Morning Note: Market News and Updates from Unilever and EssilorLuxottica.

Market News

US equities rose last night – S&P 500 (+1.7%); Nasdaq (+2.5%) – although futures have drifted this morning after mixed signals on tariffs. Donald Trump said a new tariff rate for China may come in two to three weeks, adding that the precise timing depends on Beijing. However, the China Commerce Ministry said that any content about China-US economic and trade negotiations is ‘groundless and has no factual basis’.

The President refuted an FT report that said he plans to lower tariffs on car parts. Meanwhile, Japan plans to hold its second round of trade talks on 1 May, NHK reported. Trump’s approval rating dropped to about 45%, down from 52% a week after he took office, an NYT poll showed.

In Asia this morning, equities were mixed with the MSCI Asia Index snapping a five-day winning streak: Nikkei 225 (+0.5%); Hang Seng (-1.1%). The yen strengthened. The FTSE 100 is currently 0.2% lower at 8,388. Companies trading ex-dividend this morning include Haleon (1.19%), L&G (6.15%), Rightmove (0.82%), and Spirax (2.03%). Sterling trades at $1.3285 and €1.1690.

Beth Hammack said slowing the pace of the Fed’s balance-sheet runoff may let it continue for longer. The Fed’s latest survey of regional contacts showed trade worries dominated responses. The 10-year Treasury yields 4.36%. After a two-day decline, gold has rallied this morning and currently trades at $3,333 per ounce. Newmont, the world’s top gold producer, said the all-in sustaining cost of producing the precious metal hit a record $1,651 an ounce in the first quarter.

On Ukraine, President Trump ratcheted up pressure on Volodymyr Zelenskiy to accept a peace deal that critics fear will favour Moscow. “I think we have a deal with Russia,” Trump said.

Source: Bloomberg

Company News

Unilever has today released its Q1 2025 results which were slightly better than expected. The productivity programme is running ahead of schedule and the demerger of the Ice Cream business is on track. The company has reconfirmed its full-year outlook and in response the shares have been marked up 1% in early trading.

Unilever is one of the world’s leading suppliers of consumer goods, with annual sales of more than €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 by way of a demerger. 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 fairly equally-weighted Business Groups: Beauty & Wellbeing, Personal Care, Home Care, and Foods (formerly Nutrition). Under the group’s Growth Action Plan (GAP) 2030, the Business Groups will be driven by 30 Power Brands (including Dove, Hellmann’s, and Domestos) that account for 75% of turnover and operate across 24 Business Group-led markets, which represent nearly 85% of 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 three years to end 2026, more than offsetting estimated operational dis-synergies from the separation of Ice Cream. The company has today highlighted the programme is running ahead of plan and is expected to deliver an aggregate €550m of savings by the end of 2025, having delivered close to €200m in 2024.

The aim will then be 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. The company is also targetting around 100% cash conversion over time and has a ROIC ambition in the high teens.

At the beginning of March, CFO Fernando Fernandez succeeded Hein Schumacher as CEO. Prior to becoming CFO in January 2024, he had a successful tenure as President of Beauty & Wellbeing, one of Unilever's fastest growing businesses. The move came as a surprise and appears to have been driven by the Board who are looking to further accelerate the pace of change within the company and highlighted that although it was “pleased with Unilever’s performance in 2024, there is much further to go to deliver best-in-class results”.

Back to today’s results. As expected, market conditions were more challenging than in the prior year. In the first quarter, reported sales fell 0.9% to €14.8bn, held back by the impact of currency fluctuations (-1.1%) and net disposals (-2.7%). Adjusted for these impacts, underlying sales growth (USG) – the key performance measure – was up 3.0%. As expected, this was at the lower end of the full-year guidance of 3% to 5%, although slightly better than the market expectation of 2.8%.

Performance was impacted by the timing of the Chinese New Year and Easter, and the number of trading days, as well as destocking pressures in Latin America due to elevated interest rates. Growth was driven by underlying price growth of 1.7%, while volume rose 1.3%.

The 30 Power Brands, which account for 75% of revenue, grew by 3.0%, with particularly strong performances in the largest brand Dove, which grew over 8%, as well as Vaseline, Liquid I.V., and Magnum. This was partially offset by Home Care Power Brands that were impacted by market conditions and Knorr which cycled a strong double-digit comparator in the Unilever Food Solutions business.

In emerging markets, USG was 2.0%, 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 with both markets contributing to growth. Developed markets grew by 4.5%.

All five businesses reported growth: Beauty & Wellbeing (+4.1% USG to €3.3bn); Personal Care (+5.1% to €3.3bn); Home Care (+0.9% to €3.0bn); Foods (+1.6% to €3.4bn); and Ice Cream (+4.0% to €1.8bn).

As this was only a sales update, other than the update on the productivity programme there is no detail in the statement on profitability or the group’s financial position. As a reminder, in 2024 the group generated a gross margin of 45%, the highest in a decade, and an underlying operating margin of 18.4%. Free cash flow was €6.9bn, leaving year-end net debt at €24.5bn, 1.9x EBITDA and in line with guidance of around 2x.

The company is currently buying back €1.5bn of its shares, with the programme to be completed by the end of June. In addition, the quarterly dividend has been increased by 6% to €0.4528.

Looking forward, although the company warns of heightened global macroeconomic uncertainty, it has reiterated its full-year guidance. 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. Growth will be underpinned by a strong innovation pipeline, good momentum in developed markets, and expected improvements in Indonesia and China in the second half.

The group is still guiding to a modest improvement in underlying operating margin for the full year versus the 18.4% delivered in 2024. 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.

Looking at the potential impact of tariffs, we note that Unilever has over the years “nearshored” its US supply chains to the degree that “almost everything” it sells in the US is made locally. As a result, the company believes the direct impact of tariffs on its profitability is expected to be limited and manageable.

Source: Bloomberg

Yesterday evening, EssilorLuxottica released its Q1 results which were ahead of market expectations driven by better sales in Europe and the performance of Ray-Ban Meta smart glasses. The business enjoyed continued strong momentum, with all regions and businesses contributing to steady growth. The group reiterated its 2026 revenue guidance and highlighted that growth in April was consistent with that achieved in Q1. In response, the shares have been marked down 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.

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. In myopia management, Stellest presented a six-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. In the smart glasses category, the partnership with Meta Platforms has been extended to 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 is enjoying a very strong trajectory.

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 Audio) has now launched in the US, Italy, and France and will soon be available in the UK and Germany.

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. The group also announced the acquisition of Espansione, 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 also paid $1.5bn for 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 (c. 75% of total revenue), sun (23%) and the rest being represented by Apparel, Footwear and Accessories (including Supreme brand) and smart-glasses (Ray-Ban Meta).

Back to the results. During the first quarter, amid an unsettled macroeconomic backdrop, revenue grew 7.3% at constant exchange rates (CER) to €6,848m. Although the rate of growth slowed versus the 9.2% generated in the previous quarter, performance was ahead of the market forecast of 7.1%. Organic growth was in the mid-single digits, with M&A (Supreme and Heidelberg) contributing around 2%.

EssilorLuxottica is a vertically integrated player whose go-to market strategy is based on two distribution channels. Professional Solutions (PS) includes the supply of products and services to third-party eyecare professionals (i.e., wholesale). In Q1, revenue grew by 4.4% at CER to €3,236m.

Direct to Consumer (DTC) 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 Q1, revenue grew by 10.1% at CER to €3,612m, with comparable store sales up 8%. Supreme gave an additional uplift to the overall growth of the segment.

By geography, North America, the group’s largest region (45% of sales), grew by 4.2% at CER in Q1, with solid trends in DTC and resilient demand in PS. Elsewhere, growth was stronger: EMEA (+9.9%); Latin America (+9.2%); and Asia Pacific (+10.4%), with myopia solutions strong in China.

As expected, there was no commentary on margins or profit in today’s update. However, we note 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 (63.7% in 2024), while the pro-forma operating margin was 17.0%.

The business generates strong free cash flow (€2.4bn in 2024) and is financially robust. The group ended 2024 with net debt (including lease liabilities) of €11.0bn, 1.7x EBITDA. A dividend of €3.95 was proposed, in line with the previous year, equating to a 1.5% yield.

The group’s high US revenue exposure versus minimal sourcing in the country means Essilor will be exposed to the impact of tariffs. In particular, frames are made in China and imported to the US. In response, the company is implementing measures to manage the impact, including price hikes.

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. In addition, the current quarter has started ‘pretty well’ across all regions, consistent with Q1. 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