Qualiport

Unilever's Structure
Friday, 29 May 1998

Bruce gets confused

On Wednesday we started getting familiar with Unilever and its many market leading brands. Today we will get a bit closer to the key numbers in an attempt to see whether we think they are a well managed company.

Having spent hours (sad but true) poring through the Unilever 1997 Annual Report, I can tell you it has not been easy to pick out the key numbers. The sprawling group sold off its four specialty chemicals businesses to ICI in July 1997 for US$8 billion. That transaction resulted in an exceptional profit of £2.5 billion, and has also caused the accounts to be split into those from the continuing Foods and Home & Personal Care operations and the discontinued Specialty Chemical operations. In a separate column again the results for the recent acquisitions are listed.

If that is not confusing enough, we've also got the problem of the company being split between the two main product areas, and within that being divided into 12 geographical regions. Another complication comes in the form of exchange rates. Because they are a global company, sales in foreign countries, when translated back to sterling, can throw up anomalies. Unilever like to compare their progress at constant exchange rates. Finally, included in the company's exceptional items is an amount for restructuring of £469m. Unilever recognise that in a constantly changing world, restructuring will be an on-going cost, and they estimate it to be in the vicinity of 0.5% to 1% of turnover per annum. On total turnover of almost £30 billion in 1997, that would equate to a normal restructuring charge of between £150m and £300m per annum.

On Wednesday we looked at the operating margins of the two main product areas. As a re-cap, they were:

Foods

                    1997 £m     1996 £m
Turnover             14,838      16,739
Operating Profit      1,314       1,331
Operating Margin       8.9%        8.0%
  

Home & Personal Care

                    1997 £m     1996 £m
Turnover             12,933      13,205
Operating Profit      1,395       1,325
Operating Margin      10.8%       10.0%
   

To clarify, these numbers are at the prevailing exchange rates from continuing operations plus recent acquisitions but before any exceptional items. Confused?

You will notice that in both product areas, sales actually dropped whilst profitability increased. Here in the Qualiport we're a big fan of companies that can increase their margins, so Unilever passes that test. On the other hand, margin improvement has a finite life. A company cannot physically go on substantially improving its margins year after year. There inevitably comes a point where competition will force a company to either drop its prices or spend more money on promoting their products, and both these actions have a negative effect on margins. So, whilst margin improvement is important, so is sales growth. A preliminary gong here for Unilever.

Here are the numbers again, at constant exchange rates, with all other variables being unchanged.

Foods

                     1997 £m    1996 £m
Turnover              16,762     16,739
Operating Profit       1,480      1,331
Operating Margin        8.8%       8.0%
    

Home & Personal Care

                     1997 £m    1996 £m
Turnover               14,265     13,205
Operating Profit        1,530      1,325
Operating Margin        10.7%      10.0%
 

As you can now see, at constant exchange rates the turnover growth in Foods was virtually zero, whilst in Home & Personal Care, Unilever actually produced underlying sales growth of a respectable 8%.

Well Managed?

Are the above numbers a sign of a well managed company? Insofar as margin improvement is concerned, the answer is yes. As we round up our first look at Unilever, here's a list of points to take forward as we compare the merits of our three consumer branded goods companies -- Unilever, Cadbury Schweppes and Reckitt & Coleman. Next week, depending on the Royal Mail and the efficiency of their shareholder's relations departments, we'll have a closer look at one of the other two companies.

Unilever's Plus Points

• Margin improvement. According to Hemmington Scott, the company's normal operating margin has risen every year over the past 5 years, going from 8.7% in 1993 to 9.9% in 1997.
• Sale of the specialty chemicals business for US$8m to concentrate on their core product divisions. At the 1997 year end, Unilever had net cash balances of £3.2 billion. This gives the company the firepower to expand both organically and by acquisition.
• Expanding into the emerging markets of the world, which account for nearly 90% of the world's population.
• Concentrating on building recognised brands, many of which are the market leaders.
• Very strong 1998 first quarter results, easily exceeding analyst expectations, with operating margin up substantially from 7.7% in the corresponding period to 10.0%.
• A strong generator of cash.

Unilever's Minus Points

• The company is in a constant state of change and restructuring. A charge against profits of between £150m and £300m is expected to be made per annum.
• Limited sales growth, especially in the developed countries.
• Net profit margins less than 5%, indicating a possible lack of competitive strength.
• A difficult company to analyse and to manage.

The Unilever Snapshot

Recent Share Price: 665p
1997 Normal Earnings per Share (EPS): 27.0p
1998 Forecast EPS: 24.1p
1999 Forecast EPS: 26.6p

Trailing Price Earnings Ratio (P/E): 24.6
1998 P/E: 27.6
1999 P/E: 25.0

As usual, feel free to share your thoughts about Unilever on the message boards. We deliberately haven't looked closely at their valuation, but tell us what you reckon about that. Also, would you feel comfortable investing in a company that is forecast to produce negative growth in 1999? Have a good weekend, Fools.

Bruce Jackson (TMF Googly)

Qualiport Numbers

Today's Numbers                   Date            27/05/98


          Change     Bid
          pence       £

RTO        0.02      4.14
EMAP       0.05     12.65
MKS        0.01      5.64         


Rec'd        #     Stock      Buy      Now    % Change   £ Change

19/12/97   1565  Rentokil     2.55     4.14     62.4%       1.59 
17/04/98    337  EMAP        11.85    12.65      6.8%       0.80 
11/05/98    722  M & S        5.535    5.64      1.9%       0.105


19/12/97   1565 Rentokil  4,040.63  6,479.10   60.3%    2,438.47 
17/04/98    337 EMAP      4,043.37  4,263.05    5.4%      219.68
11/05/98    722  M & S     4,052.24  4,072.08    0.5%       19.84

Cash                                    33.96

Total                               14,848.19 


                Day    Month    Year    History

Qualiport       0.4%    4.7%    52.6%    56.0%
FTSE 100       -1.7%   -1.0%    14.3%    16.9%
FTSE All Share -1.4%    0.4%    16.1%    18.6%