Author: Pan Xian (original)
Even though he has delivered two consecutive better-than-expected results, Sima Han clearly has higher expectations for Unilever.
As the performance continued to improve, the FMCG giant's share price rose more than 5% after the release of its quarterly report yesterday. Among them, under the food and nutrition sector, the Knorr brand was accused of "strong performance", and China's food and beverage planning business recorded high growth. Currently, Unilever operates five businesses: Food & Nutrition, Ice Cream, Beauty & Health, Personal Care and Home Care.
Unilever's representative brand (file photo)
"All five business groups saw growth. While this is only a first-quarter performance, we do see signs of momentum improvement with this result, which supports the full-year results. Unilever CEO Hein Schumacher said yesterday.
Xiaoshidai noticed that as Unilever's first financial report after announcing the split of ice cream, Sima Han and other senior executives answered more questions about the split at the analyst meeting. Let's take a look at the details.
Full launch
For the "huge project" of splitting up the ice cream, Unilever has moved quickly.
Xiaoshidai introduced that the company announced this decision in late March this year, and it is expected to complete the split by the end of 2025. As the world's largest ice cream company, Unilever owns 5 of the world's top 10 ice cream brands in terms of sales, including Heluxue, Menglong and Ben & Jerry's, etc., with a turnover of 7.9 billion euros (about 60.3 billion yuan) in 2023.
"The split is now in full swing and will involve the 57 national markets covered by Unilever. Unilever Chief Financial Officer Fernando Fernandez said at the first quarterly results conference.
He reiterated that the most likely path to a spin-off is a "demerger", which gives Unilever absolute control over the spin-off. At the same time, if there are other options that create value for shareholders, Unilever will also consider them.
According to CEO Sima Han's previous prediction, the most likely outcome of Ice Cream after being split is to become a listed company. "Our current default path is to spin off the ice cream business and go public separately. He once said.
In recent years, some Unilever investors have been calling for the separation of food and non-food businesses, which is believed to increase the group's overall valuation. If the split is completed, investors can expect to receive shares in the newly listed entity, earning an additional return on investment if the new entity is profitable.
In fact, if you look at the past three years, Unilever's ice cream business is actually quite "playable". For example, under the epidemic in 2021, global operating income still increased by 3.2%, and the growth rate will reach 14.8% in 2023, corresponding to operating income of 6.9 billion euros and 7.9 billion euros in two years. In terms of operating profit margin, it will reach 12.1%, 9.8% and 9.6% from 2021 to 2023, respectively, and is in a stable state of profitability.
Despite this, when compared to the rest of the group's business segments, ice cream margins are still at the bottom of the list. Therefore, in Unilever's view, the split of ice cream is not because the business is declining, but because it wants to create greater value for shareholders.
According to Fernandez, Unilever ice cream is a global leader in the industry and has good growth potential. However, in Unilever's business portfolio, ice cream is clearly an "outlier", which is reflected in the difference in profit margin structure, different channels, and the difficulty of the cold chain network to coordinate with other businesses.
"We therefore believe that the separation will allow Unilever to be more focused, simpler in its business and product portfolio, and will allow us to grow faster, with higher structured margins, higher structural returns on assets and cash conversions. Fernandez said.
Sima described the spin-off as "strategically sound" for both Unilever and the ice cream business from a portfolio perspective, and expects the business to "thrive" under the new ownership structure.
But before welcoming the "happy ending" described by Sima Han, Unilever will have to pay more to deal with this "Big Mac". At the meeting, some analysts asked whether the spin-off would lead to more taxes and fees for the ice cream business, and whether it would require more costs to operate independently if the business eventually went public.
In response, Fernandez said that the tax increase caused by the split will be fully offset by the "productivity plan". According to Xiaoshidai, the productivity plan was proposed this year and is expected to save about 800 million euros in total costs over the next three years, while affecting about 7,500 office jobs in Unilever around the world.
Sales recovered
Judging from the latest earnings report, the sales recovery highlighted by the Unilever CEO continues to make progress.
According to its results for the first quarter of 2024, the group's revenue for the period was 15 billion euros (about 116.7 billion yuan), a year-on-year increase of 1.4%, and basic sales increased by 4.4%, of which the contribution of sales volume and pricing was 2.2 percentage points. This means that Unilever's sales momentum continues to improve while reducing pricing efforts. Last year, the group's volumes returned to positive growth by 1.8 percent in the fourth quarter, compared with 2.8 percent in the quarter.
The dark blue part represents the sales volume, and the light blue part represents the pricing
"Unilever's volume growth improved in the first quarter. This was driven by our strong brands, which grew their underlying sales by 6.1% and volumes by 3.8%. Sima mentioned that brands such as Knorr are "doing strongly", and these strong brands now account for 75% of the group's sales.
However, the performance of the remaining non-strong brands needs to be strengthened. At the meeting, some analysts pointed out that according to Unilever's financial report data, the basic sales of non-strong brands fell by about 1% in the first quarter, and the sales volume fell by about 2.5%.
In this regard, Sima Han said that the non-strong brands are mainly local food brands in Europe, and the performance of these brands is indeed "unsatisfactory". But Unilever will not neglect to develop non-strong brands.
Unilever currently has 30 strong brands, including 9 food-related brands
For its brands, Unilever also put forward the goal of further increasing its share. According to the company's definition, whether or not to win shares is a key indicator to measure the competitiveness of a brand.
"We are still not satisfied with the current market share development, which is where we need to improve. Sima Han pointed out that excluding some businesses whose share is difficult to measure, such as food planning, the market share of the rest of the businesses is "still too low". However, this situation will improve from the second half of this year as the Growth Action Plan progresses, such as focusing on more impactful innovations.
Food business
Let's take a closer look at food-related businesses.
First of all, in the food and nutrition sector to which Jiale and Haolemen belong, the revenue of this department in the first quarter of 2024 will be 3.4 billion euros (about 26.462 billion yuan), a year-on-year increase of 1.1%, accounting for 23% of the group's revenue, and the basic sales will increase by 3.7%, of which the sales volume will decline by 0.4%, the decline will be narrower than the fourth quarter of last year, and the pricing will increase by 4.1%, the growth rate will decline quarter-on-quarter.
In the food and beverage planning business under food nutrition, the Chinese market continues to play the role of a growth engine.
The financial report mentioned that Unilever's food planning business had double-digit growth in global sales, of which sales volume was a high-single-digit increase. The overall performance was driven by strong growth in China, but the market also had a low base in the same period last year.
"In the field of food nutrition, our strategy is to deliver impeccable quality products through the largest brands, resulting in sustained, competitive growth. To do this, Unilever said, the business needs to reach more consumers, focus on the hottest dishes and peak seasons, and improve the efficiency and resilience of the supply chain.
Let's take a look at the ice cream business. According to the financial report, the department's revenue in the first quarter of 2024 was 1.8 billion euros (about 14.009 billion yuan), a year-on-year increase of 2.7%, accounting for 12% of the group's revenue, and basic sales increased by 2.3%, of which sales fell by 0.9% and pricing increased by 3.2%. "Due to the increased cost of key ingredients such as cocoa and sugar, the increase in pricing reflects the necessary action [we] have taken. Fernandez said.
In terms of scenarios, the financial report showed that the sales growth of home ice cream was flat, offset by the decline in pricing, and the growth of outdoor ice cream was in the mid-single digits, driven by pricing. Specifically, Heluxue recorded mid-single-digit sales growth, with positive pricing and volume growth, while Menglong sales declined by a low single digit, and pricing growth failed to fully offset the impact of lower volumes.
"In the ice cream sector, our top priority is to increase our operating margins and global market share. To this end, Unilever said, the company will build strong brands, accelerate the development of emerging markets, continue to maintain its leadership in innovation and premiumization, and improve production efficiency.
Sima Han said at the meeting that ice cream is trying to solve the problem of recent poor performance, "we will focus on returning the business to competitive growth and making improvements in all aspects".
Looking ahead to 2024, Unilever reiterates its unchanged growth guidance, expecting full-year underlying sales growth to be in the range of 3% to 5%, with volume growth contributing more and a modest increase in underlying operating margin for the full year, driven by higher gross margins and increased brand investment.
"We are fast-tracking our growth action plan with a focus on three clear priorities, including achieving higher quality growth, building a leaner and more efficient business, and strengthening our focus on performance. Unilever's transformation is still in its early stages, but it is increasingly confident in the company's ability to accelerate gross margin improvement and achieve sustained sales growth, Sima said.
"Realism"
Commenting on Unilever's latest results, Reuters said the company's sales performance in the first quarter beat expectations after the company won back consumers who had previously switched to cheaper products amid the recent spike in global inflation. It reported a 4.4% increase in underlying sales in the first quarter, compared to analysts' average expectations of 3%.
"This is a meaningful imprint on the credibility of the company's 'GAP (Growth Action Plan) strategy. Reuters quoted analysts as saying that organic sales growth and volumes across all Unilever's business units and markets met or exceeded expectations.
Sima Han (file picture)
The Financial Times, on the other hand, is focusing on Unilever's "shrinkage" of sustainability goals.
Under the leadership of the previous CEO, Unilever was accused by investors of focusing too much on sustainability at the expense of financial performance. Just last week, the company announced that it would launch a more "focused" ESG strategy, which would include extending target deadlines and scaling down environmental targets. This is interpreted by analysts as a need for short-term cost savings.
Previously, Unilever targeted a 50% reduction in virgin plastic use by 2025, now by 30% by 2026. The plan to use 100% reusable, recyclable or compostable plastic packaging by 2025 has also been extended to 2030 and beyond.
The Financial Times said that in an interview after the release of the earnings report, Sima Han said that the new strategy is far from cutting costs, but adjusting according to what the company can achieve. He also admits that in some cases, "we are simply not ready to set realistic goals."
"When setting initial goals, we may have underestimated the scale and complexity needed to achieve them," he said. "We are now in a better position to deliver achievable plastic reduction targets. This does not mean that we are investing less in this work. ”
He also pointed out that Unilever's sustainability performance should be judged by actual results, rather than by focusing on the company's high-profile long-term goals. "I like to be ambitious, but I prefer realism and really achieving goals, and that's why we changed our strategy. Sima Han said.