Foods: UNILEVER PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2003 - H 2001 2008
Unilever Pakistan Limited (ULEVER), formerly known as Lever Brothers Pakistan Limited (LBPL) is a wholly owned subsidiary of Unilever Overseas Holdings Limited, UK, whereas its ultimate parent company is the consumer products giant, Unilever PLC, UK. Following a series of high-profile acquisitions, including US-based Bestfoods, Unilever's foods business is the world's third largest after Nestle and Kraft.
It is a global leader in culinary foods, ice cream, margarine and tea-based beverages. Major brands include Knorr, Lipton and Magnum. ULEVER was incorporated in Pakistan in 1948 as Lever Brothers Pakistan Limited and merged with Lipton in 1989 and Brooke Bond in 1997. It became the largest ice cream manufacturers in Pakistan through an amalgamation with Polka in May 1999. These acquisitions have further strengthened the distribution network of ULEVER. It is listed on all the three stock exchanges of Pakistan.
Unilever Pakistan has been exporting a range of products catering to the "external constituency", for the last forty years. Since 1998, ULEVER has been entrusted with the responsibility of developing the Afghanistan business through a dedicated sales and distribution network. A wide range of home care, personal care, foods, ice cream and beverage brands are offered for export.
In June 2007, Unilever Overseas Holding Limited, a wholly owned subsidiary of Unilever PLC, UK, purchased all the shares held by the Government of Punjab. This has increased Unilever's shareholding in the company from 67.04% to 70.4%.
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Recent Results (UNILEVER) half year ended (Rupees '000)
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H1'08 H1'07
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Sales 14,831,764 11,595,151 28%
Cost of goods sold (9,488,882) (7,071,283) 34%
Gross profit 5,342,882 4,523,868 18%
Distribution cost (2,824,452) (2,602,589) 9%
Administrative expenses (531,633) (493,420) 8%
Other operating income 118,171 112,073 5%
Other operating expenses (170,066) (124,541) 37%
1,934,902 1,415,391 37%
Finance cost (57,583) (80,849) -29%
Profit before taxation 1,877,319 1,334,542 41%
Taxation (596,574) (472,501) 26%
Profit after taxation 1,280,745 862,041 49%
Earnings per share 96.34 64.85
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The sales of the company grew by an impressive 28% during the half year 2008. This rise in sales was mostly derived from the increased prices undertaken as a measure by the company to counteract the negative impact of input cost inflation and devaluation of the rupee. The rising costs of production for the period were around 34%, which impacted the gross margins of the company that increased by only 18% compared to the last year. The high sales were carried out mainly in the departments of home and personal care with a growth of 39% and ice cream with a growth of 30% in sales.
The company has managed to keep the distribution and administrative expenses under tight control throughout the half year, resulting in only slight increases in those expenses from last year's figures. Another key factor improved by the company were its financial costs, which have been led down from Rs 80,849 thousand in H1'07 to Rs 57,583 thousand in H1'08, showing a decline of 29%. Especially in the second quarter of FY08, the financial income was Rs 6,065 thousand, as compared to the cost of Rs 34,164 thousand of the same period of FY08.
The strict management policy of the company resulted in the profit before taxes to be raised by 41% from that of H1'07. The profit after tax of the company was Rs 1,280,745 thousand as compared to Rs 862,041 thousand for half year of 2007, having a growth of 49%. The EPS rose from Rs 64.85 in H1'07 to Rs 96.34 for H1'08. Hence we can say that Unilever has managed to maintain steady stream of sales and increased its profits, even in these times of high inflation and rupee devaluation through its tight control over costs and marketing strategies to increase the sales.
SEGMENTS AT A GLANCE (FY07)
UNILEVER COMPRISES OF 4 SEGMENTS:
* Home and Personal Care - represents laundry and a wide range of cleaning, skin care, hair care and oral care products
* Beverages - represents tea
* Ice Cream - represents ice cream
* Other - represents margarine
HOME AND PERSONAL CARE
This segment continues to be the major driver behind the top and bottom line growth. In FY07, sales for this high margin segment increased by 26% (13% from volumetric growth and remaining via price increase), thereby increasing its contribution to the top line to around 52% from 47% last year. Unilever maintains its market leadership in laundry detergent powders, hair and personal wash categories. The star performers were Surf detergent powder, Sunsilk shampoo and Lux beauty soap. Sales of newly introduced Clear shampoo were also in line with forecast. Despite this impressive turnover, the unprecedented rise in palm oil, tallow prices and other materials resulted in decline margins.
BEVERAGES
Gross sales for FY07 were down by 3% due to lower selling prices and volume loss to small local brands in the rural areas that are using the cheap smuggled tea. Lower tealeaf costs resulted in consumer price reduction by 5%. Following the normalisation of very high tea prices arising from severe drought conditions in 2006 in Kenya, normal gross margins have been restored. Lipton Yellow Label continues to grow, amidst cutthroat competition in mature tea market, on the back of various promotional campaigns and trade offers.
ICE CREAM AND SPREADS
Gross sales for Walls in FY07 increased by 9%, well below expectations. In FY07, the monsoon was earlier and more severe, there were acute power shortages in the south and there were delays in completing the factory expansion project, resulting in serious supply disruption in Q2'07. This damaged the trade's confidence and attention to ice cream sales, which were countered by leasing cold storage facilities in Karachi and Lahore. Hence higher distribution and additional factory costs resulted in lower sector profits and eroded gross margin.
On spreads side, Blue Band Margarine registered a 23% sales growth on the back of successful brand activation programmes. However, the overall margins for the segment remained flat at 40%.
FINANCIAL PERFORMANCE (DEC'03-DEC'07)Overall, the company sales grew an impressive 11.17% (2006: 18.77%) as it built the growth momentum started in 2005 with a 3-year CAGR of 9%. Sharper focus and increased resource allocation in marketing and customer management were the prime drivers. The sales mix improved with robust growth in Home and Personal Care. Beverages' sales declined due to lower market selling prices and lower volumes. Ice cream performance was flat due to an unfavourable business environment.
However this overall sales growth did not trickle down to the bottom line mainly due to cost pressures, high distribution expenses and restructuring costs, thereby eroding the operating and net profit margins respectively. Despite high COGS, overall gross margins improved slightly in FY07 on the back of double-digit growth in HPC segment, which contributed 60% to the gross profit. ROA showed a decline to due a higher increase in assets base due to expansion in the ice cream business along with declining profits. Similarly, ROE showed a negative trend on the account of declining profit after tax.
The overall PAT for FY07 increased by a meagre 2%, lagging the robust bottom line growth. This was due to the volume decline in tea business along with lower ice cream sales for reasons mentioned above. All the liquidity ratios have posted a declining trend over the 5-year period. The current ratio has decreased from 1.04 in 2003 to 0.73 in 2007. This shows that company's current liabilities (mainly the short-term borrowings) are rising far more than its current assets, reflecting a decline in company's ability to pay off its short-term obligations. Quick ratio, a better measure of liquidity followed a trend similar to current ratios, first increasing slightly in 2004 and then declining onwards.
Inventory turnover (ITO) ratio depicts how quickly the company is able to sell off its inventory. ITO for Unilever, though has declined during 2004, but has been on a slight rise then onwards. The slight increase is indicative of Unilever's declining operational efficiency with growth in net sales lagging behind the growth in inventory kept by the company. Reasonable ITO shows that Unilever is able to efficiently turn its inventory into sales.
Days sales outstanding (DSO) shows how quickly the company is able to collect the dues from its debtors. It should be enough for the company to avoid risks of bad debts. The trend line indicates a sharp decline in this ratio in '04 after which its been on a constant rise (slightly) due to growth in net sales lagging behind that in trade debts (37% in FY '07) indicating that perhaps the company is deliberately pursuing easy credit policy to attract large no. of creditors. However, its DSO is still very negligible compared to ITO. The operating cycle of ULEVER hence followed the same trend as that of ITO in the respective years. Initially it was much higher than the industry average but later it started declining to converge with the industry trend.
TATO has remained flat at 3 over the period under review, reflecting that the company is anticipating any increase in its sales and responding to it in a timely fashion by enhancing its assets base accordingly. The sales/equity on the other hand shows a rising trend after 2004 on account of declining equity base in the subsequent years. Also sales in FY07 have registered a positive growth which explains the rise in that year.
As far as debt management is concerned, both D/A and D/E ratios after 2004 (the decline in 2004 is because the Unilever retired significant amounts of debt in that year) show Unilever's increased reliance on debt financing rather than equity financing. The trend lines in particular show that D/A (0.63 to 0.75) ratio has remained almost stable over the years where as D/E ratio has increased significantly (1.8 to 3.08) owing to increasing long term debts (further evident by the long term debt to equity ratio) to finance the expansion, coupled with the declining equity base in the subsequent years.
The TIE ratio has increased in 2004 but again nose-dived in 2005 due to high interest rates offsetting the increase in EBIT, thus having an adverse impact on Unilever's interest covering ability. Even though this ability increased in 2006 (owing to comparatively lower finance costs), a massive surge in finance costs (70.64%) vis-à-vis a 3% increase in EBIT, was responsible for a plunge in FY07 TIE ratio. Looking at this, we can infer that Unilever is being adversely affected due to higher mark-ups in high interest rate regime.
The (P/E) ratio shows how much investors are willing to pay per rupee of the reported profits, depends on the company's price per share and its earnings per share (EPS). Unilever's EPS has been erratic (fluctuating between 120 and 130) driven mainly by any changes in company's profit after tax (as its number of shares have been constant so far in last 5 years). The year-end market prices of Unilever have been increasing over the 5-year period. Consequently, the P/E ratio also followed a rising trend driven by the increases in market price of shares, reflecting the investor's confident in Unilever. As evident from the price chart, the company has outperformed the 100 index in all years under consideration.
Initially Unilever's book value per share was very high however 2004 onwards, the company's book value per share plummeted on account of declining equity base (due to decline in reserves) but it again surged in FY07 on the back of higher reserves, compared to no change in the number of shares outstanding. Also, company's DPS followed the same trend as that of Book value per share till 2005. However, unlike book value per share, it showed a slight increase in FY06.
The company has followed the policy of maximum DPO averaging 100% and the dividend yield has been constant at 5-6% over last 5 years. Despite a decline in real payout (with inflation growth surpassing the dividend growth), the major beneficiary of this nominal growth is Unilever's associated undertaking (Unilever Overseas Holdings Ltd). Overall both DPS and BPS are greater than the average industry showing that the good return to shareholders is the prime objective of Unilever.
FUTURE OUTLOOK
The Pakistan market has become very lucrative for fast moving consumer goods (FMCGs) businesses and to new entrants, both local and international players, in the wholesale and retail industry due to sustained economic growth, rising rural incomes and changing lifestyles. On the flip side, the market environment remains very competitive and Unilever continues to invest heavily behind its growing brands. Restoring beverage margins and returning Brooke Bond Supreme to growth is of key importance in FY08. Recent announcements by Engro and Dawn Bread to enter ice cream and spreads segments respectively also pose serious rivalry for Unilever.
Unilever is concerned about the increasing volume of smuggled teas, rapidly rising input costs driven by high international oil costs and the impact on profit from the recently imposed tax on turnover. Social disruptions also make markets nervous, disrupt the trade and shakes local consumer and international confidence.
Keeping in view, Unilever's strong competitive edge of continuous innovation, global and local scale delivering cost advantages and deep local roots, one hopes that it will be able to face these challenges.
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UNILEVER PAKISTAN LIMITED (ULEVER) - FINAL
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Balance Sheet 2003 2004 2005 2006 2007
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Property, plant and equipment 1,445 1,524 1,761 2,137 3,513
Other non-current assets 573 615 609 607 479
Inventories 2763 1930 1930 2362 2906.419
Trade debts 470 84 105 175 239.313
Cash and cash equivalents 1,160 759 365 586 188.682
Current assets 4,803 3,753 3,437 3,686 4,092
Total assets 6,821 5,892 5,807 6,430 8,084
Ordinary share capital 664 664 664 664 664
Preference share capital 5 5 5 5 5
Reserves 1,345 1,437 1,178 1,161 1,311
Total equity 2,014 2,106 1,847 1,830 1,980
Surplus on revaluation of fixed assets 19 16 16 15 14
Non-current liabilities 153 90 369 348 502
Current liabilities 4,635 3,680 3,575 4,237 5,588
Total liabilities 4,788 3,770 3,944 4,585 6,090
Total equity and liabilities 6,821 5,892 5,807 6,430 8,084
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Income Statement 2003 2004 2005 2006 2007
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Net sales 21,472 18,238 17,671 20,988 23,332
COGS 14,677 12,679 10,817 13,110 14,249
Gross profit 6,795 5,559 6,854 7,878 9,083
Operating profit / EBIT 2,600 2,242 2,559 2,561 2,639
Finance Cost 51 35 77 64 109
Profit before tax 2,521 2,167 2,482 2,497 2,529
Taxation 922 442 880 853 842
Profit after tax 1,599 1,725 1,602 1,644 1,687
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PROFITABILITY RATIOS 2003 2004 2005 2006 2007
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Profit Margin 7.45% 9.46% 9.07% 7.83% 7.23%
Gross profit margin 31.65% 30.48% 38.79% 37.54% 38.93%
Return on Assets 36.96% 36.78% 42.74% 38.83% 31.28%
Return on Equity 79.39% 81.91% 86.74% 89.84% 85.20%
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LIQUIDITY RATIOS 2003 2004 2005 2006 2007
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Quick Ratio 0.44 0.50 0.42 0.31 0.21
Current Ratio 1.04 1.02 0.96 0.87 0.73
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ASSET MANAGEMENT RATIOS 2003 2004 2005 2006 2007
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Inventory Turnover(Days) 46.32 38.10 39.32 40.51 44.84
Day Sales Outstanding (Days) 7.88 1.66 2.14 3.00 3.69
Operating cycle (Days) 54.20 39.75 41.46 43.52 48.54
Total Asset Turnover 3.15 3.10 3.04 3.26 2.89
Sales/Equity 10.66 8.66 9.57 11.47 11.78
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DEBT MANAGEMENT RATIOS 2003 2004 2005 2006 2007
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Debt to Asset 0.70 0.64 0.68 0.71 0.75
Debt to Equity Ratio 2.38 1.79 2.14 2.51 3.08
Long Term Debt to Equity(%) 0.08 0.04 0.20 0.19 0.25
Times Interest Earned 50.98 64.06 33.23 40.02 24.16
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MARKET RATIOS 2003 2004 2005 2006 2007
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Earning per share 120.28 129.76 120.51 123.66 126.90
Price/Earnings Ratio 12.06 11.37 14.73 16.17 17.97
Dividend per share 126.00 135.02 119.98 122.01 122.99
Book value per share 151.50 158.42 138.93 137.66 148.94
No of Shares issued (in thousands) 13294.00 13294.00 13294.00 13294.00 13294.00
Market prices(Year End) 1450.00 1475.00 1775.00 2000.00 2280.00
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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