Hindustan Unilever Limited (HINDUNILVR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Hindustan Unilever Limited Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Srinivas Phatak, Chief Financial Officer of Hindustan Unilever Limited. Thank you, and over to you, sir.

Thanks a lot. Good evening to everyone, and thank you for making it at a short notice for what we wanted to give actually the quick update on an acquisition that we've announced some time ago. Before I begin, I hope everyone is safe and all of you are doing adequately enough to take care of yourselves. I think that's an important message that in these times, it's important to be first safe, take care of you, your family and your friends. And I think collectively, we will get through this situation and come out stronger. Before I talk about the acquisition, a quick overview of the safe harbor statement. You're familiar with it, and I will not go through. And in that context, I will actually walk you through some 4 or 5 slides, which are actually already on our website with reference to the acquisition that we have just announced. I think the first one is -- to really talk about is really our strategy. And this is with reference to our Beauty & Personal Care, and there are clearly 4 pillars to our strategy. One is the whole space in terms of portfolio focus and thinking about it from new growth segments, and within that, you will clearly see the call-out in terms of new spaces. So what we have announced today actually comes in and fits in very well in terms of a growth segment, and therefore, a big market development opportunity. Equally, when you see it from a channels perspective, which is, again, a key for us, this acquisition also helps us build our presence in the core channels of chemists and pharmacy, in health and beauty and in e-commerce. So I think now when you look at it with HFD business, which is coming into our fold very soon, when you then look at the distribution that we'll do of the over-the-counter OTC/OH products such as Sensodyne, ENO, Crocin and others, and when we acquire actually combine that with VWash, I think it only enhances our channel presence, and therefore, enables us to grow faster in the growth channels. Along with that, there are also clearly 2 models in terms of how do we get in terms of new marketing and how do we think in terms of purposeful brands. So I think when you really see, I think there is a clear and a compelling strategy that we have from Beauty & Personal Care. And actually, this acquisition of the VWash brand actually ticks many of these, and therefore, it's apt and bang on in terms of our strategy. For many of you, you're well aware of this. I think we have got strong positions across key categories, and that really helps us. So we have the brands, we have the go-to-market capabilities, and we have the distribution that's enabled us to really continue to maintain stock market-leading positions. When I now come and really look at intimate hygiene, we personally believe that it is a huge potential for market development and for multiple reasons. When you really look at the liquids portfolio that we are buying through VWash, actually it's an important component in terms of really taking care of hygiene for a lot of our women consumers, and especially when you talk about it from a point of view of menstrual cycle. I think the VWash liquids actually are a very good product with the space in terms of intimate hygiene. But if I step back and look at, therefore, the whole category, it's actually a very nascent category. And for that reason, I'm not even calling out what's the size of the market. To be honest, if you really look at the need and if you really look at the urban penetration, which is in low single digits and if you really look at the number of women in the consumption basket, it absolutely then comes down to saying that this is a huge growth opportunity, but clearly a market development opportunity. So no prizes for guessing saying that on a nascent basis for the past few years, this category has been growing at double digit, and there is every reason to believe that, that kind of growth trajectory will be maintained into the next few years. Therefore, if I come and talk a little bit about the brand, VWash is a strong and a well-established brand. It's a market leader in this segment. This is a brand which was launched in 2013, and over the years has actually expanded both in terms of portfolio, in terms of formats, in terms of channels and now it's become of an attractive size where it made sense for HUL to really look at acquisition of the brand. It's also got a very high spontaneous recall amongst consumers. And I think that's super helpful as you're really seeing from a perspective of building a brand and building a category. Obviously, this is an attractive business with potential for healthy growth and good gross margins, which also means that HUL can unlock significant synergies. No surprises here when we talk about it, it's a complete market development model that I'm talking to you. It's about building awareness than about driving penetration, then in getting the expansion utilizing the HUL distribution muscle and in all of this actually enhancing the chemist and pharma channel, which then becomes super, super important as we grow this and as we grow the rest of the portfolio. If I give you a quick overview of the transaction, if you really look at it, we are actually buying the brand along with the intellectual property, design copyrights, et cetera. We are not buying any manufacturing facilities, we are not buying any employees. VWash will manufacture -- VWash and associated third party will manufacture this product for a certain period of time for us. And then we have options to either continue or to really put up our own facilities. Therefore, we have supply security in terms of when we want to transition and take this forward. And now again, given the size and the materiality, at this stage, we are neither calling out the size of the brand nor the consideration that we are paying for it into the public domain. Suffice this to say that the transaction has been structured in a manner, which has got 2 components. A larger -- a relatively higher upfront payment and a certain portion of the consideration, which will be paid over a period of 3 years as a percentage of sales. Now that we have signed the agreements today, both the teams will sit together to work out the various aspects of the transaction, various agreements and contracts and we hope to actually complete this in the next couple of months. We are conscious that what I think we're all passing through today in the context of the coronavirus, it is a difficult environment and a difficult situation. Fingers crossed, we'll all hopefully come out stronger and come out safer. We'll have to see how that will really pan out in terms of managing the closure to this transaction. So that's something that we do not know, and we have not built in. But subject to that, it's our intention to really get this transaction completed in the next couple of months. So that actually then starts to give you a bit of an overview of the transaction. So if I were to bring this back and summarize it, it's clearly on strategy for us when we're really looking at new growth segments and we are looking at new growth spaces. VWash, if you look at intimate hygiene as a category, it is a massive market development opportunity with low penetration, big consumer universe to go after and a cycle of usage, which is quite frequent and periodic. So if you add up all of that, it is again an opportunity which you can build into the future. It plays into HUL's strengths in terms of consumer understanding, our whole market development model in terms of building awareness, driving penetration and using our distribution muscle. And I think when we combine all of that, it also then starts to help us sharpen our channel play. So that, let's say, in a summary is a strategic rationale for us to be actually going ahead with this merger. And on that, I would actually pause here and take any questions that you may be having. And if you're an institutional investor, obviously, you know whom to reach out after this. And if -- and all other shareholders can reach out to Corporate Communications. This will be on our website. Conscious of time and conscious of various things which are happening, we'll try and keep these questions to about 10 minutes, and then we can go from there. And I'll hand it over to the operator to really open it up for questions.

[Operator Instructions] The first question is from the line of Abneesh Roy from Edelweiss.

Congrats on the acquisition. My first question is, is there a royalty being paid here? And will that also be needed to be paid on any new product, which is launched under this brand? And would you look at the broader segment of feminine hygiene, so, say, sanitary napkins also from a longer-term perspective?

Yes. So first, I have not understood the question on royalty, Abneesh. So we are buying this brand from Glenmark. It's an upfront consideration, and there is a consideration, which will be paid to them for a period of 3 years linked to sales. It's similar to the way we had structured, let's say, in Indulekha transaction. So there is a fixed payout and there is a variable payout. So that's how it's being structured. It will be a percentage of sales, depending on the performance of the first 3 years. So that's how we will actually structure this deal. Our interest at this stage is primarily in the space of the liquid wash. We are not, at this stage, looking at sanitary pads and so on and so forth.

And in fact a follow-on question, that percentage of sales, that will also be applicable on any new product. So it's not on only this portfolio, it will go beyond that portfolio in the next year if you take...

It's a brand that we have bought. Yes. But to be honest, our focus right now is really on the liquids segment and not so much in the initial stages in terms of looking at portfolio expansions. Yes? But to be honest, it's a total brand, and we'll be more than happy if it continues to beat our business case, we don't see any stress in terms of what we're paying towards.

And are you divulging the -- what's the number in terms of revenue next year?

No, not at this stage, Abneesh, yes?

And it's not a fixed number, right? It could depend upon the sales performance.

Yes, yes, absolutely. So there is a certain consideration which is fixed. That, of course, will be subject to conditions which are in the agreement. There is a certain portion which will be variable that will link to sales in the next 3 years, each year's sale and there'll be a certain percentage linked to it.

My second and last question is on the point that you mentioned, enhanced offering for the chemist channel. Now could you elaborate on that bit? You already have decent presence there. Also, GSK merger will definitely give you much, much higher depth in that channel. So what exactly you mean when you say enhanced offering for the chemist channel? Is it HUL bringing that to this because before it's also a pharma company?

So it's a combination of both, as you said, Abneesh, it's a good summary. We have our own portfolio. With HFD portfolio, we've enhanced our presence in the chemist channel. As we distribute the OTC products of GSK on behalf of GSK, we get a further offering in a manner, which gives us good strong presence in the chemist channel. And when you bring in something like this, it can be both complementary and additive because it only starts to make you more and more relevant in the channel. And it works in multiple ways for you, helps this brand grow. And also gives you a bit of a broader portfolio to play there. So it's a combination of both.

The next question is from the line of Amit Sachdeva from HSBC.

Actually, I just have one question on the channel strategy. Basically, if you could share a little bit what exactly the revenue mix is right now for this channel-wise? Like what percentage of the revenue you acquired come from modern trade or chemist channel? Or any other channel, say, e-comm or anything? And say, if you -- when you write this strategy and you look into the future and you obviously talk about HUL's strength being part of it, the next 3 years, without going into numbers, how this channel mix should look like for -- given that what you want to do?

So Amit, I think perhaps the better question for us is that how do I see the growth potential of this business, yes? Given that it's a low penetration category and a market development opportunity, I think the bigger opportunity is that this is a business we should grow in double digits for the next few years very, very well, yes? And to be honest, at this stage to really talk about how much is modern trade, how much is e-commerce, it's fine because today it's an urban-centric brand and a product. But to be honest, as you look at more affordable packs and as you build market development, you can take it much further. So to be honest, the bigger joy is in growth, the lesser joy is in really trying to dissect the channels. To be honest, I have not even done the math and I'm not even sharing that with you. Of course, we have that split but I would appreciate if you really ask us to look at the bigger growth potential rather than the channel mix or the channel shift.

Understood. That's all, I think. Congratulations and good luck with that.

So thank you. I think it's a great opportunity for us to actually further serve our consumers and that's really what all consumer goods and what HUL is all about. So to that extent, I think we're delighted with the acquisition.