This summary is based on the first quarter fiscal 2007 earnings call conducted by Unilever Plc (UL) on May 3, 2007.
Chief Financial Officer: Rudy Markham
Senior Vice President of Investor Relations: John Rothenberg
Investor Relations: Charles Nichols
Key Investors Issues
- Earnings per share from continuous operation rose 6% over prior year to 0.34 euros.
- Quarterly sales were flat at 9.5 billion euros.
- The operating margin of 13.7% is 1.1 percentage points below last year.
First Quarter Fiscal 2007 Financial Highlights
The sales in the quarter were in line with last year at 9.5 billion euros.
This was after a 1% reduction due to business disposals and an adverse currency effect of 4.5%. The latter reflects the strengthening of the euro against a wide range of currencies, most notably the US dollar, the Turkish lira and the South African rand. As many of these movements date back through 2006, the full year currency impact, if exchange rates were to stay where they are, would be more moderate, at around minus 2%.
The underlying sales growth of 5.7% in the quarter comprises volume up 4.8% and pricing contributing 0.8%. The firm’s growth momentum has been building over the past few years, from an annualized growth rate of zero at the end of 2004, to comfortably over 4% today. There are a number of factors that can impact on sales growth in any given quarter. These include major product launches, price increases, trade de-stocking, and major systems implementations. Europe and Asia/Africa are probably slightly flattered by such effects, and the Americas look slightly understated. Overall, the picture remains of a strong quarter of growth.
The operating margin in the first quarter of 13.7% is 1.1 percentage points below last year.
This reduction is more than explained by the combined impact of restructuring and disposals. In Q1 2006, the firm had disposal gains of 119 million euros, compared with only 35 million euros this quarter. At the same time, the firm has kept up the pace of its restructuring activity, with a charge in the quarter of 121 million euros compared with 61 million euros in 2006, mainly associated with the One Unilever program. The net effect is 150 basis points adverse swing in restructuring disposals and impairments. Excluding these items, there was an improvement of 40 basis points.
During the quarter, Unilever continued to spend competitively behind its brands, resulting in advertising and promotions as a percentage of sales at a similar level to last year.
This means that the combined benefit of positive pricing, cost savings and positive mix and volume were more than sufficient to offset cost increases in the quarter.
Commodity related cost increases amounted to around 115 million euros in the quarter, or 120 basis points. This is a slightly lower run rate than what the firm saw at the back-end of 2006. However, there are two things to bear in mind. This is after a sharp reduction in olive oil prices which knocked around 15 million euros off material costs in the quarter, mainly in Europe. More importantly, the company has seen a continuing rise in the price of many agricultural commodities over recent months, but not all of this is yet reflected in the costs. For this reason, the firm expects to see continued cost pressures over the coming quarters, especially in Foods and this may require the company to look for additional price increases.
Meanwhile, the firm’s savings programs continue to deliver at a consistently high rate. Savings in the quarter were nearly 180 million euros, half from buying savings, and half from One Unilever and other initiatives.
In the first quarter, earnings per share on continuing operations were up 6%, while total earnings per share increased by 2%.
Total earnings include a lower net profit from discontinued operations which, in 2006, included a contribution from the Frozen Foods businesses which was subsequently sold in Q4 2006.
Operating profit was down 8%. Within this, the adverse swing in restructuring, disposal gains and impairments reduced operating profit by 11%, while the impact of exchange rates and the loss of contribution from disposals was around minus 6%. Below operating profit, the firm continues to deliver structural improvements in a number of areas which are feeding through into earnings.
Financing costs were 51 million euros lower in the quarter, reflecting lower net debt and the better funding position of the firm’s pension schemes. Net profit in joint ventures increased from 18 million euros to 27 million euros in the quarter, mainly due to the continued success of Pepsi Lipton operations, but also now including a contribution from the newly formed Portuguese joint venture.
