Consumer products giant Unilever (NYSE:UL) this week announced earnings results that, despite flat sales in terms of volume, included strong revenue growth and expanding profitability thanks to higher prices. The owner of brands including Lipton, Dove, and Knorr confirmed its full-year revenue outlook and hiked its profit margin prediction, too.
More on that forecast in a moment. First let's look at Unilever's latest operating metrics.
What happened this quarter?
The company posted a strong quarter overall, with market share expanding on healthy organic sales growth. Key financial metrics, including cash flow and operating margin, improved as well thanks to solid execution around its transformation initiatives .
Highlights of the quarter include:
- Organic sales expanded across each of Unilever's product categories. Its best performer was the refreshment division, which benefited from innovated product launches in the ice cream franchises of Ben & Jerry's and Magnum. That segment expanded by nearly 7% to help push overall growth to 3%.
- For the second quarter in a row, Unilever's organic growth was entirely dependent on rising prices as volume held steady but prices rose 3%.
- Gross profit margin ticked higher by 0.4 percentage points to 43.1% of sales and operating margin shot up by nearly 2 full percentage points to 17.8% of sales. The profitability spike helped Unilever log a 12% increase in net income.
- Free cash flow shot up by 75%.
What management had to say
CEO Paul Polman said the operating numbers demonstrate the power of Unilever's diverse operating model. "Our first half results showed growth well ahead of our markets and a substantial step-up in profitability despite the persisting volatile global trading environment," Polman was quoted as saying in a press release.
Executives credited their reorganization strategy, abbreviated as C4G, which stands for Connected 4 Growth, with fundamentally improving the company's industry position. "The transformation of Unilever into a more resilient, more competitive and more profitable business is accelerating," Polman said. "C4G is making our business even more agile, less complex and increasingly responsive to fast-changing consumer trends."
Still, Unilever explained that its markets remained "challenging," and that the industry hardly expanded at all during the quarter. "In the markets in which we operate volumes were virtually flat in aggregate," executives said.
Polman and his team affirmed their full-year growth outlook that calls for organic sales gains between 3% and 5% to put the company near the top of the industry on this core metric. The forecast implies accelerated growth over the next two quarters that executives see coming from a strong pipeline of product innovation launches.
Over the longer term, Unilever sees potential in developing new sales channels, including e-commerce and beauty stores, and so it is pouring resources into building these out. Acquisitions will play a role in boosting results, too, and executives are happy that their recent purchase of Dollar Shave Club has sped up growth in its personal care division.
Meanwhile, things are looking brighter on the financial side of the business. Cost cuts and efficiency initiatives are producing quicker results than expected, and that means the company should expand operating margin by at least a full percentage point this year-- up from the 0.8% increase management had been targeting.
Most of the savings are coming from supply chain improvements, but Unilever is also slicing aggressively in its management overhead and on marketing spending. The quicker profitability growth could allow Unilever to reach its long-term goal of 20% operating margin before 2020, given that the metric has already risen to nearly 18%.