City Snapshot: Unilever price hikes drive strong first half growth

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Unilever has posted first half growth of more than 8% due to soaring prices, but margins were hit by mounting input cost inflation.

The consumer giant said today underlying sales growth in the first six months of the year was up 8.1%, with prices up 9.8% and volumes down 1.6%.

The group said that pricing has sequentially stepped up over the past two quarters, reaching 11.2% in the second quarter, which had some negative impact on volume.

Growth was broad-based across all divisions, with home care leading the way with 10.7% growth as it was particularly exposed to rising input costs and took the highest pricing action.

Beauty and personal care grew 7.5%, driven by price and continued strong growth in ‘prestige beauty’ and ‘health & wellbeing’.

Foods and refreshment grew 7.3% with slightly negative volume at (0.9)%, although volumes were flat excluding its sold global tea business Ekaterra. Ice cream out-of-home and Unilever Food Solutions showed strong double-digit growth in the first half, compensating for lower growth of in-home ice cream.

On a regional basis, emerging markets grew by 10.0% with a 12.1% contribution from price and volume down 1.8%, including an estimated adverse impact of around 70bps from the lockdowns in China. Pricing in Latin America was strong at 19.1% with volumes contracting by (4.8)%. South Asia grew strongly through both price and volume.

Developed markets increased by 5.5%, with 6.7% from price and (1.2)% from volume. North America grew 8.7%, helped by strong performances of dressings and high growth areas such as health & wellbeing.

Overall turnover increased 14.9% to €29.6bn, including a currency impact of 5.6% and 0.6% from acquisitions net of disposals.

Underlying operating profit was up a more modest 4.1% to €5bn as underlying operating margin declined by 180bps to 17.0%.

Gross margin decreased by 210bps which reflected the “very high” inflation in input costs that was only partially mitigated by the strong pricing action and savings delivery. Brand and marketing investment was stepped up by €0.2 billion in constant exchange rates.

Due to the strong pricing action, Unilever said it now expects 2022 sales to be above its previously guided 4.5% to 6.5% range, albeit with some further pressure on volume.

It expects net material inflation for the year to remain high at around €4.6bn, with around €2.6bn in the second half.

Full year underlying operating margin expectation remains at 16%.

“The medium-term macroeconomic and cost inflation outlooks are uncertain and volatile, but delivering growth remains our first priority,” it stated. “Against this backdrop, we continue to expect to improve margin in 2023 and 2024, through pricing, mix and savings.”

CEO Alan Jope commented: “Unilever has delivered a first half performance which builds on our momentum of 2021, despite the challenges of high inflation and slower global growth.

We have made further progress against our strategic priorities. We are maintaining strong investment in our brands, supporting 9.4% underlying sales growth in our €1bn-plus brands. We continue to reshape our portfolio, completing the sale of the global tea business ekaterra, and the acquisition of Nutrafol, a leading provider of hair wellness products. Prestige Beauty and Health & Wellbeing, now 4% of group turnover, again grew double-digit.

“Our simpler, more category-focused organisation came into effect as planned on 1 July. This major change to Unilever’s operating model is an important further step that will underpin the delivery of consistent growth, which remains our first priority. The challenges of inflation persist and the global macroeconomic outlook is uncertain, but we remain intensely focused on operational excellence and delivery in 2022 and beyond.”

Unilever shares are up 2.2% to 4,002.2p so far this morning.

Morning update

Total till grocery sales at UK supermarkets surged 4.4% in the last four weeks ending 16 July, according to the monthly market share figures from NielsenIQ, with sales rising to 5.6% during the final week of the perid as inflation, coupled with the start of the summer heatwave, encouraged shoppers to spend more.

Data from NielsenIQ reveals that over the four week period, sales at the grocery multiples increased +2.7%, which is the highest growth since April 2021, when the country exited the first pandemic lockdown.

With the summer heatwave encouraging shoppers to socialise and eat picnics outdoors, sales for fresh food and beverages increased, with highlights such as sandwiches (+24%), mineral water (+28%) and ice cream (+24%). Prepared salads (+18%) and prepared fruit (+14%) also benefited from the weather shifting consumer lifestyles.

As a result of the warmer weather and opportunities to socialise, NielsenIQ data shows that in the last four week period, visits to stores rose 10% compared with the same period last year.

Despite an increase in sales, volume sales fell 4.1% in the four week period, with significant volume declines in packaged grocery (-6.4%), household items (-8.1%) and meat, fish and poultry (-9.4%)1 as households managed their weekly grocery shopping budget.

This is a result of high single digit food inflation, meaning that UK shoppers are buying less food and drink. Consequently, spend per visit (across all channels) was down 5% as shoppers continued to make trade-offs when shopping, such as opting to buy smaller packs, delaying spend or changing the products they buy.

On an individual retailer basis, Tesco was up 2% in the period, with Asda and Sainsbury’s both up 0.3% and Morrisons down 4.8%.

Lidl was up 14.8% in the period, with Aldi up 5.4%.

M&S and Co-op were up 5.7% and 3.9% respectively, while Waitrose was down 4.7%.

Mike Watkins, NielsenIQ’s UK Head of Retailer and Business Insight, said: “Shopping around is now a key coping strategy for households, who are looking to save money. However, with the start of the summer heatwave, we’ve seen UK consumers shopping more often, which has led to a stronger trading period over the last four weeks. The improvement in top line sales growth is a combination of increases in inflation, but also some incremental spend due to the weather.

“But overall, volumes at UK supermarkets are down which is no surprise given that three quarters (75%) of households have noticed that their normal weekly grocery shop is costing more than it did six months ago, while 34%2 are cutting back on their grocery purchasing.”

“The worrying pressure on sales volumes is expected to continue throughout the summer period and exacerbated due to the holidays, with more Brits travelling abroad than last year.

“This means that the key battleground for retailers will be on who can attract the most shoppers with inspiring media campaigns to build on the ongoing shopping trend to shop little and more often. This will be important for sustaining growth when shoppers revert to their usual shopping patterns after the holidays and importantly, cope with even higher household bills.”

Elsewhere on the markets this morning, Greencore has posted strong third quarter growth as food on the go continues to rebound from Covid lows.

Group reported revenue increased by 35% year-on-year in the quarter, driven by continued strong growth in both food to go and other convenience categories.

Pro forma revenue grew by 25.8%, after adjusting for the impact of an additional week in its accounting period and for movements in foreign exchange, and is 22.3% above equivalent pre-COVID levels in the third quarter of 2019

Growth was driven by a combination of increased volumes, a low-teen percentage increase in underlying pricing, and increased revenue in the group’s Irish ingredients trading business.

Depsite the inflationary challenges impacting the broader UK food industry at present, there has been limited demand impact to date in the group’s categories, Greencore said.

Pro forma revenue in food to go categories increased by 31.2% year on year, driven by continued recovery in underlying food to go demand and augmented by the onboarding of new business wins and increased pricing.

Other convenience categories saw pro forma growth of 15.5%, driven by increased underlying pricing and higher revenue in the Group’s Irish ingredients trading business mitigating a modest reduction in grocery volumes.

Meanwhile, profit momentum improved in the quarter, driven by volume growth and better conversion due to enhanced productivity.

Cost inflation remains elevated across the UK food industry, however Greencore said it continues “progress well” with the recovery of these inflationary challenges through dialogue with customers, price recovery mechanisms, effective supply chain management and operational efficiencies

Gary Kennedy, executive chair, said: “I am encouraged by the progress we have made during Q3 against the backdrop of inflationary pressures for the industry. Revenue and profit conversion through the period has been encouraging and we are confident in our ability to continue to manage the various industry challenges and end the year strongly.

“Our leading market positions, close customer relationships and intense focus on efficiencies mean that we look to the future with optimism, and we expect to deliver a strong year on year improvement in profitability, cash flow and returns for FY22”

Catering giant Compass Group moved past pre-Covid revenues in its third quarter as out-of-home eating continues to recover from the pandemic.

Underlying revenues at the group were at 109% of 2019 revenues pre-Covid levels in the quarter, following organic revenue growth of 43.4%, an acceleration from 37.9% in the second half of 2022.

All three global regions were in strong growth and now above 2019 levels, with North America up 49.7% in the quarter, Europe 41.9% and Rest of World up 15.9%.

Its business and industry division reached 97% of pre-Covid levels as is now above 100% of 2019 revenues on a run-rate basis.

Its four other divisions are already above pre-Covid levels in the quarter, with eduction up 41.4% in the period, healthcare & seniors up 12%, sport and leisure up 142.7% and defence up 10.5%.

Compass reported “very strong” net new business growth of 9.1% (or 6.9% rebased to 2019) with a retention rate of 96.1% year-to-date.

Net M&A added £223m of sales year to date as we continue to expand its portfolio of brands, focused on digital innovation and delivered-in solutions.

Given the significant acceleration in growth and ongoing recovery of its base business, Compass has increased its full year organic revenue growth guidance from around 30% to around 35%.

Operating margin guidance was confirmed at over 6%, with it now expecting exit margin to moderate slightly from around 7% due to the strong net new performance and ongoing inflationary pressures.

“While we are mindful of the challenging macroeconomic environment, we remain excited about the significant structural growth opportunities globally,” it stated.

“With a clear strategy, operational scale, and market leading offer, Compass is very well positioned to capitalise on the increase in outsourcing opportunities. Longer term, we expect revenue and profit growth above historical rates, returning margin to pre-pandemic levels, and rewarding shareholders with further returns.”

On the markets this morning, the FTSE 100 is up 0.5% to 7,343.9pts.

Risers include Compass Group, up 2.4% to 1,890p, Devro, up 2.3% to 193.2p and McBride, up 2.1% to 17p.

Fallers include Marks & Spencer, down 4.4% to 139p, Naked Wines, down 3.9% to 155p and Fever-Tree, down 3.6% to 1038.5p. 

Yesterday in the City

The FTSE 100 opened yesterday up 0.4% to 7,306.3pts.

Premier Foods ended the day up 1.8% to 115p after acquiring Indian meal kits brand The Spice Tailor for £44m.

Other risers included Bakkavor, up 8.8% to 91.2p, McBride, up 2.2% to 16.7p, Tesco, up 2.1% to 264.8p, Greencore, up 2% to 107.3p, Premier Foods, up 1.8% to 115p, Finsbury Food Group, up 1.4% to 72p, British American Tobacco, up 1.3% to 3,466.5p and Pets at Home, up 1.3% to 325.2p.

The day’s fallers included Ocado, down 4% to 759.6p, Devro, down 3.7% to 188.8p, GSK spin-off Haleon, down 3.6% to 305p, Virgin Wines, down 3.3% to 73.5p, Just Eat Takeaway.com, down 3.2% to 1,527.4p and Naked Wines, down 2.3% to 161.2p.