Morning Note: Market news and results from Unilever and Essilor Luxottica.

Market News

Global markets looked past the higher-than-expected US inflation figures (Core CPI was 3.3%) – which eroded bets on rate cuts — with traders focusing on US President Donald Trump’s Ukraine peace talks with Russia.

Federal Reserve Chair Powell told the House Financial Services Committee that “I would say were close, but not there on inflation”. Traders now predict the next rate cut to be in December instead of September.

The euro rose versus most of its Group-of-10 peers, strengthening 0.5% against the dollar. The 10-year Treasury yield rose by five basis points to 4.61%. The US 10-year breakeven inflation hit 2.53%, a 23-month high. Gold moved up to $2,915 an ounce.

In Asia, equities were mixed with risk sentiment also stoked by the improving prospects for Chinese markets: Nikkei 225 (+1.3%); Hang Seng (-0.2%); Shanghai Composite (-0.4%). US equities are currently expected to open 0.3% lower this afternoon.

The FTSE 100 is currently 0.4% lower at 8,762. Shell is trading ex-dividend today (1.07%). The pound climbed – $1.2475 and €1.1985 – after the UK economy unexpectedly expanded 0.1% in the fourth quarter. The Bank of England’s Megan Greene said we may need to keep rates higher for longer. 10-year Gilts yield 4.54%.

Source: Bloomberg

Company News

Unilever has today released its full-year 2024 which highlights a strong margin improvement and another share buyback. The productivity programme and the separation of the Ice Cream business are on track, although the choice of a demerger as the route will disappoint some. Furthermore, the guidance for 2025 is somewhat muted. In response the shares have been marked down by 5% in early trading.

Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of around €60bn across five business groups: Beauty & Wellbeing (22% of 2024 sales), Personal Care (22%), Home Care (20%), Foods (22%), and Ice Cream (14%). Its products are low-ticket, repeatable purchases, with 3.4bn people using a Unilever brand every day. With unique routes to market, the company has an unrivalled emerging market presence and generates more than half of its sales from those parts of the world expected to experience strong long-term growth in demand. In particular, the group’s 62% holding in India-listed Hindustan Unilever Limited provides exposure to the largest consumer goods company in India.

Last year, the group announced the separation of its Ice Cream unit, a business that has distinct characteristics compared with Unilever’s other activities. The separation is on track to complete by the end of 2025. This will be by way of demerger, through listing of the business in Amsterdam, London and New York, the same three exchanges on which Unilever PLC shares are currently traded. The market would have probably preferred a clean sale or JV as there will be concerns of a flow-back of shares.

Post the separation of Ice Cream, Unilever will be focused on four Business Groups: Beauty & Wellbeing, Personal Care, Home Care, and Foods (formerly Nutrition). These four Business Groups will be driven by 30 Power Brands (including Dove, Hellmann’s, and Domestos) and operate across 24 Business Group-led markets. These 24 markets represent nearly 85% of Unilever’s turnover. The remaining 100+ smaller markets will be run on a ‘One Unilever’ basis to benefit from scale and simplicity, further enhancing the group’s focus.

The productivity programme has been accelerated and is anticipated to deliver total cost savings of around €800m over the next three years, more than offsetting estimated operational dis-synergies from the separation of Ice Cream. Following thorough consultation processes, the programme is ahead of plan, with 2024 in-year savings close to €200m.

Unilever’s medium-term guidance remains unchanged. Post the separation of Ice Cream, the aim is to deliver mid-single digit underlying sales growth, supported by underlying volume growth of at least 2%. The company expects modest underlying operating margin improvement, driven by gross margin expansion through operating leverage and productivity improvements.

Back to today’s results. In 2024, reported sales rose by 1.9% to €60.8bn, held back by the impact of currency fluctuations (-0.7%) and M&A (-1.5%). Adjusted for these impacts, underlying sales growth (USG) – the key performance measure – was up 4.2%. This was in line with market expectations (+4.3%) and within the group’s multi-year range of 3% to 5%. Most of the growth was driven by volume (2.9%), while underlying price growth moderated to 1.3%.

The 30 Power Brands grew by 5.3%, driven by a 3.8% increase in volume, with particularly strong performances from Dove, Liquid I.V., Comfort, and Vaseline. The other brands saw a volume improvement to +0.7%.

In the final quarter, USG was 4.0%, a touch below the market expectation, with price up 2.7% and volume up 1.3%.

In emerging markets, USG was 4.1% in the full year, held back by Indonesia and China where distribution issues are currently being addressed. The company expects to see the benefits of these actions from the second half of 2025. Developed markets grew by 4.4%.

All five businesses reported growth: Beauty & Wellbeing (+6.5% USG to €13.2bn); Personal Care (+5.2% to €13.6bn); Home Care (+2.9% to €12.3bn); Foods (+2.6% to €13.4bn); and Ice Cream (+3.7% to €8.3bn).

As guided, the group’s turnover-weighted market share movement, which measures competitive performance on a rolling 12 month-basis, sequentially improved in the second half, reflecting increasing benefit from the Growth Action Plan.

The gross margin rose by 280 basis points to 45.0%, the highest in a decade, helped by input cost deflation in the first half, which turned into slight inflation in the second half. The underlying operating margin rose by 170 basis points to 18.4%, versus company guidance to be at least 18% with increasing investment behind the group’s brands. Underlying EPS grew by 14.7% to €2.98.

Free cash flow slipped from €7.1bn to €6.9bn, with cash conversion of 106%. Net debt rose by €0.9bn to €24.5bn, 1.9x EBITDA and in line with guidance of around 2x. Following the completion of a €1.5bn share buyback programme in November, the company has announced a new programme of up to €1.5bn starting today and to be completed in the first half, well ahead of the separation of Ice Cream. In addition, the quarterly dividend has been increased by 6% to €0.4528.

Looking forward, market growth, which slowed throughout 2024, is expected to remain soft in the first half of 2025. The group still expects underlying sales growth to be within the multi-year range of 3% to 5%, with growth expected to improve during the year as price increases, reflecting higher commodity costs in 2025. The group expects a more balanced split between volume and price. The group anticipates a modest improvement in underlying operating margin for the full year versus 18.4% in 2024. This is slightly below the current market expectations. The improvement is expected to be realised in the second half given the very strong first half comparator of 19.6%, which benefitted strongly from the combination of carry-over pricing and input cost deflation.

Source: Bloomberg

Yesterday evening, EssilorLuxottica released its 2024 full-year results which were slightly better than market expectations. The group reiterated its 2026 revenue guidance and presented an upbeat assessment of its market on the post-results call. In response, the shares have been marked up by 3% this morning.

EssilorLuxottica is the global leader (with a 25% share) in the eyecare and eyewear industry with exposure to the design, manufacture, and distribution of ophthalmic lenses, prescription frames, and sunglasses. We believe the long-term outlook for the industry is positive, driven by an ageing population, increased incidence of poor eyesight (caused in part by the increased use of smart phones and tablets), a growing emerging market middle class, increased education regarding sun protection, and the growth of eyewear as a fashion accessory. By 2050, uncorrected poor vision is predicted to reach epidemic proportions with over 50% of the world’s population expected to suffer from myopia (short-sightedness), many with serious vision-threatening side effects and long-term implications.

The company’s competitive advantage is based on its scale, portfolio of premium brands (such as Ray-Ban and Oakley), product innovation, flexible manufacturing base, quality service, routes to consumer, and partnerships. Essilor owns licences for some of the best-known luxury brands, including Chanel, Prada, Armani, and Jimmy Choo. The group also owns a majority interest in GrandVision (GV), a global leader in optical retail and an online presence, ownership of which expands its global retail footprint (to 17,600 stores) and reduces the competitive risk of retailer consolidation. The company states that its mission is to prevent industry commoditisation in Western markets, whilst promoting premiumisation in emerging markets.

During 2024, the company made two acquisitions to enhance its presence in the med-tech space. The first was an 80% stake in family-owned Heidelberg Engineering, a German company specialising in diagnostic solutions, digital surgical technologies, and healthcare IT for clinical ophthalmology. The deal brings expertise in early detection and diagnosis. There is little overlap with the group’s current instruments offering, and new and better access to doctors and clinics, strengthening relationships that could lead to cross-selling opportunities. More recently, in December, the group announced the acquisition of Espansione Group, an Italy-based company specialised in the design and manufacturing of non-invasive medical devices, protected by international patents, for the diagnosis and treatment of dry-eye, ocular surface and retinal diseases. The company did not disclose financial details of either deal.

The company has also paid $1.5bn in cash for the streetwear brand Supreme, known for its lifestyle apparel, footwear, and accessories. The company runs a digital-first business and 17 stores in the US, Asia, and Europe. At first glance, the move appears somewhat of a diversification from the group’s core business – the rationale is that it will provide a direct channel to an audience that is very difficult to reach and adds a margin accretive business to the group. We have some reservations and will watch to see if the deal is a misallocation of capital.

The business mix is now optical at approximately three-fourths of total revenue, sun at 23% and the rest being represented by Apparel, Footwear and Accessories (including Supreme brand) and smartglasses (Ray-Ban Meta).

Back to the results. During the year, revenue grew 6.0% at constant exchange rates (CER) to €26.5bn, in line with the market forecast of €26.4bn. As expected, growth accelerated in the final quarter of the year to 9.2% at constant exchange rates (CER) to €6.78bn. Organic growth was 5.6%, with M&A (Supreme and Heidelberg) contributing 3.6%.

EssilorLuxottica is a vertically integrated player whose go-to market strategy is based on two distribution channels. Professional Solutions includes the supply of products and services to third-party eyecare professionals (i.e., wholesale). In 2024, revenue grew by 4.7% at CER to €12.5bn while Q4 growth was 5.5%.

Direct to Consumer includes the sale of products and services directly to end consumers, that is the retail business, comprised of brick-and-mortar stores and e-commerce platforms. In 2024, revenue grew by 7.1% at CER to €14.1m, while Q4 growth was 12.7%. E-commerce now accounts for 7% of revenue.

By geography, North America, the group’s largest region (45% of sales), grew by 3.1% at CER in the year, accelerating in Q4 to 7.8%, with Sunglass Hut positive. Elsewhere, growth was stronger: EMEA (+7.9%); Latin America (+9.7%); and Asia Pacific (+9.3%). China remained in positive territory despite macroeconomic headwinds, supported by Stellest’s 60% growth.

In addition to underlying market trends, growth is being driven by high quality and differentiated product innovation across the existing product line and in new markets. 2024 was another year of expansion for two new product categories EssilorLuxottica has been developing: myopia management solutions and smartglasses.

Stellest (myopia management) presented a five-year clinical study of its lenses, demonstrating conclusive evidence of their efficacy in slowing down myopia progression in children. Stellest is now being rolled out to additional markets in EMEA.

As for smartglasses, the partnership with Meta Platforms has been extended entering into a new long-term agreement, under which the parties will collaborate into the next decade to develop multi-generational smart eyewear products. The collection is performing better than expectations and currently demand is outpacing supply – Ray-Ban Meta has sold 2m units since the launch, with a strong acceleration in 2024

The company has also diversified into the hearing solutions market with a disruptive new technology (i.e., lenses with acoustic technology) to meet the needs of the 1.2bn consumers suffering from mild to moderate hearing loss. The audio component is completely invisible, removing a psychological barrier that has historically stood in the way of consumer adoption of traditional hearing aids. The product (called Nuance) has seen positive results in consumer testing in the US and has now received clearance from the US FDA. The glasses have also achieved the CE marking under the Medical Devices Regulation in the EU, which will allow Nuance Audio to launch in Europe. As a result, they will be available for purchase in the US and key European countries starting from the first quarter of 2025.

Over time, the company has been able to convert its revenue growth into margin expansion, leveraging its vertically integrated business model and successfully absorbing the inflationary pressures on most cost items. Gross margins are high (up 30 bps to 63.7% in the year), while the pro-forma operating margin grew by 50 basis points at CER to 17.0%. As a result, operating profit grew by 9.4% at CER to €4,414m, in line with the market expectation.

The business generates strong free cash flow (€2.4bn in the year) and is financially robust. Net debt (including lease liabilities) rose from €9.1bn to €11.0bn, 1.7x EBITDA, with the increase driven by acquisitions. A dividend of €3.95 has been proposed, in line with last year, equating to a 1.4% yield.

Looking forward, Essilor doesn’t provide near-term guidance, although on the call, the company highlighted that the main driver of revenue growth in 2025 will be volume, with price/mix less of a factor. The company remains confident in its strategic vision and its ability to deliver on its long-term outlook for annual revenue growth of mid-single digit between 2022 and 2026 and adjusted operating profit margin of 19%-20% in 2026 (vs 17% in 2024). The target of €27bn-€28bn of revenue in 2026 was reiterated.

Source: Bloomberg