Magnum ice cream production. Image source: Unilever.
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Unilever (NYSE: UL) on Thursday posted earnings results for its fourth quarter and full fiscal year. The consumer goods giant met its broad growth targets yet warned about weakening demand trends in some of its biggest markets. Let's take a look at the key figures from the report.
What happened this quarter?
Organic growth was 2.6% for the quarter to place overall growth at 3.7% for the year, within management's goal of between a 3% and 5% improvement.
Highlights of the quarter include:
- Sales growth slowed to its weakest pace in over a year as the business was pinched by a range of negative market trends. Global economic growth slipped and a few individual markets, including Brazil and India, endured significant disruptions.
- Unilever's organic gains came entirely from higher prices as volume declined for the second straight quarter. However, its growth pace kept it just ahead of the overall market and beat rivals Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB), which recently posted 2% and 1% growth, respectively.
- Core operating margin ticked higher despite significant currency devaluation in Turkey, the United Kingdom, and Egypt.
- Earnings improved by 3% for the full year as a 7% operational gain was pulled lower by 4% due to exchange rate shifts.
- Return on invested capital fell by a full percentage point to 18% of sales. Profitability gains and working capital improvements were more than offset by increasing goodwill charges stemming from Unilever's recent acquisitions, including its $1 billion purchase of Dollar Shave Club.
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What management had to say
Executives described weakening demand trends around the world. "Market conditions have been challenging throughout the year, and particularly so in the fourth quarter," they explained in a prepared statement. "In a number of countries, volumes have been weak as consumers and retailers adjust to devaluation-led cost increases," they continued, and cited Brazil and India as prime examples.
Image source: Unilever investor presentation.
Still, the company managed to boost profitability and organic revenue even as two of its largest markets struggled. "This further demonstrates the progress we have made in transforming Unilever into a more resilient business," CEO Paul Polman said. "We have again grown ahead of our markets, driven by strong innovations that support our category strategies," he said.
Polman and his team are predicting that the tough market conditions that characterized this most recent quarter will continue at least through the first half of 2017. That sentiment was echoed by Kimberly-Clark, which earlier in the week warned of near zero growth for the next six months.
Unilever still expects to outpace rivals against that unfavorable market backdrop, though. P&G is looking for 2.5% organic gains this year and Kimberly-Clark's latest forecast calls for a 2% increase. Unilever should see closer to 3% growth, which would indicate minor market share expansion.
The clearest sign that demand conditions are improving will likely come from a volume rebound, and so investors should watch that figure closely for signs of gains. In the meantime, cost cuts will keep profitability churning higher so that the company has the financial ammunition to direct toward product innovations and marketing support, with plenty left over for increased capital returns to shareholders in the form of a steadily climbing dividend.
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