Good all-round performance with accelerated value creation
Today, Unilever released its results for the full-year 2017.
- Strong progress towards the strategic objectives set out for 2020
- Underlying sales growth excluding spreads 3.5%, with price up 2.4% and volume up 1.0%
- Underlying operating margin up 110bps, reflecting strong savings delivery
- Underlying earnings per share up 10.7%
- Free cash flow up €0.6 billion to €5.4 billion, including a one-off payment of €0.6 billion to pension funds
- Net profit increased 16.9% to €6.5 billion
Comment from CEO Paul Polman
Commenting on the results, Unilever CEO Paul Polman says: “We have delivered a good all-round performance with competitive growth, including an innovation-led improvement in volumes in the fourth quarter, and substantially increased margin, earnings and cash flow. This puts us well on track to deliver towards the strategic objectives set out for 2020 and demonstrates the progress we have made in transforming Unilever into a more resilient and more agile business.
“2017 has once more been a year of major change for Unilever with the acceleration of the ‘Connected 4 Growth’ programme, that we announced in 2016. With the implementation of a more agile, consumer-facing organisation, we are seeing quality and speed of innovation further improve. At the same time, we have significantly stepped up the delivery from our savings programmes and continued the evolution of our portfolio with 11 acquisitions announced and completed in the year as well as the announcement of the disposal of the spreads business. All of this is making Unilever increasingly competitive in light of fast-changing consumer and technology trends.
“Our priorities for 2018 are to grow volumes ahead of our markets, maintain strong delivery from our savings programmes and complete the integration of Foods & Refreshment, as well as the exit from spreads. We expect this will translate into another year of underlying sales growth in the 3% – 5% range, and an improvement in underlying operating margin and cash flow, that keeps us on track for the 2020 targets.”
Overall market conditions remained challenging in 2017 with volumes in the markets in which we operate growing at less than 1%. We did, however, see some early signs of improving conditions in emerging markets.
Unilever overall performance
Underlying sales growth (USG), excluding spreads, was 3.5% with growth in all our divisions. USG including spreads was 3.1%. Turnover increased 1.9% to €53.7 billion, which included an adverse currency impact of (2.1)% and 0.9% from acquisitions net of disposals. The step-up in volume growth in the fourth quarter to 3.2%, with 4.2% from emerging markets, included benefits from our strengthened innovation plan, and was supported by increased re-investment of savings, as well as a softer prior year comparator.
Gross margin improved by 40bps to 43.1%, primarily driven by both positive mix and the roll-out of the ‘5-S’ savings programme that more than offset commodity cost headwinds. The absolute level of brand and marketing investment was flat in local currencies versus the prior year, as savings in advertising production were re-invested in increased media spend, particularly in the second half of the year. As a percentage of turnover, brand and marketing investment was down 60bps. Overheads reduced by 10bps, driven by a further reduction in the underlying cost base partially offset by investment in capabilities including new business models and e-commerce. As a result, underlying operating margin improved by 110bps to 17.5%. Operating margin was 16.5%, up 170bps.
Update on 2020 programme
We are making strong progress towards the objectives we have set out:
The Country Category Business Teams (CCBTs) are fully in place and helping to make our innovation pipeline stronger. They are beginning to enable us to roll out global innovations faster, and be more agile in responding to local trends. The integration of Foods & Refreshment into a single business, based in the Netherlands and operational since 1 January 2018, is well under way.
The savings programmes are delivering faster than expected, with savings of more than €2 billion in 2017. This puts us well on track towards our savings target of €6 billion, and a targeted underlying operating margin of 20% by 2020. The ‘5-S’ gross margin improvement programme is being rolled out from Home Care into all divisions and realising savings across the supply chain. Zero based budgeting (ZBB) is improving our productivity in brand and marketing investment as we reduce the cost of advertising production and increase investment in media channels. ZBB is also eliminating waste in those areas where we have over-saturated traditional media channels, as well as reducing overheads.
We are evolving the portfolio at an accelerated pace to ensure we have the platforms in place for long-term growth in attractive market segments and sales channels. In 2017, we have undertaken a number of bolt-on acquisitions, most significantly Carver skin care in South Korea. We acquired Sundial Brands in the US and a 60% stake in Europe & Asia Commercial Company Ltd to build our operations in Myanmar. Other businesses acquired include Mãe Terra organic food in Brazil and Pukka Herbs organic herbal tea in the UK. We signed an agreement to purchase Quala home and beauty & personal care brands in Latin America and expect this transaction to close in the first quarter of 2018. We agreed to sell our global spreads business which we expect to exit around the middle of 2018.
Reflecting the acquisitions and a €5 billion share buy-back programme in 2017, we have reached a net debt/EBITDA ratio of 1.9x at year-end, close to our targeted leverage level of 2.0x. It is our intention to return the after-tax proceeds realised with the spreads disposal to shareholders, unless more value-creating acquisition alternatives arise.
With the purchase of the preference shares in Unilever N.V. we have also taken important steps to simplify our capital structure and improve corporate governance. The review of the dual-headed legal structure has progressed well and we expect to conclude it shortly.
Beauty & Personal Care
Beauty & Personal Care continued to grow the core with a strong set of innovations, that included five new brand launches, while expanding the portfolio organically and through acquisitions in attractive segments and channels. This led to a broad-based improvement in volumes in the fourth quarter but growth for the full year was adversely affected by challenging market and competitive conditions, particularly in Brazil and Indonesia.
Skin cleansing delivered good growth, helped by Dove shower foam, a new premium format that delivers an improved sensorial experience, and the roll-out of Baby Dove to 26 countries. Lifebuoy with Activ Silver formula for enhanced germ-protection was rolled out across Asia, while Hijab Fresh, a new brand that provides a solution to the specific needs of the Muslim consumer, performed well.
Growth in oral care picked up, supported by beauty-inspired innovations such as the Signal White Now Care Correction range, and the launch of Closeup in Argentina.
In hair care, volume-led growth was driven by Sunsilk, helped by the global expansion into natural propositions, and by local launches such as Lux Botanifique in Japan.
Deodorants grew competitively but growth was lower than in recent years. Dermalogica and Kate Somerville performed well in the prestige business.
Dollar Shave Club and the acquisitions in 2017, Living Proof and Hourglass, grew at double-digit rates and will all contribute to underlying sales growth from twelve months after completion.
Home Care delivered another year of good growth and margin improvement. This was achieved by continued market development and benefit-led innovations that address emerging needs.
In laundry, growth was driven by strong performances of the fabric conditioner Comfort in Asia and Europe, and the value brand Brilhante in Latin America. The roll-out of Surf into Central and Eastern Europe and Omo into Iran performed well. In the UK, Persil Powergems, with 100% active ingredients delivering superior stain-removal and intense freshness, had a good start.
In household care, Domestos demonstrated double-digit growth, helped by the roll-out of toilet blocks, which have reached 32 countries, and Cif’s premium sprays with improved formulation are now in more than 20 countries. The acquisition of Seventh Generation with its natural proposition performed well and started to contribute to underlying sales growth during the fourth quarter.
Foods & Refreshment
Foods & Refreshment continued to modernise the portfolio through innovations and acquisitions while building its presence in emerging markets and sustaining a strong performance in food service channels.
Growth in savoury, which was above the Group average, was driven by good performances of Knorr, which responded well to key consumer needs such as naturalness and time-saving cooking products, and local brands including Bango and Pot Noodle.
In dressings, Hellmann’s relaunched the brand with stronger natural claims in 25 markets while the organic variants have been rolled out from North America into Europe. However, volume growth was moderated by increased promotional intensity during the year, particularly in North America.
In spreads, the rate of decline slowed during the year, helped by good performances of innovations such as margarines with speciality oils and the roll-out of the dairy-free variants.
Refreshment had another good year despite increased new entrant competitive activity, particularly in North America.
Innovations behind our premium ice cream brands performed well. These included Magnum pints that deliver the ultimate chocolate and ice cream experience in a tub and Magnum double raspberry and coconut variants, which contributed to double-digit growth at brand level. Breyers delights’ low-calorie, high-protein variants, that meet the growing consumer demand for these propositions, had a promising start.
Leaf tea showed good growth as we are increasingly seeing the benefits of our innovations in speciality and premium tea segments. Lipton is successfully extending its presence in the faster-growing green and matcha segments. Brooke Bond grew strongly, helping Unilever to achieve market leadership in the tea category in India. T2 continued to show double-digit growth while Pure Leaf was introduced to Canada and the UK after the successful launch in the US.
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