© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
We are about to hand over to Unilever to begin the conference call. [Operator Instructions]We will now hand over to Richard Williams.
Good morning, and welcome to Unilever's first half results. Paul and Graeme will summarize the results and the progress we have made towards our 2020 goals and then give an update on the simplification of our dual-headed legal structure. Paul will wrap up with our outlook for the year, and we'll leave plenty of time for Q&A.As usual, I draw your attention to the disclaimer related to forward-looking statements and non-GAAP measures.With that, I'll hand over to Paul.
Well, good morning, everyone. [Audio Gap] emerging markets have been and will continue to be fundamental to Unilever's growth.With that as a context, let's go in a little bit more detail behind the results. As expected, the first growth -- the first half growth came in a little below our multiyear guidance of 3% to 5%, but with another step-up in volume. Pricing was muted, as flagged and expected. We estimate that the impact of the strike in Brazil was around 60 basis points in our first half growth and expect that around half of this, at least, will be recovered in Brazil, with no overall impact on the outlook for Unilever for the year. Behind the headline numbers, we are encouraged by the volume growth of 2.5%. There are plenty of bright spots that give us confidence in our delivery for the full year as well as medium-term plans.Growth was broad-based across our divisions. In Beauty & Personal Care, underlying sales were up by 2.7% with strong volumes. Skin care and skin cleansing both have had a great half, helped by premium innovations like our cross-brand launching of the foaming shower mousse.Now hair and deodorants, which were most exposed to the trucking strike in Brazil, were a little weaker. Underlying operating margin was up 70 basis points, with higher gross margins and lower overheads even after higher investments behind our new business models. Whilst overall growth in Beauty & Personal Care was somewhat below our medium-term expectations, the strong underlying volume growth in the first half demonstrates that we are taking the right actions to address the changing consumer trends.In Home Care, underlying sales were up 3.5%, with 3.2% from volume. We've taken a broader view of some of our categories than we have done before and have further differentiated the strategy for the 4 subcategories: fabric solutions, fabric sensations, home and hygiene, and life essentials.Fabric sensations and home and hygiene both had a great half, up 8% and 10%, respectively, reflecting strong innovations and the enormous market development opportunities in these 2 categories. Fabric solutions, which was significantly impacted by the trucking strike in Brazil, grew a little bit more than 2%. Underlying operating margin was up 60 basis points, with continued strong momentum from our savings program.In Foods & Refreshment, our final division, underlying sales, excluding spreads, were up 2.4%. Ice cream had yet another strong half, helped by a very strong innovation plan, the good weather in Northern Europe and strong performance in emerging markets. Underlying operating margin was up 100 basis points, driven by strong gross margins and lower overheads, following the setup of the new organization in the Netherlands.With that, let me hand over to Graeme to cover the results [Audio Gap]
[Audio Gap] into our factories. This was then followed by a period of recovery where distribution and manufacturing was slow to ramp up, particularly in fabric solutions and hair, where we operate with just-in-time manufacturing and lean stock levels. We expect to recover around half of the lost sales across quarter 3 and quarter 4. Notwithstanding the strikes, it's fair to say that growth in LatAm was weak overall, with tough economic conditions persisting in many of our markets. This wasn't unexpected, and we have a strong local team who have plenty of experience managing through a crisis. We quickly launched a range of value brands and SKUs and have already expanded the newly acquired Quala brand into the deodorants category just 45 days after we closed the acquisition. Sales in the second half will be helped by the recovery of stock levels in Brazil and price increases already taken across our portfolio in May.In North America, underlying sales, excluding spreads, were up 0.9%, with 1.1% coming from volume. Skin cleansing and skin care performed well, driven by innovations, including the new brand launch Love, Beauty & Planet; and premium Dove variants like the new shower foams and body polishes. In Home Care, Seventh Generation continue to grow well.Foods & Refreshment had a slower start. Despite good performance of our innovation like Magnum Pints, the sales in ice cream and dressings were weak. Pricing was down 0.2%. We're not surprised to see some dialing back of price in North America after several years of strong pricing and because of the significant changes in the retail landscape there. We have seen some lower prices in a few categories due to increased promotions, particularly in dressings, in ice cream and, increasingly, in deodorants. Our net revenue management program and our premium innovations are helping us to protect value growth in our markets despite heavy promotional intensity.You can see from the chart that volume was strong in quarter 1 and weaker in quarter 2. As we've previously explained, this was due to the phasing of innovations in North America.Turning to Europe, underlying sales growth, excluding spreads, was up 0.6%. Volume stepped up by 1.1%, offset by continued price pressure in some challenging market conditions. Continued market and competitive challenges in France weighed on our growth, whilst most other countries grew modestly with good volume-led growth. Ice cream performed strongly, up by mid-single digits, despite lapping 2 good seasons in 2016 and 2017, thanks to a very strong innovation plan. We saw good volume-led growth in Home Care, helped by innovations in fabric sensations and fabric solutions as well as the launch of Seventh Generation into the U.K.Turnover overall for the first half was down by 5%. Underlying sales growth was 2.5% or 2.7%, excluding spreads. Almost all of the first half growth, as Paul said, came from volume. Over the remainder of the year, we expect price growth to pick up as commodity inflation increases and as we annualize the implementation of GST in India, which has had an adverse impact at the global Unilever level of around 30 basis points on price. M&A increased turnover by 1.9%, largely through the acquisitions of Sundial and Carver Korea.We completed the disposal of Spreads on the 2nd of July, which will impact the second half turnover. We have received total consideration of EUR 7.3 billion for the Spreads business, which is a higher number than the EUR 6.8 billion that we previously announced. This is largely reflecting a transfer of working capital. And as a result of this, our 2018 reported free cash flow will be reduced by the equivalent amount.We've already announced in December that we expect short-term dilution to underlying operating margin of around 60 to 70 basis points on a full year basis, which will impact the second half of 2018 by around 60 to 70 basis points, and so the full year of 2018 by around 30 basis points.Our plans to tackle the stranded fixed costs are well underway and will drive a further step-up in restructuring investment in the second half of the year. We also said that we expect the dilution to underlying earnings per share of between 8% and 10% on an annualized basis from the disposal of Spreads, which will hit in the second half of this year and the first half of 2019. From the 2nd of July, Spreads will no longer be held as an asset for sale in the balance sheet, and as a result, will not be consolidated in our results. Currency translation decreased turnover by 8.9%, as you can see in the chart. This is a result of the euro strengthening against almost all of our major currencies. If exchange rates were to stay as they are today, we would expect a full year drag on turnover of between 6% and 7% and a little bit more than that on EPS.Underlying operating margin increased by 80 basis points. And as Paul has said, we're very pleased with the quality of the margin delivery. Gross margin was up by 60 basis points. The improvement was driven by 40 basis points of mix from both our premium innovations and our acquisitions. Our 5-S savings program and restructuring in the supply chain delivered EUR 700 million of savings, which more than offset material inflation.Now 5-S looks at the end-to-end supply chain cost from raw materials to distribution, and it is allowing us to make structured and sustainable interventions to take cost out without affecting and indeed often even improving product quality. To give you just one example, in skin cleansing, we show a significant improvement in the gross margins of our soap bars by changing the shape and consolidating the number of fragrances and formulations.Brand and marketing investment increased by 20 basis points as a percentage of sales. That means we spent EUR 180 million more year-on-year on consumer-facing media and in-store point-of-sale, whilst we continue to bring down advertising production costs. Overheads improved by 40 basis points. The benefits from the savings programs have been partly offset by the higher overheads mix associated with the new business models and the investments we're making in building capabilities.Underlying earnings per share increased by 8%. Operational performance, which, of course, the combination of growth and margin, contributed 11%. Our 2017 and 2018 share buyback programs helped EPS by 4.6%. As a reminder, the 2018 share buyback is intended to return the cash proceeds from the disposal of our Spreads business. The share buyback will help to repair the EPS dilution from the lost income of Spreads.We have completed the first tranche of the 2018 share buyback, and we'll complete the remaining EUR 3 billion by the end of this year. Net finance costs reduced by EUR 67 million despite an increase in net debt. This reduction largely reflected a one-off release from a provision relating to indirect taxes.Our pensions financing charge was EUR 15 million compared to EUR 49 million in the prior year. Our effective tax rate on underlying profit was 26.5% compared with 27.9% last year. We expect the rate for the full year to be in line with our medium-term guidance of around 26%. Currency movements had an adverse impact on EPS of 11%. Free cash flow was EUR 1.8 billion, which is an increase of EUR 400 million on the first half of last year. This was driven by lower contributions to our pension funds. The net pension deficit reduced to EUR 0.3 billion from EUR 0.6 billion at the end of 2017. The decrease primarily reflects the impact of lower liabilities due to higher discount rates.Net debt increased from EUR 20.3 billion at the end of last year to EUR 24.8 billion, primarily driven by our share buyback program that started ahead of the Spreads disposal. For the full year, we expect to be at or around our 2x net debt-to-EBITDA ratio.And with that, I'll hand you back over to Paul.
Thanks, Graeme. Once more, we want to stress that we're well on track to our 2020 plans, and we're delivering this whilst reshaping the portfolio and digitizing our operating model to address what are undoubtedly the significant changes that we're seeing in all of our markets. Behind that, I want to stress once more that growing the core is key, and innovations obviously drive that.First and foremost, we have changed our innovation processes quite significantly. We have differentiated the processes now for local and global launches, ensuring that all markets have activities that are big enough to respond to these key trends, and that's what you see in this picked-up volume growth. This approach is helping us grow our core with bigger global innovations, like the cross-brand launch of the new premium shower foams or our new Magnum Praliné range, expected to deliver over EUR 50 million of incremental turnover.Now we're also seeing plenty of examples of how Connected 4 Growth is helping small and agile teams [ turn their ] brilliant ideas into growth. In the U.K., our food CCBT quickly launched 2 new premium snacking brands, for example, Red Red and Prep Co. In South Africa, Domestos Flush Less spray was developed in a matter of weeks to help the drought that we saw in Cape Town. And in Germany, our new licensing agreement to produce a range of Kinder ice creams has been an enormous success and has been expanded now across other countries.In all of our launches, purpose is increasingly relevant and is inspiring great ideas. Take Less, a thoughtfully designed dispenser, for example, which, with a simple press, dispenses exactly the right amount of detergent. This means less waste, less environmental harm, cleaner laundry and a prolonged washing machine lifespan.Alongside innovation, a critical element to accelerate the transformation of our portfolio is obviously through bolt-on acquisitions, shifting us more quickly towards the future trends and increasing our exposure to higher growth segments. We've completed 24 acquisitions since the start of 2015 alone. And by 2019, these acquisitions will add about $3.5 billion -- EUR 3.5 billion in turnover. In total, we expect that the combined impact of the acquisitions to date and the disposal of Spreads will add another 1% to our ongoing underlying sales growth by 2019, and we're well on track in the first half of 2018.In Prestige, we see that our business was up 6%. For the half in Dollar Shave Club, which grew single digits, with continued momentum in the U.S. as well as the launches that we've done in the U.K. from January onwards. Carver Korea, Sundial and Schmidt's will contribute to underlying sales growth towards the end of the year, and all these brands grew strongly. Seventh Generation continues to grow well. And Mãe Terra and Sir Kensington (sic) [ Sir Kensington's ], although still relatively small, are growing strong double digit or more.Now we've also made good progress to leverage digital in all we do, from manufacturing and innovation to marketing and selling. Technology changes the way that we understand and engage with consumers. There is now more data than ever before, and understanding this data and acting on it unlocks huge opportunities for us to be more targeted and more personal, like our latest contest and purpose-led Dear Future Dad campaign, which is championing paternity leave, just one of the reasons why Dove Men+Care is growing double digit.We're embracing artificial intelligence at scale and see immediate business benefits where we do. For example, our Signal Chatbots is helping us educate children on brushing their teeth. And we're using the virtual assistants to help connect consumers to our products, like our Recipedia or our Cleanipedia, which uses Alexa to interact with our recipes and cleaning knowledge management systems.We're also using technology much more broadly with a digital strategy that spans our entire business model. We have already used robotic process automization to automate over 250 low-value processes, saving hundreds of thousands of hours across the entire Unilever business. This frees up the time and energy to focus on activities that drive the growth. And we're digitizing our end-to-end supply chain to manage the inherent complexity of fragmented channels and consumer preferences. Of course, there is a lot more to do, but I'm confident that we're taking the right steps to build on our competitive advantages for the future.Now moving quickly to the simplification of our dual-headed structure. The simplification of our dual-headed structure is an important next step to unlock the flexibility needed for future portfolio change, including through equity settlement acquisitions or demergers. And at the same time, it makes us simpler and further strengthens our corporate governance.Let me just hand over to Graeme for a minute to take you through some of the details.
Thanks, Paul. Over the last 15 years, we've taken some major steps to put Unilever at the forefront of good corporate governance. It's been quite a journey. Most recently, at the 2018 AGM, for example, we moved to 5% plus 5% disapplication of preemption rights. And we committed to a binding vote on directors' remuneration policy at least every 3 years, with an advisory vote on the directors' remuneration report every single year. We will keep these and other elements that have served shareholders well in the new Unilever holding company.In March, we made a clear commitment to further strengthen corporate governance upon simplification. Following completion of simplification, we will, for the first time in Unilever's history, create true shareholder democracy, and that means one constituency with a one share, one vote principle. It means a single class of shares and a single global pool of liquidity, a cancellation of all preference shares and the termination of the N.V. Trust Office and the related depository receipt structure.Our board wants to enshrine further governance improvements into the new Articles of Association of the new holding company. Ahead of the publication of the shareholder documentation for the EGMs, this chart, which I know is very detailed and is intended for more detailed review by you after this call, highlights just how we're simplifying and fundamentally strengthening shareholder rights.Firstly, for new NV, shareholders with at least 3% of issued capital can require the board to convene a general meeting within 8 weeks. This is a significant improvement versus the current situation for either NV or PLC shareholders. Secondly, shareholders holding at least 3% of issued capital will be able to nominate or propose the removal of a director. The same threshold applies for tabling a resolution. Thirdly, more than 75% of the votes cast at a general meeting will be required to amend the Articles of Association. Proposal to amend can be made by the board or by shareholders. At the moment, amendments to the NV articles can only be proposed by the board and can be passed with a simple majority. Fourthly, we will move to a 75% threshold for key resolutions that impact the capital structure of new NV. These resolutions include disapplication of preemption rights, share buyback authority and capital reduction. At the moment, a simple majority is sufficient to pass these for current NV.Subject to U.K. Court approval, we've now fixed the dates for the NV and PLC extraordinary general meetings. These will take place on the 25th and the 26th of October, respectively. Documentation will be sent to shareholders at least 6 weeks before the EGMs. We anticipate implementation of the single-headed structure for new Unilever around the end of December this year.And with that, let me hand back to Paul to conclude with our outlook.
Yes, I just want to wrap up by confirming the outlook for the year. We expect to deliver full year growth in the 3% to 5% range. We're also making -- we'll make continued progress towards our 2020 margin target, and we will deliver another year of strong cash flow. We will deliver this whilst also investing to build the new capabilities needed to win in a fast-changing market. And I am certainly confident that we're taking the right steps, positioning us well to benefit from the new sources of growth in our markets.And with that, let us take your questions.
Thank you, Paul. [Operator Instructions]
So I see our first question is from James Targett at Berenberg. Do you want to go ahead with your question, James?
A few questions. Just firstly, on the U.S., actually, I appreciate you mentioned some phasing impact in Q1 and Q2 to explain the volume slowdown, but you also mentioned some tough markets. I wondered if you could talk about that underlying market conditions in the U.S. And also, in some of your categories, ice cream and Dollar Shave, I think you mentioned it was mid-single-digit growth in Dollar Shave? And then finally, on the U.S., any thoughts on the potential impact from tariffs, which may be introduced? And my second question is just on the marketing spend, which was up 20 bps in the first half, I think, on a year -- on a 2-year run rate, still down about 110 basis points. I appreciate there's some working and nonworking media mix here, but is this, do you think, a good sustainable rate going forward?
Yes. Thank you, James, really appreciate it. On the second one, really quickly, the marketing spend is up 20 basis points. Our absolute spend has gone up every year, we've always said that. So when you see it's slightly going down as a percent of turnover, it is really lifted by the stronger top line growth that comes in. But we will -- and the mix that is behind that, but we will not go down in spend. Where we are currently is more or less right. And as the portfolio changes, as we are doing, our spend will continue to go in the direction that we're now flagging. So the combination of a strong gross margin improvement then, undoubtedly, the overhead improvements that you see consistently now from Unilever behind these change programs and reinvesting part of that into BMI to get to an 80 basis points -- 70, 80 basis points underlying operating margin has become our operating model, and we continue to show that to you. If we go to North America itself, there is no question that the markets remain turbulent there. Nielsen actually shows the market was being more or less flattish. And we think that including e-commerce, that market might be up 1% to 2% maximum. Price growth has dropped off in the U.S. also. There, it's not entirely surprising, in my opinion, because we've had several years of good price growth in that market. Now there are -- for us, if you look at the first half, excluding spreads, we're up [ about ] 1.7%. That's driven by volume, with prices slightly down. That's how the North America comes out. I think that we see some tale of 2 stories, if you want to, of 2 halves. Innovations there do work. Dove shower foam or Magnum Pints or the new brand that we launched Love, Beauty & Planet, are doing extremely well. Then our M&A is also putting us in attractive segments, and it's actually growing. The Prestige business, which is not in the numbers that we report here, or Seventh Generation, or Dollar Shave that are all businesses, Schmidt's, Sir Kensington, they're all businesses that we have in the U.S. where the combined growth rate is starting to become accretive, and we're happy about that. What we see over the last 6 months is a few battles that we have to deal with in the U.S. environment. One, I would say, is hair where we have a very aggressive competitor that continues to hammer away. But we think our overall hair category, where we're now #1, is doing well. But the battle is in the U.S. The same we see on deos where we have had a tremendous run. We're still building share in the U.S., and we launched the dry sprays. Now we have a competitor coming in and again putting an enormous amount of money behind that. And then the final area where the U.S. has -- sees competition and where we again keep growing share is in the whole area of dressings, where we have one of our competitors coming out with very aggressive activities. We think that the growth rate will pick up in the U.S. over the second half, partly because of our innovation program that we're putting behind that, that is fairly encouraging. I'll be there next week for a day myself. Some of the things we're doing behind net revenue management and hopefully some of this promotional activity easing off. But having said that, it continues to be a market with high competitive intensity, and we'll be prepared for that.
James, if I can just make one comment on Dollar Shave Club. It's a -- Dollar Shave Club is growing at high mid-single digits. In fact, it's almost double digits. And you've seen that we've launched in the U.K. at the beginning of this year. That's carrying on steadily. So that's the DSC.
We're happy with that. Yes. Thanks, James.
So next question is from Alain Oberhuber from MainFirst. Do you want to go ahead, Alain?
Alain Oberhuber, MainFirst. The first question is regarding the margin development. We've seen very good margin development in Foods & Refreshment. Do we expect that to continue in that pace? Whereas on the other side, Home Care, after several very strong quarters of margin development, are we going now to a more normal margin improvement, as we've seen?
Yes, I'll let Graeme answer that.
Okay. Okay, Paul, yes. So first of all, Foods & Refreshment, the -- yes, the good strong 100 basis point improvement in the first half margin, Alain, that was led by gross margin and overhead, so it had very, very nice shape to it. That's how we describe that. And that actually allowed us to increase the media spend, for example, in ice cream by EUR 40 million. I think we can continue that pace. Obviously, we're getting good savings and efficiency from combining Foods & Refreshment, first of all. But when we set the 2020 target, it was clear that Foods & Refreshment had the most distance to travel. Therefore, we're happy that it's made such a strong step forward with a high-quality margin improvement, as I said, in the first half. On Home Care, there's an impact sitting in Home Care from Brazil. 65% of the volume that we ship in Brazil is in laundry powder. So you see the deleverage impact of the Brazil trucker strike in the second quarter most profoundly sitting in the Home Care line. We did continue to make strong progress with 5-S savings. Of course, Home Care was the birthplace of the 5-S programs within the supply chain. But it's fair to say that having made strong gains with 5-S over the course of the last couple of years, we're now into the higher-hanging fruit, if you like, with regard to that. So that's the Home Care progress.
I think, Alain, the main message here is that some people were doubting that pricing would be low. And in fact, when we had a lot of pricing, they said you don't have volume. Now we have very, very strong volume, and people say, you don't do pricing so you can't do the gross margin. We don't think that it's right. What we are showing here is that if your innovation program is right across the categories, by the way, because this is across all 3 categories, we can actually expand gross margins and grow volumes significantly above the market. And it is that gross margin expansion, coupled with the indirect improvements, that allow us for all categories to invest in BMI and grow the operating margin. So I think that high quality is now coming through quarter-after-quarter and is driving the business across the categories. Then there will be some fluctuations in one category or another for some competitive challenges that we need to deal with. But structurally, we've set our company up very well for this market that we're competing in. Thank you, Alain.
Thank you. So the next question is coming from Warren Ackerman at SocGen. Go ahead, Warren.
It's Warren Ackerman here at SocGen. First question for Graeme. On the wires this morning, Graeme, you were quoted saying that underlying sales growth would be 4.5% to 5% in H2. Can you confirm that? And if that's right, I'm a bit surprised you were so precise and actually quite bullish. I get the Brazil bounce back, but what else is behind that assumption in the back half? And then secondly, just on the EGM in October, how confident are you of getting the 75% approval from Unilever PLC shareholders? And I'm interested why the bar is higher for the PLC versus only 50% for the NV shareholders? And what would happen if you don't meet that threshold? And perhaps, just related or semi-related, could you maybe tell us when you expect the FTSE indices to finally rule on whether you're going to be in or out of the Russell indices?
Thanks, Warren. So first of all, I think I've been misquoted on the wires this morning. I would never be as specific as that, you know I wouldn't in doing that.
He said [ 4.732 ]. No, I have no idea.
One. But what we did talk about was, what is your -- what are the building blocks of an acceleration in growth in the second half? And of course, that is around several factors, but principally, the return of pricing. And as we've said, we think we'll get half of the volume impact of Brazil. We think we'll manage to recover half of that in the second half, which should be 30 basis points. Then, for example, we have the GST impact in the unwinding, that's another 30 basis points. But the building blocks there, I was never that specific. On the question of the confidence, we're very confident in our ability to deliver the proposed simplification of Unilever. We've had an enormous amount of shareholder interaction now. And virtually, all -- everybody we've met, there's been really sort of universal support for the strategic benefit that unlocks for Unilever; for the greater shareholder democracy that unlocks for Unilever with one share, one vote; and for the profound step forward and continued improvement in the governance of Unilever with not just the cancellation of the preference shares and the windup of the Trust Office, et cetera, but more fundamentally, some of the governance improvements that I've set out in the charts this morning and which will all be in the documentation. The reason for the 75% threshold in PLC is simply one of different company law. In fact, it's one of the added nuances, if you like, of being a twin-headed structure as you operate under 2 legal systems. And yes, it should be the same for everybody, I would say, in the interest of equivalence of shareholders and shareholder democracy, but it isn't. It's a 75% threshold in PLC and a 50% threshold in NV. And once we've unified the company, one of the nice things will be there will only be a single threshold, and all shareholders will -- in Unilever will be treated equally. Final question, on the FTSE, and as I've said in all of the shareholder meetings we've had, we had some excellent interaction with the FTSE over several meetings. But it did become very clear that we're extremely unlikely to be included in the index at the moment of unification. I don't know when the -- when that decision officially gets made for FTSE. That's obviously a matter for them. It certainly won't be until the detailed documentation has been published and everyone has had a chance to digest that. And then I think that -- I believe that the indices' formally have changes to the index on a quarterly basis. So I imagine that if it is the case that we are required to exit the index, then that will take place on one of those normal quarterly resets. Thanks, Warren.
Okay, the next question comes from Robert Jan Vos from ABN AMRO. Go ahead, Robert.
I have 2 questions. First is on the buyback program, you plan to finalize the remaining EUR 3 billion in the second half. Obviously, this program is fully related to the disposal of Spreads. Beyond 2018, and obviously without considering more significant disposals, would you still consider doing share buybacks, for example, if your net debt-to-EBITDA drops below 2 again? And the second question, you mentioned that the trucker strike in Brazil had an impact on growth of 60 basis points. Is there anything to say about the costs related to this strike? Or what has been the impact on the underlying margin?
So on the margins, I think what you see is, very clearly, our great results that we're putting in. And I don't think it will affect the overall margin for the company. We will come in with where we set it and we'll work a little bit harder. Obviously, there are a little bit of costs, but there's no write-off in terms of products related to this or other margin effects that we have to report to the markets. But the top line has obviously been affected in the quarter because you don't have the time to react to that. So that is really Brazil. And frankly, other things will happen in other parts of the world, we just have to deal with that. On the buyback, I'll just do that very quickly. We will obviously complete the EUR 3 billion buyback, as we have said. And then in terms of the capital management, we continue to be optimizing our capital management. We've now said we have the ratio of debt-to-EBITDA is 2, and we will keep that ratio more or less. If we have M&A activity, we would prefer that. We've always said that. If we don't have the M&A activity, then we need to look at other things, including buybacks. For now, we're focused on that, and we'll continue to execute against that.
Okay. And our next question comes from James Edwardes Jones at RBC. Go ahead, James.
Two questions, please. First, on ice cream. I might have missed it, but in response to James' question earlier, I don't think you said much about ice cream. In particular, given the warm weather in the Northern Hemisphere, I would have expected it to have quite a positive impact, which I can't see the results of that. And secondly, one for Paul. Paul, you were quoted in the press a few months ago as regretting that analysts and investors never asked about Unilever's CSR approach on these calls. So I guess my question is, if you think we should be asking about it, where is it evident in these results, particularly given a relatively disappointing top line growth?
Yes. So I appreciate the question. On the ice cream, very clearly, we had also a very strong year last year, which you should not underestimate. And actually, more of the growth of ice cream, which is up close to 5% on a global basis, is driven by innovations. Magnum Core, Praliné, the Kinder ice cream, the Ben & Jerry's nondairy that we're rolling out, the Breyers delight, this category is on fire and actually providing very good top line growth and also contributions to the cash flow. As you know, it's not about CSR, it's more about RSC, responsible social corporations. CSR is Page 2 of the annual report that you put a sliding door in the hospital next door. What we are talking here about is the long-term business model that is good for all of our stakeholders. You've had 300% shareholder return over 10 years. We've created jobs for people. We've taken more environmental, socially responsible approaches. We have cut our carbon emission more than most of the companies, so you don't run the risk. You don't see a big reputation issue in the newspapers. We're producing the margins that you see right now and taking the EUR 1 billion out. A lot of that is driven by running our factories at 0 waste and thinking about other things in our value chain. So yes, if you can get out of your mindset of a quarterly reporting in 90 days and looking at it on a micro level, then any investor will see, indeed, that what we are doing makes increasingly more sense. We're running ahead on the plastic debate now and have less exposure than some of our competitors. And I'd prefer to be #1 in the human rights index than number -- on the bottom right now. I prefer to be #1 in the reputation index than being on the bottom right now. And you can make your decisions where you invest in. But fortunately, we've seen over the 10 years that we have a big-enough group of investors that are smart enough to understand these things in a company where more and more of the value is created with non-tangibles, if I may call it that way, and feel very happy with what we're doing. And at the same time, we're taking care of the other stakeholders. So I appreciate that you asked that question, indeed, for the first time. But I hope that you also act on that when you make your investment decisions. Thank you.
Thanks, James. Next question comes from Karel Zoete from Kepler. Go ahead with your question.
I have 2 questions. The first one is on input cost inflation and particularly in Asia where you have a big HPC business and weak currencies. How do you look at cost increases there and what, in terms of pricing, which is still low in Asia? The second question is on pricing in Europe. You singled out France as a difficult market, but pricing remains difficult, and I guess promotional activity is high. Can you provide a bit more color on pricing within the European market?
Yes. I'll have Graeme take them both.
Thanks for the questions, Karel. Let me just reiterate something Paul said earlier because it really is the theme as we look at the shape of the P&L for the first half. That we've been able to deliver a 60 basis point improvement in gross margin with very little pricing in the first half, I think, is a real testimony to the underlying quality of driving mix, innovation and cost savings more fundamentally. But it's good we were able to do that and we had those programs because the pricing environment from a commodity perspective has been low. I mean, in the first half, they were up by only low- to mid-single digits, most of that coming from gross material inflation, because as you touched on, the currency impact was very small because the U.S. dollar was relatively weak versus the prior year compared to those local currencies. We do expect a higher level of commodity inflation in the second half. We think there are 2 factors behind that. First of all, the USD, we expect to strengthen a little bit against most currencies, and that will give us a higher sort of transactional currency impact. And we think there'll be higher cost increases for some commodities. Pricing in Europe, it remains a fundamentally quite deflationary environment, but there are differences market-by-market. We talked about France, in particular, which is a very, very competitive and very tough retail environment in France. I think it's the toughest market across the whole of the European landscape now. And there's been -- continues to be deflationary pressure in France. But across a number of other European markets, we said our sales in the U.K. and in the Netherlands were sort of up around about 1%, we're starting to see a little bit more price inflation come through in 1 or 2 markets in Europe. But I think, Karel, over the longer term, that you've got to assume that Europe remains a difficult place to take pricing. You have to do it in a quality way, net revenue management being one of the key drivers of that.
And innovations.
And innovations, of course.
And our next question comes from Celine Pannuti at JPMorgan. Go ahead, Celine.
My first question is on the growth rate in the first half. If I exclude the Brazil strike, it's around 3%, which is around the market growth. So I would like to understand why is it that with all the innovation and the agility that you bring into the system, you don't seem to be able to grow faster than your market, or correct me if that is the wrong conclusion. And then my second question, you've mentioned a few exciting new brands, and I think you showed us last year some of the innovation or initiative in the U.S. Could you quantify how many of those, and what's the total size of these in the first half? And also, on the M&A, you gave us some numbers on some of the particular assets. Can you tell us, on an aggregate, are you at 1% for those M&A contribution on a pro forma basis in the first half?
Yes. So Celine, on the 3%, first of all, if -- which I appreciate, the volume component is pretty strong. The market on volume is between 0 and 1%. We're talking about global estimates, so it's not that easy. But our volume component is very strong. Take ourselves a year back and everybody was saying, you have a lot of pricing, but you don't have the volume. So we have come off the pricing a little bit, not negative pricing like we see some of our competitors, but just not incremental pricing in this environment, but the volume component is now very strong. So the quality of the growth is strong, and that drives the internals. Also, don't forget that some of the M&A that we're alluding to with growth above the company will only really start to kick in as of 2019 and add another 1%. A lot of that is still not in our base in terms of the numbers that we compare. In fact, the top line now is higher by 1% to 2%, I don't have the number right in front of me, just because of the M&A activity alone. So we think that we balance it fairly well in this environment and stay competitive in some of these categories where we've seen enormous competitive pricing activity. And we have to see what some of the competitors report. But from some of the reports I've seen from companies that have come out before us, they're all growing less than we are growing. So you see that environment and how that plays out. And [ I'll better ] like us, on the volume side, it was driven by innovations than anything else. On the categories, I don't know what more to say on the innovation side. If you take our brands, the very strong innovations are what we do on deodorants, for example, on going to aluminum-free, moving it into the more natural segment. We see the same with Sunsilk, the Naturals range; or we see the same in our Foods & Refreshment, where you have the new natural ketchup from Hellmann's doing well; or Lipton organic tea. I'm specifically picking those because we have to drive our brands and our portfolios much faster to the natural, organic, health and well-being trends that we see. And in some of the categories, we still have a little bit of catch-up because you have the economies of scale in this case, sometimes working against you in the transition, but we're well on our way to do this. And again, once more, that's why you see these strong volume components.
Yes. My question was more on the new brands that you are launching, like the one you presented for the U.K. or the personal care one in the U.S. Altogether, how big are those in terms of sales contribution in the first half of the year?
No, they are small. They are small. If you take a brand like Kinder or you take a brand like Love, Beauty & Planet, or you take the food brands that we are now launching, these are all launched brands in one country where you're fine-tuning the brand at launch. And yes, we have 6, 7 of those now, which is more than we've had before. But you talk in terms of total turnover that you're creating with these brands, about EUR 100 million at this point in time, that is where you are. But it's really putting the company in the right position for the future, which is not bad by itself, by the way. But a brand like Kinder and a launch in a country like Germany alone and getting EUR 30 million, EUR 40 million in turnover, we are very happy about that. And it's very promising for the future, but it takes a little bit. It's not going to be solved in 30 days. Yes, thanks, Celine.
Thanks, Celine. Okay, our next question is from Reg Watson at ING.
Paul, I appreciate -- Robert Jan Vos asked you about write-offs from the Brazil situation, and you said there aren't any. But presumably, there's a margin impact from just simply operating leverage of those lost sales.
No, the margins' impacts are -- see, what -- it's a little bit granular here in the scope of the total company, and we shouldn't really be talking that because then you get into the [ executions ] up and down. We have here 60 basis points on the top line that you lose because of an 11-day truck strike, and then it takes another week or 2 to get your whole value chain to be up again because when the truck strike, they don't strike for us alone, they strike for everybody, so all of our suppliers, et cetera. So we lose 60 basis points on the top line. And certainly, in Brazil, that doesn't help them on the margin that they are producing in the quarter. We all understand that. But we can cover for that in the year, and we can cover for that in the quarter. What you cannot cover for is quickly find the top line growth. So what Brazil is now doing is replenishing stock, replenishing inventory. And frankly, they might recuperate 1/2 or 2/3 of that. But the reason we don't talk that with you is because then, we have to go a little bit into overdrive to offset that with pluses and minuses in the rest of the world. That's why we are so confident that we say that we will come in at our guidance of 3% to 5%, that we see our top line growth picking up over the second half, otherwise, you wouldn't mathematically get there. And you've seen that we are producing 80 basis points on the bottom line. So we are happy with the guidance that is out there now, which I think is around the 70 or 80 basis points, what I've been told, on the bottom line. These are the solid results that we want to produce in, again, year-after-year for this company. And the Brazil strike or not, frankly, now we have the trade dispute with Canada. Tomorrow, we have Kim Jong-un who's going to do something. I mean, this world is full of surprises and that makes it interesting to live in, and that's why we love this world.
I mean, Reg, we said...
Okay. No, I think it's more a case of trying to work out whether or not when you see the revenues come back in the second half, whether or not we also get a boost to margin as well from that. But if you're saying that...
No, don't, don't, don't.
We'll manage it, Reg.
We'll manage that in the total. Don't worry about that. In the second half, not to get into the details, but the much bigger thing that we are working quite actively is the spreads will be totally gone in the second half. We have some cost of spreads. We need to get that out of the system. Hence, the 40 basis points now in indirects that you see and our strong organizational programs. So we need to stay on the big buckets there and not on some of these individual incidences. Yes, no, thanks for asking.
Okay, I think we have time for just one last question, which is from Alex Smith at Barclays.
I guess, it's probably a follow-up on Celine's question around innovation, but more specifically on local innovation. I think in your presentation, you spoke about the improvements in speed and number of local innovations coming to the market. Presumably, this is more about your local innovation teams having more ownership rights. I was just wondering maybe if you could elaborate a little bit on that, maybe give us some numbers in terms of the time from conception to launch, where you are today, where you were prior to those initiatives being put in place? And I think you said the number of local innovations are up around 50% at the full year. I was just wondering where we are today. But then I suppose in relation to that, how does that sit with your market share developments in HPC in Southeast Asia, in particular, I think you said in Q1, you were struggling for market share in that region in those categories? It sounds like the locals are still slightly ahead of the game in terms of agility. How do you go about leveling that playing field?
Yes, so there's a lot in your questions, so let me be really very quick. In quarters, you don't have your innovation story lined up with quarterly results. These are long-term things that happen. A lot of the countries where we put these things in place, we will see the results moving forward. We're pretty confident on that. Let me just talk the macro picture. What used to take us 12 to 18 months, sometimes 24 months to launch, we have now increasing examples of being able to do that in 3 to 6 months, the reactions on the Hijab Fresh in Indonesia, for example. But it takes -- it is not immediately that you get the sales in the next quarter because you launch something, you have to build these things. Another -- other examples where we would we be having done it very quickly is, for example, on the Domestos Flush Less. We have the water crisis in Cape Town, and we immediately launched in Africa the new version of Domestos that basically takes the urine away but doesn't need the water; or an upgrade on Lifebuoy in Vietnam where I was last week, which they put together in 6 weeks. Our innovation pace has gone up 50%. As we mentioned, we've cut the time to market by about half. And over the first half of this year, which we monitor consistently, we're up again a further 10% on these numbers. So it goes into the right direction. What we are trying to find is we have 70% of our business is global core of the core, so you see very strong growth in brands like Magnum, in brands like Comfort, in brands like Sunsilk, in brands like Comfort itself. So we have very strong growth on these global brands, and that's about 70%. But we are really unlocking the other 30% of what we call local or sometimes regional innovations, and that will increasingly come through in our numbers. And in the second half, you'll start to see a little bit more of that as well. Part of the 4 point -- sorry, the 2.7% and the strong volume component that we see, I think part of that is already reflected there why we keep the volume so high. If we now get a little bit more the price component back, then you'll see that also coming through fully into the top line, which is what you're asking for. But you're starting to see this already, I think, in the overall results that we're putting in. Southeast Asia, specifically, we have strong countries, and we have some countries where we see change happening. Indonesia is a very big country for us, don't underestimate that, and it continues to be a very successful country. But the country itself is going through an adjustment from a commodity-driven export that is really softer now to an added value and the structural changes that are happening in the country. In the go-to-market structure, we sold at this moment in flattened sales, whilst historically, we've been on the high single digits. So that will come back. We're not worried about that, and that is an issue that others also have to deal with.So I thank you. I thank Alex also, thanks for the question. I just wanted to summarize, first of all, wishing you all a good summer. And hopefully, you'll have some time to take off. We appreciate the support.Secondly, by reiterating once more that we're well on track to the targets that we've set out of this fiscal, of this full year of 3% to 5%, of strong operating margin improvement again towards our 2020 targets and driven once more by a stronger volume component that we feel happy with, by an enormous savings program to take cost out of the system and make this company more agile and by consistently reinvesting part of that in smart innovations, increasingly local, but still an enormous component of that, global. That is the way that the world is going. That is the way that we need to adapt our own strategies, and then on top of that, accelerate that with some of the M&A activity.This quarter, we're happy to get Equilibra in Italy, for example, to our stable again. And we feel very comfortable that we can enhance this transformation by smartly looking at these bolt-on acquisitions as we move forward as well. If that results, at the end of the day, in even more cash flow than we thought and again lowering the ratio of debt-to-EBITDA, then we'll have to be smart in our capital management, and it might result in more share buybacks. But that's not a point where we are right now. We think we're in good shape. We think the market is very difficult, but we feel firmly that we are ready to deliver again once more for the 10th year in a row what we promised you.Thanks again. Enjoy the peace and tranquility of the reporting season, and hopefully, see you guys when we do the roadshows. Thanks for your support.
Thanks, everyone.
Thanks, Paul. We'll close the call there. Any further questions, Ansgar, Becky and I will be available on the lines. Thanks very much, everyone.
This conference has been recorded. Details of the replay can be found on Unilever's website and will be available shortly. Thank you.