31 July, 2008 - Unilever reported underlying sales growth was 6.8% in the second quarter, taking the half year rate to 7.0%. Prices increased by 7.4% in the second quarter and by 6.1% in the first half year.
Financial Highlights of the Half Year
• Underlying sales growth of 7.0% in the first half year.
• Operating margin of 16.0% in the first half year, with an underlying improvement of 0.4 percentage points.
• Earnings per share up by 6%, or 12% at constant exchange rates. The first quarter benefited from disposal
profits, while the second quarter was affected by higher restructuring charges and a particularly low tax rate last
year.
Operational Highlights
• Broad-based growth in every category.
• Continued strong growth in Developing and Emerging (D&E) countries from both volume and pricing.
• Price-driven growth in Western Europe and North America.
• Cost increases recovered through determined pricing action and accelerating savings. Efficiency programmes on
track to deliver €1 billion of savings this year.
• Further significant progress with disposal programme, including Bertolli olive oil and North American laundry.
Group Chief Executive Patrick Cescau said: “Our performance in the first half year has been good in what has been a challenging environment. We have delivered 7% underlying sales growth and an underlying improvement in profitability while maintaining competitiveness. The changes already implemented in the business have made us nimbler and better able to respond to the market conditions. We are doing so against our clear priorities of maintaining competitiveness,
improving margins and investing selectively to gain market share.
"Looking to the future, our strategy leverages our strong brands, broad geographic footprint and products that meet everyday needs across a wide range of price points. Our innovation programme focuses on opportunities in health and wellness, the use of superior technology, and rapid deployment into new markets. This continues to be the best route to long-term value creation.
"For this year we confirm our outlook for delivering growth ahead of our 3-5% target range, with an underlying improvement in operating margin.”
Summary Of Business Performance For The Second Quarter And First Half Year
Underlying sales growth was 6.8% in the second quarter, taking the half year rate to 7.0%. Prices increased by 7.4% in the second quarter and by 6.1% in the first half year.
Europe grew by 2.3% in both the quarter and the half year. All of the growth has come from pricing, with volumes 2.9% lower in the second quarter. The lower volumes largely reflect weaker ice cream sales and the expected reversal of the additional sales at the end of the first quarter ahead of price increases and systems implementations.
The Americas has sustained its momentum with growth of 5.7% in the first half year. This was achieved against a strong comparator which included the impact of additional sales ahead of the systems change in the US in June last year. In Latin America growth accelerated in both value and volume including a good performance in Brazil. Growth in Asia Africa picked up further to 15.1% in the second quarter and is broad-based across countries with double-digit increases almost everywhere. In addition to pricing, volume growth was robust at 4.1% in the second quarter.
At a global level, all categories grew by more than 5% in the first half year.
Advertising investment behind our brands was increased by some €100 million at constant rates of exchange in the first half year. With the benefit of higher sales, media efficiency programmes and fewer promotions, A&P as a percentage of sales was 0.7 points lower in the second quarter and 0.4 points lower in the first half year.
Commodity costs increased by around €600 million in the second quarter and by around €1 billion in the first half.
This is equivalent to 5.5 percentage points of sales in the quarter and 4.8 percentage points in the first half. Both price increases and savings from cost reduction programmes accelerated in the second quarter. As a result we were able to deliver an underlying improvement in operating margin of 0.5 percentage points in the quarter, taking the first half year improvement to 0.4 percentage points.
Financial Commentary
Turnover
Underlying sales growth was 6.8% in the second quarter and 7.0% in the first half year. The Euro has strengthened against most currencies and this, together with a small net impact of acquisitions and disposals, led to turnover being 1.4% lower in the second quarter and 0.5% lower in the first six months.
Operating profit
Operating profit was 5% lower than last year in the second quarter because of the strengthening of the Euro and a higher level of restructuring charges. The operating margin at 13.2% was 0.5 percentage points below last year. Before the impact of restructuring and disposals there was an underlying improvement of 0.5 percentage points.
For the half year, operating profit was 16% higher than last year and the operating margin of 16.0% was 2.3 percentage points higher, both being boosted by profits on disposals in the first quarter. Before restructuring and disposals there was an underlying improvement in operating margin of 0.4 percentage points.
Finance costs and tax
Finance costs of net borrowings were 16% lower than last year in the quarter and in line with last year for the first six months.
The effective tax rate was 28% in the second quarter and 25% in the first half year. This compares with 19% and 20% in the second quarter and first half of last year respectively, both of which included benefits from the favourable settlement of tax audits. The underlying tax rate, before restructuring and disposals, was 26% in the first half of this year. For the full year we expect the tax rate on this basis to be around 25%.
Joint ventures, associates and other income from non-current investments
Share of net profit from joint ventures and associates and other income from non-current investments for the second quarter was in line with last year at €39 million. For the first half year these contributed €92 million, which was €47 million below last year as a result of a lower level of one-time gains in the first quarter.
Net profit and earnings per share
Net profit was 19% lower than last year in the second quarter, reflecting higher restructuring costs, the low tax rate in
the same quarter last year and the stronger euro.
Net profit was 5% higher in the first six months with a benefit from profits on disposals, but a negative impact from the stronger euro.
Earnings per share for the first six months were €0.79 which included a net gain of €0.07 from restructuring and disposals. This compares with €0.75 in the first six months of last year which included a negligible net impact from
restructuring and disposals and benefited from the particularly low tax rate.
Share buy-backs
By the end of June we had bought back 53.6 million shares at a total purchase price of €1.1 billion, as part of the planned 2008 share buy-back of at least €1.5 billion.
Cash flow
Net cash flow from operating activities was €0.7 billion lower than last year. This was entirely due to a build-up of working capital in the first half year. Part of this came from the effect of commodity price inflation. In addition there were a number of temporary factors including the planned build-up of stocks during the change programme and calendar effects. The largely one-off nature of these, together with an intensified programme for working capital management across the business, is expected to result in a much improved cash flow in the second half year.
Restructuring costs were slightly higher than in the first half of 2007, but this was more than offset by lower cash contributions to pension funds and favourable tax rebates. Net capital expenditure was also slightly higher than last year.
Balance sheet
Working capital has increased from its normal seasonal low point at the start of the year. The increase has been heightened by the factors referred to above in the commentary on cash flow movements. The overall funding position of the Group’s pension arrangements improved slightly with net liabilities for all schemes of €1.0 billion at the end of the half year, down from €1.1 billion at the end of 2007. Assets have reduced by €2.1 billion due to the fall in market values and the appreciation of the euro against the currencies of investments. Liabilities fell by €2.2 billion, mainly due to the impact of higher discount rates, net of higher inflation assumptions and the strengthening of the euro.