Shares in Unilever fell this morning (1 October) in reaction to the consumer goods giant issuing a sales warning for the third quarter – on the back of a slowdown in emerging markets. City analysts said it was a blow for Unilever. However, some were more concerned about the company’s performance in developed markets – and insisted emerging markets, in the long term, still present potential for FMCG companies.
Andrew Wood, Sanford Bernstein
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“Paul Polman, the CEO of Unilever, is presenting at our Strategic Decisions Conference in London tomorrow (2 October) and attended a dinner with us and a small number of investors yesterday evening, and Unilever decided that it was necessary to release this statement ahead of those events.
“From our conversations with management – Polman and James Allison, the head of strategy, M&A and IR) before, during and after dinner we would highlight the following points: in general terms, management believed/indicated that this slowdown in Q3 was not internally induced, but a more general issue with market growth in the aftermath of the significant currency weakness that had squeezed local incomes in certain emerging markets; management specifically mentioned South Africa, India, Indonesia, Brazil and Russia and did not distinguish between the impact on the food or the HPC businesses; management re-emphasised that this was a market issue and not a Unilever market share issue, with its share performance broadly following the same trajectory as in H1.
“Polman indicated he had expected a slowdown in the emerging markets but he had also expected the mature markets, especially in the US, to recover to compensate for the slowdown in the EMs. This did not materialise, with the CEO indicating the pick-up in economic growth in the US is not seeing a discernible improvement in consumer activity, recently indicated by Wal-Mart Stores’ and Target Corp.’s efforts to undertake some stock reductions in their US business. Additionally, Unilever’s European business (and specifically the ice-cream business) did not see a huge acceleration from the weather which was not, across the continent, significantly better than Q3 2012.
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“However, despite the poor news on Q3, we still consider that the EMs thesis has not changed. We continue to believe (as does Polman) that the EMs continue to offer a long and healthy runway for growth. We do expect some slow-down in growth from the levels seen in 2010-2012, but we conclude that the headline fears that will inevitably come from the Q3 warning should not be extrapolated as a general and rapid deceleration in emerging markets growth.”
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By GlobalDataGraham Jones, Panmure Gordon
“Q3 sales says as much about developed markets as it does about emerging markets. There are always going to be bumps in the road in emerging markets, and Unilever continues to grow ahead of its markets and is well versed at handling currency devaluations and the inflationary pressures, and consumer environments, that come with them. That said, the fact that we have had yet another period of disappointing growth in developed markets really should, in our view, prompt a re-evaluation of Unilever’s strategy, particularly in spreads.
“We had expected a slowdown to 4.5% growth in Q3, driven by a slowdown in growth in emerging markets from 10.3% to 7.5%, but a return to modest growth in developed markets of 0.5%. However, developed markets are stated to have remained ‘flat to down’, so if we assume a 0.5% decline for developed markets that implies broadly 6% growth in emerging markets to get to c.3.3% for the group.
“Unilever has enjoyed strong emerging market growth for many years now, and there are obvious macro factors driving this slowdown. Unilever must be reasonably confident about an uptick in sales growth in Q4 to have bothered to mention it (they are particularly averse to quarterly guidance).
“This clearly isn’t good news for the shares short-term, but we don’t think it should change the fundamental thesis for the stock. That said, we think it is a timely reminder of Unilever’s over-reliance on developing market growth, and while Unilever has improved its growth performance in many categories in developed markets, there are notable exceptions, such as spreads. Solving that conundrum shouldn’t be overlooked in the quest to return emerging markets to their former growth rates.”
Darren Shirley, Shore Capital
“With 57% of sales delivered from emerging markets, and assuming a 0.5% decline in underlying sales growth across developed markets, we estimate emerging market underlying sales growth through Q3 of circa 6%, still robust relative to the developed market world but somewhat below the double-digit growth reported in recent years, and below the circa 9% average Unilever has reported over the past 20 years.
“Management states that despite the slowdown, it is on track to deliver its 2013 priorities of ‘profitable volume growth ahead of our markets, steady and sustainable core operating margin growth and strong cash flow’. However, we believe it is also prudent to reduce our previous expectations for core EBIT margin expansion of 35 basis points for 2013 to 14.1%.
“Looking into 2014, we also lower our expectations for EBIT margin expansion to 20 basis points (previously 31 basis points) to reflect lower volume growth, such lower margin and sales growth assumptions.”
Jon Cox, Kepler Cheuvreux
“We suspect emerging markets decelerated to 7% in Q3 (10%+ in H1, 11%+ in 2011, 2012) amid volume weakness caused by price hikes to offset currency impact. We believe a mixture of price cut reversals and an acceleration of new product roll outs will lead to an improvement in Q4 and our base case is a normalised environment in 2014.
“Unilever’s hard-won credibility amid an acceleration in the operating performance take a dent from the statement, but we believe the fundamentals of the case are intact in terms of the sustainability of the turnaround. However, it is an emerging market play given that almost 60% of its sales are generated in those markets. We cut estimates by 3% on average, bringing underlying sales growth down to 4.2% in 2013 from 5.5% previously and slice 10 basis points off margin assumptions given the likely increase in promotional intensity to rekindle more sluggish markets. While we see weakness short term and continue to see a sector derating, we believe this will attract investors who are looking at the long-term fundamentals.”
