Unilever profits fall despite sales growth improvement

Unilever PLC reported mixed interim results for H1 2025, with underlying sales growth accelerating to an analyst-beating 3.8% in Q2, driven by positive volume across all business groups. However, underlying operating profit declined 4.8% to €5.8 billion and free cash flow halved to €1.1 billion, impacted by Ice Cream separation costs and adverse currency movements affecting turnover. Despite this, the company maintains its full-year underlying sales growth forecast of 3-5% with an expected improvement in operating margin, while progressing its Ice Cream demerger and having completed a €1.5 billion share buyback.

Analysis

Unilever PLC presented a mixed set of interim results for the first half of 2025, characterized by accelerating top-line momentum but pressured profitability. The company's underlying sales growth quickened to 3.8% in the second quarter, surpassing analyst expectations and bringing H1 growth to 3.4%. Critically, this growth was driven by a healthy balance of 1.5% from volume and 1.9% from price, indicating genuine consumer demand rather than sole reliance on inflation pass-through. However, this operational strength was masked in reported figures, with total turnover declining 3.2% to €30.1 billion due to adverse currency movements and net disposals. Profitability faced significant headwinds, as underlying operating profit fell 4.8% to €5.8 billion, and free cash flow was halved to €1.1 billion. These declines were attributed largely to specific factors, including costs associated with the planned Ice Cream business separation and higher working capital. Despite the H1 profit contraction, management reaffirmed its full-year guidance for 3-5% underlying sales growth and an expected improvement in underlying operating margin, signaling confidence that the pressures will abate. This outlook is supported by ongoing strategic initiatives, including a productivity program that has yielded €650 million in savings and the impending demerger of the ice cream unit. The completion of a €1.50 billion share buyback and a 3% dividend increase further underscore management's confidence in the firm's forward-looking cash generation capabilities.

Key Decisions for Investors

• Investors should focus on the reaffirmed full-year guidance for sales growth and margin improvement, as management appears to be looking through the H1 profit weakness caused by currency effects and one-off restructuring costs.
• The successful demerger of the Ice Cream business in mid-November and evidence of operating margin expansion in second-half results are key catalysts to monitor for validation of the current strategy.
• The quality of top-line growth, demonstrated by a positive 1.5% volume contribution, should be viewed as a key positive indicator of brand health and may warrant a more constructive stance than the headline profit decline suggests.
• Consider the completed share buyback and dividend hike as signals of management's confidence in future cash flow, despite the significant temporary reduction in H1 free cash flow.