Unilever (UL, Financial) recently crashed to a one-year low. Reviewing the company’s operations may be worthwhile to see if the company’s is trading at a good bargain price compared to its 52-week price levels.
Earnings performance
Unilever delivered its third-quarter earnings results in mid-October. The $118.5 billion consumer goods company uses non-GAAP (generally accepted accounting principles) figures to update its investors and prospectors as well.
According to Unilever, the non-GAAP measures being used are underlying sales growth (USG) and underlying volume growth (UVG) (1)(2).
Unilever said it had a non-GAAP USG of 4.2% nine months into the fiscal year. On the other hand, the consumer goods company did not state its profit figures for the period. Unilever closed -3.5% with shares trading twice the volume the day before the earnings announcement while the broader index closed -0.3%.
(Non-GAAP USG figures, results presentation)
According to Unilever, its non-GAAP USG performance for the third quarter is on track with its 3% to 5% target.
“Our business continues to demonstrate its resilience by growing competitively and consistently in tough market conditions. Underlying sales growth of 4.2% in the first nine months, including over 7% in emerging countries, was ahead of our markets across all four categories. This was driven by strong innovations in support of our category strategies. During the third quarter, we have made further progress in reshaping our portfolio, adding businesses in fast-growing segments with the acquisitions of Dollar Shave Club, Blueair and Seventh Generation
“With markets remaining soft and volatile, we have continued to transform our business at an accelerated pace. We are progressing well with the fast implementation of our change programmes: net revenue management, zero-based budgeting and ‘Connected 4 Growth,’ making our organization more agile and responsive to market needs. These actions keep us on track for another year of volume growth ahead of our markets, steady improvement in core operating margin and strong cash flow.” –Â Paul Polman, CEO
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Other important key terms
Turnover
In addition to Unilever’s unique earnings report, the company also has its own term and definition of revenue or sales in GAAP. Unilever uses the term turnover as an equivalent to sales/revenue. The turnover figure entails a long definition as to how Unilever states its sales given a period.
According to Unilever, Turnover comprises sales of goods after the deduction of discounts, sales taxes and estimated returns. It does not include sales between group companies.
Discounts given by Unilever include rebates, price reductions and incentives given to customers, promotional couponing and trade communication costs. Turnover is recognized when the risks and rewards of the underlying products have been substantially transferred to the customer (8)(9).
Core operating profit
Core operating profit represents Unilever’s measure of segment profit or loss as it is the primary measure used for the purpose of making decisions about allocating resources and assessing performance of segments (8).
Valuations
Unilever’s ADR shares had a trailing 12-month price-earnings (P/E) ratio of 24 times (industry median: 19.96), price-book (P/B) 7.8 times (industry median: 1.73) and price-sales (P/S) ratio of 2.3 times (industry median: 1)(13). Unilever also had a trailing 3.59% dividend yield with a 76% payout ratio.
Market performance
(Shareholder returns, annual report)
According to Unilever, its NV (euro) shares appreciated about 70% from 2011 to 2015 while its PLC shareholders appreciated 48%. Unilever ADR (American Depository Receipts) shares, meanwhile, had a total five-year return of 7.68% while the broader Standard & Poor's 500 index returned 15.46% (10). Year to date, ADR shares failed to outperform the market with -5.91%; the broader index had 9.68%.
(Results presentation)
Unilever
Unilever is a British-Dutch multinational consumer goods company co-headquartered in Rotterdam, Netherlands, and London (7).
The Unilever Group, including the companies Unilever N.V. (NV) and Unilever PLC (PLC), was formed in 1930 and operated as nearly as practicable as a single economic entity (3)(4)(5).
According to Unilever, each NV ordinary share represents the same underlying economic interest in the Unilever Group as each PLC ordinary share. However, NV and PLC remain separate legal entities with different shareholder constituencies and separate stock exchange listings (6).
Unilever’s products include food, beverages, cleaning agents and personal care products. Unilever is the world's largest producer of food spreads, such as margarine, and one of the oldest multinational companies. Its products are available in about 190 countries (7).
Unilever owns over 400 brands but focuses on 13 brands with sales of over 1 billion euros: Axe/Lynx, Dove, Omo, Becel/Flora, Heartbrand ice creams, Hellmann's, Knorr, Lipton, Lux, Magnum, Rama, Rexona, Sunsilk and Surf.
Further, the company has made numerous corporate acquisitions, including Lipton (1971), Brooke Bond (1984), Chesebrough-Ponds (1987), Best Foods (2000), Ben & Jerry's (2000), Alberto-Culver (2010) and Dollar Shave Club (2016) (7).
(Financial review, annual report)
Segments
Unilever had four segments as of February: Personal Care (38% of total fiscal 2015 sales), Foods (24%), Home Care (19%) and Refreshment (19%).
Personal Care
The Personal Care segment includes sales of skin care and hair care products, deodorants and oral care products. Unilever’s personal care segment had a turnover growth of 13.2% to 20 billion euros ($21.25 billion) in fiscal 2015 with a core operating profit margin of 18.9% –highest among the segments. Unilever had a 4.8% USG on the segment nine months into 2016.
Foods
The Foods segment includes sales of soups, bouillons, sauces, snacks, mayonnaise, salad dressings, margarines and spreads. For fiscal 2015, the segment recorded a turnover growth of 4.5% to 12.9 billion euros and a core operating profit margin of 18.2%. Three quarters into 2016, the segment delivered a 2.1% USG.
Home Care
The Home Care segment includes sales of home care products, such as powders, liquids and capsules, soap and a wide range of cleaning products. In fiscal 2015, home care segment had turnover growth of 10.9% to 10.16 billion euros with a 7.6%. Nine months into 2016, the segment delivered a 5.6% USG.
Refreshment
The Refreshment segment includes sales of ice cream and tea-based beverages. For fiscal 2015, refreshments had turnover growth of 10.3% to 10.12 billion euros with a core operating profit margin of 9.4%. Three quarters into 2016, the segment delivered 4.2% USG.
Overall, Unilever had five-year sales and profit growth averages of 3.78% and 2.95% (10). The consumer goods company also had a five-year operating profit average of 14.6.
(Turnover per segment, Annual and Quarterly Filings)
Cash and book value
Unilever had cash and cash equivalents of $4.3 billion (13, 14). Unilever also had 45% of its $60.9 billion assets in goodwill and intangibles. The company had a book value of $16.3 billion.
Cash flow
(Unilever cash flow, Form 6-K)
Despite having nine months’ figures from operations (turnover and the like), Unilever did not provide its cash flow figures in its recent full third-quarter announcement.
In review, however, Unilever was able to grow its cash flow from operations by 32.2% to 7.3 billion euros in fiscal 2015, compared to the previous year (11). Capital expenditures were 1.87 billion euros, leaving the company with 5.46 billion euros in free cash flow (12).
(Unilever fiscal 2015 acquisitions, Form 6-K)
Unilever also spent 1.8 billion euros, a 506% increase from previous year, in acquisitions for the period.
(Author’s calculation, retrieved from Form-6 K)
Unilever also allocated 3.9 billion euros in dividends, or 71.6% of its free cash flow. The company had 1.54 billion euros in net cash flow change to both of its short-term borrowings and additional financial liabilities for the period.
Conclusion
Given the difficulty in discerning financial figures from Unilever’s filings, conservative investors should probably consider other investment securities rather than Unilever’s.
Nonetheless, Unilever demonstrated consistent turnover growth or USG over time.
Valuations indicated that Unilever’s shares are still at premium compared to its peers despite its lackluster performance in recent times, and analysts from Citigroup rated its shares, particularly Unilever N.V., as a buyback in August, while RBC Capital Mkts had downgraded Unilever to sector perform from outperform in July.
In summary, Unilever is neither a buy nor a hold.
Notes
(1) Quarterly filing: the company further directs its investors to read on page 38 and 39 of its 2015 annual report to further understand these non-GAAP figures.
(2) Annual report:
Underlying sales growth (USG) refers to the increase in turnover for the period, excluding any change in turnover resulting from acquisitions, disposals and changes in currency.
The impact of acquisitions and disposals is excluded from USG for a period of 12 calendar months from the applicable closing date. Turnover from acquired brands that are launched in countries where they were not previously sold is included in USG as such turnover is more attributable to our existing sales and distribution network than the acquisition itself.
Underlying volume growth (UVG) is part of USG and means, for the applicable period, the increase in turnover in such period calculated as the sum of (i) the increase in turnover attributable to the volume of products sold; and (ii) the increase in turnover attributable to the composition of products sold during such period.
UVG therefore excludes any impact to USG due to changes in prices.
Me: this all sounds too complicated and therefore I have relied more on both GuruFocus and Morningstar data as I prefer GAAP figures and not non-GAAP.
(3) Form 6-K published in February.
(4) Form 6-K: through Unilever’s Equalisation Agreement makes the economic position of the shareholders of NV and PLC, as far as possible, the same as if they held shares in a single company and also regulates the mutual rights of the shareholders of NV and PLC. Under this agreement, NV and PLC must adopt the same financial periods and accounting policies.
(5) Form 6-K: Through Unilever’s Deed of Mutual Covenants provides that NV and PLC and their respective subsidiary companies shall cooperate in every way for the purpose of maintaining a common operating policy. They shall exchange all relevant information about their respective businesses – the intention being to create and maintain a common operating platform for the Group throughout the world. The Deed also contains provisions for the allocation of assets between NV and PLC. Under the Agreement for Mutual Guarantees of Borrowing between NV and PLC, each company will, if asked by the other, guarantee the borrowings of the other and the other’s subsidiaries. These arrangements are used, as a matter of financial policy, for certain significant borrowings.
(6) Form 6-K: Shareholders cannot convert or exchange the shares of one for the shares of the other.
(7) Wikipedia.
(8) Form 6-K.
(9) Form 6-K: Depending on individual customer terms, Turnover can be at the time of dispatch, delivery or upon formal customer acceptance.
(10) Morningstar data.
(11) Me: In calculating cash flow from operating activities, I used Unilever’s cash flow from operating activities and deducted income taxes paid. Unilever, meanwhile, determined its cash flow from operating activities without deduction of income taxes paid.
(12) Me: In calculating free cash flow, Unilever deducted income tax paid, net capital expenditures and net interest and preference dividends paid from its cash flow from operating activities thus resulting into lower free cash flow.
(Cash Flow, Annual Report)
Meanwhile, I solely relied on purchase of property, plant and equipment as capital expenditures in its Form 6-K figures and deduct it from cash flow from operating activities to retrieve the free cash flow number.
(13) GuruFocus data.
(14) Unable to find Unilever’s recent quarter debt figures.
Disclosure: I do not have shares in any of the companies mentioned.
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