The Financing Structure Of Unilever Plc Finance Essay

Unilever Plc (Unilever) operates as a single business entity. It was formerly known as Lever Brothers Limited. Unilever NV and Unilever Plc are the two parent companies of the Unilever Group having separate legal identities and separate stock exchange listings for their shares.

Unilever Plc (Unilever) is a leading food and personal care product offering company in the world. The company is engaged in the manufacturing and distributing foods, home care and personal care products. The company along with a strong and well differentiated portfolio of 400 global and regional brands operating across 14 categories operates in 150 countries with around 174,000 employees.

BUSINESS DESCRIPTION

Unilever operates in four business segments namely, Personal Care; Home Care; Savoury, Dressings & Spreads; and Ice Cream & Beverages. The company also offers solutions for professional chefs and caterers. It has around 270 manufacturing facilities worldwide.

The Personal Care segment includes business in the mass skin care, daily hair care and deodorants product areas. These products are sold under Dove, Lux, Rexona, Sunsilk, Axe and Pond’s, Suave, Clear, Lifebuoy, Vaseline, Signal and Close Up.

Its Home Care segment includes laundry products such as tablets, powders and liquids for washing of clothes by hand or machine. It also offers soap bars. In this segment, the principal brands are Omo, Surf, Comfort, Radiant, Skip and Snuggle. The household care products include surface cleaners and bleach that are marketed under the Cif, Domestos and Sun/Sunlight brands. The company’s new products include Dove pro-age range of products, Dove Summer Glow self-tanning and body lotions, Clear antidandruff shampoo and Small & Mighty concentrated liquid laundry detergents.

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The Savoury, Dressings and Spreads segment includes sauces, soups, salad dressings, bouillons, snacks, mayonnaise, spreads, olive oil, margarines and cooking products like liquid margarines, and frozen foods. These products are sold worldwide under Calve, Knorr, Hellmann’s, Becel, Flora, Wish- Bone, Rama, Blue Band, Amora, Ragu and Bertolli brands.

The Ice cream and Beverages division includes ice cream, tea-based beverages, weight management products, and nutritionally enhanced products. These products are marketed worldwide under various brand names such as Magnum, Cornetto, Carte d’Or and Solero, Wall’s, Kibon, Ola and Algida, Ben & Jerry’s, Breyers, Klondike and Popsicle. The tea-based beverages are sold under Lipton, Brooke Bond and PG Tips brands. The weight management products are sold under Slim-Fast, and nutritionally enhanced products are marketed under Annapurna and AdeS/Adez brands.

In the the Home Care division, it holds the global number two position in laundry, with a number one position in man developing and emerging markets. The company holds global number one position in mass skin care and deodorants, and the number two position in hair care where as in oral care and household care the company’s strategy is focused on strong regional and local leadership positions in selected markets in Europe, Asia and Latin America. In the Foods division, it holds number one position in savory and dressings, spreads, tea-based beverages and ice cream. Unilever is the category leader in margarine and spreads in most European countries and North America. The company’s UK’s foods division is the number one producer of savory and dressings business.

Products and Brands

Unilever owns more than 400 brands as a result of acquisitions, however, the company focuses on what are called the “billion-dollar brands”, 13 brands, each of which achieve annual sales in excess of €1 billion. Unilever’s top 25 brands account for more than 70% of sales. The brands fall almost entirely into two categories: Food and Beverages, and Home and Personal Care.

Unilever’s billion$ brands are

Axe/Lynx

Lipton

Blue Band[14]

Lux (soap)

Dove

Omo/Surf (detergent)

Flora/Becel

Rexona/Sure

Heartbrand

Sunsilk

Hellman’s

TIGI (haircare)

Knorr

Products of the company are distributed through distribution centers, group-operated facilities, satellite warehouses, and public storage depots, wholesalers, independent grocery stores, co-operatives, and various food service providers. Unilever invests around EUR 1 billion in research and development activities through five laboratories to develop new products and technologies.

Geographic Presence

Unilever has geographically diversified operations. It is engaged in manufacturing and distributing foods, home care and personal care products. Its products are sold in more than 150 countries which include Europe, the Americas, Asia and Africa. During the fiscal year 2008, the company generated 32% revenue from Western Europe, 32% from the Americas and 36% from the Asia, Africa and Central & Eastern Europe. It is the category leader in margarine and spreads in most European countries and North America. The company’s UK’s foods division is the number one producer of savory and dressings business. Thus, wide geographic presence decreases the business risk of the company. This also acts as an easy way for the expansion plans of the company, as wider reach in terms of geography would mean reaping more benefits eventually improving the profit margins, attaining economies of scale and recognition on a worldwide basis. following are the name of some of the countries with Unilever’s presences.

Ireland

Sudan

Italy

Sweden

Japan

Switzerland

Pakistan

Thailand

Singapore

Tunisia

Spain

United States

Sri lanka

United Kingdom

Industry Comparison

Revenue Growth Rate

The company’s compounded annual growth rate for revenue was 1.39% during 2005-2009. This was below the S&P 500 companies average* of 9.67%. A lower than sector average* revenue CAGR may indicate that the company has underperformed the average sector growth and lost market share over the last years. The company’s underperformance could be attributed to a weak competitive position or inferior products and services offering or lack of innovative products and services.

Return on Equity

The company’s return on equity (ROE) was 30.62% for fiscal year 2009. This was above the S&P 500 companies average* of 18.69%. A higher than sector average ROE indicate that the company is efficiently using the shareholders’ money and that it is generating high returns for its shareholders compared to other companies in the sector.

Operating Profit Margin

The company’s operating margin was 12.91% for the fiscal year 2009. This was below the S&P 500 companies average* of 18.74%. A lower than sector average* operating margin may indicate inefficient cost management or a weak pricing strategy by the company.

Financial Analysis

Instead of 2 year analysis of the financial position of the company analysis is performed on a five year data as this will provided with better coverage of the companies performance.

Current ratio

Current ratio of the company has been on the rising trend since 2005. Current ratio of the company has increased from 0.75 time in 2005 to 0.93 times in 2009. This trend shows that the company is moving toward a stable liquidity position. Whereas, in comparison to the averages of the industry trend and S & P 500 companies Unilever is not able to maintain sound current ratio. Currently industry averages at around 1.53 times whereas; S&P 500 companies averages around 1.91 times. This is almost as double to where Unilever currently stands.

Quick ratio

Quick ratio of the company has shown similar rising trend as that of current ratio. Quick ratio of the company has moved to 0.5 times in 2009, which is a rise of approximately 35% during the five year period (2005: 0.37 times). This ratio of the company is quite close to the industry averages (i.e., 0.78 times), whereas, S&P 500 companies quick ratio averages to around 1.36 times. Considering the rising trend of the company, it appears that its liquidity position will improve in the near future to meet the industry averages.

Gross Profit margin

Gross Profit margin of the company has shown a mix trend over the years. During the period from 2005-2009 gross profit margin of the company stood at 48.32%, fall of just 2%. This shows that the company is in a stable position as it is able to stay consistent in maintaining its Gross Profit Margin. On the other hand, Industry average stands at 44.72%. Being on the higher side of the industry shows that the company is able to effectively manage its cost and pricing policies.

Net Profit Margin

Similar to the Gross profit margin, net profit margin of the company has shown a mix trend. On average the net profit margin of the company has increased by 4% during the 5 year period to 8.46% in 2009. This is higher then what the industry average is (Industry average: 7.25%). On the other hand S&P 500 companies’ average net profit margin to approximately 12.59%, showing that the company is not meeting the S&P 500 companies standards.

Return on Assets

Return on assets of the company has shown an increasing trend during the 5 year period. During the said period, ROA increased to approximately 10% in 2009 from 8.74% in 2005, this is a rise of 14%. In comparison, the industry averages the return on assets at around 7.71% and S&P 500 averages assets at around 7.91%. This shows that the company is able to used the employed assets efficiently and effectively then what the normal industry trend depicts.

FINANCING STRUCTURE

Unilever PLC is a highly un-geared company. Its total debt to total equity ratio stood at only 0.82 in 2009, which is a decline of around 46% during the 5 year period (2005: 1.51). Similar fall in the total debt to total capital ratio was observed, which fell by approximately 25% to 0.45 in 2009. On the other hand a slight increase of just 9% was observed in the Long term debt to total capital of the company during the same five year period.

In contrast to the leverage ratios, a significant fall in the payout ratio was observed. Payout ratio of the company fell from 61.37% in 2005 to just 38.54% in 2009. This shows that currently the company is in the phase of financing its activities from its retained earnings instead of taking long or short term financing.

In comparison to a competitor Reckitt Benckiser Group, the leverage of this company is similar to the leverage of Unilever PLC. During the year 2009, Total Debt to Total Equity ratio Reckitt Benckiser Group is only 0.82. Payout ratio of the Reckitt Benckiser is 50.28% in 2009, which is higher than that of Unilever PLC, representing the fact that Reckitt Benckiser Group Plc is utilizing higher portion of its retained earnings as compared to Unilever Plc

In comparison with the industry trends, average total debt to equity is approximately 1.16 times whereas, as per S&P 500 it is around 0.73. In view of these average industry and sector trends, company is performing quite well.

On the other hand, company’s payout ratio is on the higher side when compared to the industry and S&P 500 averages. Average industry’s payout is almost is 42% whereas, average payout as per S&P 500 is 28.82%.

This shows that company is not availing its short term financing options. Taking up these short term financing will release some pressure from the retained earning and can be paid out to the shareholders of the company because as the low payout trend of the industry indicates that the shareholders are prone to short term gains in comparison to long term capital gains.

2009

2008

2007

2006

2005

Unilever PLC

Total Debt/Equity

0.82

1.1

0.77

0.78

1.51

Long Term Debt/Total Capital

0.35

0.3

0.25

0.22

0.32

Total Debt/Total Capital

0.45

0.52

0.44

0.44

0.6

Payout Ratio

38.54%

43.04%

56.62%

83.71%

61.37%

Reckitt Benckiser Group Plc

Total Debt/Equity

0.03

0.48

0.21

0.53

0.09

Long Term Debt/Total Capital (?)

0

0

0

0

0.04

Total Debt/Total Capital (?)

0.03

0.32

0.17

0.35

0.08

Payout Ratio (?)

50.28%

50.76%

41.93%

48.65%

42.39%

WEIGHTED AVERAGE COST OF CAPITAL

As discussed in the above section, Unilever PLC has a very low (nominal) gearing of 0.35%. Virtually the company is debt free; hence cost of equity of the company will be its weighted average cost of capital.

In order to calculate Cost of Equity of Unilever PLC Capital Asset Pricing Model (CAPM) has been used. Beta for the company has been taken from the Dow Jones Report, which is 0.76 whereas; many technical issues were presents when indentifying risk free rate (Rf) and risk premium (Rm-Rf). Hence, the risk free rate and the market rate (Rm) are assumed to be 8% and 12% respectively for the purpose of this calculation.

Cost of Equity

=

Rf + (Rm-Rf)b

Cost of Equity

=

8% + (12% – 8%) 0.76

Cost of Equity

=

11.04%

Here,

Cost of Equity =

=

WACC

Hence,

WACC

=

11.04%

NEW PROJECT

Project Description

Company has recently conducted a market survey for deodorant target only toward a young generation. Evaluation of the investment proposal to manufacture product XARI was performed. The product has performed well in test marketing trials conducted recently by the research and marketing department of the company.

Key Elements of Project

Initial investment cost

Evidences for the initial investment cost can be found from various sources, research reports related to the particular industry, information from the companies which have recently invested in the respective sectors can prove quite useful, internal budget preparation etc.

Annual revenues / operating costs

Evidences of independent annual revenues and operating cost can be also be found from various sources, demand and supply of the particular products and projected by various research houses such as Business Monitor, by analyzing past trends of the company and peer analysis of the companies already operating in the industry/segments

Rates of inflation

Information related to the past and future rates related to inflation can be found in abundance. In addition to the government bodies, numerous independent research houses provided forecasted/projected inflation rates of different countries. These rates are calculated after critically analyzing and assessing various factors that affect the inflation rates. Report from Economic Intelligence Unit is one of the research houses which provides rates of inflation, both past trends as well as forecasted for different countries.

Rates of taxation, and tax reliefs and allowances

Best sources for finding information related rates of taxation and tax reliefs and allowance is to go through government regulated bodies. Legal regulations related to tax and updates in the upcoming changes can be found on government operated website and accurate and up to date information related to any legal issue is available there.

Risk and Uncertainty

After a through research I came to the conclusion that identification of risks is best done by a sequential manner.

Firstly brainstorming exercise was done with some colleague of mine in order to evaluate what factors ,both beneficial and adverse, can be faced by the new project that the company was going to undertake. This exercise was purely for the identification of the risk that the project might face during the tenor of its operations. After my initial task of risk identification I assessed the likelihood of the occurrence of that risk and categorized them on the scale of high, medium and low. Then I assessed the consequences of each of risk if they occurred and whether, there occurrence will have a major impact on the operation of the company or its future prospect or not.

Risks with low chances of occurrence and low negative impact were ignored and emphasis was placed on the risks that have high chances of occurrence or which could have measurable impact on the company’s performance.

This risk was than further classified into quantifiable and non-quantifiable risk (uncertainty). The impact of the quantifiable risk, such as rate of inflation, increase in the cost of raw material, fall in demand of the product etc, were incorporated when calculating the Net Present Value of the Project.

Uncertainties such as war, political instability, change in government regulation etc, were a bit hard to incorporate. In order to overcome these problems sensitivity analysis was used.

Via Sensitivity Analysis result of the project are categorized into three possible outcomes Best Case Scenario, Moderate Case Scenario and Worst Case Scenario. These 3 cases will show the performance of the company in the two most extremes situations that the company might operate. Result should then be interpreted keeping in mind of all the expected scenarios.

Net Present Value

After the successful test, following information has been prepared by me in order to assess the viability of the project. The research team has prepared the following forecasted demand of the product along with that various other variables such as selling prices and inflation rate are also estimated. These forecasts reflect, along with others, the expected life of the products, change in the economic conditions in the long run etc.

Weighted average cost of capital has been calculated as above at 11.04%. The product has no terminal value at the end of four year.

NPV of the project with respect to the following data is almost about 348,578 pounds

Forecasted Information for Product XARI

Initial Investment

2 million Pounds

Selling Price (Current Price)

20 pound/unit

Expected Inflation in Selling Price

3% per year

Variable operating cost

8 pound/unit

Fixed Operating Cost

170,000 per yar

Tax Rate

30%

Year

1

2

3

4

Demand (units)

60,000

70,000

120,000

45,000

Quarterly Report

It appears that the company has performed reasonable well when compared to the forecast that the management prepared. Minor variances were witnessed by the company in most aspect of the project.

Initial investment of the company exceed by just 100,000 pound. Company just sold 100 less units in first quarter as compared to the forecasted data. The reason for this relate to the factor that market awareness was not created by the company as it incurred less operating cost as anticipated.

Company managed to sell units at a selling price 15% more the forecasted price. On the other 13% more cost was incurred on each unit than was projected.

The reason for such a change could relate to the fact that the company underestimated the price of it project, and once market started to accept the product its selling price increased