Unilever sales hit by Brazil truckers strike but margins improve

Excluding the spreads business, for which the disposal was completed at the start of July, the consumer goods conglomerate grew underlying sales 1.9% in the three months to 30 June, which was slower than the 2.3% expected by analysts.

For the first half as whole, sales increased 2.7%, excluding spreads. The growth came from sales volumes swelling 2.5% in the six-month period, with growth across all three divisions, while prices were up just 0.2%.

Reported revenues, excluding spreads, fell 4.5% in the second quarter to €13.0bn, which saw first-half turnover excluding spreads decline 4.8% to €24.9bn. With underlying operating margin improving in all three division, up 80 basis points at group level to 18.6%, profit before tax and excluding spreads rose 1.3% to €4.7bn.

As a result, underlying earnings per share climbed 7.8% or 18.6% in constant currency to €1.22, which was ahead of the analyst consensus of €1.18.

Chief executive Paul Polman said growth was driven by "strong innovation and continued expansion in future growth markets", with the margin improvement "of high quality and in line with our strategy, driven by further gross margin progression, increased investment behind our brands and strong savings delivery".

In Beauty & Personal Care, organic sales rose 1.6%, with several brands performing particularly well, including Vaseline's skin care as it was driven by a successful market development campaign, together with growth from acquisitions Carver, Sundial and Schmidt's, and the launch of Dove 'body polish' in North America. Deodorants returned to good volume growth, but price was negative due to promotional activity.

Growth in the second quarter however was hit by the truckers' strike in Brazil as well as challenging competitive conditions in Europe and South East Asia.

Home Care growth of 2.2% was broad-based with the exception of Latin America, with Comfort softener delivering double-digit growth, continued double-digit growth of Domestos toilet blocks and bleaches, and the launch of Cif premium sprays in 23 European markets. Water purification performed well, while Blueair air purification saw sales decline sharply in China, the brand's biggest market.

In Food & Refreshment, where organic sales rose 1.3%, efforts continued to build the presence in emerging markets and keep up with consumer trends such as organic, vegan and wellness. New Magnum ice cream variants were launched, Ben & Jerry's non-dairy was rolled-out from the US into Europe, while a new Kinder ice cream was launched in Germany and France. Portfolio transformation in Europe and North America was held back by a decline of the black tea business, while Knorr foods grew ahead of the group average but salad dressings sales fell in "intense" promotional environment.

"The Connected 4 Growth change programme, which makes our organisation more agile and resilient, is driving the step-up in our innovation and savings programmes," said Polman, confirming the exit from spreads on 2 July and the return of €3bn so far of a €6bn share buyback programme in 2018. "We have also signed an agreement to acquire a 75% stake in the Italian personal care business Equilibra."

"Our expectation for the full year is unchanged. We expect underlying sales growth in the 3-5% range, an improvement in underlying operating margin and strong cash flow. We remain on track for our 2020 goals."

REACTION & ANALYSIS

Unilever shares, which had climbed around 14% since directors revealed that they would scrap the dual Anglo-Dutch corporate structure and kicked off the share buy-back, dipped 0.3% to 4,912p on Thursday morning.

"Having explicitly lowered expectations for 1H, we think Unilever’s sales performance is disappointing," said analysts at RBC Capital Markets, "particularly in light of hot weather in the northern hemisphere which ought to have boosted ice cream sales. EPS beat and guidance was maintained."

"While Unilever (and others) have made much of the 11 day Brazilian transport strike in Q2, it’s not the only thing that was going on," they added, expecting the period of sustained warm weather in Europe and North America to have boosted ice cream sales. "With food and refreshment organic growth up just 1.3% (vol +0.5%) in Q2 that doesn’t seem to have happened. In this context we regard a sales miss versus company compiled consensus (we presume unusually hot weather wasn’t factored into the original 3% guidance for 1H) as incrementally disappointing."

They concluded that nothing in the interim results alters RBC's cautious view: "we think Unilever will struggle to deliver on its combined sales and margin targets for 2020".

Broker Liberum said the results were a "mixed bag", with organic sales growth missing consensus by 60bps, noting that developed markets fell 0.6% but emerging markets rose 3.1%, with Asia/Africa, Middle East, Turkey/Russia, Ukraine, Belarus the standout region with organic sales rising 6.3% while the Americas fell 3.8%.

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. Gross margin expansion was driven by margin-accretive innovations and cost savings.

Liberum rate Unilever at 'hold' with a 3,960p target price. "In our view, the risk/reward outlook for the shares is balanced. Management is reinvesting 2/3rds of a €6bn cost savings program in growth initiatives and is committed to delivering an ambitious 20% underlying EBIT margin target by 2020. Unilever also remains focused on shareholder returns - the dividend is growing 8% in 2018 and a €6bn share buyback started in May. While more aggressive EPS growth certainly underpins the shares, failure to deliver on lifted expectations could lead to a pull-back. In addition, the company’s bold margin targets could be unsustainable in the long run."