Coronavirus Update

Unilever Plc - Half-Year Report

This content has been sourced from: https://www.investegate.co.uk/unilever-plc--ulvr-/...

Performance highlights (unaudited)

Underlying performance

GAAP measures

 

 

vs 2019

 

 

vs 2019

First Half

 

 

 

 

 

Underlying sales growth (USG)

 

(0.1)%

Turnover

€25.7bn

(1.6)%

Underlying operating margin

19.8%

50bps

Operating margin

18.2%

60bps

Underlying earnings per share

€1.35

6.4%

Diluted earnings per share

€1.25

9.2%

Second Quarter

 

 

 

 

 

USG

 

(0.3)%

Turnover

€13.3bn

(3.1)%

Quarterly dividend payable in September 2020

€0.4104 per share

             

First half highlights

· Underlying sales declined 0.1% with volume declining 0.3% and price growth of 0.2%

· Turnover decreased 1.6% including a positive impact of 1.1% from acquisitions net of disposals and negative impact of 2.5% from currency

· Underlying operating profit excluding currency increased 3.8%, before a negative impact of 3.2% from currency

· Underlying earnings per share up 6.4%, including a negative impact of 3.7% from currency

· Free cash flow up €1.3 billion to €2.9 billion, reflecting our objective to protect cash during the crisis

· Quarterly shareholder dividend maintained at €0.4104 per share

· Completed acquisitions of Horlicks brand from GSK, enhancing presence in healthy nutrition

· Announced plans to unify the Group legal structure under a single parent company

 

Alan Jope: Chief Executive Officer statement

 

"Performance during the first half has shown the true strength of Unilever. We have demonstrated the resilience of the business - in our portfolio, in a continued step-up in operational excellence, and in our financial position - and we have unlocked new levels of agility in responding to unprecedented fluctuations in demand.

 

We have also taken action to strengthen the strategic future of the company by announcing proposals to unify our dual-headed legal structure, progressing the strategic review of our global tea business and making new commitments to help protect the climate and regenerate nature.

 

From the start of the Covid-19 crisis, we have been guided by clear priorities in line with our multi-stakeholder business model to protect our people, safeguard supply, respond to new patterns of consumer demand, preserve cash, and support our communities.

 

Our focus for the rest of 2020 will continue to be volume led competitive growth, absolute profit and cash delivery as this is the best way to maximise shareholder value.

 

I would like to thank every member of the Unilever team for the outstanding commitment they have shown in the most difficult of circumstances."

 

 

23 July 2020

 

FIRST HALF OPERATIONAL REVIEW: DIVISIONS

 

 

Second Quarter 2020

First Half 2020

 

 

 

(unaudited)

Turnover

USG

UVG

UPG

Turnover

USG

UVG

UPG

Change in underlying operating margin

 

€bn

%

%

%

€bn

%

%

%

bps

Unilever

13.3

(0.3)

(0.8)

0.5

25.7

(0.1)

(0.3)

0.2

50

Beauty & Personal Care

5.3

(0.9)

(0.5)

(0.4)

10.6

(0.3)

0.1

(0.4)

50

Home Care

2.6

4.0

3.2

0.8

5.3

3.2

2.9

0.3

130

Foods & Refreshment

5.4

(1.8)

(3.2)

1.4

9.8

(1.7)

(2.5)

0.8

(20)

 

Our markets: The spread of Covid-19, combined with the lock-downs and restrictions that have been implemented in many countries, has led to significant changes in the operating environment in our markets. Consumer demand patterns have been impacted by channel closures, more time spent in the home and the critical importance of hygiene.

China was the first of our markets to be impacted by Covid-19, entering lock-down in January. China slowed significantly during the lock-down period, with some recovery after April as the economy opened back up. In most other major markets, sales patterns in January and February were normal and Covid-19 impacted from March onwards. In North America and parts of Europe there was a positive impact from household stocking in March. Consumption patterns then normalised in the second quarter with heightened levels of demand for hygiene and in home food products.   Market growth in India had already been slowing prior to the spread of Covid-19 and the market was further impacted by the introduction of the strict national lock-down at the end of March. This national lock-down continued until early June, when it was followed by further regional lock-downs. Latin America was impacted by Covid-19 later than other major markets, with the effects primarily in the second quarter, exacerbating already challenging conditions in the region.

Unilever overall performance:   Underlying sales declined 0.1% with volumes declining 0.3% and price growth of 0.2%. Developed markets grew 2.4% whilst emerging markets declined 1.9% .

The impact of Covid-19 on our business in the first half varied widely across our channels and categories. Channel closures as a result of lock-downs in our markets negatively impacted our food service, out of home ice cream and Prestige businesses. Food service declined by nearly 40% and out of home ice cream declined by nearly 30%. Shoppers moved from offline to online channels, driving e-commerce growth of 49% .

As people spent more time in their homes, we saw growth in home consumption of foods, ice cream and tea. It also meant that consumers had fewer personal care occasions from going to work or socialising, and we saw a decline in our personal care business, except for hygiene products. The effectiveness of good hygiene practices against the spread of Covid-19 increased demand for our hand and home hygiene products, which each grew double digits. Consumers eating and cleaning more at home, and focusing more on hand hygiene, led to underlying sales growth in North America of 9.5% in the second quarter, despite a negative impact of 3.7% from food solutions and Prestige channel closures.

The lock-downs introduced in our markets during the first half varied in severity, with some having a more significant impact on the supply and availability of goods, particularly those in India and China. China entered lock-down in January and declined mid-teens during the first quarter. The market re-opened from April, and China returned to mid-single digit growth in the second quarter. Growth in India was impacted by the lock-down implemented from March.

Turnover decreased 1.6%. There was a positive impact of 1.1% from acquisitions net of disposals and a negative impact of 2.5% from currency.

Underlying operating profit was €5.1 billion, an increase of 3.8% excluding a negative impact from currency of 3.2%. Underlying operating margin improved by 50bps. As consumer habits and the status of lock-downs have been changing during this period, we have been quick to adapt and reallocate our brand and marketing investment week by week. In response to lock-downs in our markets, we reduced spend in some channels and geographies while maintaining investment in growth opportunities. This, combined with a deflationary environment in media rates, led to a reduction in brand and marketing investment by 100bps during the period. In the second half of the year, we expect to see higher brand and marketing investment, as lock-downs ease and we support brand campaigns and product innovations tailored to the new environment. Gross margin reduced by 30bps driven by costs to adapt and run our supply chain in response to Covid-19, ensuring the safety and continuity of our operations, as well as an adverse mix effect. Overheads increased by 20bps, including an adverse currency mix.

We delivered free cash flow of €2.9 billion, an increase of €1.3 billion. The increase was driven by favourable working capital movements, reduced capital expenditure and lower cash tax paid, primarily a result of higher tax on disposals in the prior year relating to the disposal of the spreads business.

Covid-19 response and support measures: Unilever has put in place a wide-ranging set of measures to support global and national efforts to tackle the Covid-19 pandemic.

In our own operations, strict protocols for hygiene and physical distancing are in place for Unilever's sourcing units and distribution centres. Unilever's office-based employees have been working from home since March, with some limited reopening of office workplaces in selected countries, where stringent requirements have been met.

We are supporting global efforts to tackle Covid-19, contributing €100 million through donations of soap, sanitiser, bleach and food. We are also working in partnership with others, including a programme to reach up to a billion people globally with the UK Department for International Development to urgently tackle the spread of the disease through raising hygiene awareness and changing behaviour. We have also made available up to €500 million of cash flow relief for our most vulnerable small and medium sized suppliers, though so far the levels of uptake have been low.

Unilever's financial strength remains robust and we have not sought Covid-19 related financial support from any governments.

Strategic review of tea: In January Unilever announced a strategic review of its global tea business, which includes leading brands such as Lipton, Brooke Bond and PG Tips.

This review has assessed a full range of options. We will retain the tea businesses in India and Indonesia and the partnership interests in the ready-to-drink tea joint ventures.

The balance of Unilever's tea brands and geographies and all tea estates have an exciting future, and this potential can best be achieved as a separate entity. A process will now begin to implement the separation, which is expected to conclude by the end of 2021.

The tea business that will be separated generated revenues of €2 billion in 2019.

Recent acquisitions: During the second quarter, we completed the acquisitions of the health food drinks portfolio of GlaxoSmithKline in India, Bangladesh and 20 other predominantly Asian markets. Acquiring the iconic brands Horlicks and Boost is in line with Unilever's strategy to enhance its presence in healthy nutrition.

Beauty & Personal Care

Beauty & Personal Care underlying sales declined 0.3%, with volume growth of 0.1% and negative pricing of 0.4%.

Skin cleansing saw mid-teens volume-led growth, as we quickly responded to the critical need for hand hygiene to prevent the spread of Covid-19. We rolled out our Lifebuoy hygiene brand to over 50 markets and increased our hand sanitiser capacity by around 600 times across several brands. This helped contribute to double digit growth for Suave. Lock-downs in our markets and reduced personal care occasions amidst restricted living, led to lower demand for skin care, deodorants and hair care, which each saw volume and price decline. The division's largest brand Dove remained resilient, with mid-single digit growth. Our Prestige portfolio was impacted by health and beauty channel closures in many markets. Consumer oral care demand remained robust. However, the category saw negative volumes related to disruption caused by lock-downs in key markets.

Underlying operating margin in Beauty & Personal Care increased by 50bps. Gross margin was lower, with negative pricing and an impact from mix, and overheads increased. This was offset by a reduction in brand and marketing investment through lock-down periods.

 

 

Home Care

Home Care underlying sales grew 3.2%, with 2.9% from volume and positive pricing of 0.3%.

We saw increased consumer demand for household cleaning products, such as Cif surface cleaners, and our home and hygiene brands delivered high-teens underlying sales growth. Working with environmental health experts, Domestos educated consumers about targeted cleaning of high-touch surfaces in the home to help prevent the spread of Covid-19 and saw strong double digit growth. Strict lock-downs in Asia impacted fabric solutions, which declined overall. However future formats such as capsules and liquids continued to grow. Clean and green brand Seventh Generation saw strong double digit, volume-led growth. Fabric sensations declined low-single digit, driven by Brazil and China.

Underlying operating margin in Home Care increased by 130bps, driven by gross margin improvements from savings delivery and lower commodity costs.

Foods & Refreshment

Foods & Refreshment underlying sales declined 1.7%, with volumes down 2.5% and positive pricing of 0.8%.

Lock-downs in most markets led to the closure of out of home channels. This, together with reduced tourism, led to a reduction in out of home ice cream sales of nearly 30%. Similarly, food service sales were down around 40% as hotels, restaurants, cafes and bars closed. At the same time, we saw double digit growth in our retail foods business with Knorr and Hellmann's performing strongly. Sales of ice cream for consumption in home increased by 15% in the first half and by 26% in the second quarter, significantly offsetting the declines in out of home channels. Magnum and Ben and Jerry's continued to grow strongly.

Underlying operating margin in Foods & Refreshment declined by 20bps. Gross margin fell, driven by mix, volume deleverage from out of home channel closures and costs related to Covid-19. This was partially offset by a reduction in brand and marketing investment.

 

 

FIRST HALF OPERATIONAL REVIEW: GEOGRAPHICAL AREA

 

 

 

Second Quarter 2020

First Half 2020

 

 

(unaudited)

Turnover

USG

UVG

UPG

Turnover

USG

UVG

UPG

Change in underlying operating margin

 

€bn

%

%

%

€bn

%

%

%

bps

Unilever

13.3

(0.3)

(0.8)

0.5

25.7

(0.1)

(0.3)

0.2

50

Asia/AMET/RUB

6.1

(1.8)

(2.4)

0.6

11.8

(2.7)

(2.9)

0.2

(40)

The Americas

4.2

5.2

4.2

0.9

8.2

5.0

4.1

0.9

220

Europe

3.0

(4.5)

(4.4)

0.0

5.7

(1.8)

(1.0)

(0.8)

(30)

 

 

Second Quarter 2020

First Half 2020

(unaudited)

Turnover

USG

UVG

UPG

Turnover

USG

UVG

UPG

 

€bn

%

%

%

€bn

%

%

%

Developed markets

5.8

2.1

2.2

(0.1)

10.9

2.4

3.0

(0.6)

Emerging markets

7.5

(1.9)

(2.9)

1.0

14.8

(1.9)

(2.6)

0.7

North America

2.8

9.5

9.5

(0.1)

5.1

7.3

7.7

(0.4)

Latin America

1.4

(0.8)

(3.2)

2.5

3.1

1.9

(0.8)

2.8

 

Asia/AMET/RUB

Underlying sales declined 2.7% with volume decline of 2.9% and positive pricing of 0.2%. Volumes were impacted by lock-downs of varying severity imposed across the region. China, the first market to enter lock-down, starting from January and easing in April, declined in the first quarter. Following the relaxation of restrictions, China returned to mid-single digit growth in the second quarter, although food service remained challenging. India and the Philippines declined, as strict lock-downs were imposed from March, disrupting the flow of goods and negatively impacting consumption of discretionary personal care categories as consumers stayed at home more. Thailand was negatively impacted by reduced tourism. Regional lock-downs were imposed in Indonesia as Covid-19 spread, and while growth was positive over the half year, sales declined in the second quarter.

Underlying operating margin was down 40bps with a reduction in gross margin and higher overheads, driven by investment in our connected stores programme in South Asia, which digitises the retail value chain, and partially offset by lower brand and marketing investment .

The Americas

Underlying sales growth in North America was 7.3% with 7.7% from volume and a decline of 0.4% from price. This growth includes negative impact of around 3% from our food service and prestige businesses which were impacted by channel closures. The decline in these businesses was offset by increased consumption of in home foods and ice cream as well as hygiene products; consumption which was sustained throughout the second quarter. Our supply chain responded quickly to increase capacity for products experiencing a surge in demand.

Latin America grew 1.9% with volumes down 0.8% and positive pricing of 2.8%. The impact of Covid-19 on the region was concentrated in the second half of the period. Mexico saw negative volumes and a sequential decline in the second quarter, more than offsetting growth in the first quarter. Brazil grew low-single digit overall, as a second quarter decline only partially offset growth in the first quarter. Volumes grew in Argentina throughout the first half, driven by in-home foods consumption, against a backdrop of prolonged strict lock-down measures.

Underlying operating margin was up 220bps, with lower brand and marketing investment as well as an improvement in overheads, which was driven by savings programmes in Latin America and volume leverage in North America.

Europe

Underlying sales declined 1.8% with negative volumes of 1.0% and price down 0.8%. Negative volumes in Europe were a result of significant declines in out of home ice cream and food service, as well as reduced demand for personal care products. The most severely impacted countries were Italy and Spain, where increased demand for in home eating and hygiene products only partially offset these negative impacts. The UK grew mid-single digit and Germany low-single digit however, as increased demand for in home eating and hygiene products more than offset declines in the negatively impacted categories.

Underlying operating margin was down 30bps, with a reduction in gross margin due to adverse mix and supply chain costs related to Covid-19 as well as higher overheads, driven by volume deleverage and other one-off items, which were partially offset by lower brand and marketing investment.

 

 

ADDITIONAL COMMENTARY ON THE FINANCIAL STATEMENTS  FIRST HALF 2020

Finance costs and tax

Net finance costs decreased by €102 million to €249 million in the first half of 2020. The decrease was driven by interest on tax credits in Brazil and India and exchange rate losses on cash balances in Zimbabwe in the prior year. Cost of borrowings decreased due to lower hedging costs, partly offset by lower income on cash as interest rates declined. The interest rate on average net debt decreased to 2.0% from 2.8% in the prior year. 

The underlying effective tax rate for H1 2020 was 22.6% compared with 26.2% in H1 2019. The decrease was primarily driven by favourable tax settlements which were agreed during the period, a reduction in the India tax rate and replacement of Indian distribution tax with a dividend withholding tax. The effective tax rate for H1 2020 was 22.3% compared with 26.8% in H1 2019.

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

Net profit from joint ventures and associates was €89 million, compared to €85 million in the prior year. Income from other non-current investments was zero versus €2 million in 2019.

Earnings per share
Constant underlying earnings per share increased by 10.1%. Underlying earnings per share on a current currency basis increased by 6.4% to €1.35, following a negative currency impact of 3.7%. The improvement was driven by reduced tax and net finance costs, as well as higher operating profit. These movements were slightly reduced by an increase in profit attributable to minority interests following the completion of the merger between Unilever's listed subsidiary in India and GlaxoSmithKline's Consumer Healthcare Limited.

Diluted earnings per share increased by 9.2% to €1.25 led by the improvement in underlying EPS.

Free cash flow
Free cash flow in the first half of 2020 was €2.9 billion, up from €1.5 billion in the first half of 2019. The improvement was primarily led by favourable working capital movement as we enhanced our focus on receivables management, as well as reduced capital expenditure following a review of all spend in light of the Covid-19 crisis. In addition, cash tax paid was lower as the prior year included payments relating to the disposal of the spreads business and tax settlements.

Net debt

Closing net debt decreased to €22.8 billion compared with €23.1 billion at 31 December 2019. Increases to net debt due to dividends paid and acquisitions were offset by the free cash flow delivery.

Pensions
Pension liabilities net of assets increased to €0.4 billion at the end of June 2020 versus €0.2 billion as at 31 December 2019. Higher liabilities resulting from falling discount rates were partially offset by positive investment returns on pension assets.

Finance and liquidity
On 25 March 2020 Unilever announced the issuance of €1,000 million 1.25% fixed rate notes due March 2025 and €1,000 million 1.75% fixed rate notes due March 2030.

In April 2020, €300 million 0.0% fixed rate notes matured and were repaid. In May 2020, $800 million 1.8% fixed rate notes and $150 million 5.15% fixed rate notes matured and were repaid .

On 31 December 2019 Unilever had undrawn revolving 364-day bilateral credit facilities in aggregate of $7,865 million with a 364-day term out. As part of the regular annual process, the facilities were renewed in the first half of 2020 (undrawn balance at 30 June 2020 was $7,965 million). The intention is that these facilities will again be renewed in 2021.