Unilever : 2019 First Half Year Results

2019 First Half Year Results

Released : 25/07/2019 07:00

RNS Number : 6414G

Unilever PLC

25 July 2019

2019 FIRST HALF YEAR RESULTS

Performance highlights (unaudited)

			Underlying performance		GAAP measures
					vs 2018			vs 2018
	First Half
	Underlying sales growth (USG) (a)		3.3%	Turnover	€26.1bn	(0.9)%
	Underlying operating margin(b)	19.3%	50bps	Operating margin(b)	17.6%	40bps
	Underlying earnings per share(b)	€1.27	5.0%	Earnings per share(b)	€1.14	3.4%
	Second Quarter
	USG(a)			3.5%	Turnover	€13.7bn	(0.1)%
	Quarterly dividend payable in September 2019			€0.4104 per share

1. USG does not include price growth in Venezuela and Argentina. See page 6 for further details.
2. 2018 numbers have been restated following adoption of IFRS 16. See note 1 and note 9 for more details.

First half highlights

• Underlying sales grew 3.3% with volume 1.2% and price 2.1%
• Emerging markets underlying sales growth 6.2% with volume 2.5% and price 3.6%
• Turnover decreased 0.9% driven by the sale of our spreads business, partially offset by a 1.1% currency benefit
• Underlying operating margin increased 50bps with 30bps from gross margin
• Operating margin increased by 40bps
• Underlying earnings per share increased 5.0%, with constant EPS up 3.0%

Alan Jope: Chief Executive Officer statement

"We have delivered consistent growth within our guided range for 2019, led by our emerging markets. Accelerating growth remains our top priority and we continue to evolve our portfolio and seek out fast growth channel and geographical opportunities, as well as address those performance hotspots where growth is falling short of our aspirations.

For the full year, we continue to expect underlying sales growth to be in the lower half of our multi-year3-5% range, an improvement in underlying operating margin that keeps us on track for the 2020 target and another year of strong free cash flow. Our sustainable business model and portfolio of purpose-led brands are key to delivering superior long-term financial performance."

25 July 2019

FIRST HALF OPERATIONAL REVIEW: DIVISIONS

	Second Quarter 2019			First Half 2019
									Change in
	Turnover	USG(a)	UVG	UPG(a)	Turnover	USG(a)	UVG	UPG(a)	underlying
	operating
(unaudited)									margin(b)
	€bn	%	%	%	€bn	%	%	%	bps
Unilever	13.7	3.5	1.2	2.3	26.1	3.3	1.2	2.1	50
Beauty & Personal Care	5.5	3.5	1.6	1.9	10.7	3.3	1.7	1.6	100
Home Care	2.7	8.9	4.5	4.3	5.4	7.4	2.8	4.5	120

Foods & Refreshment

5.5

1.0

(0.6)

1.6

10.0

1.3

(0.1)

1.4

(40)

1. Wherever referenced in this announcement, USG and UPG do not include any price growth in Venezuela and Argentina. See pages 6 to 7 on non-GAAP measures for further details.
2. 2018 numbers have been restated following adoption of IFRS 16. See note 1 and note 9 for more details.

Our markets: Growth in our markets was mixed. Market growth in Europe and North America was held back by the impact of weather on ice cream sales. In the emerging markets we continued to see good momentum particularly in China and South East Asia. India saw strong market growth, though it moderated, as expected. Argentina remains hyperinflationary and high levels of pricing continue to weigh on consumer demand.

Unilever overall performance: Underlying sales grew 3.3% with 1.2% from volume and 2.1% from price. Emerging markets grew 6.2%, led by Asia/AMET/RUB, which saw broad-based geographic growth, whilst developed markets were weaker.

In the second quarter, we estimate the 2018 truckers' strike in Brazil increased USG by 100bps. Second quarter growth was suppressed by around 50bps due to weak ice cream performance; a result of poorer weather, particularly in Europe following two years of very strong summers. 80bps of Argentina price growth in the quarter was excluded from USG due to hyperinflationary status.

Turnover in the first half decreased 0.9% driven by the sale of the spreads business, partially offset by a currency benefit of 1.1%.

Underlying operating margin improved by 50bps. Gross margin was up 30bps, helped by efficiencies from our 5-S programme. Overheads had an adverse impact on underlying operating margin of 10bps. Our change programmes have helped to address stranded costs following the disposal of spreads and we continue to invest in the ongoing digital transformation of our business. Brand and marketing investment decreased compared to the prior year, as we continued to deliver zero based budgeting savings ahead of target, with an increased focus on digital spend. More than two thirds of savings have been reinvested, largely behind innovations and new brand launches.

Beauty & Personal Care

Underlying sales grew 3.3%, with 1.7% from volume and 1.6% from price.

Deodorants performed well, supported by our Rexona Clinical and Dove Zero aluminium ranges, alongside the extension of Love, Beauty & Planet. New formats continued to drive sales in skin cleansing, including the incremental launch of Dove bath bombs as well as Dove foaming handwash. Good performance in skin care was supported by on-trend innovations including Pond's Instabright glow cream. Hair care saw only modest growth for the first half, with a challenging second quarter particularly in the US. Oral care returned to growth in the second quarter, helped by innovations such as Closeup natural whitening toothpaste and Signal White Now. Our prestige brands, including Dermalogica, Hourglass, and REN, saw double digit growth overall, and we announced the acquisitions of Garancia and Tatcha, which are not yet included in USG.

Underlying operating margin in Beauty & Personal Care increased by 100bps, driven by efficiency programmes in brand and marketing investment.

Home Care

Underlying sales grew 7.4%, with 2.8% from volume and 4.5% from price.

Fabric solutions performed strongly, benefiting from premiumisation and the execution of our strategy to move consumers into products with additional consumer benefits, including Omo Perfect Wash in Brazil. China saw good performance from the relaunch of Omo while in India Surf Excel continued to grow double digit. Seventh Generation continues to be rolled out in Europe and North Asia, building on the naturals trend. Home and hygiene grew well, supported by double digit growth from Sunlight, and we launched innovations such as the Cif Cleaner Choices range with natural cleaning ingredients. In Indonesia we used our Home Care brands to run the mosque cleaning programme during Ramadan, an example of purpose-led growth. Good growth in fabric sensations was supported by the launch of a redesigned Comfort core range, focusing on clothes care, as well as a natural variants range. The life essentials category was flat.

Underlying operating margin in Home Care increased by 120bps, with improvements in gross margin, as well as efficiencies in brand and marketing investment and overheads.

Foods & Refreshment

Underlying sales grew 1.3%, with (0.1)% from volume and 1.4% from price.

In tea, sales declined with volumes impacted by weak consumer demand in developed markets. This was partially offset by black tea in emerging markets and our fruit, herbal and green tea ranges, including Pukka's premium herbal offering. Sales in dressings were flat with volumes slightly down as competitive intensity remained high. Despite poorer weather in the second quarter compared to the previous two years, ice cream grew slightly over the half. We saw good ice cream performance in Asia/AMET/RUB and from innovations such as Magnum white chocolate and cookies. Savoury performance was helped by the launch of new snack pot variants meeting the trend towards convenience. The introduction of Hellmann's burger and spicy dipping sauces continue to broaden the brand beyond core mayonnaise, and Sir Kensington's performed well.

Underlying operating margin in Foods & Refreshment decreased by 40bps, as a result of an adverse impact on overheads related to the disposal of our spreads business.

FIRST HALF OPERATIONAL REVIEW: GEOGRAPHICAL AREA

	Second Quarter 2019			First Half 2019
										Change in
	Turnover	USG(a)	UVG	UPG(a)	Turnover	USG(a)	UVG	UPG (a)		underlying
		operating
(unaudited)										margin(b)
	€bn	%	%	%	€bn	%	%	%		bps
Unilever	13.7	3.5	1.2	2.3	26.1	3.3	1.2	2.1		50
Asia/AMET/RUB	6.3	6.3	2.5	3.7	12.2	6.2	2.9	3.2		70
The Americas	4.2	3.7	1.3	2.3	8.1	2.1	(0.1)	2.2		80
Europe	3.2	(1.6)	(1.1)	(0.5)	5.8	(0.6)	(0.2)	(0.4)		(40)
	Second Quarter 2019			First Half 2019
(unaudited)	Turnover	USG(a)	UVG	UPG(a)	Turnover	USG(a)	UVG	UPG(a)

	€bn	%	%	%	€bn	%	%	%
Developed markets	5.6	(1.6)	(1.5)	(0.1)	10.4	(0.7)	(0.6)	(0.1)
Emerging markets	8.1	7.4	3.3	4.0	15.7	6.2	2.5	3.6
North America	2.4	(0.2)	(1.2)	1.0	4.6	0.1	(0.5)	0.7
Latin America	1.8	9.3	5.0	4.1	3.5	4.9	0.5	4.4

1. Wherever referenced in this announcement, USG and UPG do not include any price growth in Venezuela and Argentina. See pages 6 to 7 on non-GAAP measures for further details.
2. 2018 numbers have been restated following adoption of IFRS 16. See note 1 and note 9 for more details.

Asia/AMET/RUB

Underlying sales grew 6.2% with 2.9% from volume and 3.2% from price. South East Asia grew well with accelerating growth in Indonesia, the Philippines and Vietnam helped by locally relevant innovations delivered through our C4G organisation. Turkey continued to see good volume growth despite double digit price growth in response to the devaluation of the Lira. Sales in China were up high-single digit led by premium innovation and strong growth in e-commerce. Growth in South Asia was good, where we continue to outperform in moderating markets. Africa returned to high single digit growth in the second quarter despite trade disruption surrounding the elections in Nigeria and the introduction of a new currency in Zimbabwe.

Underlying operating margin was up 70bps driven by brand and marketing investment efficiencies and improvement in gross margin.

The Americas

Latin America grew 4.9% against a weak comparator due to the Brazil truckers' strike in 2018. In Brazil the consumer environment continued to normalise and our business was helped by innovations including Rexona Clinical Protection. In Argentina, which continues to be hyperinflationary, volumes declined 9.1% in markets that declined close to 20%. All price growth continues to be excluded for Argentina.

Underlying sales growth in North America was flat with price growth of 0.7% but volume down 0.5%. In Beauty & Personal Care, good momentum in deodorants was offset by weak performance in hair. Foods continued to be impacted by high levels of promotional activity, whilst ice cream declined slightly. Home Care delivered strong growth as Seventh Generation performed well and Love, Home & Planet, which builds on the success on Love Beauty & Planet, had a promising start.

Underlying operating margin was up 80bps led by brand and marketing investment efficiencies and a small improvement in gross margin.

Europe

Underlying sales declined 0.6% with volumes down 0.2% and price down 0.4%. Our European business faced challenges from continued price deflation and adverse weather in the second quarter. Our e-commerce and discounters channels grew strongly, helped by our channel-focused divisional strategies. The broader retail environment remains difficult, particularly in Germany where we saw significant decline. Southern Europe performed strongly, helped by growth in Home Care and Foods & Refreshment. Central and Eastern Europe continued to grow well, with good performance in all categories, particularly fabric sensations.

Underlying operating margin was down 40bps, impacted by the sale of spreads and a decline in gross margin due to negative pricing.

ADDITIONAL COMMENTARY ON THE FINANCIAL STATEMENTS - FIRST HALF 2019

Restatement of 2018 balances

2018 numbers have been restated following adoption of IFRS 16. More detail is provided in note 1 and note 9 on page 15 and pages 21 to 24 of the financial statements.

Finance costs and tax

Net finance costs increased by €63 million to €351 million in the first half of 2019. The increase was due to exchange rate losses on cash balances in Zimbabwe of €40 million following the significant devaluation of the new Zimbabwe dollar as well as higher cost of debt.

The effective tax rate was 26.8% versus 25.9% in the same period last year, primarily due to a non-taxable credit in acquisition and disposal related costs in 2018. The effective tax rate on underlying operating profit was 26.2% compared to 26.5% in the prior year.

Joint ventures, associates and other income from non-current investments

Net profit from joint ventures and associates was €85 million, compared to €83 million in the prior year. Income from non-current investments was €2 million, down from €5 million in 2018.

Earnings per share

Underlying earnings per share increased by 5.0% to €1.27. The adverse impact of the spreads disposal was offset by the 2018 share buy back programme. Improvement in underlying operating margin and a positive currency impact were partially offset by the adverse finance costs. Underlying earnings per share at constant rates increased by 3.0%. These underlying measures exclude the post-tax impact of business disposals, acquisition and disposal-related costs, restructuring costs, impairments, one-off items within operating profit and any other significant unusual items within net profit but not operating profit.

Diluted earnings per share increased 3.4% at current rates and 2.3% at constant rates. Improvement in underlying EPS was partially offset by a credit to acquisitions and disposal related costs recognised in the prior year as a result of early settlement of the contingent consideration for Blueair.

Free cash flow

Free cash flow in the first half of 2019 was €1.5 billion, down from €2.0 billion in the first half of 2018. This included lost underlying operating profit following the disposal of spreads as well as an adverse impact from tax paid relating to profit on the disposal, totalling €0.5 billion.

Net debt

Closing net debt increased to €24.2 billion compared with €22.6 billion at 31 December 2018. The increase was driven by dividends paid, acquisitions and a negative currency impact, partly reduced by free cash flow delivery.

Pensions

Pension liabilities net of assets reduced to €0.5 billion at the end of June 2019 versus €0.9 billion as at 31 December 2018. The decrease was driven by good investment returns which were partially offset by higher liabilities as discount rates continued to decrease.

Finance and liquidity

On 4 June 2019 we announced the issuance of €650 million 1.5% fixed rate notes due June 2039 and £500 million 1.5% fixed rated notes due July 2026.

In February 2019 $750 million 4.8% bonds matured and were repaid. In March 2019, $750 million 2.2% fixed rate notes matured and were repaid.

COMPETITION INVESTIGATIONS

As previously disclosed, along with other consumer products companies and retail customers, Unilever is involved in a number of ongoing investigations and cases by national competition authorities, including those within Italy, Greece and South Africa. These proceedings and investigations are at various stages and concern a variety of product markets. Where appropriate, provisions are made and contingent liabilities disclosed in relation to such matters.

Ongoing compliance with competition laws is of key importance to Unilever. It is Unilever's policy to co-operate fully with competition authorities whenever questions or issues arise. In addition the Group continues to reinforce and enhance its internal competition law training and compliance programme on an ongoing basis.

NON-GAAP MEASURES

Certain discussions and analyses set out in this announcement include measures which are not defined by generally accepted accounting principles (GAAP) such as IFRS. We believe this information, along with comparable GAAP measures, is useful to investors because it provides a basis for measuring our operating performance, ability to retire debt and invest in new business opportunities. Our management uses these financial measures, along with the most directly comparable GAAP financial measures, in evaluating our operating performance and value creation. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP. Wherever appropriate and practical, we provide reconciliations to relevant GAAP measures.

Unilever uses 'constant rate', and 'underlying' measures primarily for internal performance analysis and targeting purposes. We present certain items, percentages and movements, using constant exchange rates, which exclude the impact of fluctuations in foreign currency exchange rates. We calculate constant currency values by translating both the current and the prior period local currency amounts using the prior period average exchange rates into euro, except for countries where the impact of consumer price inflation rates has escalated to extreme levels. In these countries, the local currency amounts before the application of IAS 29 are translated into euros using the period closing exchange rate. The table below shows exchange rate movements in our key markets.

		First half average	First half average
		rate in 2019	rate in 2018
Brazilian Real (€1	= BRL)	4.282	4.125
Chinese Yuan (€1	= CNY)	7.659	7.715
Indian Rupee (€1 = INR)	79.149	79.478
Indonesia Rupiah (€1 = IDR)	16046	16663
Philippine Peso (€1 = PHP)	59.010	62.911
UK Pound Sterling (€1 = GBP)	0.873	0.880
US Dollar (€1 = US $)	1.130	1.212

Underlying sales growth (USG)

Underlying Sales Growth (USG) refers to the increase in turnover for the period, excluding any change in turnover resulting from acquisitions, disposals and changes in currency. We believe this measure provides valuable additional information on the underlying sales performance of the business and is a key measure used internally. The impact of acquisitions and disposals is excluded from USG for a period of 12 calendar months from the applicable closing date. Turnover from acquired brands that are launched in countries where they were not previously sold is included in USG as such turnover is more attributable to our existing sales and distribution network than the acquisition itself. Also excluded is the impact of price growth from countries where the impact of consumer price inflation (CPI) rates has escalated to extreme levels.

There are two countries where we have determined extreme levels of CPI exist. The first is Venezuela where in Q4 2017 inflation rates exceeded 1,000% and management considered that the situation would persist for some time. Consequently, price growth in Venezuela has been excluded from USG since Q4 2017. The second is Argentina, which from Q3 2018 has been accounted for in accordance with IAS 29, and thus from Q3 2018 Argentina price growth is excluded from USG. The adjustment made at Group level as a result of these two exclusions was a reduction in price growth of 1.3% for the second quarter and 1.2% for the first half. This treatment for both countries will be kept under regular review.

The reconciliation of changes in the GAAP measure turnover to USG is provided in notes 3 and 4.

Underlying volume growth (UVG)

Underlying volume growth (UVG) is part of USG and means, for the applicable period, the increase in turnover in such period calculated as the sum of (i) the increase in turnover attributable to the volume of products sold; and (ii) the increase in turnover attributable to the composition of products sold during such period. UVG therefore excludes any impact on USG due to changes in prices. The measures and the related turnover GAAP measure are set out in notes 3 and 4.

Underlying price growth (UPG)

Underlying price growth (UPG) is part of USG and means, for the applicable period, the increase in turnover attributable to changes in prices during the period. UPG therefore excludes the impact to USG due to (i) the volume of products sold; and (ii) the composition of products sold during the period. In determining changes in price we exclude the impact of price growth in Argentina and Venezuela as explained in USG above. The measures and the related turnover GAAP measure are set out in notes 3 and 4.

Free cash flow (FCF)

Within the Unilever Group, free cash flow (FCF) is defined as cash flow from operating activities, less income taxes paid, net capital expenditures and net interest payments. It does not represent residual cash flows entirely available for discretionary purposes; for example, the repayment of principal amounts borrowed is not deducted from FCF. Free cash flow reflects an additional way of viewing our liquidity that we believe is useful to investors because it represents cash flows that could be used for distribution of dividends, repayment of debt or to fund our strategic initiatives, including acquisitions, if any.

The reconciliation of net profit to FCF is as follows:

€ million	First Half

(unaudited)	2019	2018
		Restated(a)
Net profit	3,209	3,229
Taxation	1,145	1,100
Share of net profit of joint ventures/associates and other income
from non-current investments	(87)	(88)
Net monetary gain arising from hyperinflationary economies	(29)	-
Net finance costs	351	288
Operating profit
4,589	4,529
Depreciation, amortisation and impairment
965	1,228
Changes in working capital	(1,888)	(1,697)
Pensions and similar obligations less payments	(94)	(76)
Provisions less payments	47	(61)
Elimination of (profits)/losses on disposals	(36)	16
Non-cash charge for share-based compensation	95	115
Other adjustments	23	(283)
Cash flow from operating activities
3,701	3,771
Income tax paid
(1,309)	(1,081)
Net capital expenditure	(558)	(495)
Net interest paid	(291)	(194)
Free cash flow	1,543	2,001
Total net cash flow (used in)/from investing activities	(716)	(1,441)
Total net cash flow (used in)/from financing activities	(856)	(679)

(a) Restated following adoption of IFRS 16. Refer note 1 and note 9.

Non-underlying items

Several non-GAAP measures are adjusted to exclude items defined as non-underlying due to their nature and/or frequency of occurrence.

• Non-underlyingitems within operating profit are: gains or losses on business disposals, acquisition and disposal related costs, restructuring costs, impairments and other significant one-off items within operating profit
• Non-underlyingitems not in operating profit but within net profit are: significant and unusual items in net finance cost, monetary gain/(loss) arising from hyperinflationary economies, share of profit/(loss) of joint ventures and associates and taxation
• Non-underlyingitems are both non-underlying items within operating profit and those non-underlying items not in operating profit but within net profit

Underlying operating profit (UOP) and underlying operating margin (UOM)

Underlying operating profit and underlying operating margin mean operating profit and operating margin before the impact of non-underlying items within operating profit. Underlying operating profit represents our measure of segment profit or loss as it is the primary measure used for making decisions about allocating resources and assessing performance of the segments. The reconciliation of operating profit to underlying operating profit is as follows:

€ million	First Half
(unaudited)	2019	2018
		Restated(a)
Operating profit	4,589	4,529
Non-underlying items within operating profit (see note 2)	465	438
Underlying operating profit	5,054	4,967
Turnover	26,126	26,352
Operating margin (%)	17.6	17.2
Underlying operating margin (%)	19.3	18.8

(a) Restated following adoption of IFRS 16. Refer note 1 and note 9.

Underlying earnings per share (EPS)

Underlying earnings per share (underlying EPS) is calculated as underlying profit attributable to shareholders' equity divided by the diluted combined average number of share units. In calculating underlying profit attributable to shareholders' equity, net profit attributable to shareholders' equity is adjusted to eliminate the post-tax impact of non-underlying items. This measure reflects the underlying earnings for each share unit of the Group. Refer to note 6 on page 19 for reconciliation of net profit attributable to shareholders' equity to underlying profit attributable to shareholders equity.

Underlying effective tax rate

The underlying effective tax rate is calculated by dividing taxation excluding the tax impact of non-underlying items by profit before tax excluding the impact of non-underlying items and share of net profit/(loss) of joint ventures and associates. This measure reflects the underlying tax rate in relation to profit before tax