Global uncertainty clouds Unilever's outlook

by Keith Nunes
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Paul Polman, c.e.o. of Unilever, said the company is facing a tough environment.

LONDON — Paul Polman, chief executive officer of Unilever, didn’t mince words when discussing the global economic environment and his company’s financial results during fiscal 2015.

“Not to make you all cry, but just to be realistic, this is a tough environment we are facing,” he told financial analysts in a conference call on Jan. 19. “It’s tough out there. There’s no doubt about it. It would be irresponsible to assume that it’s getting better right now.”

Noting that the beginning of 2016 has seen some very volatile markets around the world, Mr. Polman said low commodity prices are not helping emerging markets, which have seen large outflows of capital.

“If China cools down a little more than some people expect it will again affect other countries,” he said. “And then you have the issues of the Russias, Brazils and Indonesias.”

In reviewing the global markets during 2015, Mr. Polman said the downturn in the global economy has been more prolonged than he anticipated.

“At the beginning of last year I said that we were starting to see more tailwinds than headwinds, but unfortunately the tailwinds proved short-lived,” he said. “We saw waves of devaluations in many emerging markets, some prompted by a lack of confidence in government actions. More expected perhaps was the necessary loosening of exchange rates in Argentina at the end of the year.

“Brazil, another country, fell further into recession, with G.D.P. actually declining 4.5% in the third quarter alone and the fourth quarter is not expected to be much better.

“A number of the oil exporting countries like Russia, the Gulf region, part of Latin America and Africa, are equally struggling. Crop failures for a second consecutive monsoon failure have put pressures on rural demands in India.”

He said in developed markets consumer demand for Unilever’s products is weak, with prices falling in Europe. In the United States, he said the market is growing at around 1% to 2%, but the gain is being offset by customer destocking.

“At the same time, the level of uncertainty has never been higher,” Mr. Polman said. “Geopolitical instability has intensified in many places, not least in the Middle East.

“And we have once again seen the devastating consequences of climate-related incidents that wreak havoc on communities and supply chains. The monsoon failures in India I talked about, floods in Latin America and the U.K., typhoons in the U.S. and the list goes on and, frankly, it’s getting longer.”

Against that backdrop, Unilever sales rose 10% to €53.3 billion ($58.1 billion) during fiscal 2015, ended Dec. 31. Net income fell 5% when compared with fiscal 2014 to €5.3 billion ($5.77 billion), equal to €1.82 ($1.98) per share on the common stock.

“In this very uncertain and unpredictable environment we remain squarely focused on delivering consistent growth driven by strong innovations and already strong margin improvements,” Mr. Polman said.

Unilever's Savory division, which includes brands like Knorr and Hellman's, now makes up 42% of Food business sales.

In the Food business unit sales were $14.1 billion and in the unit’s Savory division, which includes such brands as Knorr and Hellmann’s, sales grew 5% and the division now makes up 42% of Food business sales.

“It’s the strongest growth in many, many years,” Mr. Polman said. “Half of our savory business is now in emerging markets. Here, urbanization and an increased proportion of women moving into paid employment drives demand for products that help ease the task of meal preparation.”

Unilever’s Baking, Cooking and Spreads division, which includes the Country Crock and Flora brands, continues to be a drag on company performance, Mr. Polman said. He said the company has not been able to stem the division’s ongoing market decline and added that a fall in butter prices proved to be an additional hindrance to performance.

When asked by a financial analyst about plans for the Baking, Cooking and Spreads business, Mr. Polman left his options open.

“ … I cannot think of more bad news on this unit, if I may put it straight to you, than we have had now,” he said. “And it is my sincere wish that with the structure that we have set up that we see improvements in 2016. If we don’t, we will have to think about other things. And we’re obviously looking at all options (so) we don’t start from zero if that point arrives. But, for now, we are squarely focused with everybody on making this unit work.”

Unilever's Refreshment business unit, which includes Ben & Jerry’s, Magnum, and Talenti, had sales of $11 billion.

A bright spot for Unilever was the Refreshment business unit, which had sales of $11 billion and includes the Ben & Jerry’s, Magnum, the recently acquired Talenti business as well as Unilever’s tea divisions. Ben & Jerry’s achieved a second year of double-digit growth and sales are now approaching $654 million, Mr. Polman said.

“Underlying sales growth in tea improved to around 3%,” he said. “This is still below the overall market growth, a little bit below that, which is heavily skewed toward more premium segments. Here again I’m encouraged by the fact that we have significantly strengthened our innovation pipeline, especially in premium. Three years ago less than 5% of our innovations were global; today almost 50% of them are and our overall pipeline is 30% larger.”

In his concluding remarks, Mr. Polman said there are some major issues that need to be resolved in the global economy to get growth back.

“Having said that, this company is better prepared than ever to deal with that,” he said.

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