Jul 20, 2017
Executives
Andrew Stephen - Vice President, IR Paul Polman - Chief Executive Officer Graeme Pitkethly - Chief Financial Officer
Analysts
Warren Ackerman - Societe Generale Martin Deboo - Jefferies Jonathan Feeney - Consumer Edge Research James Edwardes Jones - RBC Capital Markets Reg Watson - ING Toby McCullagh - Macquarie
Operator
We're about to hand the call over to Unilever to begin the conference call. [Operator Instructions].
We will now hand over to Andrew Stephen.
Andrew Stephen
And welcome to Unilever's Half-Year Results Presentation, which will be given in the usual way by Paul and Graeme. Paul will give the headlines of the first half performance and talk about how Connected 4 Growth is building more agility and resilience into our business.
Graeme will cover the results in a bit more detail and Paul will wrap up. We'll leave plenty of time for Q&A.
As usual, I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures. And with that, I'll hand over to Paul.
Paul Polman
Well, thank you, Andrew, and good morning, everybody. The first half results demonstrate again good progress against the objectives we have set out.
We are building on the past eight years of consistent and comparative growth in both top and bottom line and the investments we've made over this time consistently. The Connected 4 Growth program, which we announced last year, is now accelerating this performance.
It is making Unilever simpler, more agile and more connected. It means we can bring better innovations to market faster, both globally and indeed at local level.
This is driving continued growth ahead of our markets, which we see as the best way of delivering long-term shareholder value. At the same time, the savings programs, which are an integral part of Connected 4 Growth, enable us to accelerate our margin expansion.
The savings programs are delivering faster than planned, allowing for a higher level of reinvestment going forward. In essence, our business model is one of investment-led growth ahead of the market.
It is a model of delivering compounded returns on investment for shareholders. This is evidenced by sustainable, attractive and growing dividends over the long-term.
Before we look at the results for the first half, let's start with the market context. As you will expect, it's mixed picture.
For the time being, our markets are still subdued growing at only about 2% in total. Looking ahead, there are some positive signals at a macroeconomic level but there are a few notable exceptions like Turkey or Egypt, currencies in emerging markets have mostly been stable, or even in some cases, strengthening.
In the short-term, we are seeing the benefit of this in the positive currency effects on our fast half results. More importantly though, over this time, we should relieve some of the pressure on the billions of people, who had their disposable income squeezed by these higher costs.
It will take a while for this to work through to the improve demand for our categories but in due course we should see the return to healthy growth rates in emerging markets as you all agree with me is now well overdue. In the short-term, there has been some significant disruptions in a number of markets.
Political uncertainty is high in several countries. This is hampering their recovery.
This is particularly so in Brazil, where the trade has reacted to contrasting demand by reducing stock. In India, the welcome introduction of the new Goods and Services Tax prompted distributors and wholesalers to cut back their stocks during the transition period.
And in Indonesia, we've seen changes in effects of calendar that led to a few less shipping days. Volatility such as this are likely to be renowned for the time being.
This is exactly why Connected 4 Growth is lending another day too soon. It makes our business more resilient and better able to continue to deliver profitable growth, despite these challenging market conditions.
With that context, let's first turn to the results for the first half of the year. Underlying sales growth grew 3%.
This was again ahead of our market. All of our categories, and all of our subcategories, except for spreads, showed growth.
Excluding spreads, underlying sales growth was 3.4%. Our savings programs are running ahead of plan as we have accelerated key initiatives of what we call now 5S in the supply chain that with the Connected 4 Growth organizational changes.
Together they are actually delivering more than €1 billion of savings in the first half of the year alone. Underlying operating margins was up by 180 basis points after an investment of about half of the growth savings generated.
The accelerated delivery of savings will allow a higher level of reinvestment, particularly in brands and marketing in the second half of the year. This will support an innovation plan, which is somewhat back-weighted this year particularly in personal care.
If you look at underlying earnings per share, they grew at a strong 14%. Free cash flow at €1.4 billion was €600 million higher than in the first half of last year, even after a one-off injection of €600 million into our pension fund.
Sustained competitive growth obviously depends on the quality of our brands and innovation. The Connected 4 Growth program once more is a key enabler here.
The new Country Category Business Teams, or CCBTs as we now call them, are all fully up and running. They are cross-functional teams, charged with the delivering of business results.
They take the innovations from the global team and land them in the marketplace but they are also now empowered and provided with resources to develop local innovations without going through the lengthy process of internal approvals and global teams. In a nutshell, this means that we both be more global and more local.
This gives us more frontline focus with more of our resources and activities closer to the market that customers list and where trends all develop from. Where these trends have regional or global relevance, the global category teams develop but then a more focused way so that we can scale them faster.
So far this year, we've actually reduced the number of global project by around 10% but at the same time increased the average size of those projects by over 20%. Meanwhile the local teams empowered and provided with resources to develop local innovations with speed has increased a number of local launches by 25% already this year alone.
We have just completed detailed reviews with each of our categories and clusters as part of our strategy review and it is clear that our innovation plans have never been stronger. Our global innovation has more differentiated technology.
We are also starting to step up again our expansions into white spaces and we are in a more agile and better able to meet the local trends more quickly. Let's just look at a few examples of what is already landing in the marketplace.
I don't think it's an exaggeration to say that our new Persil Powergems represents the kind of innovation that comes once in a decade. It's the first laundry detergent made with 100% active ingredients that makes it twice as concentrated as the powder with less chemicals to get the triple power of stain removal, care and freshness.
Signal Enamel Repair toothpaste takes our unique NEO Mineral Technology, which we originally introduced at the super premium price points in a product called Regenerate and it applies it now for the first time to one of our mass brands at a very affordable price. And then you have Magnum Double.
I know we all like that one, using double-dipping technology to create a sensuous double layer that now includes new raspberry and coconut flavors. All of our categories are planning significant white space expansions too.
Whilst I won't share the details of our future plans as you can understand, you can see here a few examples of launches which are actually happening now. The Hijab Fresh is an example of an entirely new brand.
Now launched in Indonesia, it provides a solution to the specific needs of Muslim consumers brought to life in a very local way. You have Baby Dove as an example of entering a new segment.
It was first introduced in Brazil three years ago and is now in 19 markets, with the US and the UK amongst the most recent launches. We are also just now introducing Omo into Iran, an example of taking one of our established brands into a new country.
And we continue to expand acquired brands as well. Examples would be TRESemmé that has just entered 25 new markets since we acquired it seven years ago and actually is now entering China.
Dermalogica would be another one that is entering China. We are also introducing Grom ice creams into the in-home market for the first time, an example in this case of entering a new channel.
Here you can see a few examples of the many initiatives in the market that show you the greater local agility for the Connected 4 Growth program and what that is really bringing to us. Take Lux Botanifique developed by the local team.
It takes Lux into the premium natural segment in Japan, already available online and the full launch is next month, or take Breyers delights in the US, low in calories, high in protein and priced as a super-premium brand launched at an accelerated pace to hit the summer season in the US. In Thailand, the country ended the year-long mourning period following the death of their beloved king and within two months our local CCBTs had launched the new laundry detergent to help people wash the black clothes that they are now wearing.
In Italy, the local foods team introduced a natural liquid bouillon under the Knorr brand taking the idea to launch in just four months, working with third-parties to develop and manufacture it. And another example from Italy, the homecare CCBT launched a combined spray and mousse under the Cif brand, expanding rapidly to local competitive development working closely with the global team and that digital advertising.
And finally, Dove Sakura, a seasonal limited edition in China taken from idea to launch in just five months. This is a different Unilever, and as I say, these are just a few examples.
Alongside innovation, we've been developing our portfolio through M&A as well. Acquisition can often be faster and more secure route to developing a new segment of our channel than doing it organically.
Recent acquisitions like Dollar Shave Club, Seventh Generation, Blueair, Sir Kensington, Living Proof and Hourglass are all examples of this. The other kind of acquisition consolidates strength and scaling our core categories and unlocks access to substantial cost and revenue synergies.
A good example is the acquisition of Quala home and personal care brand in North Latin America, which we announced in May. We will continue to target those kinds of acquisitions those that expand our presence in new categories, segments of channels and those that brings scale and synergies.
And we will continue to do so across our portfolio in personal care, homecare, and food and refreshment. As well as having a good strategic fit, acquisitions must meet our strict financial criteria and I think we have a good discipline and certainly track record of delivery.
A few of the acquisitions we made between 2009 and 2015 show that well over 80% of the investments we've made is either in line with or ahead of the original business case. For the more recent acquisitions those made during the last 12 months, it's obviously too early to make a full financial assessment, but I'm also encouraged to see them grow and grow in the aggregate at more than 20% in the first half year.
These will start to contribute to underlying sales growth as we obviously anniversary them. The final aspect of Connected 4 Growth that I want to talk about is how we are building our presence in new channels.
Some of this is through acquisitions as I've just described and some of it is organic. It's an important change because we see disruptions everywhere around us, be it in the rapidly growing e-commerce channel or the simultaneous growth of both discounters and premium drugstores or in how and where are people choose to spend their money and treating themselves with more impulse purchases.
In e-commerce we now have over 600 people developing our capabilities across the many different models, grocery.com, pureplay or direct-to-consumer and we're introducing more products and formats that are specifically designed for the online sales channel. Our sales through drugstores have been growing at twice the rate of our personal care business over the last few years.
This has been helped by partnerships with key retails and channels specific innovations like IUs [ph] and our net revenue management program to get the right assortment and price points. Our entrance into Prestige has also helped us to build scale and specialized beauty stores like Sephora or Ulta Beauty.
We now have 1,300 stores for our ice cream and tea brands and they are growing around 15%, 20% per annum and helping to build our brand equities and so underpin our growth of our refreshment units. With that, let me hand over to Graeme to take us through the results in more detail for the first half of the year.
Graeme?
Graeme Pitkethly
Thank you, Paul. Good morning, everyone.
Let's start with the first-half year performance by category. All the categories grew and all of them delivered a significant step-up in margin.
Personal care grew 2.6% with volumes flat. This was against the relatively strong comparator of 5.7% in the first half of last year, which was largely from volume.
Our three biggest personal care brands; Dove, Rexona and Lux and our largest brand in Prestige which is Dermalogica all grew in mid-single digits. However the trade disruptions taking place in Brazil, India and Indonesia have particularly affected volumes in personal care, and it's also in personal care that we see that innovations and marketing plans for the year to be most back-weighted.
We therefore expect a significant step-up in brand and marketing investment in the second half and an acceleration of volumes. Home care grew by 3.3%, with volume up by just under 1%.
Comfort fabric conditioners continue to grow strongly, and in Brazil our value brand, Brilhante, is benefiting from consumer down trading. Foods grew by 0.6% with volume down 1.7%, excluding spreads which declined by 3.7%, underlying sales for foods were by 2%.
Knorr, our largest brand grew at 4% driven by strong growth for cooking products in the emerging markets. This was partly offset by a decline in some of our non-core brands such as Pot Noodles in Europe.
Refreshments grew by 6.1%. Ice cream was up 7% driven by innovation behind brands like Ben & Jerry's and Magnum.
With another strong start to the season in Europe after a good season last year, tea grew by 5% driven by the specialty teas which we've been building within our portfolio. There was a drag to the overall refreshment growth from the decline in AdeS but this will come over the numbers in the second half as we completed the disposal at the end of the first quarter.
Looking now at underlying sales growth in the first half year by region. Asia/AMET/RUB grew at 5.5% with volumes up 0.8%.
Very unusually for this region volumes in the second quarter were actually down by 0.6% but this was heavily influenced by the fewer shipping days in Indonesia and the trade de-stocking in the transition to the new Goods and Services Tax in India. Our experienced Indian team have managed through the GST transition very effectively indeed and we expect to recover that volume shortfall in the second half.
China returned to good growth in the first half year, driven by rapid expansion in the e-commerce channel. Our businesses in Latin America again demonstrated the resilience with growth of 5% and volumes down by only 1%, despite the sharp market contraction and trade de-stocking in Brazil.
Mexico, in particular, delivered a very strong volume driven performance. In North America, we grew by 0.3% with volume down 0.2%.
Excluding spreads, the region grew by 0.9% and volume was up 0.3%. Here also growth was led by the fast emerging e-commerce channel where our sales were up by 50%.
In Europe, underlying sales were down 0.8% and volume down by 0.6%. Excluding spreads, both underlying sales and volumes were slightly positive.
Consumer demand is still weak in Europe and the retail environment is challenging in much of the region but we are seeing good momentum in Central and Eastern Europe and in Spain. Overall then underlying sales growth was 3% for the first half all from price, and over the remainder of the year, we expect an acceleration of our volume growth.
At the same time, we expect price growth to moderate. There are two reasons for this.
First of all, a little less pressure from commodity cost increases in the second half, and secondly, tax benefits from the introduction of GST in India will be passed onto consumers with an impact at the global Unilever level of around 28 to 30 basis points on price in the second half. M&A increased turnover by 0.8% largely through the acquisitions of Dollar Shave Club, Blueair and Seventh Generation, and partly offset by the disposal of AdeS at the end of the first quarter.
Currency translation increased turnover by 1.7%. This comes from stronger currencies in a number of emerging markets.
A positive effect from the stronger US dollar was almost exactly balanced by the weaker pound sterling. If exchange rates were to stay as they are today, we would expect a full-year benefit of around 1% on turnover and around 2% on EPS.
Now let's look at the drivers of the improvement in underlying operating margin. Starting with an update on our savings programs, which are delivering faster than planned and realized more than €1 billion already in the first half year.
This is a strong start towards our total target of €6 billion over the three years to 2019. In the supply chain, we delivered more than €500 million of savings in the first half year.
This includes the 5S program, which we first launched in home care, where it has delivered excellent results. We are now rolling the program out across the other categories, 5S looks to the business more broadly than traditional savings programs.
In addition to the usual areas, that brings for example savings through simplification. In laundry, we reduced the number of powder formulations by 65% and the number of liquids formulations by 35%.
Working closely with strategic partners contributes to both innovation and cost reduction, unit developments and packaging technologies, alternative active ingredients or the move to new weight efficient materials have significantly reduced costs all of that without compromising our focus on winning products. We are now making greater use of e-auctions for many of our purchases and this is beginning to generate a lot of value.
And a forensic look at the cost incurred versus the value that the consumer is willing to pay for demonstrates towards further opportunities for cost reduction while continuing to win with consumers. In brand and marketing investment, we have delivered more than €300 million of savings through the zero based budgeting.
Certainly it helped us to reduce wasted investment to drive efficiencies and to improve effectiveness. Let me give you just a few examples.
Our analysis shows that we are producing too many new pieces of advertising. More than 95% of our advertising films were being replaced before they had reached their maximum effectiveness.
Now this created a lot of wasted work, both internally and for our agencies. And by managing this better and running those for longer, we - our spend is down in agencies by about 17% in the first half.
At the same time by looking more closely and creatively at the costs associated with producing a new asset, we found savings opportunities, so we are now using a wider set of production houses and some lower cost locations. This has helped us to reduce average cost per film by 14%.
We've also tightened our disciplines around media planning. Let me give you just one example from Southeast Asia where we had a tendency to overexpose people to our advertising beyond the point of diminishing returns.
Here we've been able to reduce our media spend by 12% by focusing on the quality of our advertising reach. Across our ZBB program, we have set clear operational KPIs not just to track delivery of the savings themselves but also to ensure that we are delivering the underlying operating improvements in a healthy way, which is compatible with continued competitive growth.
In overheads with the savings around €200 million, we also see the benefits of ZBB. To take just one small example, the number of airline flights is down by 30% and the average cost per flight is down by 24%.
In addition the new Connected 4 Growth organization has enabled us to reduce middle and senior management headcount by 13% and integration of foods and refreshment into a single team will allow us to unlock substantial further savings. So let's see how this is reflected in our margin development.
Underlying operating margin increased by 180 basis points. Gross margin was up by 40 basis points.
The supply chain savings of more than €500 million have largely been reinvested as the price increase of 3% was below the pricing that would have been needed to offset commodity cost increases in the first half. These increased by mid-to-high single digits in local currencies.
As we communicated before, we expect our lower level of commodity cost inflations in the second half when we'll be looking to retain more of our savings as well as taking less pricing. Brand and marketing investments was lower than last year by 130 basis points.
There are two main reasons for this. Firstly, the strong and fast delivery of savings and productivity gains from ZBB.
And secondly, a back-half-weighted innovation plan this year particularly in personal care, as we focused on getting the new CCBTs fully up and running in the first half. With a planned step-up in the second half, we expect brand and marketing investment in absolute terms to be maintained at or around last year's levels.
Our overheads improved by 10 basis points. The benefits in the savings programs have been largely offset by the higher overheads mixed associated with the new business models we are developing and acquiring to strengthen our position in direct-to-consumer e-commerce and with retail-led brands for example.
Underlying earnings per share increased by 14.4%. Operational performance, which is the combination of growth and the margin contributed 16.9%.
We lost one-off gain last year on our investment in strong products, which more than offset increased income from our Pepsi Lipton joint-venture to give a drag of 1.7%. Our underlying tax rate was higher this year at 27.9% compared with 26.1% last year.
We expect the rate for the full-year to be in line with our medium term guidance of around 27%. There was a small gain from share buybacks, representing the impact since the program began in May.
And currency movements had a favorable impact of 2.6%. Free cash flow was €1.4 billion, that's an increase of €600 million on the first half of last year.
This result was achieved despite a one-off injection of €600 million into our pension funds which we flagged with the first quarter's trading update. We continue to apply rigor and discipline to our management of working capital and our moving annual average stocks have reduced by a further two days over last year.
Capital expenditure continues to trend down, following the earlier phase of reinvestment and we expect it to be around 3% of sales for the full-year in line with our longer term guidance. Our net debt increased from €12.6 billion at the end of last year to €13.8 billion.
This includes the effect of €1.4 billion of share buybacks completed between the start of May and the end of June. We are well on track to complete the €5 billion share buyback program by the end of the year.
And finally, our net pension deficit halved to €1.6 billion as a result of both the cash injection and strong investment returns. And with that, let me hand back to Paul.
Paul Polman
Well, thanks Graeme. So let's wrap up for the interest of time.
As you have seen the accelerated Connected 4 Growth program which started in the fall of 2016 is actually working well for us. As Graeme has just shown you, we are running faster than planned with our savings programs as well as our margin delivery.
But fundamentally Connected 4 Growth is about securing long-term profitable growth through impactful innovations and local agility. With the new organization now fully up and running, including the local CCBTs and more focused global category teams, we have a strong innovation plan for the second half of the year.
You can just see you a few examples of that on this chart that I won't go into for the interest of time. We will be supporting these with a significant step-up in brand and marketing investment in the remainder of the year and expect to see an acceleration of our volumes.
We continue to expect underlying sales growth in the 3% to 5% range for 2017. We now also expect underlying operating margins to be up by at least 100 basis points and upgrade to our previous guidance and we expect another year of strong cash flow.
And with that, let me open it up, Andrew, if I may, to questions.
Andrew Stephen
Thank you, Paul. [Operator Instructions].
And finally keep your questions to a maximum of two. So I see our first question is from Warren Ackerman of Societe Generale.
Warren, please go ahead.
Warren Ackerman
Good morning guys. It's Warren Ackerman here at Soc Gen.
Two questions actually, both on volume. The first one is a bigger picture question for Paul on volume.
Paul, I remember when you first started back in 2009, you talked about getting volume growth up to global GDP growth. That was one of your key priorities.
It seems to me that there hasn't really come through in recent years. If I look at last year, global GDP growth was north of 3% but low volumes were less than 1%.
I know there are reasons but my question really big picture is, are you disappointed by your volume performance and should we be concerned about the impact of lower media spend of volumes going forward? And then specifically for Graeme, second question on volume.
Can you isolate, Graeme, the impacts from less trading days in Indonesia, maybe also kind of tell us what volumes did in Brazil in Q2? I think in Q1 Brazilian volumes were down 10% [ph].
Thank you.
Paul Polman
Thanks, Warren. I appreciate both questions.
Obviously our model continues to be in investment-led growth model. You've seen our significant increase in brand spend over the last nine years.
I think cumulatively we've added about €12 billion through our brand spend to strengthen our brands. So those are significant investment and we continued to do that.
What you see over the first six months is a small adjustment in brand spends really related to phasing our savings programs and maintaining competitiveness in a market where we see a lots of our competitors slightly coming down. We are again flag that for the total year our BMI will be flat.
So I don't see that we are understanding media. I don't have any indication on that one.
On the volume side specifically, there is a component obviously [indiscernible] I can take out, so you see some of the volume coming through. We expect the second half of the year to have a positive volume component but there is no doubt in my mind that longer term we need to have more volume in this market as we grow or as we continue to grow our business.
And as I said, I have no doubt either that that actually we'll be coming with the plans that we have put in place over the second half already and you'll see that. But there are some components that Graeme will go a little bit more in detail in the first half that have cost us the volume a little bit more and I'll let him answer that.
But let me take a little bit of a longer term view and give you the macro picture. What we will unfortunately had to deal with despite growing our business from €38 billion to now are about €55 billion despite continuing to grow at twice the market rates and ahead of our competitors, we have had one headwind that is consistently stuck us which is really in the emerging markets where since the financial crises, interest rates, currencies etcetera, we've had a prolonged period of about eight, nine years now where we have seen significant weakening of emerging market currencies.
Well, with unfortunately we have to price as many of that is being imported, and as we price for that, we have seen in these countries that rate-related increases or productivity-related increase were actually trailing the pricing that we have to do on our products and the markets have been subdued. So despite seeing in this six months for example, a 5.5% increase in the emerging markets, you actually see the volume component of these emerging markets continuing to be very, very low, while historically it was all volume-driven growth.
I am convinced that that is coming back now. We are starting to see these currencies stabilizing.
We are starting to see the effects of our pricing that is needed being more temperate now and we are starting to see vary in some markets with volume components coming back. That's obviously a very big part of the total that we're producing as overall numbers.
So I'll let Graeme give a little bit more granularity on Indonesia because I just came from there and perhaps India as well you might a little too.
Graeme Pitkethly
Just to pick up from where you left off there. Warren, as Paul said, our volumes have actually been improving sequentially over the last three or four quarters.
I know they are flat in this quarter but there is no volume growth in the market but there is a sequential improvement and that's despite the three markets that we called out specifically and it's worth drilling into them a little bit, and that's India, Indonesia and Brazil, because in aggregate the impact on those markets - we think that that has had about an 80 basis point impact on volume at an aggregate level and you see it more in the Asia/AMET/RUB geographic results. We think it about 150 basis points impact there.
And particularly in personal care, those three markets are 25% of our personal care business in just those three markets. We think there is about 130 basis point impact.
Addressing your question on Indonesia, in total, there were nine fewer shipping days in the first half in Indonesia. That was the timing of the Lebaran holidays and unexpected two day ban on transportation which was news [ph].
And as a consequence the Indonesian volumes were down by the high-single digits in the second quarter. As you mentioned, in Brazil, volumes were down 10% in the first quarter but have improved.
They are only being down mid-single digits in the second quarter that we've got strong contraction in market volume of course there with the economic difficulty in Brazil but - and also a bit of a credit crunch interest rates of 13% or so versus inflation of 4% as well, so a lot of customer de-stocking as money goes into bank deposits. And just to round out the picture Warren, in India, as I said in the presentation, I think we've managed the GST implementation very well there.
Congratulations to the team on the ground. They've done a really good job.
We would expect to recover most of that volume we lost in the second quarter over the balance of the second half.
Warren Ackerman
Okay. Thanks guys.
Andrew Stephen
And our next question is from Martin Deboo of Jefferies.
Martin Deboo
Yes, morning gentlemen, Martin Deboo at Jefferies. It's a question probably for Graeme, I think on what I would call the moving parts of margin in H2.
And I didn't want to be churlish given how good H1 has been but the axiom of your guidance is that you're only going to see something like 20 bps of margin improvement in H2. My back on the envelope on A&P would suggest that full-year A&P is going to be down about 70 bps, therefore flat in H2.
So I guess the question is, why are you being so conservative on full-year margin guidance? Surely if cost savings continues to flow in H2, there is no implication from restructuring costs if we're looking at underlying margins.
So I'm just curious as to why you don't feel even more confident on your margin guidance full-year than you are being?
Graeme Pitkethly
Good morning, Martin. Can't argue with your mathematics there but let me just try and deconstruct it a little bit for you.
You're right. We now expect to deliver at least 100 basis points and that's quite a slowdown in moment rate from the 180 that we delivered in the first half of the year, but I think the incredible thing is just to go directly to the mix of that delivery in the first half of the year with a 130 basis points from brand and marketing investment.
Absolute levels of spend were down about €200 million in the first half. We think we were very competitive through that period.
When we look at share by share of market for example, it's clear that we are still above 100 over the first half year for that. We are very clear that we are competitive with those spend and that the benefits are coming through productivity but it's clear from that and the step-down that we had that the market rate of investment is actually coming down a little bit.
That's the first thing. Second thing is that, as Paul said in the presentation, we really do have a second half weighted innovation program and we do expend therefore to step-up the brand and marketing investment.
As we said before, we want to make sure that we are investing to keep the growth momentum going. We are still growing 1% or so ahead of our markets.
We think it's very important to land that innovation well and invest behind it, and I think you'll see that in the second half of the year. That means that we expect to come over the full-year with a higher level of investment in BMI in the second half will be accelerating the thing absolute spend levels that we saw last year and net-net with a further contribution from gross margin, we should step-up in this delivery because of the phasing of commodity cost increases and the delivery of savings programs, which the commodity cost ease off a little bit in the second half, our savings programs continued to deliver, that means we'll see a shift in mix of margin delivery, more gross margin, less in aggregate from brand and marketing investment.
And we think overall that that will give us at least a 100 basis points for the full-year. So you're right, we are not banking the momentum.
We've gotten extrapolating it. We think we need to continue to invest buying the business.
We've got a good program to do that and we need to remain competitive. So that's really the anchor point of that guidance.
Paul Polman
Martin, it's really in the BMI to ensure continued growth. This is a long-term compounding growth model based on reinvestment and we have major innovations coming up that we will put our BMI against.
So life is not exactly measured in the six months nor do we run our business that way, and you'll see the swing in the BMI component that will be clear at the end of the year.
Martin Deboo
Okay, it's all very helpful. Thank you.
Paul Polman
Yes.
Graeme Pitkethly
Thanks Martin.
Andrew Stephen
And we have a next question from Jonathan Feeney of Consumer Edge.
Jonathan Feeney
Good morning. Thanks very much.
Couple of questions please. First just a detailed question.
Graeme, you mentioned that pricing in the first half wasn't enough to cover commodity, you'd expect them to back off in the second half. Could you give us a sense to exactly how much you would have needed and would need in the second half to cover commodities, if that's something you could probably disclose?
And also in your commentary - and Paul certainly I would love your comment on this too - you mentioned - Graeme mentioned a forensic look [ph] that what the consumers prepared to pay for, and I thought that was an interesting comment. If you look at the volumes delivered this first-half in the context of all the cost savings you have globally, five years ago, 10 years ago, given all the changes that have happened with the consumer, would you have been spending back more of this savings to drive volume right now and that maybe this forensic look is driving you to price a little bit more versus - and wait for the volume to come more naturally or is that fanciful thinking on my part?
Thank you.
Paul Polman
I'll answer second one. There might be good for second.
It is clear that we have seen with competitive benchmarking and our own feedback from the markets that our 5S program as we call it, gives us an opportunity to be even sharper in designing for value. What it really means is that what our price points and often its currency-related because of our developing market issues but our price points that the consumers can afford and design our product cost structure around that.
We gave you last time, I think, on the call the example of the deodorant can but one deodorant might be 10% cheaper to the consumer but the can itself in price would be higher. We don't want that any more.
So we are putting enormous energy in the systems with our design people, formula-wise, packaging-wise to be able to reflect product cost structures that mirror more of the price points and that's a huge idea and we see huge possibilities there. Your question, if you look back over the last five or 10 years, the reality is we've grown at twice the market rate.
We've outgrown our competitors significantly. I can take - especially in home and personal care at double the rate.
And we've been accused that sometimes that perhaps putting more into growing and moderating that a little bit more with growth in the bottom line. So there is always a fine balance how you trade off these two things.
I think after having invested €12 billion in the total BMI component and significantly strengthening our business, we certainly feel that we are competitive now and many of the volume growth components that will come as we move forward will actually come from a much stronger innovation program than anything else and that's where we are focused on now and I think we are starting to see the first effects of that. If you ask me your question, would you have invested more of your savings to grow?
I think we might have gotten more pressure from the market that we are not progressing as not from the bottom line, so I have the fine balance here, a balance where I need to continuously to deliver on performance to have this compounded long-term growth model works and to continue to invest in the long-term. And that's always a balancing act that in hindsight you would do some things differently but I think broadly we are getting that balance right, and as I said before, you'll see the volume components coming in moving forward interestingly once more, more driven by another step-up again in an innovation program that many of you have commented on is getting stronger and stronger at Unilever.
Graeme Pitkethly
Jonathan just to pick up your first point on commodities and pricing. It's really - it's impossible in the time really to give you a very granular answer principally because of the interplay between the movements in commodities and hard currencies that we talk about when we say high-single digits and mid-single digits.
That's hard currency pricing and how that actually lands in markets is hugely impacted by currency movements, foreign exchange movements against that. But just broadly, our pricing of 3% if you think about it mid-to high single digits increases on the base of commodities that we have in the first part, that would give you a number that's well in excess of the pricing applied to our turnover number and that shows an extent to which we've had to work good work in the supply chain to deliver the savings just remain competitive.
And when we've got those two deltas, that's when we say that we've been investing in pricing and investing our savings back into those programs. As I said in the presentation, we do expect the commodities to inflation to ease off so that would be mid-single digits for the full-year and we expect more of those to be invested back into brand and marketing investment in the second half.
Jonathan Feeney
Thank you very much.
Andrew Stephen
Thanks Jonathan. Next question is from James Edwardes Jones of RBC.
James, go ahead please.
James Edwardes Jones
Yes, good morning team. Can I go back to Martin Deboo's question quickly?
I'm still struggling with that second half margin. If margin is going to be broadly flat as a percentage of sales in the second half, gross margins improving and you've got cost cuts cutting through, why are you only pointing to something in the order of 20 basis points margin growth in the second half?
Paul Polman
Let me just stop this otherwise we get the same question over and over again. We got 130 basis points pickup in the first half on BMI.
In the second half, we'll have a slightly negative margin contribution of BMI, if you then look at that swing that gets into the bottom line. So guys just run your own numbers there but that is what we keep telling you.
So in the second half, we will spend more BMI behind the increased pace of innovations, and as a result, our contribution from BMI will be negative in the sense that it will lower the margin over the second half.
Graeme Pitkethly
You could expect the contribution of gross margin and BMI maybe to be roughly 50-50 in terms of the overall margin contribution.
Paul Polman
Yes.
James Edwardes Jones
Sorry. Say that again, Graeme?
Graeme Pitkethly
In terms of the overall bottom line margin improvement for the year, you could expect the contribution from gross margin and the contribution from BMI to be roughly equal.
James Edwardes Jones
Okay, but then you should have cost cuts on top of that. It still seems you're being relatively cautious.
Paul Polman
No, we're not. We are going up in gross margin from this quarter to next quarter.
We'll probably get a little bit more out of gross margin. We will be spending more in BMI and we will continue to write the efficiencies in [indiscernible].
As a result of that between first and second half, you will see that the second half margin progress will be less than the first half. Overall will be around 100 basis points, slightly plus perhaps when we come out at the end of the year but it will be around that 100 basis point.
That's really what we are telling you.
James Edwardes Jones
Okay, thank you.
Paul Polman
Yes.
Andrew Stephen
So we have two more questions on the line. First Reg Watson from ING.
Reg Watson
Hi gents. Sorry, Paul, I appreciate your frustration with the questions on margins and the explanation you've just given.
But looking at the slides on the update on savings programs, you had greater than €300 million from brand and marketing savings. That's 110 basis points.
So you could look at the 130 basis points from BMI in the first half and 110 basis points from savings, only 20 basis points from the phasing of BMI spend. Why is that not the right way to look at this?
And therefore the delta between the first half, second half, the swing, if you like, is going to be 40 basis points.
Paul Polman
No, that is no problem looking at that. But what you don't take into this equation that we keep saying is that we reinvest some of these savings.
We are reinvesting, so we might report savings but it doesn't mean they all go to the bottom line. We've got some of these savings.
Reg Watson
I appreciate that. So some of that's already been moved back to the first half [ph].
Paul Polman
Yes, this is the first half was BMI we brought because BMI you can save quicker by for example running advertising longer on air, selling [ph] your production cost better. You can save quicker but your media for example is booked.
So there are savings that we can turn on but through to spend more, you might have a little bit longer lead time. So the way that your absolute savings work and the way that your reinvestments work might not be 100% aligned on a six months basis.
Reg Watson
Okay.
Graeme Pitkethly
Maybe I can just to illustrate that a little bit. So yes €300 million of BMI gross savings, about €200 million of that - about €100 million of that gets reinvested and €200 million was the movement in the absolute.
But within that, there is a phasing impact as well as the innovation between the first half and the second half. The same with the €6 billion of overall savings that we anticipate over the course of the next two years.
We expect that around two-thirds of that will be reinvested and about a third of it will drop into the bottom line. So when we are talking savings, Reg, we are always talking gross numbers, not necessarily tracking to the exact movement in the P&L.
Reg Watson
Yes, I appreciate that. It's always been some hedging [indiscernible] net of two in the guide.
Graeme Pitkethly
That's right.
Reg Watson
Final question for you, gents. So moving off of the margin, you'll be pleased to hear and somewhat more philosophical.
When you look at the multiple paid for Reckitt's food business, what do you think the implications are for Unilever on that?
Paul Polman
Well, I don't know. We don't comment on the competitors and what they buy, so that's…
Reg Watson
Well, it's more what they sold and the…
Paul Polman
Yes, but I think looking at the comments this morning in the press I think a lot of people are surprise by the multiple. But this is a quality asset, no doubt, but I think staying with Unilever you've seen very disciplined approach to M&A from Unilever.
We have an active M&A program. 80% of that is running in line or ahead of our payout of the actives we'll continue to have that discipline and that's probably why we didn't end up with that assets.
It's a high multiple for an asset like this according to many people that have written around it about it, so that's really what it is.
Reg Watson
Okay. Thanks gentlemen.
Andrew Stephen
And our final question is from Toby McCullagh of Macquarie. Toby go ahead please.
Toby McCullagh
Hi there. Good morning.
Just a couple for me. So following on slightly on the M&A side and then I'm afraid back to margins as well.
In terms of the M&A, putting together the Prestige's personal care business that was originally a target to get that around about €1 billion of sales. I just wonder if you could give us an update of roughly how big that is now and what the underlying sales growth of that aggregate business is in the quarter or year-to-date and whether you can share anything on the margin of that business, either the number itself or whether it's accretive dilutive to personal-care more broadly or the group?
And then also on, I suppose relatively recent M&A, an update on Dollar Shave Club. It's interesting to know that Harry's has launched fairly aggressively in the UK recently.
I just wonder what the plans are at Dollar Shave Club? And then just two very quick sort of clarifications on overall margin.
I wonder in the underlying operating margin in the first half, was there an FX impact in the plus 180 basis points? And then a final clarification.
You've given us helpful on the impact of GST being about 20 or 30 basis points hit at the group level coming through pricing. Just looking at the HUL presentation, is there an offsetting positive margin implication that we should expect within that, and if so, is it material?
Paul Polman
Yes, thanks. So Toby if I just go to Prestige for a second, first.
Obviously we're very happy with the Prestige's business that we are building. We've just added Living Proof and Hourglass with that.
So if I now look at the total Prestige unit that we've put together, it's about €0.5 billion just to keep it simple and they are doing relatively well. We have brands like Living Proof or Hourglass anywhere between 15% and 25%, 30% growth and we are happy about that.
That bigger brands in all of this is Dermalogica, where we have spent the first year bringing the sales back to the channels that we want to sell in and get rid of the grey market. But having done that, we now see the growth rates in the higher single digit numbers.
We are just launching the brand in China as I mentioned before. So we feel we have now a portfolio that is good.
The Hourglass acquisition by the way was very well received by the retailers because it really completed a little bit more our Prestige company level. Within all of that, I think most of the brands are actually amongst the fastest growing brands.
Unilever Prestige and skincare grew about 14% and would be one of the top 10 players actually in double-digit growth in that segment. In Prestige hair, although we only have Living Proof as I mentioned, also one of the strongest growing brands.
So we are pleased with how that business is growing, increasingly getting an e-commerce component to that, for example in the case of Dermalogica. So as we are putting this together, very good people running it like facility and others looking at some selective further acquisitions to strengthen that unit but bit by bit we are exactly creating what we anticipated to create and we are getting stronger with retailers.
Obviously some of the major retailers behind this like Ulta or brand.com or Sephora. We are becoming a major player to them and that's a good thing.
It will take a little bit. When I talked about the €1 billion which is certainly true which is a number that I feel we need more or less to have a critical mass within this company.
I've never said that we will do that overnight. The €1 billion for me is sort of a 20-20 type thing that we keep in mind with the combination of organic growth and M&A.
This is highly fragmented market where the brands are smaller but where you need a portfolio of brands. But so far, our acquisitions work out well.
On the margin side, it is slightly margin dilutive as we build these brands, but I think that will pretty quickly come in line with the total company. But for now, we are still slightly margin dilutive and got growth accretive and that's obviously what we have communicated before as well.
So, so much on Prestige. Just one or two words on margin.
Toby McCullagh
And Dollar Shave?
Paul Polman
Dollar Shave Club. Dollar Shave Club is obviously doing very well.
We continue to grow well into the double-digits and expanding the brand. There is no doubt that there is reaction in the marketplace from the biggest competitor and from Harry's that we are obviously responding to as well.
It gets reflected a little bit in the customer acquisition but we continue to acquire at a very high pace the consumer base. And like Harry's, we're looking also at expansion beyond [indiscernible].
So we continue to feel very confident that we made the right acquisition there and it's starting also to permeate into other parts of our business where we are leveraging the benefits of direct-to-consumer and increasingly starting to leverage that as well.
Graeme Pitkethly
And just on your question on margin, Toby, I'll actually pass over to Andrew for the detail but the P&L impact of foreign exchange on margin was pretty small in the first half. It was around about 10 basis points.
Andrew Stephen
Yes, that's correct. So, there are two parts of your question I think.
One was on the FX impact which Graeme has just addressed. The other was one on India and GST.
There were two factors that HUL called out when they reported their results the other day. The first was a pure accounting impact of where credit fund exercises are booked.
We don't see any impact of that in the Unilever consolidated numbers because under IFRS turnover was already consolidated [inaudible], so no impact from that. The other impact is the fact that there is a less tax paid and there are full credits for the taxes that are paid.
That will get passed onto consumers in the second half. That did means the less cost, less price as well and a minimal impact on our margin.
So with that, that finishes the questions and we'll bring the close to a call there. Paul, do you like to wrap up with any closing remarks?
Paul Polman
No, I would like to thank everybody because it's in the midst of the summer and I don't know if you're calling in from your holidays, so if you still have your holidays. But all I want to end with is thank you for your support.
We think they are overall solid results. We do believe that we will see an acceleration of the top line in over the second half.
We will also see a stronger volume component over the second half, that's mainly driven by a strengthened innovation program, which then also needs the appropriate BMI support and so that's really what we've tried to communicate to you. Overall good results from our side.
We believe the Connected 4 Growth program is working. It's increasingly visible in the company as I go around.
It's creating a lot of energy and excitement here. So what we've put in place since the fall of 2016, as we've mentioned to you, are starting to come through in the numbers.
I appreciate your support. I wish you some time off with your loved ones.
Enjoy the holiday season and hopefully see you soon again. Thank you very much.
Operator
This conference has been recorded. The details of the replay can be found on the Unilever website and would be available shortly.
Thank you.