(Adds CEO, CFO, analyst comment.)
By Michael Carolan
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Unilever PLC (UN, UL) beat expectations with its third-quarter sales Thursday, as lower prices and higher advertising spend boosted volumes for the second quarter running. The company expects further volume growth in the fourth quarter as lower prices continue to drive demand.
The result is a fillip for new Chief Executive Paul Polman, who identified volume growth as his key focus for the group when he joined earlier this year from Nestle SA. Prior to Polman's arrival, Unilever had been criticized for allowing volumes to slip as it aggressively raised prices.
The maker of Ben & Jerry's ice cream and household products such as Dove, Lynx and Cif, said underlying sales--which strip out acquisitions, disposals and currency movements--grew 3.4% in the third quarter, ahead of analysts' forecasts. This measure of sales is closely watched because it's a directly comparable measure of how the company's products are selling.
The sales rise was wholly a result of a 3.6% increase in volumes, which followed a 2% volume rise in the previous three months. Polman said all the company's regions and categories showed volume growth.
Unilever's prices were down 0.2% in the third quarter and Polman said he expects steeper cuts of between 2% and 3% in the last three months of the year due to last year's high comparatives
The company increased prices by over 9% in the fourth quarter of 2008, partly to offset higher commodity costs. However, it was criticized by some analysts and industry experts for raising prices too much just as many of its markets were tipping into recession. Polman admitted that the company had been too aggressive in raising prices last year and Chief Financial Officer Jim Lawrence said prices were "now about where they should be."
However, prices will continue their year-on-year falls until the middle of next year when Unilever starts to lap the price increases of early 2009, said Lawrence.
Unilever's price cutting is in contrast to rival Procter & Gamble Co (PG) of the U.S., which saw its volumes fall 3% in its latest quarter as it raised prices in some geographies to offset currency devaluations.
Unilever's total sales in the third quarter dropped 2% to EUR10.2 billion because it's sold some business units, while net profit dropped to EUR1.05 billion, from EUR1.64 billion a year ago when a number of disposals boosted the bottom line.
While both the volume and margin performance exceeded expectations, Unilever's shares fell on the steeper-than-expected price cuts. By 1037 GMT, the stock was down 53 pence, or 2.9% at 1776 pence.
Evolution analyst Warren Ackerman said the price cuts were "not such an issue as long as the volumes continue to improve." He expects volumes to rise 4%-5% in the fourth quarter, resulting in a further rise in sales despite the price cuts.
Unilever's operating margin was up 0.7 percentage points in the period. The company said earlier this year its margins would return to growth in the second half as commodity prices fall from their record high levels of last year.
Andrew Wood at Sanford Bernstein said the company was set to continue benefiting from lower commodity prices. Strong gross margin growth is supporting a big increase in advertising and promotion spend, yet still allowing good operating margin growth and driving strong volume momentum. "We expect more of the same in the fourth quarter," he said.
-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@dowjones.com