I’ve been talking a lot about Procter & Gamble (PG) in my articles as of late, and thought I should balance it out by writing about one of their competitors. I decided to go with a company that recently reported fourth-quarter and full-year 2011 results, and is run by a man who spent 22 years as the president of European operations at P&G, as well as a short stint at Nestle before moving into his current role; his name is Paul Polman, and he is the CEO of Unilever.
In 2011, Unilever generated underlying sales growth of 6.5% (lapping 4.1% growth in 2010), with 4.8% coming from pricing and the remaining 1.6% coming from higher volume; in the words of CFO Jean Marc-Huët, “We would have preferred more volume and less price. But in a strong inflationary environment where significant pricing has been essential to protect profitability, we're pleased that the volumes have held up so well.” After accounting for a 2.5% currency headwind and 1% of positive contribution from acquisitions/disposals, full-year sales came in at €46.5 billion, a 5% increase from 2010.
The company is split into four separate segments: Personal Care (33% of full year sales), Home Care (18%), Foods (30%), and Refreshments (19%); in regards to underlying sales growth for the year, Personal Care & Home Care both grew high single digits (8.2% and 8.1%, respectively), while Foods & Refreshments both expanded at a mid-single digit rate (4.9% for both segments).
On a regional basis, the company is split into three geographic regions: Asia Africa CEE (41% of full year sales), The Americas (33%), and Western Europe (26%). For the full year, underlying sales growth was up double digits (10.5%) in the company’s Asia Africa CCE region, and mid-single digits (6.3%) in the Americas, with a 10.8% increase in Latin American sales being weighed down by 2.1% sales growth in North America; not surprisingly, Western Europe also struggled, and produced sales growth of just 0.7% for the full year.
Despite sales growth and price increases, €2.4 billion of commodity cost inflation for the year had its effect on the P&L, with gross margin dropping 180 basis points from 2010 as a result. At the bottom of the income statement, net income and diluted EPS were both 3% higher on a constant currency basis, at €4.62 billion and €1.46 per share, respectively.
Unilever is sometimes called “the emerging markets company,” largely due to the concentration of business in Asia, Africa and Eastern Europe discussed above. Here is what Mr. Polman had to say about the emerging market results for 2011:
“Emerging markets continue to generate what we call outstanding top line performance. In fact, it's been an acceleration from recent years with underlying sales growth of 11.5% overall. Now many of our key countries achieved double-digit growth. Those include China, India, Turkey, South Africa and Mexico. For the full year, emerging markets, despite the Alberto Culver transaction, contributed 54% of total group turnover. That's a record high. Volume growth was again strong. Mid-single digit levels overall [in line with the past 20 years], but into double digits for key markets such as China as well as India.
Some of you naysayers out there were always worried about the emerging markets. I remember when I came in 2008, "Oh, you guys are so exposed to emerging markets." Then in 2009, "Oh, competition is coming in to the emerging markets." Then in 2010 or '11, "Oh, you got all the input cost in the emerging markets." Then I made a statement trying to be honest and say emerging markets are slowing down, "Oh, he's giving a warning about the emerging markets." I don't know what you guys do in your private time, but you're making your life incredibly miserable.
We see 11.5% as good growth, and the organization should be complimented on that. And we will continue to look for opportunities as 2 billion people come into this world and improve their standards of living to get more than a fair share of that.”
Interestingly, Unilever’s management specifically noted that 60% of their business is growing or maintaining share, compared to the 45% reported by P&G in the fourth quarter; while both parties pointed figures on the issue of pricing in the face of commodity cost inflation, one thing is clear in this chess match: Unilever has upped its game since Paul Polman took over, and P&G shouldn’t overlook the experience he attained over the past 30 years (largely at their expense).
About the author:I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.
I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over a period of many years.