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Unilever plc Earnings Decline on Weakening Demand

Unilever (NYSE: UL) posted earnings results for the first half of fiscal 2016 this week. The headline numbers met management's forecast, but they were still marked by weak profit growth as demand for consumer products slowed across many key markets.

What happened this quarter?

Overall, revenue fell 3% but rose slightly after accounting for currency exchange swings. Operating profit fell slightly, despite an encouraging uptick in profitability.

Other highlights of the quarter include:

  • Organic sales rose 4.7% over the last six months, which was the same pace that Unilever posted in the first quarter. That result puts the company on pace to improve on last year's 4.1% growth in 2016 -- and significantly outpace the 2.9% growth it posted in 2013. Its near 5% pace of expansion is trouncing rival Procter & Gamble (NYSE: PG), which is projecting roughly flat organic growth for its 2016 fiscal year.
  • Weakening demand trends hurt Unilever's results, though. The company had to rely more heavily on price increases as its volume growth slowed in developing markets and turned negative in richer economies, including the U.S. and Europe. P&G relies more heavily on developed markets, which helps explain why its volume has been negative for most of the past year.
  • Unilever's operating margin expanded by half of a percentage point to 15% of sales. Executives believe cost cuts will help that figure grow to just above 15%, compared to 14% in the prior fiscal year.
  • Pushed lower by currency moves, earnings per share ticked up by just 1% over the past six months.

What management had to say

Unilever described a weak selling environment that isn't set to turn positive anytime soon. "Consumer demand remained weak and in the markets in which we operate volumes have slowed further," management said. Meanwhile, executives "do not see any sign of an improving global economy," CEO Paul Polman said in a press release.

Image source: Unilever investor presentation.

Yet Unilever can still boost its earnings and improve its market position, Polman pointed out. "Despite a challenging environment with slower global economic growth and intensifying geopolitical instability, we have again grown profitably in our markets," he said.

Looking forward

The 2016 fiscal year appears to be playing out just as Unilever had predicted, with growth becoming harder to achieve but the key metrics of market share and profitability creeping higher anyway. In that environment, Polman and his team are focused on improving operating margin and producing stronger cash flow through initiatives aimed at lowering working capital balances. The financing strength helps ensure the company has plenty of excess funds to deliver to shareholders, but its dividend payout ratio remains elevated at over 70% (roughly the same as Procter & Gamble's). 

Volume gains should be powered by a quickening pace of innovation and new product rollouts. This organic growth will likely be boosted by acquisitions like its recent purchase of Dollar Shave Club, which Unilever said it bought for its attractive subscription model and unusually high growth rate. Still, overall results are under increasing pressure that's not likely to lift until global growth rates pick up.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.