Morning Note: Market news and updates from Unilever and WPP.
Market News
Equity markets were marked lower in the US last night – S&P 500 (-1.4%); Nasdaq (-2.4%) – on the back of mixed corporate results. This morning Asia, markets were also generally weak: Nikkei 225 (-2.1%); Hang Seng (-0.3%); Shanghai Composite (+0.5%). The FTSE 100 is currently trading 0.7% lower at 7,362. Standard Chartered is down 12% in early trading after profit missed with charges related to China investments. HSBC is down 3%.
Bond yields have crept back up again – the 10-year Treasury is 4.96%. The ECB will probably stand pat on rates for the first time in over a year and may indicate its intention to hold through the first half of 2024. But Christine Lagarde warned the fight against inflation isn’t over, saying officials must be “very attentive” to risks.
Sterling slipped to $1.2083 and €1.1463, while gold moved back up to $1,987 an ounce.
The injection of a war premium into the oil futures market hasn’t stopped prices for actual physical barrels from tumbling. Sweet crude prices have plunged in recent days, traders said, amid falling refinery profits and high freight costs. Brent currently trades at $89 a barrel.
The UAW reached a tentative labour agreement with Ford, putting pressure on the carmaker’s two chief rivals to end a protracted strike that has cost the industry billions of dollars. Ford agreed to a record 25% hourly wage hike over the life of the contract, which exceeds four years.
Source: Bloomberg
Company News
Unilever has today released its Q3 results and reiterated its full-year revenue guidance. The new CEO has set out his action plan which aims to drive growth and unlock the group’s potential. In response, the shares have been marked down by 3%.
Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of over €60bn across five business groups: Beauty & Wellbeing (20% of H1 2023 sales), Personal Care (23%), Home Care (20%), Nutrition (22%), and Ice Cream (15%). 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.
Hein Schumacher has recently taken on the role of CEO. He was previously the CEO of the global dairy and nutrition business Royal FrieslandCampina and Non-Executive Director of Unilever. With today’s results, he has set out an action plan to address the gap between the group’s past performance and its potential. The focus will be on:
1. faster growth: focus first on 30 Power Brands (70%+ of turnover), scale multi-year innovation, increase brand investment and returns, and selectively optimise the portfolio. There will be no major or transformational acquisitions.
2. greater productivity and simplicity – to build back the gross margin and drive the benefit of the new organisational structure.
3. a stronger performance culture – with a new incentive framework.
The action plan will strengthen the group’s performance within its existing multi-year financial framework: underlying sales growth of 3%-5%; modest margin expansion; 100% cash conversion; mid-teens return on invested capital; EPS growth and an attractive dividend; and delivering total shareholder returns in the top third of the peer group. The group will provide more detail on each of the actions in this morning’s presentation. Initially, our thoughts are that the plan is more evolutionary that revolutionary, with the group focusing on generating the most from its existing brands and an unparalleled distribution capability.
Returning to today’s results, in the three months to 30 September, reported sales fell 3.8% to €15.2bn,
the market forecast. Underlying sales growth (USG) – adjusted for the impact of currency fluctuations (-8.0%) and M&A (-0.6%) – was 5.2%. The result was in line with the market forecast (+5.0%) and, as expected, below the rate of growth in the first half (9.1%).
Growth was driven entirely by price increases (+5.8%) in response to continued high input cost inflation. However, as expected, price growth continues to moderate as inflation eases. Despite the price increases, volume only fell by 0.6%, with the resilience driven by innovation and investment behind the group’s brands. Underlying volumes are now positive in Beauty & Wellbeing, Personal Care, and Home Care.
In emerging markets, USG was 8.3%. However, China is recovering more slowly than expected and sales declined mid-single digit in the quarter. Developed markets grew 0.8%, with North America and Europe both growing low single-digits.
The performance by business segment was Beauty & Wellbeing (up +7.4% to €3.1bn); Personal Care (up +8.0% to €3.6bn); Home Care (+5.3% to €3.1bn); Nutrition (up +5.6% to €3.2bn); and Ice Cream (up -2.8% to €2.2bn). There are 14 €1bn+ brands that account for 56% of turnover that grew by 7.2%, led by strong performances from Dove, Hellmann’s, Rexona, and Sunsilk.
On a disappointing note, only 38% of the business is winning market share, versus the group’s target be over 50%. This reflects the significant (planned) net SKU reduction, pricing dynamics, and consumer shifts in certain markets. Improving competitive performance is a key focus of the action plan the group has set out today.
As expected, there was no comment on the group’s financial performance with this release. At the half-year stage, net debt was €24.3bn. The group recently completed a €3bn share buyback programme. In addition, the quarterly dividend has been maintained at €0.4268. The group has also announced it has entered into an agreement to sell Dollar Shave Club with completion expected before the end of 2023. Unilever will retain a minority shareholding of 35%.
The group has reiterated its guidance for underlying sales growth to be above 5% – despite being up 7.7% year to date – with underlying price growth continuing to moderate. The expectation for net material inflation for 2023 is still around €2bn. The group continues to expect a modest improvement in the underlying margin in the full year, reflecting higher gross margin and increased investment behind its brands.
Source: Bloomberg
WPP has this morning released its Q3 results, which were below market expectations, and once again lowered its full-year guidance. In response, the shares have been marked down by 3% in early trading.
WPP is a global communication services company which has undertaken a business improvement programme leaving it with stronger agency brands, a simpler structure, and a stronger balance sheet.
However, in the near term, the company has been impacted by cautious spending trends, particularly across technology clients. In the three months to 30 September, like-for-like (LFL) revenue less pass-through costs, the key measure of the group’s top-line performance, fell by 0.6% at constant currency, to £2.8bn. This was below the market forecast of +1.0% and the growth rate generated in the two previous quarters: Q1 (+2.9%); Q2 (+1.3%).
Performance by business sector was: Global Integrated Agencies (+0.1%), with GroupM, the group’s media planning and buying business, up 1.6%; Public Relations (-0.9%); and Specialist Agencies (-6.8%).
The group’s largest region, North America, fell by 4.1%, primarily reflecting lower year-on-year revenue from technology clients and the expected impact of 2022 client losses in the retail sector. Elsewhere, growth was 1.1% in the UK, 1.1% in Western Continental Europe, and 2.8% in the Rest of the World. China was impacted by a slower than expected macro recovery impacted our integrated creative agencies.
New business performance remains strong, with $1.4bn won in Q3, including Estée Lauder, Hyatt, Lenovo, Nestlé, Unilever, and Verizon.
Most of WPP’s costs are variable in nature and substantial actions have been taken to manage profitability and cash flow. Good progress on its transformation programme is being made, with the group on track to reach its target of at least £450m this year versus a 2019 base and £600m by 2025.
The group has today announced two significant moves to further strengthen its competitive offer, simplify its business, and benefit from scaled technology platforms. Firstly, the launch of VML, the world's largest creative agency. Secondly, further integration of GroupM with common products and single technology platform, streamlining of operations and back-office functions supporting client-facing agencies. Together these moves are expected to drive stronger revenue growth and net annualised cost savings of at least £100m in FY25 with a part-year benefit in FY24.
As this was only a revenue update, there is limited commentary on the group’s financial position. Average adjusted net debt for the 12 months to 30 September was £3.5bn, versus £2.5bn last year, with the increase primarily due to the 2022 share buyback programme.
The group allocates capital on a mix of:
- capital expenditure, with £300m expected in 2023.
- targeted, scalable M&A to expand the group’s presence in fast growing regions and its global offer in experience, commerce, and technology.
- dividend growth, with a payout ratio around 40% of headline EPS. The yield is currently around 5%. In the first half, an interim dividend of 15p was declared, the same as last year.
- share buybacks, albeit not at present.
Full-year guidance for LFL revenue less pass-through costs growth has been lowered (again) from 1.5%-3.0% to 0.5%-1.0%. The year-to-date growth rate is 1.2%. The guidance for a headline operating profit margin is now 14.8%-15.0% versus previous guidance of ‘around 15%’.
For now, the group’s medium-term guidance remains unchanged: revenue less pass-through costs growth of 3%-4% and headline operating margin of 15.5%-16.0%. The company plans to hold a Capital Markets Day in January 2024 to update on its strategic roadmap to drive growth, further efficiencies, and margin expansion over the next three to five years.
Source: Bloomberg