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Unilever - sales pop, price hikes weigh on volumes

Unilever posted third quarter sales of €15.8bn, reflecting underlying sales growth of 10.6%.

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Unilever posted third quarter sales of €15.8bn, reflecting underlying sales growth of 10.6%. Growth was broad based across divisions, fuelled by higher prices which more than offset a 1.6% drop in volumes.

Personal and Home Care divisions saw the largest volume declines, 4.1% and 3.6% respectfully. Equally, both divisions had the largest price hikes too.

The quarterly interim dividend for the third quarter is maintained at €0.4268. The second tranche of the ongoing buyback will see a further €750m of shares repurchased by December 2022.

Unilever now expects underlying sales growth for the full year to be above 8%, with more negative underlying volume growth. Expectations for underlying operating margin remains at 16%, with cost pressures expected to continue into 2023, albeit at a lower level.

The shares were broadly flat following the announcement.

See the latest Unilever share price, charts and how to trade

Our View

Unilever's third quarter was relatively strong, with revenue and underlying sales growth both ahead of analyst expectations. That's given management confidence to upgrade full year expectations. That's all well and good but there are challenges.

Volumes are falling, and though it's only low single digits for now, declines are expected to push a little higher over the rest of the year. This isn't a Unilever specific issue though, as we've seen with other names in the wider industry, raising prices and keeping volumes ticking higher is beginning to become a mammoth challenge.

In Unilever's case, a small drop in volumes when the group's pushing record price hikes onto consumers isn't the end of the world. The reason they've been able to keep demand somewhat intact is down to the host of strong branded products in the armoury. In unfavourable conditions, brand power is king.

It's for that reason, protecting the quality of those brands is Unilever's number one priority, and that comes at a hefty cost. Brand and marketing investment racked up €3.7bn in the first half, with that expected to increase into the second. That's all part and parcel with the group's strategy of locking in long-term customers with well-known, trusted brands.

This part of the business is a non-negotiable, so if revenue starts to weaken margins will come under pressure.

Luckily there are other levers to pull. The group's shifted its organisational structure following a period of lacklustre growth and pressure from investors. Greater focus and cost savings of €600m over the next couple of years certainly sounds good. But turning a beast like Unilever into a streamlined outfit isn't a quick process. We're hopeful the new CEO, set to come in at the end of next year, comes in on board with the new direction of travel or there could be more turbulence.

On a more positive note, free cash flow at the half year mark was €2.2bn and net debt was 2.3 times cash profits (EBITDA), which helps underpin ongoing investment and the dividend. There's a prospective yield of 3.9% on offer, please remember though there are no guarantees.

The group's valuation has come down below the long-term average, reflecting the market's uncertainty. This could prove attractive if management can navigate through this turbulence effectively, although a departing CEO could impact this. The stock is down a touch this year, but the defensive nature means it has outperformed the broader market. Of course, there are no guarantees and past performance is not a guide to the future.

Unilever key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 27th October 2022