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Unilever - 2020 guidance withdrawn

Sophie Lund-Yates, Equity Analyst | 23 April 2020 | A A A
Unilever - 2020 guidance withdrawn

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Unilever plc Ordinary 3.11p

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Unilever's underlying sales were flat in the first quarter, with a 0.2% increase in volumes being offset by 0.2% reduction in prices. Turnover was €12.4bn.

Covid-19 is having a significant impact on the business, and is causing shifts in demand. Hygiene and in-home food products are doing well, but consumption of food service and ice cream items have all but stopped. The uncertainty means all previous growth and margin guidance for 2020 has been withdrawn.

The quarterly dividend of €0.4104 per share has been maintained.

The shares fell 4.2% following the announcement.

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Our View

On a typical day a third of the world's population uses a Unilever product, and these small, everyday purchases tend to be pretty resilient in a downturn. But coronavirus is highlighting some challenges.

Out of home eating has pretty much ground to a halt, hurting the sales of things like ice creams, and revenue from food service customers. Stockpiling has helped to mitigate some of this as customers cleared supermarket shelves and loaded up on Unilever's branded cleaning goods like Domestos. But we note this is mostly pulling forward future purchases and the uplift hasn't been quite as good as might have been expected in any case.

Supermarkets saw sales rise as much as 30% at the beginning of the outbreak and some analysts had been expecting Unilever to get a bigger slice of that action.

That leads us to the issue of lacklustre sales prior to the pandemic. Growth in more developed markets had been difficult, with price pressures and tougher trading conditions. That puts the onus on other regions to pick up the slack.

We wonder how much of the pressure is coming from a weakening of brand power. Smaller brands and cheaper own-brand options have sprung up in recent years, helped by a surge in digital marketing. This can undercut the potency of Unilever's multi-million pound traditional advertising campaigns.

This is a particular bugbear for the consumer giants because brand power and loyalty increase prices and boost margins. Some of the extra profit is then reinvested in next year's marketing budget, keeping the virtuous circle spinning. If a consumer base becomes less loyal it throws that circle through a loop.

We should add it's not that Unilever has lost the war. Margins of almost 20% means it has some wriggle room to help cushion the effect of any disruption.

Being one of the biggest means Unilever has a lot in its armoury to fend off competition too. Whether that be through bigger research and development budgets, or buying up rivals. Getting sales moving at a slicker pace in the future will depend on using its substantial resources to adapt quickly and meet the needs of a changing consumer base.

We're not all that concerned about Unilever navigating the current disruption, although it won't be without ups and downs. We're more focussed on how the group plans to propel growth in the long-term once things start to settle down.

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First quarter trading details (all sales quoted on an underlying basis)

Volumes declined 2.2% in emerging markets, and rose 3.9% in developed markets. China suffered significant volume declines following lockdowns which restricted eating out and shopping. North American and European sales benefited from stockpiling behaviour, but overall growth was impacted by price declines in these regions.

Beauty & Personal Care saw sales growth of 0.3%, feeding into turnover of €5.3bn. Volumes rose by 0.7%, but prices fell 0.5%. Stockpiling and an increased need for hygiene products benefitted the division. Skin cleansing saw mid-single digit volume-led growth, while brands including Vaseline also continue to do well.

Large ice cream volume declines contributed to a 1.8% fall in overall volumes in Foods & Refreshment. Prices rose 0.1% and turnover was €4.4bn. There was increased demand for savoury food and dressings in Europe and the USA, with Hellmann's growing by double digits. The strategic review of the tea business is ongoing.

Home Care turnover reached €2.7bn, reflecting a 2.4% increase in sales growth. This was driven by a 2.6% rise in volumes, but prices fell slightly. There was double digit sales growth for household cleaning products including Domestos bleach.

In response to the pandemic Unilever is contributing €100m through donations of soap, sanitiser, bleach and food. It's also helping to produce medical equipment. It has made €500m of cash flow relief available for its small and medium sized suppliers, and small-scale retail customers.

The group said: "we are systematically reviewing all areas of cash generation and usage and re-evaluating all costs in the light of the current circumstances".

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