Monday, February 24, 2014

Unilever partners with Facebook alliance to reach millions in India- 02/28/2014


  1. Sources: Bloomberg, Company 10K and Earnings Call,, JP Morgan

    5 operating segments:
    Reference items all in Euro $ ( Rev 2013 59 B, OCF 5.8 B, FCF 3.7 B)
    % of total rev and % of total OI
    Personal care 36%/41%, principal brands in personal care include Dove, Lux, Vaseline, Ax, and Pond's.
    Food, savory products, dressing and spreads, 27%/41%, and key brands include Knorr, Hellmann's, Amora
    Home care 18%/7%, includes laundry products, its brands include Omo, Surf, Comfort etc,.
    Refreshment 19%/11%, popular brands include Magnum, Breyer's, Klondike, Ben&Jerry's and Popsicle.
    Operating margins: Foods 22.8%, Personal care 17%, Refreshment 9.1%, Home care 5.9%.

    Unilever's rev grew at a CAGR of 4.2%, and its NI declined at a CAGR of -.7% for the past 5 years.

    UN's gross margin is 15.1%, slightly higher than the industry average 14.9%, Profit margin is 9.7%, .1% higher than industry average.
    UN is trading at a P/E multiple of 16.5x, comparing with industry average 18.9x, P/FCF and P/Sales also suggested that UN is trading at a discount relative to its industry.

    Compare with Procter& Gamble, Unilever is more reliant on emerging markets. P&G generates 37% of its total revenues from emerging markets, Unilever gets 56%, and it expects to generate 70% in those markets.

    FCF conversion: 6% of Rev and 64% of OCF
    Uses of FCF
    - Maintenance CapEx, 35% use of FCF,
    - Dividend paymanet, 52% use of FCF,
    - Acquisition and disposals, 25% source of FCF

    - Competition is intense especially in the US, Nigeria and India, short term growth rate will decline to 5%-6%.
    - Innovation drove the volume and net income, 75% of all innovated products are margin accretive.
    - Negative commentary in retails in the UK and the US, further price decline is possible.

    - Higher GDP and population growth in emerging markets will boost aggregate household product demands. Unilever can increase the volume and improve its margins as a result.

    - Foreign exchange risks: Emerging markets experienced lower consumer demand and years of high inflation, potential FX-driven price increases will likely hurt sales.
    - Unilever's increase prices above CPI from 2011-2013, therefore, the gross margins were higher than before. However, price increases may come at the expense of volume growth.
    - Increasing cost to compete: UN needs to raise its promotional efforts to match up with other competitors such as P&G and private label products.
    - Market share trends in WE and the US remain challenging: a potential macro recovery might not necessarily boost volumes in developed countries, given the "late-cycle: nature of staples industry.

  2. Sources:
    - 2012 10K
    - 2013 full year earnings press release
    - Unilever official website
    - Seeking alpha

    Business Overview:
    Unilever is a leading manufacturer and marketer of consumer products in the world with significant presence across developed, developing and emerging markets. It is among the world's largest consumer goods companies after Procter & Gamble and Nestle.
    It has four business segments: (% of total revenue in FY 2013; % of operating income in FY 2013)
    - Personal care segment: 36%;41%
    - Foods Segment:27%;41%
    - Refreshment segment: 19%; 11%
    - Home care segment: 18%; 7%

    Revenue by geography: 55% from emerging market and 45% from developed.

    Core Businesses:
    - Largest segment and profit driver Personal care:
    • Strong performance in hair care, skin cleansing and deodorants
    • Major brands in this segment are Dove, Lux, Rexona, Sunsilk, Axe and Pond’s
    - Second largest segment Foods:
    • Categories include savory, dressings & spreads
    • Major brands: Knorr, Hellmann’s, Flora, Rama, Calvé, Amora, Ragú and Bertolli

    - Multinational retailers, wholesalers, distributors and small independent shops
    - Walmart is Unilever’s largest retail customer

    Financial Overview:
    - FCF: 3.9 b in 2013, slightly lower than 2012 due to a lower inflow of working capital
    • FCF as % of Rev: 7.5% in 2013; 9% in 2012;7.2% in 2011; 8.2% in 2010
    • FCF as % of OCF: 65% in 2013; 70% in 2012; 64% in 2011; 69% in 2010
    • Use of FCF:
    o Dividends paid was 80% of FCF in 2013
    o Net capital expenditure was 54% of FCF in 2013
    o Debt repayment: 32% of FCF in 2013
    o No shares repurchase in 2013
    o No use in acquisition, instead cash inflow: sale of its Wish-Bone and Western dressings brands to Pinnacle Foods Inc. and completed the sale of its Skippy business in China to Hormel Foods
    - Margins: EBITDA Margin 17% VS. P&G 21% Nestle 19%; Operating Margin 15% VS. P&G 18%, Nestle 16%.; Profit Margin 10% VS. P&G 13%, Nestle 11%. All of these around industry avg.
    - ROE: 33% VS. P&G 16% ,improving & leading in the industry; ROA: 11%, flat in the past 5 yrs
    - D/E: 0.51, remain stable around 50% from 2010 till now

    Competitive strength:
    - Strong brand recognition and new product innovation which will bring up its gross margin
    - Divesting non-core businesses and focusing more on core businesses in emerging markets

    What can go wrong?
    - Revenue:
    • Pricing power low: Although have increases in both volume and price last year. Lots of alternatives in the mkt, if price continues rising, customers may switch to competitors
    • Negative returns in spread business, may continue hurt sales in the near future
    • Customer spending slowdown in developed markets
    • Slowdown in emerging markets due to weak currencies and macroeconomics
    - Expenses:
    • Fluctuations on the cost of the underlying commodities and materials which cannot be passed through price increasing
    • Currency related expenses
    - FCF:
    • Continuous acquisition for expansion may put pressure on FCF

  3. Unilever Q4 and Full Year Results 2013
    Seeking Alpha
    S&P Capital
    Morning Star


    2 Business Segments (Revenue % Operating Income %) Fiscal year 2013
    Home & Personal Care Segment 54.%, 48%
    Personal Care 36%, 41%
    Home Care 18%, 7%
    Foods & Refreshment Segment 46%, 52%
    Foods 27%, 41%
    Refreshment 19%, 11%

    CORE BUSINESS - Personal Care
    - The business in emerging markets grew 8.4% driven by underlying volume growth of 5.3%. In developed markets we declined (1.7)%.
    - Personal Care segment underlying sales growth 7.3%, price growth 1.2% and Volume growth 6.1%


    - Multinational retailers, wholesalers and distributors to small independent shops
    - International retailers such as Walmart, Tesco, Carrefour and Metro
    - Wholesalers and millions of small independent outlets and kiosks,

    Free Cash Flow:
    - FCF in FY 2013 €3.9 billion decrease 11% from 2012
    - FCF/OCF 48% in 2013 there are 3% decrease from 2012
    - FCF/Revenue 8% in 2013 there are 1% increase from 2012 Use- of FCF:
    - Use of FCF:
    1. Pay dividend: FY 2013, €2.9 billion dividend paid.
    2. M&A: The company spent €2.9 billion on acquisitions


    Profit Margin:
    - Operating Margin: 15%,
    - Net profit Margin: 9.7%,
    ROE: 33%; increased 3% from 2012
    ROA: 10%. Increased 1% from 2012

    USG/UVG & Pricing Power
    - Unilever's underlying sales growth was 4.4%, with emerging markets up 8.8%.
    - Underlying volume growth was 2.4% and pricing was up by 1.9%.

    PRO (What is going right)
    - Strong Brand Recognition:
    - Divesting Businesses; Increasing Exposure in Emerging Markets:
    - Expansion through Acquisitions:
    - Innovation product

    CON (What may go wrong)
    Revenue (Revenue growth is slowing down)
    - Sluggish Spreads Business:
    - Revenue slowdown in European
    - Increasing competition in emerging markets
    Expense (Margins are higher than its major competitors)
    - The operating expenses are higher its major peers (P&G, Nestle)
    - The high volatility in commodity prices affect its COGS
    Free Cash Flow
    - Currency risk remains an issue as Unilever pays out its dividends in Euros.