Unilever PLC (LON:ULVR) said disruption from natural disasters in the Americas and the impact of poorer weather in Europe adversely affected the third quarter.
The consumer goods group, which fought off a US$143bn takeover bid from Kraft Heinz this year, reported a 1.6% decline in turnover to €13.2bn in the third quarter, including a currency impact of 5.1% as a result of a stronger euro.
READ: Unilever's efforts to lift margins with cost cuts and price rises are short term fixes, says analyst
Shares fell 4.28% to 4,353p in morning trading.
On an underlying basis, however, sales rose 2.6% as a 6.3% increase in emerging markets offset a 2.3% decrease in developed markets. Analysts had expected underlying sales growth of 3.9%.
In an effort to offset a meagre 0.2% rise in volumes, Unilever raised prices by 2.4% following a 2.8% hike in the second quarter.
“While conditions in our developed markets remain challenging, we are starting to see signs of improvement in some of our biggest emerging markets including India and China,” said chief executive Paul Polman.
“For the full year, we continue to expect underlying sales growth within the 3- 5% range, an improvement in underlying operating margin of at least 100 basis points and strong cash flow."
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Operations in the Americas were disrupted by hurricanes Harvey and Irma, which hit Florida and Texas in recent months, while poor weather in Europe hit ice-cream volumes, including its Magnum brand.
The retail environment in Europe remained "challenging" with weak consumer demand, Unilever said. Trading was affected by rising competition from smaller rivals and shifting consumer preferences towards niche and alternative brands.
Ongoing investigations with competition authorities
The owner of Marmite, Dove, Sunsilk and Domestos brands is also involved in a number of ongoing investigations by competition authorities, including in Italy and South Africa. In March, South Africa authorities recommended a fine equivalent to 10% of the company’s turnover for price fixing of edible oils and margarine.
The company said it would make a provision where appropriate and disclose contingent liabilities in relation to such matters. It added that it was co-operating fully with competition authorities.
Unilever restructures the business
Unilever is currently undergoing a restructuring and in April announced that it would sell or demerge its spreads business, including brands Flora, Stork and Bertolli.
In September, the group said it would take full control of its South African subsidiary from investment firm, Remgro, in exchange for handing over its spreads business and a cash payment. Remgro is selling its 25.7% stake in Unilever South Africa Holdings and paying 4.9bn rand in cash. The spreads business was valued at 7bn rand.
The underlying third quarter growth figures exclude the spreads business. With this included, sales rose 2.8%.
Unilever said the exit from the spreads business is on track. In the last three months, the group also announced the acquisitions of Weis ice-cream in Australia, Pukka Herbs tea in the United Kingdom, Carver skin care in Korea, and Mãe Terra organic food in Brazil.
On track to reach cost savings target
Under its so-called Connected 4 Growth restructuring programme, the company is on track to reach its savings target of €6bn and underlying operating margin of 20% by 2020.
Polman said the programme is starting to make the business less complex and more responsive to fast-changing consumer trends.
“The transformation of Unilever into a more resilient, more competitive and more profitable business continues and we are making good progress against the strategic objectives we have set out for 2020,” he said.
“The new organisation is delivering increased innovation speed and our savings programmes are allowing us to step up investment behind new growth opportunities. We expect to reap the benefits over the coming quarters.”
'Slightly disappointing' trading update, says Hargreaves Lansdown
Unilever has responsed to rising competition and changing consumer preferences by cutting costs and raising prices but these are short term fixes, said Charlie Huggins, a fund manager at Hargreaves Lansdown.
"To succeed in the long term Unilever will need to adapt its business model, becoming more agile and responsive to changing trends."
Huggins said the third quarter update was "slightly disappointing" with a very weak performance in developed markets.
On the upside, the analyst said business "throws off cash", which can either be returned to investors or used to acquire fast-growing brands.
"The group is only at the start of a major cost cutting programme, so there should still be plenty of scope for margins to rise," Huggins added. "And in the long run, Unilever’s significant exposure to some of the fastest growing areas of the world, like India and China, should stand it in good stead.”
Bold margin targets could be unsustainable long-term, says Liberum
Liberum left its rating at 'hold' and target price at 3,870p, saying that organic sales growth of 2.6% missed consensus forecasts by 130 basis points. The broker said its forecast for organic sales growth is in line with management expectations at 4% per annum over 2017-2020.
Following the cancelled bid from Kraft-Heinz, management has committed to buying back €5bn shares and growing the dividend 12% in 2017. It has also promised that two-thirds of their €6bn cost savings programme by 2019 will be reinvested in growth and committed to an ambitious 20% underlying earnings (EBIT) margin targets by 2020.
"While more aggressive EPS (earnings per share) growth underpins the shares, failure to deliver on lifted expectations could lead to a pull-back," Liberum said.
"In addition, the company has set bold margin targets that could be unsustainable in the long run. In our view, the risk / reward outlook for the shares is now more balanced."