Unilever confident of strategy, despite turnover dip

Anglo Dutch foods to personal care conglomerate Unilever reported better first quarter sales growth today, although revenues dipped.

Underlying sales growth rose 3.4%, but turnover for the three month period was 5.2% down at £10.98bn.

However, chief executive Paul Polman said the board is confident of hitting its goals.

He said: “The first quarter demonstrates another good volume-driven performance across all three divisions (beauty & personal care, home care and foods & refreshment).

“The broad-based growth, including over 4% volume growth in emerging markets, shows that the ‘Connected 4 Growth’ programme is working and enhancing our long-term compounding growth model.

“We are further improving the quality and speed of our global and local innovation as a result of a more agile, consumer-facing organisation.

“At the same time, we are maintaining strong delivery from our savings programmes and expecting to complete the exit from spreads in the middle of the year.”

Turnover, excluding spreads, showed a 5.2% fall to £10.37bn, while underlying sales growth, excluding spreads, was 3.7% better.

Mr Polman added: “For the full year, we continue to expect underlying sales growth in the 3% – 5% range and an improvement in underlying operating margin and cash flow that keep us on track for our 2020 goals.

“We intend to start a share buy-back programme of up to £5.23bn in May to return the expected after-tax proceeds from the spreads disposal.

“We are raising the dividend by 8%, reflecting confidence in our outlook.”

Port Sunlight, in Wirral, is the centre for Unilever’s home care and personal care research and development, with more than 750 scientists based there.

World famous brands such as Dove, Sunsilk, Rexona, Axe, Domestos, TRESemmé, Comfort, Dirt is Good, Surf and Signal all have Port Sunlight technology inside.

The group has also created a pilot plant at the site that allows it to manufacture prototype shampoos, fabric conditioners, toothpastes, deodorants and laundry liquids.

Unilever says the plant also works with three local strategic partners – The University of Liverpool, Manchester University and Daresbury Laboratory.

Nearby, the group operates a detergents factory in Warrington.

Commenting on Unilever’s announcement today, Russ Mould, investment director with Salford Quays-based investment platform AJ Bell, said: “At first glance Unilever’s first-quarter update reads well with underlying sales growth of 3.4% and the launch of a new €6 billion share buy back scheme.

“However, the shares are largely shrugging off the news and may instead be focusing on how Unilever is exchanging pricing power for volume growth, in a move which may suggest that 18 months after the fact we are now finding out who was the winner in the spat between Tesco and Unilever over the price of Marmite – and it may not be Unilever.

“First quarter sales growth of 3.4% year-on-year on an underlying basis did represent a slight slow down from the 4% advance in the fourth quarter, but it was still better than all of the other three-month periods since Q2 2016.

“However, the mix of that sales growth is interesting.

“Volumes rose 3.4% and prices just 0.1%.

“This is a marked reversal of the trend seen until Q3 2016, when Unilever was driving sales growth through price.

“But it was at this point that Tesco rebelled over the price of Marmite and threatened to stop stocking to consumer staple and it is noticeable that since then Unilever has throttled back on price increases to drive volumes.

“That may be good news for shoppers and possibly for Tesco, although its implications for Unilever may be less immediately clear, despite the benefits of the additional volumes, as the real secret to Unilever’s high-teens operating margins (and boss Paul Polman is targeting 20% by 2020) is its brands and the pricing power that names such as Hellman’s, Persil, Liptons and Dove confer.

“If investors have any cause to question that pricing power then they may start to wonder about Unilever’s margin targets and the valuation attributed to the stock, since the shares, at roughly 19 forward earnings, trade on a big premium to the FTSE 100, which trades at 14 times to 15 times.”

He added: “That premium is merited owing to the high margins and returns on capital which come from the company’s brands and their pricing power – but that premium could be eroded, to the detriment of the share price, regardless of any share buyback activity, if investors start to fret that Unilever is losing some of its brand and price power.

“It is too early to tell now, but this is a trend which investors will be watching closely from here onwards.”