) basis to ensure that they can benefit from Unilever''s scale. . Focus priorities: As to its category / geographical priorities, Unilever highlighted the...
Summary of Q324 sales Q3 LFL sales growth at +4.5% was 30bp ahead of co. consensus (+4.2%), driven by volume growth at +3.6% (+40bp vs. co. cons.). Pricing at +0.9% was in-line (co. cons: +1.0%). It was notable that the beat was driven by a standout performance from Ice Cream where LFL sales growth of +9.8% was 640bp ahead of VA consensus. Excluding Ice Cream, LFL sales growth was +3.6% with +3.1% volume growth. News Unilever commented that it is making significant interventions in Indonesia, but it will not be a quick fix and the benefits are not expected to become apparent until H225. Earnings We leave our FY24e/FY25e/FY26e EPS broadly unchanged (improved FX translation largely offsetting the Russia exit). Investment thesis We believe that Unilever is structurally a faster organic growth business than consensus assumes. Rating and target price Rating: Outperform rating. Target price: GBP54. 15 questions for management The share price of Unilever Indonesia has fallen around 80% from its peak, if you are so confident on its long-term potential, why not take it private?
Summary of Q2/H124 results Q2 LFL sales growth at +3.9% was c.30bp below co. cons and driven by +2.9% volume (co. cons: +2.6%) and +1.0% pricing (co. cons: +1.6%). The story was however more about the bottom-line. The H1 EBIT margin at +250bp YOY was c.200bp above consensus, driven by +420bp GM expansion. This helped to deliver a c.12% EBIT / EPS beat vs. co. consensus. Also noteworthy was a c.3% increase in the dividend (the first since Q420). News We highlight that the Unilever CEO believes that there is still a lot to do and while there are some green shoots in competitiveness, it will take time. Earnings We revise our FY24/25/26e EPS by c+5% (primarily reflecting a higher EBIT margin assumption). Investment thesis We believe that Unilever is on a journey towards becoming a structurally faster growth, largely pure play HPC business. Rating / target price We maintain our Outperform rating. Our TP moves from GBP49 to GBP53 (reflecting our EPS revisions and the 6-month roll-forward of our target earnings base). 15 questions for management If over a 19% margin was too high, how should we think about the margin beyond FY24?
What''s driving Unilever''s improved performance? Contrary to consensus wisdom, we believe that Unilever''s recent performance improvement has little to do with new management, the new organisation and implementation of the Growth Action Plans; we believe it is largely a function of portfolio change. Portfolio change has materially shifted Unilever''s growth dial Our analysis suggests that Unilever''s portfolio change has likely shifted its momentum growth rate by +130bp (vs. its c.+3.0% pre-Covid run-rate). We estimate that the exit from Ice-Cream will add a further +30bp. The recent strategy changes offer additional upside Do not forget that it was only in late Oct-23 that the new CEO announced his Growth Action Plans. Implementing change in a company the size of Unilever takes time. This presents an opportunity for further growth upside. We believe Unilever looks set to keep positively surprising near-term We look for Q2e LFL growth of +4.8% (VA cons: +4.2%) and FY24e LFL growth of +4.8% (VA cons: +4.4%). Looking at the mid-term, we believe the structural step-up in growth can drive a re-rating Post the exit from Ice-Cream, we believe that Unilever will be a structural c.5% organic sales growth company. While this alone should drive a re-rating, if it starts to perform competitively, we believe that c.5-6% is a realistic organic sales growth frame. We reiterate our Outperform rating. TP to GBP49 (from GBP48) We reiterate our Outperform rating. Our target price moves to GBP49 (from GBP48).
We have adjusted our estimates to reflect updated FX translation and SBB assumptions (notably phasing and the share price). We do not consider the changes to be material; our rating is unchanged.
Summary of Q124 sales A strong start to the year for Unilever with +4.4% LFL sales growth coming materially ahead of co. consensus (+3.0%). As to the source of the beat, it was principally volume driven (+2.2% vs. co. cons. at +1.2%). Pricing at +2.2% was modestly ahead of co. consensus (+1.8%). We note that the volume beat was widespread with beats in all regions and categories, Ice Cream (modest miss) was the only exception. The quarterly DPS at EUR0.4268 was sequentially unchanged. News We highlight that there was no news i.e. no notable one-offs were called out. Earnings We revise our FY24e/FY25e/FY26e EPS by c.+1%. Investment thesis We see scope for the operational delivery to positively surprise and we believe that Unilever is on a journey towards becoming a largely pure play HPC business. Rating and target price We maintain our Outperform rating and GBP48 target price. 15 questions for management To what extent is your improved performance a function of the portfolio changes coming through as opposed to the Growth Action Plans that you are implementing?
We have adjusted our estimates to reflect updated FX and in particular a change in our methodology for estimating the net impact of hyperinflation in Argentina (FX devaluation net of pricing). Our operational assumptions remain unchanged. While we continue to value Unilever on c.19x FY25e EPS, as a consequence of our earnings revisions our target price moves from GBP49 to GBP48. We do not consider the changes to be material; our rating is unchanged.
Unilever announced plans to separate its ice cream business into a separate publicly listed company (SpinCo), potentially via a spin-off transaction. This is part of its Growth Action Plan (GAP) which intends to streamline operations and accelerate business growth. Post the separation, Unilever will focus on four core businesses: beauty and wellbeing, personal care, home care, and nutrition.
ULVR UNILEVER UNLC UNIL UNILEVER UPFL UCL
You asked: we revisit Unilever Foods merging with Kraft Heinz In our recent report (see End Game), we explored the implications of Unilever splitting into two separate Food and HPC entities. While we reiterated our longstanding view that a merger of Unilever Foods and Kraft Heinz makes sense (see Kraft Heinz: the return), we did not revisit our analysis. Having now received many investor requests to do exactly this, revisiting our Unilever Foods - Kraft Heinz merger analysis is the focus of this report. A merger makes strategic sense for both parties Merging its Foods interests with Kraft Heinz would help Unilever to operationally exit its Foods business and would completely transform Kraft Heinz. A merger makes financial sense for both parties For Unilever (HPC) we see material eventual EPS accretion (rather than dilution: +9.0% in year 4) and a likely meaningful multiple re-rating. As to Kraft Heinz, the transaction would be transformative. We see good returns (year 4 ROIC of 8.6%) and estimated +9.9% EPS accretion (year 4). Furthermore, courtesy of its large minority stake, Unilever shareholders should also benefit in the likely meaningful share price appreciation at Kraft Heinz. While out-of-the-box, we continue to see merit in the combination Reflecting upon our analysis, we continue to see a great deal of merit in the merged combination of Unilever Foods and Kraft Heinz. While our Kraft Heinz analyst, Max Gumport, is of a similar view on the merits of a combination, he (likely sensibly) believes that the likelihood of such a combination occurring is remote. This said, stranger things have happened (for example, Kraft Heinz seeking to ''merge'' with Unilever itself or Unilever appointing a left-field CEO who spent a large part of his career at Heinz).
ULVR KHC KHC
It''s all a bit strange: we believe we are moving closer to the end game: a split We suspect that we are moving closer towards Unilever announcing its intent to split. Consider: i) a Foods IPO suggested by Unilever in Feb-22; ii) a new, split-facilitating organisation; iii) a new left-field CEO with a track record in change; iv) communication of an ''action plan'' not a ''strategy''; v) the heads of both Foods units departing; vi) a CFO with more CEO than CFO credentials; vii) a repeated qualified defence of the existing structure; viii) a seemingly inactive activist. But what about dis-synergies: meaningful but not prohibitive While Unilever has never quantified dis-synergies, we are able to make an educated stab at what they may be. We arrive at an estimated max. post tax dis-synergy of EUR6.2bn (c.5% of equity value) which while noteworthy, is very likely not prohibitive for material value being released from a split. A split would likely release meaningful value: we see c.44% equity upside We believe Unilever is a relatively high growth, EM-focused HPC business (FY25e LFL: 5.9%) combined with a relatively low growth Foods business. However at present, we believe its valuation is determined more by the latter than the former. As a consequence of this, even allowing for dis-synergies, our core split scenario points to c.44% equity upside. Conclusion: Yes, a split has been discussed for decades, but the end game feels close While we are conscious that the possibility of a Unilever split has been discussed for decades, we suspect that the end game is now close. Furthermore, we believe that there is nothing in Unilever''s valuation for a split. Our target price moves from GBP44 to GBP49 to reflect the increased probability of a split.
Summary of Q4/FY23 results Following an underwhelming Q4 from Indonesia, Unilever''s Q4/FY23 results offered some positive relief. While Q4 LFL sales growth at +4.7% was 30bp shy of co. cons, volume growth at +1.8% was 70bp above. North America was the principal driver of the volume beat (+6.3% coming 4.5% ahead of VA cons.). FY23 EBIT margins expanded by +60bp (co. cons: +40bp) propelled by +200bp GM (VA cons: +110bp). FY23 FD EPS at EUR2.60 was in-line with consensus (both co. and VA). News Indonesia is improving and expected to decline MSD in Q124 (cf. -16% in Q423). Earnings We revise our EPS by +1-2% (we suspect we have a rather more bullish view on likely hyperinflationary pricing than Unilever). Investment Thesis We see scope for the operational delivery to positively surprise and we believe that when the strategy is finally announced it will be more radical than most assume (we believe a split is likely). Rating / target price We maintain our Outperform rating and GBP44 target price. 15 questions for management Consensus was looking for +5% EPS growth in FY24 and you are guiding to a -5% FX hit. Do you expect to achieve meaningful EPS growth in FY24?
Estimate changes: Unilever PLC (ULVR.L, Price 3914p - Buy - TP: 4800p)
Summary of Q323 sales While Q3 LFL sales growth at +5.2% was in-line with co. consensus expectations (+5.2%), volumes at -0.6% were light (co. cons: +0.1%), principally as a function of a weak performance from Ice Cream (where volumes declined by -10.1% vs. VA cons. at -4.0%). In explaining the Ice Cream performance, Unilever made reference to consumers trading down to value brands and private label, and less favourable weather conditions vs. last year, particularly in Europe. News Unilever announced a strategy update. Details are summarised within. Earnings We maintain our FY23e EPS and revise our FY24e/FY25e EPS by -1% to -2% (primarily due to modest margin pruning). Investment thesis We view a new CEO, an effective margin rebase, substantial portfolio/organisation change and the possibility for more radical change (a split) as being an attractive combination. Rating and target price We maintain our Outperform rating and GBP47 target price. 15 questions for management Simpler, faster, bigger, more focused. Your strategy reboot appears to be a rehash of what we have heard in the past from every new Unilever CEO, what is different this time around?
Although the overall results hit the mark, the disappointing performance in volume-mix and Business Winning MAT leaves much to be desired. Unilever’s ambitious drive for growth and profitability is appreciated, yet the latest update from the new CEO didn’t quite dazzle.
Meets consensus for Q3 & keeps FY guidance unchanged Q3 organic sales +5.2% is exactly in-line with the company-compiled consensus. Underlying volumes are a little worse than expected at -0.6% (consensus +0.1%), while price is strong at +5.8% (consensus +5.1%). However, volumes have finally turned positive in Beauty & Wellbeing, Personal Care and Home Care. The FY23 outlook is unchanged. Consensus expects FY23 organic sales +7.1% vs guidance of “above 5%” and +7.7% in the 9M period, which implies +4.7% growth in Q4 (a very slight moderation in trend from Q3’s +5.2% but essentially a similar rate of growth). Given the sell-off yesterday in Reckitt on a very minor miss, we do not expect the market to react significantly to an in-line result from Unilever – and possibly the volume miss is a little disappointing. However, those hoping for a major shake-up in the strategy this morning will probably be underwhelmed by the new CEO’s announced plan, which, while sensible, does not materially change the outlook for Unilever in our view. “New” Action Plan will sound familiar to FMCG investors; no major transactions to be expected New CEO Hein Schumacher has revealed more about his plans for the group. He is focused on growth, productivity and simplicity. He also intends to introduce a performance culture. A step up in growth will be delivered by a focus on the biggest brands and on innovations. Importantly, he has ruled out any transformational portfolio changes. The medium-term headline targets remain 3-5% organic sales growth and modest margin expansion. Fernando Fernandez, formerly head of Beauty & Wellbeing, has been announced as CFO this morning. There will be a webcast at 8:30, hosted by CEO Hein Schumacher and retiring CFO Graeme Pitkethly, where more details about the new plan will be revealed. We think understanding the new reward culture will be critical. Link to watch here.
The company’s new organisational structure appears to be delivering improved performance. The H1 results included a nice mix of volume, sales, and margin improvement. In Beauty & Wellbeing and Personal Care, the two business units where performance has been mixed/disappointing in recent years, volumes have been in solid growth territory for the past two quarters. We were particularly impressed by how Nutrition was able to cut overheads quickly enough to deliver 80bps of divisional operating margin expansion in H1 – despite gross margins in that business still shrinking y-o-y. New CEO Hein Schumacher provided some initial thoughts on the business at the interims and will follow this up with more detailed commentary at the Q3 results in October. While understandably complimentary about Unilever’s brands, footprint, sustainability leadership and heritage, Schumacher identified performance culture, science-backed innovation and the group’s focus as areas where Unilever can still improve. And, the percentage of business winning share has dropped to a disappointing 41% (although this has been affected by a planned 17% SKU reduction). We note the new organisational structure is not yet fully embedded after 12 months – evidence that Unilever is, unsurprisingly, a big ship to turn. We are encouraged by the results in 2023 to date and believe there is scope for consensus to rise further if H2 proves less challenging than the current guidance implies. We appreciate management’s desire to invest in the brands over the near term to improve the market share performance, as well as the uncertain macro outlook. Our unchanged 4,800p TP implies an FY23E PE of 21.3x (P&G (N/R) is on 25.3x CY23 PE); we note that the Unilever DCF fair value in our model is 5,037p.
Summary of Q2/H123 results A strong set of results from Unilever. Q2 LFL sales growth at +7.9% was 1.5% ahead of co. cons, with volumes at -0.3% coming 90bp ahead. The volume beat was principally driven by North America and Latin America. As to pricing, Europe with Q2 pricing at +15.5% was the stand-out (in part reflecting incremental actions in Nutrition and Ice-Cream). Turning to margins, H1 margins expanded by 10bp YOY (vs. co. cons. at -80bp) with gross margins expanding by +30bp. H1 FD EPS at EUR1.39 was c.7.8% ahead of co. cons. and the quarterly DPS at EUR0.4268 remained flat sequentially. News We highlight that the new CEO will give more detail on his plans with the Q3 update in late October. Earnings We revise our FY23e/FY24e/FY25e EPS by +3%, +2% and +2% respectively. Investment thesis We view a new CEO, an effective margin rebase, substantial portfolio/organisation change and the possibility for more radical change (a split) as being an attractive combination. Rating / target price We maintain our Outperform rating. Our TP moves from GBP51 to GBP50. 15 questions for management As things stand, there will likely be little to no pricing to be had in the industry in FY24. Given this, do you believe that you will be able to perform at the upper end of the +3-5% mid-term growth range that you target?
The Q2 performance beat has been welcomed by the market with the stock up by 5.10% over the day. The driving forces behind this exceptional performance were the strong pricing power and better-than-anticipated volume resilience, particularly evident in the Beauty & Wellbeing and Personal Care segments, which constitute 43% of the group’s turnover. The FY outlook has been revised upward.
An informal Golden Rule: ignore organisation changes claiming to accelerate growth One of our informal staples'' Golden Rules (it should probably be a formal one) is to ignore any organisation structure changes that claim to accelerate organic sales growth (as typically much is promised and little delivered). Unilever''s history is a case in point Unilever''s history provides ample evidence to substantiate the view outlined above. In this report, we reflect upon the many organisation changes that Unilever has taken over the past couple of decades. While most of the organisation changes have promised much with respect to accelerating organic sales growth, actual delivery has been quite a different matter. Could Unilever''s new organisation be the exception to the rule? Unilever has made a convincing case that its new organisation structure should help to accelerate growth. Notably, we can see some key benefits: i) we can understand it (unlike Unilever''s previous structure) and ii) it should radically reduce matrix tensions (finally). Notwithstanding history, we give Unilever the benefit of the doubt. Mr Schumacher: if Unilever does not perform now - it needs to split Coupling the new organisation structure with the material portfolio reshuffling that Unilever has undertaken over recent years (we estimate portfolio churn approaching c.20% of sales), if Unilever is not now capable of sustaining MSD organic sales growth (we would suggest the current +3-5% target reflects a poverty of ambition for a business with c.60% of sales in developing markets), we believe no more organisation tinkering should be undertaken; Unilever''s new CEO, Hein Schumacher, should pursue a split. Do we have an idea for how this could be undertaken? You bet...
Summary of Q123 sales A strong start to the year for Unilever with +10.5% LFL sales growth coming meaningfully ahead of co. consensus (+7.2%). Notably the beat was volume driven (-0.2% vs. co. consensus at -3.2%). Furthermore, the volume beat was widespread, with every region and every business group coming ahead of VA consensus expectations. DPS at EUR0.4268 was held flat (for the 9th consecutive quarter). News We highlight that Unilever estimates than on an underlying basis its volume growth was around -1% to -2% in the quarter. Earnings We revise our FY23e/FY24e/FY24e EPS by c.(2)%-(3)%, primarily due to FX translation and the forthcoming sale of Suave. Investment thesis A new CEO, an effective margin rebase and further scope for portfolio/structure change leads us to believe that Unilever can re-rate. Rating and target price We maintain our Outperform rating. Our target price moves from GBP48 to GBP51, with the impact of our EPS revisions being offset by target multiple expansion (reflecting recent sector/market re-rating). 15 questions for management The dividend has now been flat for 9 consecutive quarters. Can you please elaborate on what your dividend policy is?
Above our expectations, Unilever’s pricing drove Q1 growth, while volume remains under pressure (Nutrition and Ice Cream). Unilever remains confident in its ability to deliver at the upper end of its guidance.
Early signs show the new strategy is working Unilever has reported Q1 USG of +10.5% (company-compiled consensus +7.2%), with three of the five divisions in double digit growth. Volumes contributed -0.2% (consensus -3.2%) and price contributed +10.7% (consensus +10.7%). The large “billion euro” brands grew 12.1%. FY23 outlook is raised to “at least at the upper end” of the 3-5% medium-term guidance; previously this was “at least in the upper end” of the range. So overall this appears to be a c. 1% increase to FY23 top-line guidance. H1 underlying operating margin is now expected to be “at least 16%” in H1 (consensus 16.0%), having previously been expected at around 16%. However, FY margin outlook is unchanged. Beauty & Wellbeing USG is +9.3%. Volumes were an impressive (to us) +2.6%, as Prestige and Health & Wellbeing held up despite pressure on consumers. Personal Care USG is +12.7%. Deodorants performed well. Home Care USG is +10.2%. Lower volumes hurt Home & Hygiene and Air Wellness. Nutrition USG is +11.9%. Volumes were -1.3%. Ice Cream USG is +6.0%. Volume softness in the at-home channel more than offset strong performance in the out-of-home channel. This is a solid start to the year for Unilever and likely to deliver minor consensus upgrades. Management hosts an analyst call at 8:00am UK time.
We find it interesting that Unilever’s volume elasticities were significantly lower, i.e., better, during 2022 than the historic rate for the business would have suggested (about 0.2x vs 0.3-0.4x in “normal” times). This suggests better brand strength across the portfolio than has been feared (or, to play devil’s advocate, possibly some stocking up by savvy EM consumers ahead of further price increases). Nevertheless, management expects volume declines to improve sequentially off the Q422 low and in the round table the CFO was quite positive about the outlook for the EM consumer. SE Asia, for instance, is yet to see the benefit of Chinese travellers returning to the region. Several factors have contributed to improving Unilever’s competitive position over the past 5 years, including portfolio pruning and selective acquisitions, increasing the efficiency of media spend, better R&D/innovations, significant restructuring of the cost base and a new organisational structure. Clearly, 2023 will be another challenging year for Unilever despite the business being on a surer footing. Consumer disposable income is very stretched in many markets. The new organisational model, which overall should benefit the group’s sales growth rate, is not without its pinch points, as managers adapt to new ways of working and new targets. It is helpful that the incoming CEO has the support of board member Nelson Peltz, the activist investor whose investment firm also holds a little over 1% of Unilever shares. New FY23E forecasts: organic sales +6.3% (guidance is at least the upper end of 3-5%), which is comprised of flat volumes and +6.3% price; we also model +28bps underlying operating margin expansion (guidance is “modest margin expansion”). FX is a 3.9% drag on the top-line in FY23E. Our new FY23E adj. dil. EPS is €2.66 (previously €2.89). The DCF valuation is 5,389p.
Summary of Q4/FY22 results Q4/FY22 results were broadly in-line. Q422 LFL sales growth at +9.2% was modestly ahead of VA consensus expectations (+8.7%) with volumes being in-line (-3.6% vs. VA cons. at -3.5%). The latter was somewhat of a relief given recent peer reporting (PandG vols: -6%; Colgate vols: -4%). The FY22 EBIT margin at 16.1% was in-line with VA consensus, as was EPS (+0.7% vs. VA cons). The quarterly dividend was maintained at EUR0.4268. News We highlight that the new CEO has internally communicated: i) his focus on performance and value creation; ii) his commitment to the new organisation and iii) his belief that performance can be enhanced by staying the course on Unilever''s longstanding commitment to sustainable business. Earnings We revise our FY23e/FY24e/FY25e EPS by 0%, (2)% and (2)% respectively. Investment Thesis While Unilever re-rated somewhat through 2022, given material scope for re-investment, Indian exposure, a new CEO and likely further portfolio change, we believe it can re-rate further. Rating / target price We maintain our Outperform rating. Our TP moves from GBP49 to GBP48 (reflecting our EPS revisions). 15 questions for management Are there any examples of FMCG companies which have been successfully led by a CEO with a finance background?
We welcome the transparency by the group, which has laid out the scenario we already had in mind: volumes still at risk and margin pressure. Nothing new, but the warning is all the clearer when it comes from a food giant.
Top-line beats, bottom-line exactly in-line Unilever’s FY22 underlying EPS is €2.57, exactly in line with consensus. FY22 underlying operating margin is also exactly in line with consensus at 16.1% and -230bps y-o-y. Q4 underlying sales of +9.2% (consensus +8.2%) is a beat, with volumes -3.6% (consensus -3.0%). Given the market’s obsession with Unilever’s volumes, the fact that volumes are not much worse than expected is likely to reassure. FY23 outlook implies limited upgrades, though shape of consensus may shift more to top-line over margin The FY23 outlook is for “strong underlying sales growth, with improving volume performance …as the year progresses”; underlying sales growth is expected to be at least in the upper half of the medium-term 3-5% growth guidance. Management also expects to deliver “only a modest improvement” in underlying operating margin. Consensus expects underlying sales growth of +4.3%, with volumes -0.8%, and underlying operating margin 16.6% (+50bps vs the just reported 16.1% in FY22). Management has previously said that it expected to deliver margin improvement in FY23, so the fact that they have stuck to this rhetoric is a positive. The results today are reassuring, but the bigger challenge for Unilever is maintaining its market share gains, supported by the recent reorganisation. The announcement earlier this week that Hein Schumacher (ex-Royal FrieslandCampina and Heinz) will replace Alan Jope as CEO in July cleared up some of the uncertainty that has persisted since Jope announced his decision to retire late last year, but wider strategic questions still loom. Unilever hosts a conference call for analysts and investors at 8:00 GMT.
A review of Mr Schumacher Following Unilever''s recent announcement that the current CEO of Royal FrieslandCampina, Hein Schumacher, will be succeeding Alan Jope as CEO of Unilever with effect from 1st July 2023, with this report we review Mr Schumacher''s career and assess his suitability for the role. The positives We see a number of positives in Mr Schumacher''s appointment: i) he is external; ii) the transition is a little quicker than anticipated (protracted management changes are never good); iii) there is a good precedent on former Royal FrieslandCampina CEOs (Carlsberg); iv) his tenure at Royal FrieslandCampina was largely defined by portfolio streamlining and organisation simplification; v) in our view, Royal FrieslandCampina appears to have a more pragmatic, commercially-focused approach to sustainability. The negatives The biggest negative to our mind is that Mr Schumacher has spent most of his career in the finance function (we would have preferred a sales and marketing background). In addition, he has no HPC experience and given the nature of Royal FrieslandCampina (a co-operative owned, relatively commoditised, dairy company), it is hard to ascertain its financial performance during his tenure as CEO. Conclusion: We prefer more of a sales and marketing background, but remain open-minded While we remain open-minded, we have to be honest and say that we would have preferred someone with more of a sales and marketing background. This aside, given Mr Schumacher''s track record at Royal FrieslandCampina, we cannot help but think that further portfolio changes (likely more divestments) may be more material than some think. We continue to believe that it would make sense to combine Unilever''s Food and Refreshment assets with Kraft Heinz (see Kraft Heinz: the return).
Not an intentional comedian At the recent Hindustan Unilever (HUL) CMD we asked a question which caused some hilarity with the audience. Our question was ''it is conceivable within the next decade that HUL''s market capitalisation will be greater than Unilever''s, what if anything are the implications of this?''. With this report, we explain why no humour was intended. HUL''s market cap is now c.58% of Unilever''s HUL''s market cap is now c.58% of Unilever''s. Winding back only 5 years ago it was 24%. Given that Unilever owns c.62% of HUL, the stake now accounts for c.36% of Unilever''s market cap. In around ten years'' time, the market caps should be comparable Assuming that both stocks maintain their current multiples, if we leverage and extrapolate consensus earnings estimates, the market caps should theoretically be comparable by FY33. One implication of this is that the HUL stake would then account for c.61% of Unilever''s market cap. Yawn, you''ve heard all this before? We suspect that some investors are now making a familiar cry that they have heard all this before / the stub argument has never worked / HUL is very expensive. Fair, however... We believe that this time it is different...eventually something needs to give While we are conscious that these words are a hostage to fortune, this time it is different. India feels primed for lift-off and to become the ''new China'' from a staples'' consumption perspective and importantly without the dark shadow of geopolitical concerns. One way or another, we believe that the value of Unilever''s crown jewel will eventually become more apparent to Unilever shareholders. Perhaps something for an activist to ponder...
Summary of Q322 sales A strong quarter for Unilever with LFL, pricing and volume all ahead of co. consensus expectations. To be more specific, Unilever posted +10.6% LFL sales growth (co. cons: +8.0%) driven by a -1.6% volume decline (co. cons: -2.6%) and +12.5% pricing (co. cons: +10.9%). From a regional perspective, Asia Pacific Africa and Latam were the standout performers with volumes and pricing coming ahead of VA consensus expectations in both regions. News Unilever estimates that good summer weather in Europe boosted Ice-Cream volumes to the effect of around +30bp on overall Unilever Q3 volumes. Earnings We revise our FY22e/FY23e/FY24e EPS by +0.4%/(2.9)%/(3.6)%. The reductions in our outer-year estimates are primarily driven by FX and, to a lesser extent, increased interest costs. Investment thesis We see attraction in Unilever as a value play that offers potential change optionality. Rating / target price We maintain our Outperform rating. Our TP moves from GBP46 to GBP45. 15 questions for management A lengthy CEO search process often leads to dysfunctional behaviour among existing executives as they jostle for position. Has the Chairman given any indication of the timetable to which he aspires?
The FY sales guidance was upgraded but we are not convinced as we expect the difficulties to be felt very soon. We continue to expect Food players to be the most impacted by lower consumer disposable incomes.
Q3 beat on both volumes AND price, raising outlook Unilever continues the theme of FMCG beats and raises in Q3. Q3 underlying sales are +10.6% (consensus +8.0%). Volumes of -1.6% (consensus -2.6%) are better than feared. Price of +12.5% (consensus +10.9%) is also better than expected. This well-balanced top-line delivery should please the market. Importantly, underlying volume growth improved in four of the five Business Groups during Q3 as compared to Q2, despite more pricing being taken, which suggests the strength of the businesses is improving following the re-organisation of the operations which completed over the summer. The FY outlook is raised to above 8% underlying sales growth (previously above 4.5-6.5%), with volume more negative than in the 9M (which was -1.6%). Consensus is currently at +7.7% sales growth for FY22, and expects -2.2% volumes, so we do not expect a significant upgrade. However, the Q3 delivery and FY outlook should reassure the sceptics. The company notes its pension funds are well-funded with no liquidity issues. Unilever hosts a conference call at 8:00am BST.
Summary of Q2/H122 results Q2 LFL sales at +8.8% were c.1.8% ahead of co. consensus with volumes at -2.1% coming c.30bp below consensus and pricing at +11.2% coming +2.2% above. We note Unilever commented that China volumes (lockdowns) declined by -10.5% (which we estimate equates to around -70bp at the group level). As to profits, H1 margins at 17.0% (-180bp YOY) were materially above co. consensus (16.4%) with the quality being better than we anticipated (GM -210bp YOY). This margin beat was the principal factor behind H1 EBIT and EPS coming c.6% ahead of company consensus. News We highlight that Unilever changed its mid-term margin guidance from restoring margins over 2023 and 2024 to increasing margins over 2023 and 2024. Earnings We revise our FY22e EPS by c.+2% (primarily higher revenues), but leave our FY23e and FY24e EPS unchanged (some tempering of margin expectations offsetting higher revenues). Investment thesis We see attraction in Unilever as a value play that offers potential change optionality. Rating / target price We maintain our Outperform rating. Our target price moves from GBP44 to GBP46 reflecting the 6-month roll-forward of our target earnings base. 15 questions for management Can you please shed some colour on the dynamics of your last Board meeting?
Reassuring update, given still low elasticities, and FY sales guidance increased. However, we continue to keep a cautious eye on the company for the next half given consumers’ changing habits which should become tougher in the coming weeks.
Sales ahead of expectations Q2 organic sales +8.8% (consensus +7.0%) are once again very strong. This is despite the fact that China remained disrupted by lockdowns during the period. Price was +11.2% in Q2, with volumes -2.1%, with the beat therefore coming from price, unsurprisingly, with a slight miss on volumes. Price was also strong across the various regions, with even Europe delivering +6.5% price (and -1.8% volumes) in Q2. The underlying operating margin fell just 180bps (consensus -240bps) to 17.0% (consensus 16.4%), reflecting much better recovery of cost inflation than feared. By region the underlying operating margin was -320bps in Europe, -200bps in Americas and -90bps in Asia/AMET/RUB. Underlying EPS of €1.34 in H1 (consensus €1.27) is a 5.5% beat and implies growth of 1% y-o-y. FY outlook raised Management raised the FY outlook for organic sales growth to above the range of 4.5-6.5%.Consensus currently expects +6.4%. The FY operating margin is expected to be at 16% (consensus 16.0%), as the company plans to invest in marketing, R&D and capex during H2 to support ongoing required price increases. Flowing through the H1 beat as well, we expect FY22 consensus EPS to rise 3-4% on an underlying basis before FX adjustments. Thereafter the margin is expected to improve beginning in FY23 and FY24. FCF was €2.2bn (vs €2.4bn in H121), due to higher cash tax and capex offsetting the improvement in working capital and operating profit. The sale of ekaterra (the tea business) completed on 1st July. The first €750m buyback tranche completed on 22nd July, and the company intends to launch another tranche of buybacks in Q3 (it has committed to up to €3bn in total). Management hosts a conference call at 8:00am BST.
We''ve been thinking (always dangerous as my father used to say) Having been very critical of Unilever''s attempted acquisition of GSK CH (see An unhealthy transaction), we thought it worth reflecting as to whether there is a better transformational MandA option open to Unilever. We believe that there is, and it is a name that is likely somewhat familiar to Unilever...Kraft Heinz! Unilever should combine its Food and Refreshment with Kraft Heinz We believe that Unilever should combine its Food and Refreshment business with Kraft Heinz, partly funded by Unilever holding a minority stake in the combined entity. Not only does the maths work well for both parties (primarily as a consequence of KHZ synergies likely more than offsetting Unilever''s dis-synergies), but from an operational perspective, Unilever would become a much simplified, emerging market focused, higher growth, HPC pure play. Unilever: we see no mid-term EPS dilution and scope for a material re-rating While there are many variables, our core deal scenario points to modest eventual earnings accretion (i.e. no dilution). We would anticipate a meaningful multiple re-rating (at least a couple of P/E points feels reasonable). Kraft Heinz: a transformational impact As to Kraft Heinz, the deal which we outline would be transformational for the company. We see good returns (8.5% in year 4) and we estimate c.21% EPS accretion (year 4). We believe that Kraft Heinz shareholders would likely be very enthused on the deal (and this would in turn result in even more upside for Unilever shareholders courtesy of its minority stake). Conclusion: while this is out of the box, we think it makes a great deal of sense for everyone While we fully acknowledge that our thinking is somewhat out of the box, it makes sense when you think about it. Unilever is clearly willing to exit FandR given the proposed IPO to fund the acquisition of GSK CH and this would enable it to exit while offsetting the thorny issue...
Summary of Q122 sales A strong start to the year for Unilever with +7.3% LFL sales growth coming materially ahead of consensus (co. cons: +4.4%). While the beat was largely price driven (+8.3% vs. co. cons at +6.3%), volumes were also better than anticipated (-1.0% vs. co. cons. at -1.7%). Looking through the geographical lens, Asia/AMET/RUB was the standout beat with +9.1% LFL vs. VA cons. at +3.9%, driven by both pricing and volumes. News We highlight that Unilever expects a LSD volume decline in FY22. Earnings We revise our FY22e/FY23e/FY24e EPS by c.+5%, +9% and +8% respectively. The variance to our previous estimates primarily related to improved FX translation (around +4% on our FY23e EPS) and improved margins (Unilever''s assessment of incremental cost pressures was better than we feared). Investment thesis We see attraction in Unilever as a value play that offers potential change optionality. Rating and target price Reflecting our EPS revisions, our target price moves from GBP40 to GBP44. We maintain our Outperform rating. 15 questions for management Your assumption of margin restoration across 2023 and 2024 is partly based upon an assumption that commodity costs normalise. Assuming that there is no normalisation and current levels prevail, how do you see the margin developing?
A Q1 beat but we note above all that volumes are under pressure and that the FY guidance has been revised downwards. We remain cautious for the moment.
Strong Q1 beat, with only Europe suffering significant volume decline Q1 underlying sales growth of 7.3% compares favourably with the consensus of +4.4%, though remains below P&G’s 10% growth rate during the same period. Growth was price-led, as anticipated. Unilever’s volumes -1.0% (consensus -1.7%) were broadly as expected, while price +8.3% (consensus +6.3%) was much stronger. The company’s 13 largest brands grew sales +8.8% in aggregate. By category Home Care grew 9.2%, Beauty & Personal Care grew 7.1% and Foods & Refreshment grew 6.5%. Emerging market grew 9.5% (price +10.1% / vols -0.6%). Volumes have softened in China and Brazil, alongside higher prices. However, volumes remained strong in Indonesia, Philippines and Vietnam. Developed markets grew 4.1% (price +5.7% / vols -1.5%). North America grew 8.5% with price and volume both solidly positive, while Europe grew just 0.7%, with volumes -4.4%. Outlook raises on top-line, margin lowers The FY outlook is raised to the high-end of the 4.5-6.5% range for sales, and to the low end of the 16-17% range for underlying operating margin given ongoing inflation and the need to invest in the brands in order to take large price increases. In the H1 the margin should be within the 16-17% range; a further update on FY margins will be provided at the H1 results. Consensus for the FY has already fallen by c.8% since the start of the year and currently assumes underlying sales growth +5.2% and OM -210bps to 16.3%, with a 2.5% tailwind from FX. We therefore expect that consensus will rise slightly to reflect the stronger top-line, with margin forecasts largely unchanged or nudged down a little. Management hosts a call for analysts and investors at 8am GMT.
FY results were solid, with organic sales +4.5% and the operating margin only 10bps in a highly inflationary year. However, the outlook assumes a much larger input cost headwind in FY22, with margins down significantly (INVe 173bps). The reorganisation of the business into 5 category units, which will mark a break from the old matrix structure, should enable faster decision-making and allow the company to be more responsive to consumer trends. The new structure will go live in July, and will deliver modest cost savings (€600m, or 1.4% of opex) over FY22 and FY23. Clearly, the main benefit should be faster growth over time. Pricing to recover inflation will drive sales growth in FY22. It appears that the Board is putting major portfolio changes on hold for the time being. This is sensible in light of the ongoing plan to reinvigorate organic sales growth and improve competitiveness; on the latter point, management confirmed that market share trends continue to be strong with 53% of the business winning share in 2021 (and the key US market exiting 2021 at 65%). Valuation. Removing the current market value of the Hindustan Unilever stake from Unilever’s market cap means the rest of Unilever (89% of its earnings, since HL represents roughly 11% of net income attributable to ULVR shareholders) is trading on a FY22E PE of just 15.3x (see Figure 1 overleaf). That is an unusually low valuation for a Consumer Goods business that is expected to deliver 3-5% organic sales growth over the medium-term and has the widest global distribution footprint of any FMCG company. Our DCF also continues to show significant potential upside (to 5,470p). With our estimates broadly unchanged following the FY21 results, we retain our 4800p TP which implies a FY22E PE of 22x and a FY22E EV/EBITDA of 17x. We note this is a discount to the other mega-cap FMCG stocks, Nestlé and Procter & Gamble.
Summary of Q4/FY21 results Q4 LFL sales growth at +4.9% was 110bp ahead of co. consensus driven by volumes (+70bp vs. co. cons.) and pricing (+40bp vs. co cons). FY21 EBIT margins at -10bp YOY were c.10bp ahead of co. consensus with the shape being very much as we anticipated. FD EPS at EUR2.62 was c.5% ahead of co. consensus, the beat being in large part attributable to below the line items (for example, an effective tax rate of 23% vs. co. consensus at 25%). News We highlight that Unilever is guiding to a FY22 EBIT margin of c.16-17% (-140 to -240bp YOY). Earnings We revise our FY22e/FY23e/FY24e EPS by -12%, -5% and -6% respectively. The reductions primarily reflect reduced margin expectations and reduced share buyback assumptions. Investment thesis We believe that Unilever is too cheap for what it is and one way or another market perception will positively change. Rating / target price We maintain our Outperform rating. Reflecting our earnings revisions, our target price moves from GBP49.50 to GBP47. 15 questions for management How long would it have taken you to separate Foods and Refreshment from the rest of Unilever and what would the cost have been?
“Dramatic costs inflation” led the company to expect the FY22 margin to be down by between 140bp and 240bp. What a surprise, when the consensus was expecting -10bp, and us -30bp. The guidance obviously brings negative sentiment to other FMCG players.
Headline results are a beat, but outlook a mixed bag Q4 organic sales +4.9% (consensus +3.8%) and FY organic sales +4.5% (consensus +4.3%) is comfortably ahead of expectations, and is the strongest top-line growth rate for the Group in nine years. The 13 billion euro brands in aggregate grew sales 6.4%. FY underlying operating margin -10bps (consensus -20bps) is also not as bad as feared. Pricing accelerated to +4.9% in Q4 to recover inflation. Underlying EPS of €2.62 (consensus €2.49) is a 5% beat. The dividend is raised 3%. The outlook is for FY22 organic sales growth of 4.5-6.5% and the operating margin to contract by 140-240bps (consensus assumes +4.1% organic sales and a flat operating margin in FY22). The margin guidance is significantly worse than expected, but this metric should recover from FY23. Management expects “significant input cost inflation” in FY22, which will be H1 weighted. The new organisational structure is expected to generate €600m in cost savings over the next two years. The company completed €3bn of share buybacks in FY21 and has announced a further €3bn to be spent over FY22-23. Category performance Beauty & Personal Care Q4 organic sales +6.2%. Prestige Beauty grew double digit in FY21 (this is broadly in-line with L’Oreal’s +16% LFL reported last night). Margins were flat here over the FY. Home Care Q4 organic sales +5.0%. Home & Hygiene continues to be above the pre-pandemic level. The operating margin was -110bps over the FY. Foods & Refreshment Q4 organic sales +3.2%. The operating margin was +40bps over the FY.
What the organisation change could mean We believe that there is rather more to Unilever''s recently announced organisation structure changes than meets the eye. In this report we examine what the changes may mean. First things first, it is very rare that organisation changes have a meaningful growth impact First things first, in our experience it is very rare that organisation structure changes have a meaningful impact on growth (PandG being an arguable exception). Furthermore, the frequency with which organisational changes are embraced tends to be inversely proportionate to growth prowess. The new structure that Unilever has announced marks a radical change. It carries risk We believe Unilever''s new organisation structure effectively flips the principal axis of management from country to category. It is a very radical change. While it is not without high risk (precedents for navigating the change are not positive), it should indeed bring improved accountability. Does it mark a near-term intent to split? Not to our mind Does this shift mark a near-term intent to split? Not to our mind, for there is still the thorny issue of a shared back-office and the bigger issue of shared distribution in emerging markets. This said, it is a tentative step in this direction. Will Trian approve of the changes? Most likely yes During the hotly contested proxy battle in 2017, Trian consistently argued that PandG''s matrix structure inhibited proper accountability. Keeping in mind that Unilever is effectively intending to move to a structure that is somewhat analogous to that at PandG (and arguably even more radical, given that it will fully embrace the structure globally), we suspect that the change will likely meet with Trian''s approval. Will the changes appease those investors hoping for management change? We very much doubt it.
A new structure Unilever has announced the awaited re-organisation of its business. The new structure is based around 5 category business units. Beauty & Wellbeing will include Hair Care, Skin Care, VMS and Unilever Prestige. This will be headed by Fernando Fernandez, the current EVP of LatAm. Personal Care will include Skin Cleansing, Deodorants and Oral Care. This will be headed by Fabian Garcia, the current President of North America. The Home Care structure is unchanged and includes Fabric Care, Home & Hygiene and Water & Air. Peter ter Kulve will continue to run this business. Nutrition will include Scratch Cooking, Healthy Snacking, Functional Nutrition, Plant-based Meat and Food Solutions. This will be run by Hanneke Faber, the current President of Foods & Refreshment. Ice Cream has been split out into a standalone business that will be run by Matt Close, the current EVP of Ice Cream (which was within the old Foods & Refreshment division). As a result of this re-organisation, Unilever expects to make 1,500 roles redundant, or roughly 1% of its global workforce of 150,000. This is 15% of the senior management positions and 5% of more junior management positions. All costs related to this new plan will managed within the existing restructuring investment plans. Our View: We see this as a positive step that will more closely align the business units with their category trends, and should result in some (as yet unquantified) cost savings. It remains to be seen whether this will satisfy the new activist shareholder on the register. We think the separation of Ice Cream from the rest of Foods should make each unit more attractive to potential buyers, as the demand dynamics, cost structure and logistics of each are quite different. We continue to see good value in Unilever shares and reiterate our Buy. The company will report FY results on 10th February.
No bid above £50bn for GSK Consumer Healthcare Yesterday evening, Unilever confirmed that it would not increase its offer for GSK Consumer Healthcare above £50bn. This should reassure the market that management is disciplined with regards to M&A. We continue to like Unilever’s organic prospects and believe further M&A opportunities will arise in the HPC space. The company is committed to moving the portfolio into higher growth categories. We await the organisational update the company plans to present later this month and the FY results on 10th February. Although the move on GSK was poorly received by the market, it showed that Unilever has the courage required to truly transform its business, which has struggled to deliver strong enough growth in recent years. The shares remain well below the pre-announcement level and yield over 4%. Buy.
Never have we seen such uniformly negative investor feedback Never in our many years in Staples have we seen such uniformly negative investor feedback on a transaction (GSK CH). We suspect the only reason that Unilever shares were not down much more yesterday is that they were already trading at a multi-decade low from a relative valuation perspective. The market is understandably concerned that there will be further moves Given that Unilever has already made three bids and has left the door open to a further move, the market is understandably nervous that there will be more to come, either with GSK CH or elsewhere (some speculating on Reckitt). Even leaving the finances to one side, we rather question whether Unilever can successfully acquire either asset. GSK CH and Reckitt would likely need shareholder approval, something that looks unlikely.... We believe that both GSK CH and Reckitt would likely be Class 1 transactions for Unilever. The implication of this is that both transactions would require a majority of voting shareholders to be in favour. Is this likely to be the case? We doubt it. Put simply, investors do not want Unilever spending capital on a material expansion until it has demonstrated that its own house is in good order. Which will start to make life rather difficult from a governance perspective Assuming that we are correct on Unilever shareholders likely voting intent, it means that they will not support the major strategic initiative that the Board/management are endeavouring to pursue. We find it hard to envisage that such a state of affairs can be sustainable. This year''s AGM could be rather eventful... While the market''s focus has always been upon activism being the catalyst for change, we are starting to ponder whether there may be other avenues. Mindful that under Unilever''s articles all directors stand for re-election every year, this year''s AGM has the potential to be eventful...
Unilever’s bid for GSK’s Consumer HealthCare division is causing a stir, as it seems totally unreasonable. The group was asked to move on portfolio rotation, but definitely not to be so ambitious at the risk of penalising shareholders.
GSK Consumer on the table? Unilever issued a statement this morning confirming its interest in GSK Consumer, the JV asset that is planning to list in London later this year. Management believes the Oral Care and VMS businesses would be highly complementary to its HPC existing business and the OTC business could leverage Unilever’s emerging market footprint to increase scale. GSK Consumer has sales of c. £10bn and (we estimate) EBITDA of c. £2.5bn. Assuming an EV/EBITDA multiple over 20x (P&G bought Merck Consumer Healthcare for 19.5x in 2018), the EV of this deal would be over £50bn, which would likely require Unilever to make some disposals. To that end, management confirms it is willing to divest lower growth assets as part of its journey to improve the group’s growth rate. The last offer from Unilever was for £50bn, implying 20x E/EBITDA (P&G bought Merck for 19.5x in 2018). We note that the boards rejected the last three offers from Unilever, stating that they materially undervalued the business. We do not know whether GSK and Pfizer, which jointly own GSK Consumer Healthcare, would be amenable to selling the asset to Unilever instead of pursuing the IPO route. We know they rejected the last 3 offers, including one valuing the business at £50bn. If they are, this could mark the start of a major change in Unilever’s strategy and could result in a sale of the remaining Food businesses. Operating model changes Unilever further announced plans to reveal a new operating model later this month. This “major initiative” is designed to improve category focus and agility. We have been encouraged by the improvement in underlying performance during what has been a very challenging couple of years. However, the market remains unconvinced – with the valuation still comfortably below the long-run average. We are sceptical that an operating re-jig will excite the market – but the fact that management is considering major moves in its portfolio may do so. We continue to like Unilever based on (1) valuation; (2) a strong geographic footprint; (3) exposure to attractive categories; (4) a management team committed to growth; (5) capital returns to shareholders; and (6) M&A optionality.
Unilever attempting to acquire GSK Consumer Healthcare This weekend, following press reports (The Times) of a bid approach, Unilever confirmed that it had approached GSK and Pfizer to acquire their Consumer Healthcare business and that there is no guarantee that an agreement will be reached. GSK also commented, confirming three unsolicited Unilever bids, the last of which was for GBP50bn. In this report we examine what the business is, how the deal maths stack up and what the wider implications for both Unilever and the sector are. We think the deal is a very bad idea The wisdom in launching a transformational part equity funded bid approach that will likely not do anything for Unilever''s growth profile at a time when confidence in management could not be lower and the stock is trading at over a 20-year low relative to peers, is frankly beyond us. Unilever should only buy one thing: its own stock. The move signals firm Board backing for Unilever CEO Alan Jope For those Unilever shareholders who hope for activism to alleviate their suffering, we are mindful that this move implicitly suggests that CEO, Alan Jope, has the firm backing of the Board. In other words, it appears that any activist is unlikely to find a receptive audience in the board room (this said, other shareholders may well now be more receptive). Who else could have interest? Realistically there is only one likely additional party Even if Reckitt would have the desire, it does not have the financial capacity. Realistically, there is only one player with both likely interest and the ability to fund it: PandG. Keep in mind that PandG was reportedly in talks to acquire Pfizer Consumer Health back in 2018. What will happen to Unilever''s shares on Monday? We expect to see weakness in Unilever shares on Monday. The only positives that we can muster are that the shares are already on their knees from a relative valuation perspective and a deal would likely offer reasonable EPS...
Blueprint for an activist: no pushback In our recent report (see Blueprint for an activist) we argued that Unilever is a structurally sound asset which is shouldering a material management discount. In addition, we argued that contrary to consensus wisdom, a Food / HPC split would not make sense, but that a geographical split (EM/DM) would make a great deal of sense. While we received very little investor pushback on our EM/DM split argument, most investors viewed it as a rather radical suggestion. Keeping this in mind, in this report we outline a less radical ''activist blueprint lite''. Pursue more leverage Yes, adding financial leverage is low quality stuff, but when your stock is yielding approaching 4% and your 2029 Euro bonds 0.3%, there is an argument to be made. Rather than debate buyback theory we are mindful of Warren Buffet''s view on the topic: buy stock when it is cheap. Moving to c.3x ND/EBITDA (FY22e) would drive an estimated c.14% EPS accretion on a full year basis. Action more disposals Unilever''s lowly valuation opens the door to pursue further disposals. For example, it appears that even tea (Ekaterra) is worth materially more than where Unilever itself trades at (and to a buyer with no synergy). Within we identify around EUR1bn (of sales) of local Food brands that could be divested. We also explore the implications of divesting Ice-Cream (a rather better business than many appear to think). Conclusion: At current levels, we believe that activism is more a question of when than if We remain steadfast in our belief that Unilever is a structurally sound asset that is shouldering a material management discount and offers a great deal of strategic optionality. At current levels, we continue to believe that activism is more a question of when as opposed to if. This said, we are conscious that hopes for activism do not make the firmest foundation for an investment. Keeping this in mind, we note that our operational estimates...
A fair price for a solid brand portfolio Unilever announced yesterday afternoon that it would sell its global Tea business, ekaterra, to CVC Capital Partners for €4.5bn. These assets had been put under strategic review in early 2020. The 34 ekaterra brands being sold include PG Tips, Lipton, Pukka, T2 and TAZO. As previously announced, Unilever will retain the Tea business in India (where it provides important scale to the wider business in India) and the Pepsi Lipton ready-to-drink Tea joint ventures. The price paid for ekaterra is 2.25x EV/sales, which compares to deal multiples in the non-alcoholic drinks category that range from 1-3x, depending on brand strength and category growth prospects. Given the size (€2bn of sales) and breadth of the portfolio across price-points, we think this is a fair price, especially considering the business had been a drag on Unilever’s group sales growth for a number of years. We expect Unilever will use its strong balance sheet to continue to make bolt-on acquisitions in the higher growth areas of interest it has previously identified: hygiene, prestige beauty, skin cleansing, skin care, functional nutrition and plant based foods. We are also pleased that the Tea sale removes a distraction for management, allowing it to focus on more important areas.
Mixed feelings following the Q3 results: the maintained FY margin guidance reassured in the current inflationary environment, but the Q3 volume decline raises questions about the trade-off between pricing and volumes.
Summary of Q321 sales Q321 LFL sales growth at +2.5% was modestly ahead of co. consensus (+2.2%) but with a much stronger than expected pricing component (+4.1% vs. co. cons. at +2.4%) and weaker than expected volume component (-1.5% vs. co. cons. at -0.2%). News We highlight that 1% of the -1.5% Q3 volume decline was attributable to South East Asia volumes declining at a HSD rate (largely due to Covid related restrictions). Earnings We revise our FY21e/FY22e/FY23e EPS by c.+1%. Investment thesis We believe that the relative valuation of Unilever does not reflect our belief that over the mid-term it should deliver c.4% top-line (LFL) growth with margin expansion. Rating / target price We maintain our Outperform rating and GBP50.50 target price. 15 questions for management Should you not be focusing on volume share as opposed to value share during a period of elevated pricing?
Q3 in-line, margin outlook maintained Q3 organic sales of +2.5% are a slight beat vs the company-compiled consensus of +2.2%. Within this sales growth, volume was -1.5% (consensus -0.2%) and price was +4.1% (consensus +2.4%). E-commerce grew 38% and now represents 12% of group sales. By division, Beauty & Personal Care grew sales 2.6%, Home Care grew by 1.4%, and Foods & refreshment grew by 3.0%. Both Prestige Beauty and Functional Nutrition grew at a double-digit rate. North America and Europe markets declined against a tough comp in the previous year, though Unilever outperformed its markets, growing 2.0% in North America and +0.3% in Europe. Latin America was +8.7% (pricing was taken here first during the year) and Asia/AMET/RUB was +2.3%. In the Emerging Markets overall Unilever grew sales 3.9%, and in the Developed Markets growth was +0.6%. The CEO is confident the company will be ‘well within’ the 3-5% growth for the full year (+4.4% at 9m stage). Margin guidance for an ‘around flat’ underlying operating margin year over year is reiterated. There had been some concern that this would be cut again given continued cost inflation, so there may be some relief on that. However, we suspect the market may focus on the volume weakness vs expectations given the negative sentiment towards the stock, but we see this as proof that the company can price to protect its margins – which is a good thing in the current inflationary environment. We also note South East Asia was the main source of volume disappointment, so the weakness was not significantly widespread.
Nestle, Pernod Ricard, Danone...Unilever? There has been considerable activist interest in European Staples over recent years. To our mind, the case for Unilever to be the next candidate is compelling. It is an attractive, structurally sound asset whose underlying value is trapped by its structure and a lack of confidence in management. Pursuing a Food / HPC split makes no sense Contrary to many commentators, we believe it would be folly to split Unilever into two independent Food and HPC entities. To our mind there is not material SOTP upside and certainly not sufficient upside to warrant weathering the material dis-synergies that would likely result. In our view, a Food / HPC split would necessitate enduring lengthy disruption to most likely destroy value. However, pursuing a geographical split (EM/DM) makes a great deal of sense We do however believe that a geographical split (EM/DM) would likely create a lot of value, for it would release the real SOTP in Unilever, namely the great disparity between EM and DM valuations. In addition, in comparison to a Food / HPC split, dis-synergies would likely be more limited and there would be far less disruption to the business. Our analysis points to potential equity upside of c.97% (shockingly high we know - see within for an explanation). Unilever is too good an asset to be left to permanently flounder While talk of activism is one thing, seeing it realised is quite another. This said, capital markets tend to be efficient in the end. We believe that Unilever is too good an asset to be left to continue to flounder. The status quo cannot be permanent. At present, given Unilever''s relative valuation, the question to our mind is more when an activist strikes as opposed to if they strike.
Summary of Q2/H121 results Q2/H1 results were modestly ahead of consensus expectations from an operational perspective, with Q2 LFL sales growth of +5.0% (co. cons: +4.8%) and H1 margins declining by -100bp (co. cons: -120bp). The shape of the Q2 sales development was very much in-line with Visible Alpha consensus expectations. H1 EPS at EUR1.33 was c.+7% ahead of co. consensus driven by an unusually low tax rate (21.9%), income from non-current investments and finance costs benefitting from a one-off FX gain. News We highlight that Unilever tempered its FY21 margin guidance from a slight increase to ''around flat'' (co. consensus: flat). Earnings We revise our FY21e/FY22e/FY23e EPS estimates by c.+1-2% (partly FX). Investment thesis While we are cognisant that investor confidence is low and will take time to recover, we believe that the relative valuation of Unilever does not reflect our belief that over the mid-term it should deliver c.4% top-line (LFL) growth with margin expansion. Rating / target price We maintain our Outperform rating and GBP50.50 target price. 15 questions for management Ever since Alan Jope took over as CEO there has been a continued downgrading of consensus margin expectations. Why should we have confidence that this downgrade trend will not continue?
Q2 results were roughly in line with expectations. With little surprise, the FY21 margin outlook was cut given the price uncertainties of the raw materials. This is the first bad signal for the sector.
Slight underlying beat, but input costs bite Organic sales were +5.4% in H1 (consensus +5.3%), with Q2 +5.0% (consensus +4.8%), delivering a small top-line beat. The underlying operating margin of 18.8%, -100bps y-o-y (consensus 18.6%, -120bps y-o-y), is also a little better than expected; the underlying operating profit is 1.4% ahead of consensus. The company continued to invest behind its brands, as previously guided. Input cost inflation continues to be a headwind, and has increased during Q2. Adj. EPS of €1.33 is 7% ahead of consensus at €1.24. Net finance costs were lower than forecast and non-current income was higher than expected. The €3bn share buyback programme is still underway, with €900m repurchased during H1. The FY21 outlook is tempered slightly on tougher cost inflation. While the 3-5% organic sales growth guidance remains intact, management now expects a flattish underlying operating margin (previously ‘a slight increase’). The FX headwind was previously expected to be 3-4% on sales and 4-5% on EPS. Going into the call, our early assessment is that consensus may be unchanged, with the H1 beat absorbed by the FY margin downgrade. Food drives growth Beauty & Personal Care organic sales +3.3% in H1 and 4.2% in Q2. Underlying operating margin was -220bps y-o-y. Deodorants returned to growth and Skin Care grew double digits. Gross margin was hurt by cost inflation. Home Care organic sales +4.5% in H1, with Q2 +3.2%. Underlying operating margin was -130bps y-o-y. Household cleaners declined against tough comps, but Fabric Care grew mid-single digits. Gross margin was also hurt by inflation in this division. Foods & Refreshment organic sales +8.1% in H1, with Q2 +6.8%. Underlying operating margin was +60bps y-o-y. Ice Cream sales have improved but are still not back at pre-crisis levels. Food Solutions grew double digit. Food at home is still in growth despite tough comps. Margins benefited from operating leverage.
The comp remained relatively easy in Q2, but a slowdown is still expected vs the strong +5.8% delivered in Q1 – a figure which included some stocking up. During Q2, India was affected by a resurgence in COVID cases, and several markets in SE Asia were also disrupted by COVID spikes and restrictions. We forecast Q2 organic sales +4.0% (volume +2.7% / price +1.3%), with Asia/AMET/RUB +6.5%, Americas +5.3% and Europe -0.1%. Our underlying operating margin assumption for the year is +20bps (H1 94bps / H2 +137bps), against guidance for a ‘slight increase’ over the FY and a decline in H1. In H1, there will be 90bps of COVID-related costs y-o-y, commodity inflation in the low double-digits, and c. 100bps of additional marketing spend compared to the year ago period. Unilever’s strong cost containment and pricing power will partially offset this. We note the weather in Europe has been unhelpful for sales of Ice Cream, a higher-margin product within the Unilever portfolio. Longer term, we see many positives supporting the stock. There is a €3bn buyback currently ongoing (and with more to follow, we expect), management is actively managing the portfolio with various disposals and acquisitions, top-line growth is improving to at least in-line with the sector rate and margins should continue to expand due to category mix shift and cost savings. In addition, the group is very focused on ESG matters and, in particular, is working to significantly reduce the impact of its plastic packaging, among other goals. The valuation is 17.8x FY22E PE and 14.4x EV/EBITDA – this compares to P&G on 22x and 16x, respectively. Our DCF fair value is 5,033p. Minor revisions to our model result in a 1.6% cut to FY21E EPS, which is now €2.52 (previously €2.56). Buy.
Unilever is on track to deliver the FY guidance of 3-5% organic sales growth and a slight increase in operating margin. If share gains continue at the Q1 rate then the upper end of FY guidance is achievable. Management was upbeat regarding the outlook, even for difficult markets like India. Unilever has been more negatively affected by the COVID crisis than some of its HPC peers, though sales still grew 2% in FY20. As markets re-open the company should see a boost to its personal care, out of home ice cream and food service businesses, all of which have been negatively affected by the crisis. We are encouraged by the various portfolio actions being taken by management. The Tea business will be separated later this year. The smaller personal care and beauty brands (with sales of €600m) are being grouped into a new unit called Elidia Beauty, and options are being explored for them. Unilever is expanding further into health & wellness categories, which we view as being highly complementary to the existing business. With the single share structure, Unilever now has greater flexibility to pursue a wider range of deals, should it wish to. Unilever is extremely committed to sustainability and ESG matters. At the recent AGM, a majority of shareholders voted in favour of the company’s proposed climate transition plan; Unilever is one of only a few large companies that have invited shareholders to vote on climate targets. In light of the positive momentum in the business, which could lead to upgrades, we raise our TP. We apply a FY21E PE of 21.8x which lifts our TP to 4,900p. This is still a significant discount to major global HPC peers which are trading on 23-30x PE multiples.
Better than expected results driven by the acceleration in emerging markets. Like its peers, Unilever argued about input cost inflation which pushed us to be slightly cautious on a margin improvement yoy.
Summary of Q121 sales A strong start to the year for Unilever with +5.7% LFL sales growth coming meaningfully ahead of consensus expectations (co. cons: +3.9%). From a geographical perspective the beat was widespread with all regions with the exception of Europe (lockdowns) coming materially ahead of Visible Alpha consensus expectations. From a category perspective, Home Care (+5.9% LFL vs. VA cons. at +4.1%) and Food and Refreshment (+9.8% LFL vs. VA cons. at +5.1%) were materially above consensus, while Personal Care (+2.3 LFL vs. VA cons. at +3.2%) was somewhat below. News Unilever has announced its intention to undertake up to a EUR3bn share buyback before year-end. Earnings We leave our FY21e EPS unchanged, but increase our FY22e and FY23e EPS by c.+2%. Investment thesis We believe that the relative valuation of Unilever does not reflect our belief that over the mid-term it should deliver c.4% top-line (LFL) growth with margin expansion. Rating and target price We maintain our Outperform rating and GBP53 target price. 15 questions for management Would focusing upon growing your markets not be more advantageous to you over the longer-term than focusing on growing your market share?
Q1 ahead of guidance; €3bn buyback announced The year has started off very well for Unilever. Q1 LFL of +5.7% (consensus +3.9%) is well ahead of consensus and the medium-term ambition of 3-5%, with volume +4.7% (consensus +2.9%) and price +1.0% (consensus +0.9%). Prestige Beauty and Functional Nutrition were called out as particularly strong in the period. Personal Care +2.3% as demand for beauty and personal care products remains subdued; deodorants are still in decline due to lower usage by consumers during restrictions. Home Care +5.9% was helped by a recovery in India and new launches in various markets. Foods & Refreshment +9.8% as strong demand for at-home food continues in Europe and North America; out of home ice cream returned to growth as EMs rebounded, though Europe remains in decline. The outlook confirms delivery of the medium-term guidance of 3-5% top-line growth in FY21, with H1 at the top of the range. The operating margin should increase slightly over the FY, but will be down in H1 on the y-o-y phasing of costs and inflation. A €3bn share buyback, to be completed by the end of the year, will likely be welcomed by the market. Unilever is one of the first major FMCG companies to restart buybacks post the crisis. Management is creating a new unit, called Elida Beauty, to house some of the smaller beauty and personal care brands. The operational separation of Tea is ongoing. Management is hosting a webcast at 08:30am BST.
Momentum continues to improve Yesterday Unilever hosted an upbeat investor event focusing on its US operations (c. 19% of group sales, when US sales of the globally managed units are included). The Head of Unilever USA, Fabian Garcia, presented. The key takeaways for us were 1) the underlying growth of the US business, ex Food Service & Prestige Beauty, was 12% in 2020 (vs +8% reported at the FY results), which is a very respectable rate of growth compared to its large peers, 2) over 50% of the business is gaining value share and 70% of the business is gaining volume share, and 3) growth can continue in 2021. Still hampered by Hair Unilever US is highly skewed to Beauty & Personal Care and Foods & Refreshment. Beauty & Personal Care is 49% of US sales, Foods & Refreshment is 36% of sales, Home Care is 4% of sales, Functional Nutrition is 6% of sales and Prestige Beauty is 5% of sales. Although margins in the US are high, the gross margin still expanded 250bps during 2020. While momentum is improving across the business generally, as evidence by the market share gains, Hair Care is still not where it needs to be. Efforts to turn it around continue; Suave is currently being relaunched. Tresemme is challenged by its high exposure to styling products which remain out of favour during restrictions and lockdowns. Unilever US is very focused on the e-commerce opportunity (14% of sales). Garcia stated he was happy with the existing digital capabilities of the business, and he expects e-commerce to accelerate further. Outlook and portfolio Garcia provided some thoughts on consumer trends that will affect the US market over the medium term. These included holistic health, pleasure starved, home experiences, stimulus bump, mass vaccination, and hybrid working conditions. Garcia expects ‘competitive growth’ to continue in 2021 even off of the tough comp in 2020, though the economy will likely be bifurcated (with winners at the higher income level and losers at the lower income level) and inflation is on the horizon. Unilever will continue to evolve the portfolio to higher growth areas. Already 15% of Unilever USA is in the desired categories that management identified with the FY results. Recently acquired brands delivered impressive sales growth in 2020: the Functional Nutrition brands grew over 50%, the Home Care brands grew over 50%, and the Food brands grew over 20%.
Underwhelming is no understatement As the recent share price trajectory is testament to, to say that Unilever''s recent FY20 results presentation and strategy refresh were underwhelming would be no understatement. However, the purpose of this report is less to reflect back and more to look forward. Thought 1: Unilever''s competitiveness is improving While it got rather lost in the results'' debris, Unilever''s competitiveness is markedly improving. This bodes well for when market conditions normalise. We continue to believe that there is more positive change taking place than the market recognises. Thought 2: Risk on margins feels rather skewed to the upside The market interpreted Unilever''s communication as being a margin rebase and consensus has moved to reflect this. Was this really Unilever''s intention? Unclear. Coupling c.90bp of Covid related costs and c.EUR1.3bn (c.2.3% of FY23e sales) in hard restructuring savings, risk on margins now feels rather skewed to the upside. Thought 3: The ''stub'' valuation is now astonishing Hindustan Unilever and Unilever Indonesia now represent c.43% of Unilever''s market capitalisation. Excluding these assets, Unilever now trades on c.11.8x CY22e P/E and c.8.6x CY22e EV/EBITDA. If one were to utilise India and Indonesia as a proxy for the entire emerging market business, one is paying -17.8x CY22e P/E for the developed world business (your eyes do not deceive; that is a minus sign). Thought 4: An obvious target for activism Unilever ticks exactly the same activism boxes that PandG ticked (Trian); a fundamentally sound company where change is happening, but it is somewhat unappreciated and could usefully be expedited. In many ways it is a far better target than Danone (given the absence of structural issues).
Growth has long been a bugbear for Unilever shareholders (and would-be shareholders). Despite the fact that more of the portfolio (65%) is now growing market share than at any time over the last 4 years, Unilever shares are down at a level they last reached in March 2020. As management articulated on the results call, the business is in better shape now. Organic sales improved from flat in H1 to +4% in H2, as the company stepped up marketing spend. Management targets underlying sales growth of 3-5% over the long-term, and even aims to achieve this target in the current year, a rather impressive feat given ongoing restrictions and uncertainty. Part of the growth longer term will come from evolving the portfolio. Management identified several fast growing segments that Unilever will increase its exposure to: hygiene, prestige beauty, skin cleansing, skin care, functional nutrition and plant-based foods. The company will remain disciplined, with ROIC in the mid-high teens (FY20 18%) and net debt/EBITDA around 2x. Further cost savings of €1.3bn have been identified and will be captured over the next few years, with total spend of €2bn over 2021 and 2022. These savings will mainly come from the European supply chain and global back office. The business is well positioned for the current consumer environment. It is already generating 9% of sales online; this rises to 33% in China. 81% of Unilever’s brands are #1 or #2 in their markets, and the company leads in 6 categories. The business has more consumer reach points (40bn) than any of its competitors. Unilever is also well positioned for the rising interest in companies’ ESG credentials. It is the top corporate sustainability leader for the 10th consecutive year, according to GlobeScan, and is the employer of choice in 54 markets; it has also published ambitious plastics targets.
Summary of Q4/FY20 results Q420 LFL sales growth at +3.5% was in-line with company consensus but c.40bp below VA consensus. All regions with the exception of Asia/AMET/RUB were ahead of consensus expectations (Unilever made reference to declines in Indonesia, the Philippines and Thailand). While margins were c.50bp below consensus expectations, Unilever made reference to c.90bp of additional costs/mix associated with Covid-19. EPS at EUR2.48 was in-line with consensus, with a lower than expected tax rate (23%) compensating for the margin shortfall. News We highlight that while Unilever commented that 2021 is the first year of its multi-year strategy, this does not mean that it is targeting 3-5% LFL sales growth with LFL underlying profit growth ahead of LFL sales growth in 2021. Earnings We leave our FY21e/FY22e/FY23e EPS broadly unchanged. While our FY21e/FY22e/FY23e EBIT estimates are reduced by c.(2)%, this is largely offset by below the line elements (e.g. tax). Investment thesis We believe that the relative valuation of Unilever does not reflect our belief that over the mid-term it should deliver c.4% top-line (LFL) growth with margin expansion. Rating / target price We maintain our Outperform rating. Our target price moves from GBP55 to GBP53. 15 questions for management As Covid hopefully dissipates, should we expect that the related 90bp depression of your margins will dissipate as well?
FY20 growth was especially driven by hand and home hygiene products, laundry and in-home food and refreshments, while food solutions and ice cream were the main drags, impacted by channel closures. The group finally disappointed with missed market expectations, especially on the bottom line, and with a weak performance in the emerging markets.
Q3 figures beat expectations with a strong volume/mix and a significant acceleration in emerging markets. Even so, no return to FY20 guidance.
Summary of Q320 sales A strong quarter for Unilever with +4.4% organic sales growth coming materially ahead of consensus expectations (+1.3%). Furthermore the beat was widespread with all regions delivering both organic sales growth and volume growth that were materially ahead of Visible Alpha consensus expectations. News Unification: Unilever commented that it intends to proceed with its proposals provided that, in the Board''s view, they remain in the best interest of Unilever, its shareholders and other stakeholders as well. Earnings We leave our FY20e/FY21e/FY22e EPS broadly unchanged. Investment thesis We believe that the current valuation implicitly embeds a ''free option'' on the possibility that Unilever starts to come good and organic sales growth starts to positively surprise. Rating / target price We maintain our Outperform rating. Our NV target price remains at EUR62 and our PLC target price remains at GBP56. 15 questions for management There does not appear to have been any sequential improvement in the proportion of the business winning value share, when and how do you expect to see an improvement on this front?
Unilever PLC Unilever NV
David Taylor''s tenure as PandG CEO did not always enthuse the market David Taylor has now been CEO of PandG for nearly 5 years. While most investors rightfully take a very positive view on his tenure, it is worth remembering that the first three years were rather underwhelming wrt. organic growth, perceived strategy and share price. In contrast, over the last two years, the market''s perception and PandG''s valuation have been transformed. Alan Jope''s CEO tenure at Unilever has yet to enthuse the market Reflecting upon Alan Jope''s c.21 month tenure as Unilever CEO feels rather similar to the early years of David Taylor at PandG. Organic growth has generally been underwhelming, the strategy feels insufficiently radical and the shares have materially de-rated. The shares implicitly offer a free option on Unilever coming good With Unilever trading at around a two decade low vs. Nestle on cons. fwd P/E and over a decade low vs. PandG, the share price is implicitly ascribing very little likelihood to the possibility that Unilever comes good. Evolutionary change does not mean irrelevant change The management, organisation and strategy changes that have been made under Alan Jope are generally of an evolutionary ilk that does not provide for an exciting investor narrative. However take care, for evolutionary change does not mean irrelevant change and looking under the bonnet a little, we see a good possibility that Unilever may start to come good. Many of the issues that we believe have held Unilever back from achieving its organic growth potential are being addressed. We''ll take the free option: upgrade to Outperform: NV TP: EUR62; PLC: GBP56 To our mind the risk / reward on Unilever feels rather positive given its relative valuation. We see a good chance that organic growth could start to positively surprise and this could start to trigger an investor re-appraisal. As with PandG, we may look back in two years'' time through a very different lens.
Summary of Q2/H120 results Q2/H1 results were much better than consensus expected, primarily driven by North America. On the Q2 top-line, Unilever posted -0.3% LFL vs. consensus at -4.3%. Within this, North America posted +9.5% LFL (vs. Visible Alpha cons. at -0.8%). Turning towards the H1 bottom-line, the EBIT margin expanded by +50bp (cons: -50bp) with the Americas margin ahead by +220bp (Visible Alpha consensus -20bp). H1 EBIT at EUR5.1bn was c.8% ahead of consensus which when coupled with a low tax rate led to a c.13% H1 EPS beat vs. consensus. News Unilever commented that the US business has not been particularly impacted by pantry loading and it has seen sustained high levels of consumption which show no sign of slowing. Earnings We revise our FY20e by +6%. Our FY21e and FY22e EPS are revised by c. +1%. Investment thesis While we believe that the valuation is relatively inexpensive, we rather worry that Unilever has lost its way somewhat and that righting the organisation could take longer than the market anticipates. This said, the rhetoric is starting to sound more promising and more focused upon FMCG basics. Rating / target price We maintain our Neutral rating. Our NV target price remains at EUR53 and our PLC price remains at GBP48. 15 questions for management You appear to have significantly dialled back your rhetoric on driving brand ''purpose''. Is this merely co-incidental or does it reflect a shift within the organisation to focus more upon tangible innovation?
Q2 sales and H1 margins both beat estimates, pushed by finally better than expected Food & Refreshments and a strong performance in North America. Any exit of the tea business should now be confined to the developed markets.
UNILEVER - NEUTRAL | EUR51(+7%) Q2 sales far better than expected No deterioration in trends Home Care benefitting from COVID-19 No guidance provided for the full year
Amidst a challenging trading environment, Unilever exceeded the highest analyst estimate on both the top and bottom line. Underlying sales growth declined 0.3% in 2Q while underlying earnings per share grew 6.4% in 1H. 1H underlying EPS beat expectations by 13.4%. Free cash flow delivered, growing 85% in the half. While parts of the portfolio proved resilient like household care, cleansing, and in-home products, it could not offset the challenges from discretionary-linked out-of-home segments like ice cream, food service and prestige beauty. Some key needle movers include North America growing 9.5% in the quarter and more favourable marketing rates. While guidance remains withdrawn, we believe Unilever’s valuation reflects an iconic, powerful brand-led business on sale due to temporary factors. TP to 5290 from 5100p.
UNILEVER - NEUTRAL | EUR51(+10%) A less interesting tea sale on the agenda? The disposal of tea could exclude major assets Back in January, we were surprised by this announcement We welcomed the deal as a sign of greater priority for HPC The change in profile could be slower to come We reiterate our Neutral recommendation
UNILEVER - BUY | EUR55(+17%) Another attempt to unify the legal structure The announcement came as a surprise …in the context of huge uncertainties
UNILEVER - BUY | EUR60(+26%) No impact provided for the epidemic Sales flat organically over the quarter Details by region Full year guidance withdrawn
Disappointing Q1, which reflects more issues than we expected for Unilever. Stockpiling was finally offset by a drop in ice-cream sales and less out-of-home consumption, while supply chain disruptions should continue to hurt South Asian sales especially. We will lower our expectations.
We think Croda will be the most resilient of the UK Chemcos in 2020, as was the case in the 2007-2009 GFC. The cyclical auto and energy end markets are just under 10% of revenues while ~60% of revenues come from the resilient health, agriculture and personal care sectors.
ULVR OR UNAT
Q4 was weak but finally less than we expected. While the end of the year was marked by many concerns, improvements are expected, especially in H2 FY20. The group maintained its 20% operating margin target for 2020, while we become more and more confident about its success following the announcement of the tea strategic review.
UNILEVER - BUY | EUR60(+19%) No surprise Q4 organic sales only increased 1.5% Market conditions were highly challenging 2019 EBIT margin up 50bp Unchanged outlook
Group organic sales growth in 4Q’19 decelerated to 1.5% (volume/mix 1.1%) driven by the slowdown in South Asia and West Africa. Unilever had guided for such a slowdown at its sales warning announcement in Dec’2019.
The main sources of disappointment are India, Ghana, Nigeria and North America. Category growth has slowed in India, Unilever’s largest EM, from c.10% to c.5% over the course of 2019. In West Africa, liquidity has become more of an issue. And in N America, the market remains unsurprisingly competitive, though this is a slight reversal of the Q3 commentary (when Dressings had returned to growth). Coming on the back of an upbeat CMD and sustainability webcast last week, today’s announcement hurts the credibility of management. Having spoken to the company, it is clear that near term plans are little changed as a result of today’s warning. Management feels it has the right level of investment in place to deliver the (very) bottom end of the 2020 range for both sales and margins. We believe many investors feel otherwise, and would welcome greater investment. Investment view. We like Unilever’s market positions around the world, but agree that growth has been disappointing and a new strategy is needed. Longer term, we expect Unilever to continue shifting towards Beauty as a category, and anticipate further disposals. Near term, however, we see Unilever as being between a rock and a hard place: needing to deliver on its 2020 objectives as the market has become more challenging and also under pressure from shareholders to ignite growth. The challenges Unilever has had in meeting its 2020 targets mean CEO Jope may have greater leeway to make more significant changes in time.
Unilever’s unscheduled update suggests a poor Q4 (1-1.5% organic sales growth expected), which will slightly drive down FY19 top-line growth. The main reasons are the South Asian and West African slowdowns. The group also gave guidance for FY20 sales growth, which is expected to be in the lower half of the multi-year range and more weighted towards the second half. Having already low expectations, we don’t see major changes in our target prices.
Unilever, Shaftesbury, AB Dynamics, Civitas Social Housing, Ted Baker, Gem Diamonds, STMicroelectronics, Capital & Counties, St Modwen, MJ Gleeson, Market Highlights
ULVR SHB ABDP CSH TED GEMD STMPA SHC SMP GLE UNAT
Unilever’s recent investor days highlighted a move away from a dizzying pace of bolt-on deals towards integration, disposals and continuing digital transformation. The market misses that management focus on scaling the brands of tomorrow whilst disposing of slow-growth assets should help Unilever become a mid-single-digit top-line growth company in time.
Unilever reaches 2.5bn consumers every day and the company takes its responsibility for setting sustainability aspirations for the industry very seriously. Ambitious targets have been set. The Dove brand will be the biggest brand to be packaged in 100% recycled plastic. All of Unilever’s production sites will be carbon neutral by 2030, with 26 sites already meeting this standard. Sustainable packaging and cleaner ingredients, especially in Home Care, are consumer trends that Unilever is aiming to stay ahead of. No trade-offs in the pursuit of margins and growth. Management believes it can achieve both faster growth and higher margins. The CEO cited the Dove brand, which has grown on average 7% p.a. over the last 10 years and seen its margins expand 580bps. We suspect portfolio change may play a role, too. The US is still a work in progress, but there are some encouraging signs of a turnaround. E-commerce will be critical in this market over the next few years. China is growing sales at 8-9% organically and margins are expanding. Unilever will double its coverage in lower tier cities within 12 months; these new areas hold 50% of China’s population. E-commerce is driving nearly all the growth in this market, and Unilever is very well positioned in that channel. Investment view. There was little “new” news to come out of the CMD this year, but we did take comfort in the quality of the management team across the markets and categories. Growth is clearly the priority, and management is also preparing for the future by developing innovations that are based on sustainability as a principle – which it views as an unavoidable mega-trend. A pause in M&A is sensible, and would probably be welcomed by the market, especially if it is accompanied by increased buybacks. Add maintained.
Domino's Pizza Group, Unilever, Ericsson, Network International, Moneysupermarket.com, Zooplus
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The group delivered slightly lower than expected Q3 sales. Emerging markets and Home Care were the key growth drivers, even though we note a slight slowdown in the Emerging markets as the group faced softer demand in India and a decline in China.
Q3 could have been better. The tough comp in Q3 (-25bps headwind) was broadly offset by the benefit (+30bps) from the accounting change on inflation in Argentina and Venezuela. FY guidance of growth in the lower half of the medium-term 3-5% range implies no real pick-up in Q4, despite comps easing by c.100bps in Q4 vs Q3. We nudge down forecasts (EPS -0.3% in FY19E and -1.6% in FY20E – see table on pg. 2), but stay ahead of consensus. Emerging markets slow. We are concerned about the progression in emerging market volumes, which are a key driver of top-line for the group. In Q3, these slowed to +2.2%, after +2.5% in H119 and +2.8% in FY18. End markets in China and India have slowed, Brazil volumes are still flat and Argentina remains under significant pressure. This makes Unilever more reliant on an improvement in developed markets, which remain highly competitive. Investment view. We admire Unilever’s geographic footprint, strong market share positions and relatively high margins. We see the 2020 20% operating margin target as attainable, but perhaps holding back growth a bit too much in the process. The company faces challenges in several of its key markets with competition intensifying, both from multinationals and local players. We remain curious about the new CEO’s plans for Unilever longer-term, but do not expect an update on this until the latter half of 2020. Valuation: We apply a 19x CY20E PE to arrive at our €57/4902p (previously €58/5300p) target price. The DCF continues to show downside.
Group organic sales growth of 2.9% (volume/mix +1.4%) in 3Q’19 is 10bps lighter than consensus and below the 3.6% pace in 1H’19. The shares have been under pressure recently, down 13.4% from 03/09/2019.
Not quite good enough Q3 underlying sales growth of +2.9% is just shy of expectations (consensus +3.0%). Price delivered +1.5% in the quarter (consensus +1.6%), with volume +1.4% (consensus +2.1%). FY guidance for 3-4% underlying sales growth is maintained, but management continues to expect the lower end of this range (consensus +3.4%). Management intends to step up competitive actions, such as innovation and will be focusing on the faster growth areas to improve growth. There is a call at 8am UK time. The Home Care category drove the growth Home Care slowed a little from the strong +7.9% (restated) it delivered in H119, to +5.4% in Q3, but this was still better than Beauty & Personal Care +2.8% and Foods & Refreshment +1.7%. Developed markets still negative, but improved Regionally, emerging markets outperformed the developed. Underlying sales in Emerging markets worsened to +5.1% after +7.4% in Q2. Developed markets underlying sales were a little improved, -0.1% after the disappointing -1.6% in Q2, but still are not growing. Hair Care in the US declined.
Last week we published a video discussing our recent initiation on six companies in the European soft drinks industry. Click here to see the video. Reynolds American submits PMTA for VUSE e-cigs to FDA Campari acquires Ancho Reyes and Montelobos brands Shiseido acquires prestige skin care brand Drunk Elephant
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Last week, we published updates on Unilever NV (HOLD, TP € 53.5 from €49.6)and Nestlé (HOLD, TP CHF107 from CHF95). Click here for our upcoming Beer Industry Expert event.
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Portfolio still evolving. While further large disposals beyond Spreads are not top of management’s mind right now, we were intrigued by the comment “developed market black tea is not a long term growth category.” We expect management will continue to refine the portfolio, with an emphasis on premium and niche brands which are still delivering good growth (e.g. Seventh Generation, Talenti, Sir Kensington’s, Schmidt’s). Prestige Beauty is now generating c. €600m of sales, and continues to grow at a double-digit rate. Brand investment will not be compromised. Brand support as a percentage of sales fell 30bps in H1 due to efficiency savings (ZBB, shift to digital), 2/3 of which were reinvested. Management plans to increase brand support in underperforming areas as savings came in ahead of targets. Geographic footprint is advantageous. Unilever’s emerging markets (60% of sales) grew organically by 6.2% in H119, while developed markets fell nearly 1%. When the acquisition of Horlicks closes, Unilever will have even more exposure to India, its largest emerging market. Investment view. Our Buy thesis is unchanged. We think management’s margin target for 2020 is achievable despite further investment in the brands. The ongoing portfolio shift should result in better top-line growth over the medium-long term. The valuation at 18.4x CY20E PE is undemanding relative to global peers (Colgate and P&G are on mid-20s multiples) and its own recent history. We think a CY20 PE multiple of 20x is appropriate, and our €58/5300p target implies a 20.2x PE. Our PLC target price is up from 5000p due to FX moves.
We maintain our Hold rating on a lifted 4,735p target price. Unilever is reinvesting 2/3rds of its €6bn cost savings into growth initiatives and is committed to an ambitious 20% underlying EBIT margin target by 2020.
Group organic sales growth of 3.5% (vols +1.2%) 20bps below consensus. Emerging markets rose 7.4% (3.3% vols) while Developed markets declined1.6%.
A very slight miss, but margin expansion coming through Organic sales +3.5% in Q2 (consensus +3.7%) are a touch disappointing, with slightly weaker volume +1.2% (consensus +1.9%) and better price +2.3% (consensus +1.7%). Developed markets organic sales were -1.6% in Q2, while Emerging markets were up strongly +7.4%. Both Europe and the US contributed to the decline in developed markets, with particular weakness in ice cream. In the EM’s, China, India and South East Asia were all strong. The underlying operating margin rose 50bps (consensus +40bps). Underlying EPS of €1.27 was slightly below consensus of €1.29. The outlook for FY19 is unchanged but CEO Jope highlighted the need to improve growth in some underperforming areas. By category, HPC drives growth & margins, while Foods weak Beauty & Personal Care organic sales were +3.5% in Q2, with 100bps of margin expansion in H1. Home Care organic sales were +8.9% in Q2, driven by premiumisation in Fabric Solutions and a successful rollout of Seventh Generation in Europe and North Asia. Home Care margin expanded 120bps in H1. Foods & Refreshment organic sales +1.0% in Q2 was hurt by weakness in ice cream and tea, as well as competition in dressings; the margin contracted 40bps here. The call is at 8:30am UK time. Given recent strength in the shares, we anticipate some slight weakness this morning.
Unilever has released another set of results driven by emerging markets, while Europe and North America negatively weighed. The publication confirmed, once again, the decrease in the food division, to the aid of beauty and home care products.
We highlight key news items from the past week and our views below. Unilever ventures invests in Australian skin care brand. P&G reports strong 5% organic sales growth in 3Q’19. Kraft Heinz appoints AB InBev marketing head as CEO.
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Our latest edition of Consumer Staples Weekly includes: Unilever to acquire wellbeing company OLLY Nutrition FDA allows allulose to be excluded from added sugar labels Pernod Ricard acquires Italian gin brand Malfy McConnell supports raising tobacco purchasing age to 21
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Group organic sales growth of 3.1% (volume/mix +1.2%) in 1Q’19 beat consensus by 30bps. Emerging markets led growth at 5.0% LfL (1.7% vol/mix) while developed markets only rose 0.3%. Beauty & Personal Care organic sales rose 3.1% (1.9% vol/mix) led by improved volumes in skin care and deodorants.
Unilever reported Q1 results which beat expectations, pushed by a strong performance in emerging markets and the Home Care division. Guidance has been reiterated. Coupled with our confidence on the portfolio’s reshaping strategy, an increase in our estimates is expected.
We highlight key news items from the past week and our views below.Unilever acquires oral care brands from P&G.RB faces risk of substantial fines as Indivior charged for fraud. Danone sells Earthbound Farms organic salads business. Proposed merger of US spirits distributors scrapped.
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We highlight key news items from the past week and our views below. Unilever appoints new Beauty & PC head; acquires Garancia. Südzucker’s results and outlook read negative for AB Foods. Tate sells oat-based ingredients plant in Sweden. Heineken increases stake in United Breweries to 46.5%
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Consumer Staples Weekly, Consumer Discretionary Dealspotting, Domino's Pizza Group, Market Highlights
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We highlight key news items from the past week and our views below. Unilever acquires premium home care brand The Laundress. Wal-Mart raises pay in bid to attract drivers amidst shortage. Juul planning to enter Indian market by late 2019.
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Group organic sales growth of 2.9% (vols +1.9%) missed consensus by 60bps. Excluding Spreads, group organic sales rose 3.1% (vols +2.1%).
Key financials: FY18 underlying sales up 3.1%, driven by pricing +1.0% and volume +2.1%, not helped by the 2.9% growth in Q4 which has missed expectations (3.5%). FY18 USG by division: Beauty & Personal Care +3.1%, Home Care +4.2%, Food & Refreshment: +2.3%. FY18 by regions: Asia/AMET/RUB: +6.2% to €22.9bn, Latin America: -1.0% to €7bn, North America: +1.0% to €8.8bn, Europe: +0.9% to €11.3bn. The underlying operating margin is up +90bp to 18.4%. The operating margin stood at 24.6%. 2019 outlook: underlying sales growth in the lower half of the range 3-5% and an underlying operating margin that will continue to grow to 20%.
On 22nd January, we published our 2019 outlook for the European Consumer Staples sector. On 23rd Jan, we published our note Tobacco - Menthol migration maths highlighting the potential impact of a U.S. menthol cigarettes ban on the tobacco sector.
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On 08th November, The Washington Post reported that the U.S. FDA is expected to announce a ban on flavoured e-cigarettes sales in convenience stores and gas stations in the week of 12th November as part of its action-plan to tackle the youth e-cigarette "epidemic". The ban would exclude mint and menthol flavours, as banning them could give menthol cigarettes an edge over e-cigarettes. The actions would apply only to closed-ended pod based systems and not to open ended mods. The agency could also introduce new rules, including age-verification requirements, on online sales to reduce sales to minors. On 9th November, The Wall Street Journal reported that the FDA plans to pursue a ban on menthol cigarettes over the next year or so, as menthol flavour likely causes increased smoking initiation by youth and young adults. Liberum view: A ban on flavoured pod-based e-cigs would hurt market leader JUUL the most. A ban on menthol cigarettes could be particularly damaging to BAT as menthol (Newport, Camel) represent more than 50% of BAT’s U.S. cigarette volumes and c.20% of BAT’s global profits. Menthol smokers would likely move to menthol e-cigarettes or other non-menthol cigarette brands as they may view menthol and non-menthol brands differently.
Unilever PLC British American Tobacco p.l.c.
As promised, Unilever delivered a pick-up in both pricing and volumes. The company also managed to recover sales in Brazil after the truckers’ strikes in Q2. After the turmoil linked to dropping the idea of moving its HQ, the solid Q3 results provide some stability to the stock.
Group organic sales growth of 3.8% (vols +2.4%) was modestly ahead of consensus. Including Argentina, organic sales growth rose 4.5% (4.3% consensus). Emerging markets rose 5.6% (3.4% vols) while Developed markets grew 1.3% despite deflation. Beauty & Home Care organic sales rose 4.0% (2.8% vols) led by improved price growth and innovations. Home Care organic sales grew 4.5% (1.5% vols) led stronger pricing and recovery in Brazil following the trucker strike. Foods & Refreshment organic sales rose 3.2% (2.5% vols) with strong growth in ice cream and emerging markets teas.Asia/AMET/RUB was the standout geography with organic sales rising 6.6% while Europe was still sluggish on 1.4%. Unilever reiterated 2018 guidance for organic sales growth of 3-5% and an improvement in underlying operating margin and cash flow that keep the group on track for their 2020 targets.
Immediate cigarette nicotine reduction proven more effective | German retailer Kaufland pulls Unilever products from shelves | Danone announces measures to pacify Moroccon consumers
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On 26th July, Altria reported a -10.8% decline in cigarette shipment volumes in 2Q’18. Adjusted for trade inventory movements, cigarette shipments were down -5% in 2Q’18 versus an industry decline of -3.5%. Marlboro volumes fell -10% yoy in 2Q, leading to a -30bps market share loss to 43.2%. The company noted that it is still waiting for FDA authorization for the IQOS heat-not-burn product launch, but noted that it is prepared with launch plans for IQOS and could make the product available in the U.S. with 2-3 months of FDA approval. Liberum view: Altria’s share loss in cigarettes raises concerns about the future pace of volume declines in the U.S. especially in light of the aggressive expansion of JUUL vaping products. On the same day, BAT announced it has received SE clearance from U.S. FDA for its carbon tip THP product Eclipse, which raises concerns that IQOS may lose first mover advantage to Eclipse.
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Maintain Hold on raised target price of £42 (£39.6 prior) due to solid progress toward the group’s 2020 targets. Unilever reiterated guidance for 3-5% organic sales growth in 2018 and progress toward its 20% margin target. We forecast acceleration in 2H organic sales growth to 3.6% as one-off factors drop out, yet this implies only c.3% organic sales growth in 2018. Underlying margin progress of 50bps in 2018 and the second tranche of the €6bn share buyback underpin our forecast for 4.5% 2018E EPS growth.
The Q2 results were largely impacted by the truckers strike in Brazil. Unilever expects to recover at least half of the damage this has caused in the second half. Although Brazil is a clear hit on the top-line performance, profitability progressed well.
Group organic sales growth of 1.6% (vols +1.2%) missed consensus by 60bps. Ex Spreads, group organic sales rose 1.9% (vols +1.5%). Emerging markets grew 3.1% (2.3% vols) while Developed markets fell 0.6%. Beauty Care organic sales rose 1.6% (1.9% vols), Home Care grew 2.2% (1.6% vols) and Foods & Refreshment rose 1.3% (0.5% vols). Asia/AMET/RUB was the standout region with organic sales rising 6.3% while the Americas fell 3.8%. 1H’18 underlying EBIT margin rose 80bps to 18.6%, 30bps ahead of consensus driven by 60bps gross margin improvement, A&P spend rose 20bps and overheads reduced by 40bps. Underlying EPS of €1.22 in 1H’18 rose 7.8% beating consensus by 3%. Unilever reiterated 2018 guidance for organic sales growth of 3-5% and an improvement in underlying operating margin and cash flow that keep the group on track for their 2020 targets.
No major surprises. The underlying performance of +3.4% matches the expectations, helped by volume/mix, however, pricing seems to be somewhat weak. Investors should be pleased with the share buy-back programme. We see the company as being on track to deliver its FY guidance.
Group organic sales growth of 3.4% (vols +3.4%) was in-line with consensus. Excluding the disposed Spreads unit, group organic sales rose 3.7% (vols +3.6%). Emerging markets rose 5.1% (4.3% vols) while Developed markets grew 1.1%. Beauty & Home Care organic sales rose 3.9% (4.0% vols) led by innovations, expansion into white spaces and channel build-out. Home Care organic sales grew 4.9% (4.8% vols) led by emerging markets, naturals and premium. Foods & Refreshment organic sales rose 2.3% (2.1% vols) with solid growth in food service, emerging markets and faster-growing segments. Asia/AMET/RUB organic sales rising 5.9% while Europe was flat. The dividend will rise 8% in 2018 and a €6bn share buyback starts in May. Unilever confirmed 2018 guidance for organic sales growth of 3-5% and an improvement in underlying operating margin and cash flow.
Unilever finalizes new simplified corporate structure | L’Oréal acquires Canadian beauty-tech company Modiface | Diageo acquires premium aperitif company Belsazar | FDA issues ANPRM to cut nicotine in combustible cigarettes
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Unilever announced that it will move its legal HQ to the Netherlands. At the same time, the company confirmed it will maintain its listing in London, Amsterdam and New York. The group also said that the headquarters of the Beauty & Personal Care division and the Home Care division will be located in London. The headquarters of the Foods & Refreshment division will continue to be based in Rotterdam, meaning that employment in both countries should not be affected by this decision.
Unilever acquires Romanian ice-cream producer Betty | Danone’s venture capital unit invests in Harmless Harvest | Nestlé withdraws from Merck & Pfizer consumer units sales | Beer industry writes to Trump on probe on aluminium imports
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A strong set of numbers driven by volume growth which kicked in a little bit later than initially expected. All subdivisions improved their performance in Q4, excluding spreads. The company delivered an 110bp underlying margin improvement as promised driven by C4G with ZBB & supply chain savings. We believe the company is on track to deliver its 2020 guidance.
4Q’17 LfL sales grew 4.0%, 30bps above consensus driven by solid 3.2% volume/mix growth. Pricing was negatively impacted by pass-through of lower prices in India post implementation of GST and change in accounting for hyperinflation in Venezuela. Emerging markets remain strong at 6.3% while developed markets remain subdued 0.8%. FY’17 underlying EBIT margin rose 110bps to 17.5% in-line with consensus driven by 40bps gross margin improvement and a 60bps contribution from A&P spend. Underlying EPS of €2.24 in FY’17 rose 10.7% beating consensus by 1%. Unilever expect to deliver 3-5% underlying sales growth and an improvement in operating margin and cash in 2018. Maintain HOLD and €45 / GBp 3,960p target price.
On balance, we expect a solid, if unspectacular, set of results. Growth remains constrained - we forecast 3.7% LfL sales growth for Consumer Staples with headwinds from soft consumer demand, geopolitical turmoil and disinflation. Input prices remain benign but intense price competition, retailer pressures and online deflation impede margin growth, putting the onus on cost savings and M&A to drive EPS. Sector valuation remains elevated at 20.8x cal’18E, a 36% premium to STOXX600. We expect valuations to remain capped, particularly if bond yields continue to rise.
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Unilever (ULVR LN, HOLD, T/P 4350p) Q3 underlying sales increased by 2.6%. Q3’s pricing increased +2.4% and volume rose 0.2%. The quarter, which lapped a weak Q3 2016, was affected by poor weather in Europe and natural disasters in America. The company maintain their target of 3 to 5% underlying sales growth.
Q3 trading update: underlying sales grew +2.6% (cons. +4%) driven by pricing +2.4% and volumes +0.2%. On reported figures, Q3 was down 1.6% (FX: -5.1%, net acquisitions: +1.1%). USG by division: PC +1.8% (cons. +4.7%), Foods +1.5% (cons. +1.1%), Refreshments +3.1% (cons. +4.4%), HC +4.6% (cons. +4.6%). Developed markets were down 2.3% organically, whereas emerging markets posted a strong 6.3% OG. The FY guidance is confirmed: underlying sales growth in the 3–5% range (we expect the lower range), an improvement in the underlying operating margin of at least 100bp and a strong cash flow.
Unilever (ULVR LN, HOLD, T/P 4350p) CFO Graeme Pitkethly hosted sell-side analyst roundtables in London, Friday 22nd September and expressed confidence that margins will increase from their current level, 16.4% (FY2016 restated underlying operating margin which is before restructuring costs). We believe there should be ample scope for them to do so – a view supported by chief comparators.
Unilever (ULVR LN, HOLD, T/P 3800p) released interim 2017 results which were in line with expectations. Revenue was €27.7bn up 5.5% and up 3.0% on an underlying basis. Profit before tax was €4.6bn up 24.2% at constant rates. Diluted EPS increased 19.9% to €1.09.
Q2 update: underlying sales were up +3% at constant FX (cons. +3.2%) and +3.4% excluding Spreads, with flat volumes and pricing at +3%. Q2 USG by division: PC +2.2% (price-driven, impacted by Brazil, Indonesia and the GST introduction in India), HC +2.5% (price-driven), Foods +1.2% (still negative volumes), Refreshments +6.7% (excellent performance driven by new innovations). By region in Q2, Asia/AMET/RUB delivered +4.3% USG, the Americas delivered +3.7%, Europe stood at + 0.3%. Emerging markets progressed +4.8% (uniquely price-driven), whereas developed markets were up +0.7% (both price- and volume-driven). Overall, in H1, underlying sales were up 3%. On reported figures, sales were up 5.5% (FX: +1.7%, net acquisitions: 0.8%). The underling operating margin in H1 was up +180bp to 17.8% (cons. +16.8bp). All divisions recorded progress in margins: PC +240bp, HC +110bp, Foods +100bp, Refreshments +230bp. The gross margin improved by 30bp to 43.1%. FCF is up 65%. The FY guidance is maintained for the top line (3-5%), whereas the underlying operating margin should improve by at least 100bp (80bp previously) on the back of innovation and cost efficiencies (C4G).
Unilever (ULVR LN, HOLD, T/P 3800p) is due to release interim 2017 results on Thursday 20th July. We take this opportunity to update our forecasts and preview the data. In Unilever’s Q1 results, underlying sales grew 2.9% despite tough trading market conditions. Pricing grew 3.0%, but volume fell 0.1%. We trim our 2017 organic revenue growth forecast from 3.4% to 2.8%.
Unilever (ULVR LN, HOLD, T/P 3800p) released their Q1 trading statement this morning – Q1 underlying sales grew 2.9%. Turnover increased 6.1% to €13.3bn, in front of Bloomberg consensus of €13.2bn. Despite trading market conditions being described as tough, Unilever grew pricing by 3.0%, but saw volume declining 0.1%.
Q1 update: underlying sales are up 2.9% (cons. 2%) with pricing of +3% and volume -0.1%. On reported figures, sales are up 6.1% (FX: 2.4%, net M&A: 0.8%). OG by division: Personal Care +3.1%, Foods +0% (+1.7% excluding spreads), Home Care +4.1% (good performance), Refreshments +5.4% (good performance). OG by region: Asia/AMET/RUB grew +6.9% (both price and volume driven), the Americas grew +1.2% (impacted by Brazil and North America), and Europe was down 2% (strong deflationary environment). Developed markets were down 1.5%, whereas emerging markets grew +6.1% (price driven). FY guidance is maintained.
After a failed approach by Kraft-Heinz, Unilever has outlined its restructuring programme. The company has announced following measures: -The group is targeting a 20% underlying operating margin (before restructuring) and a 19% core operating margin (including restructuring costs) by 2020. This target should be achieved thanks to an increased savings target (€6bn, vs. €4bn previously) coming from the supply chain (€4bn vs. €3bn previously) and increasing savings in overheads as well as brand and marketing investments (€2bn vs. €1bn previously). This will be supported by €3.5bn of restructuring costs in FY17-19. - The Spreads unit will either be sold or demerged. - The company will combine Foods & Refreshments into one entity. - Unilever will launch a share buy-back of €5bn this year. - The dual-headed structure (NV and PLC) is expected to be simplified (review to be done by the end of this year). - The group is targeting a net debt/EBITDA ratio target of 2.0x (2.6x including pensions & lease adjustments). - Cash conversion ratio is expected to achieve 100% by 2020. - The quarterly dividend up +12%. For FY17, the group expects the top line to deliver 3–5% growth on an underlying basis, and an underlying operating margin improvement of at least 80bp.
Unilever (ULVR LN, HOLD, T/P 3800p) announced yesterday that it will publish the findings of a root and branch review in April 2017. This is stated as being a result of the recent approach made to them by KraftHeinz (KHC US, N/RO), an offer which quickly lapsed.
Unilever (ULVR LN, HOLD, T/P 3800p) announced yesterday that it is no longer subject to a £40 per share offer from KraftHeinz, which valued Unilever at 14x EV/EBITDA and a 24x P/E ratio. The announcement was made jointly with Kraft Heinz. While the offer lapse will probably prompt Unilever’s shares to open lower – they rose 13.3% on Friday – longer term changes may be more positive.
After Friday’s fireworks, Kraft Heinz has withdrawn its bid for Unilever. The company cannot revive takeover talks with Unilever for six months.
Kraft Heinz has launched a bid for Unilever with a premium of 18% to Unilever’s Thursday closing price (the offer stands at $50 per share which would translate into c. £39.50). Unilever has declined the offer.
Unilever (ULVR LN, HOLD, T/P 3800p) announced Q4 and FY2016 results were in line expectations at sales level with organic revenue growing 3.7% to £52.7bn, beating Bloomberg consensus of £52.2bn. Adjusted core diluted EPS was in line with our estimates at €1.82, but below €1.85 Bloomberg consensus. Unilever hold a full year results conference call at 8.00am.
Q4 results: underlying sales growth (USG) stood at 2.2% (cons. at 2.8%) with pricing at 2.6% and volumes at -0.4%. USG by division: PC +2.5% (weaker performance, on the back of Brazil and demonetisation in India and higher promotional activity in North America), Foods +1.9% (good performance), Refreshments +0.7% (ice-cream was impacted by a weak Brazil and Turkey but also tough comparables), HC +3%. On a full-year basis, underlying sales grew by 3.7% (cons. at 3.9%), with pricing at +2.8% and volumes at 0.9%. On a reported basis, turnover was down 1% (FX: -5%, net acquisitions +0.6%). The core operating margin is up 50bp to 15.3% (better than the 15.2% expected by consensus and our estimates). Unilever expects a slow start in FY17 with growth improving as the year progresses.
Unilever - Full Year Results | Diageo - Half Year Results
Unilever PLC Diageo plc
Unilever released its Q3 trading update. Underlying sales grew +3.2% (cons. 2.9%) driven by pricing +3.6% and slightly negative volumes (-0.4%). On reported figures, Q3 is flat (FX: -3.4%, net acquisitions: +0.2%). USG by division: PC +3.1% (price driven), Foods +1.7% (price driven), Refreshments +4.5% (price & volume driven), HC +3.9% (price driven). The company maintained its FY guidance and expects USG to arrive somewhere at around 4% for the FY.
Unilever released its Q2 results. The underlying sales grew +4.7% at constant FX with volumes up +1.8% and pricing at +2.8% (cons. +4.4%). On reported figures, sales were down -3.2% (FX: -8.1%, net acquisitions: 0.7%). USG by division: PC +5.6% (good performance with good volumes), Foods +2.7% (still negative volumes), Refreshments +4.2%, HC +6% (price-driven). Overall, in H1, underlying sales were up 4.7%. The core operating profit in H1 was up +50bp to 15% (cons. +30bp). The gross margin improved by 80bp to 42.7%. By region, Asia/AMET/RUB delivered +5.9% USG, the Americas delivered +6.4% (uniquely price-driven), Europe stood at + 0.8% (with negative pricing). The company does not expect market conditions to improve in FY16 and maintains its full-year guidance of 3-5% underlying sales growth with an improvement in the core operating margin.
Unilever Q2 – Small beats on sales/profit | Britvic – FY2016 Q3 reconfirms profit guidance | SABMiller – Africa star performer
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Unilever will be first of the large cap UK FMCG companies to report in the upcoming reporting season when it releases its interim results on Thursday 21st July. Market expectations are for 4.4% underlying sales growth in Q2 compared with 4.7% reported in Q1 and 4.6% for H1 as a whole. The slowing trend is expected to continue into the second half of 2016 with full year consensus being 4.1% on the back of a 3.6% rate of H2 expansion.
Unilever released its Q1 trading update. The underlying sales stood at 4.7% (in line with consensus) with volumes up 2.6% and pricing 2%. The negative currency impact stood at -7.1% whereas net acquisitions were at 0.7%. OG by division: Personal Care +5.8%, Foods +1.9% (continuous weak performance with slightly negative volumes of -0.2%), Home Care +7% (very strong growth), Refreshments +3.8% (good performance). OG by region: Asia/AMET/RUB grew +5% (mostly volume driven), the Americas grew +8% (driven by LatAm and a flat North America which was dragged down by the poor performance of spreads), and Europe was down -0.6% (strong deflationary environment). Developed markets were slightly negative (-0.3%, uniquely volume driven), whereas emerging markets grew +8.3% (both price and volume driven). The group sees no material changes to what was announced at the FY release (underlying sales growth of 3-5% with a constant improvement in the core operating margin).
FY & Q4 results. The numbers were slightly better than expected on an underlying basis. In Q4, underlying sales growth (USG) stood at 4.9% (consensus at 4%) with pricing at 2.9% and volumes at 1.9%. On a full year basis, underlying sales grew by 4.1% vs. cons at 3.9% (pricing at 1.9%, volumes at 2.1%). All divisions performed better than last year: PC +4.1% USG, Foods +1.5% USG, Refreshments +5.4% USG, HC+5.9%. The FX stood at +5.9% whereas net acquisitions were at -0.1%. On the reported figures turnover progressed by 10% to €53.3bn. By region in Q4, Asia/AMET/RUB delivered USG of 6.3%, Americas 6.4% (negative volumes due to stronger pricing in Q3 and Q4 linked to weakening currencies in LatAm) whereas Europe was at 0.7%. The group core operating margin for the FY progressed by 30 bps (in line with consensus) and stood at 14.8% (15.1% in H2). By division, HC recorded an impressive +130 bps gain in core margin, PC +20bps whereas Refreshments were up +60bps. The Foods core margin was down by -40 bps. The operating margin stood at 14.1% (vs.16.5% last year, lower than consensus at 14.6%) due to no profits from disposals. Consequently the FY15 net profit stood at €5.26bn vs. €5.52bn last year. The group expects tougher market conditions in 2016 and high volatility. The group's underlying sales growth should be volume driven.
Unilever released its Q3 trading statement. Underlying sales grew by 5.7% (consensus at 3.9%) with volume up 4.1% (consensus at 2.4%) and pricing 1.5% (in line with consensus). The FX effect stood at 2.9% whereas net acquisitions added 0.6% to the revenue. On a reported basis, revenue was up by 9.4%. Accelerated performance in Q3 was driven especially by a strong PC (USG: 6.1% vs. 3.3% in Q2, volume driven) and Refreshments (USG: 8.4% vs. 3% in Q3, good ice-cream performance driven by stronger volumes). Foods recorded USG at 1.6% (+1.2% in pricing) whereas HC underlying sales grew by 6.5% (+5.7% in volumes). By region, Asia/AMET/RUB recorded 5.3% USG on softer Chinese comps. The Americas grew by 9.4% (stronger pricing in LatAm coupled with the return to growth in North America). Europe remains in deflation mode, although the region recorded +2% USG in Q3 thanks to stronger volumes in ice-cream. The emerging markets grew by 8.4%. The company expects FY underlying sales to be in the upper end of 2-4% range (guidance raised vs. 2.9% communicated at the time of the H1 release).
Q2 results: the USG stood at 2.9% (consensus at 2.6% vs. 2.8% in Q1) with 1.5% pricing and 1.3% volume growth. USG by category: PC 3.3% (2.7% in Q1), Food 0% (2.9% in Q1), Refreshments 2.9% (2.4% in Q1), Home care 5.8% (3.1% in Q1, positive surprise). By region the Americas delivered USG at 5.7%, Asia/AMET/RUB at 3.4% whereas Europe remained under deflation (-0.9% USG). The total turnover in Q2 grew by 11.8% (including a 9.6% FX effect). For the full H1, total revenue grew by 12% (FX at 10.1%) with 2.9% USG (consensus at 2.7%) with 1.7% pricing and 1.1% volume. The core operating margin progressed by 50bp to 14.5% driven by HC (+220bp), Foods (+30bp) and Refreshments (+60bp). PC reported -20bp in the core operating margin. The core EPS increased by 16%, however the reported diluted EPS slipped by 10% on the back of the one-off gain in 2014 linked to US disposals in Food. The FCF increased to €1.12bn due to lower working capital and higher core operating profit. Net debt increased to €11.8bn (€9.9bn in December 2014) due to dollar-denominated debt and acquisitions. The company proposed a quarterly dividend of €0.302.
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