October 23, 2014 / 6:19 AM / 5 years ago

Unilever promises more cheap goods, cost cuts to tackle slowdown

LONDON (Reuters) - Unilever promised investors that new, cheaper products and more cost cuts would help it grow profits, even as reticent consumers dragged its sales growth in the third quarter to its weakest in nearly five years.

Europe’s persistent woes and a slowdown in emerging markets, where Unilever has more than half its sales, have weighed on the maker of household brands from Dove soap to Omo detergent.

In Britain, relatively wealthy consumers have snapped up premium goods like the company’s 10 pound ($16) Regenerate toothpaste, or its 29 pound ($46.40) jars of Maille mustard with wine and truffles. But the company said that most consumers in most countries are cutting back.

To grow even as families tighten their belts and turn to discount stores, Unilever is introducing cheaper products, like smaller Cornetto ice cream cones that sell for 1 euro in Spain or 1 lira in Turkey. It is also putting more emphasis on a local food brand in Brazil, Arisco.

“We’ve learned from the previous economic crises the importance of having such value brands in the portfolio that can capture some of the downtrading that inevitably happens when disposable income levels fall,” said Unilever Chief Financial Officer Jean-Marc Huet on a conference call.

At 1030 GMT on Thursday, an index of European blue chip stocks was flat, but Unilever shares were down 2.5 percent, after it reported a 2.1 percent rise in third-quarter underlying sales growth, below average analyst expectations of a 3.7 percent increase, according to a company-compiled consensus.

Sales volume, measuring the amount of goods sold, rose only 0.3 percent, below analysts’ estimate of 1.8 percent and growth of 1.9 percent in the first and second quarters.

“This was an unimpressive quarter from Unilever, where we thought the stars were nicely aligned,” said RBC Capital Markets analyst James Edwardes Jones, citing weak comparisons with a tough year-earlier period, repeated warnings from the company and a low stock valuation.

“The relatively low valuation remains, but on this evidence, rightly so,” he added.

Bernstein Research analyst Andrew Wood said Unilever’s sales growth was the lowest since the fourth quarter of 2009.

“We are responding to this lower growth environment by driving our savings program harder,” Huet said, citing examples such as cutting 1,400 jobs this year, slashing its number of laundry product formulations and reducing its long-term exposure to pension financing costs.

“In times like this, where growth is less and markets are weak, it’s all the more important that we apply all the levers to translate top line growth ... into earnings per share.”

EMERGING MARKETS SLOW

Emerging markets, key for Unilever, have taken a dive in recent months, with Brazil sliding into recession, China facing what may be its worst slowdown in 24 years and Russia dealing with Western sanctions over the crisis in Ukraine.

That has hurt the whole sector, with Nestle, Coca-Cola, Heineken and Reckitt Benckiser some of the companies to report disappointing results.

In Britain, consumers are also cutting back. Premier Foods reported lower sales on Thursday, blaming a shift to discount chains that stock their own cheaper brands. The UK company, which has a relatively high exposure to struggling Tesco, saw its shares slide 12 percent.

Two bright spots have been France’s Danone and Pernod Ricard, which are recovering from particular problems in China.

China was also particularly sore for Unilever, whose third-quarter sales slid 20 percent there, as retailers and wholesalers reduced inventory levels due to the slowdown.

CFO Huet said overall growth in the global markets that Unilever operates in was trending below 2 percent, down from 3 percent at the start of the year.

“We don’t see any material improvement,” Huet told Reuters. “It’s been a while since you’ve seen growth beneath 2 percent on a global basis.”

Unilever, however, still expects to outperform its markets this year, and said it can achieve “another year of profitable volume growth ahead of our markets, steady and sustainable core operating margin improvement and strong cash flow”.

Reporting by Martinne Geller; Editing by Keith Weir and Clara Ferreira Marques

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