Hindustan Unilever Limited (HINDUNILVR) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Hindustan Unilever Limited Conference Call for March Quarter 2020. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Suman Hegde, Group Controller and Head of Investor Relations. Thank you, and over to you.

Thanks, Stanford. Good evening, everyone, and welcome to the conference call of Hindustan Unilever Limited. We will be covering this evening the results for the quarter and financial year ended March 31, 2020. On the call with me from the HUL end, I have Mr. Sanjiv Mehta, Chairman and Managing Director; and Srinivas Phatak, Chief Financial Officer, HUL. We really hope that you're staying safe and keeping healthy in these uncertain time. Given the exceptional circumstances created by the COVID-19 outbreak, we are presenting the results to you from our respective homes in line with the lockdown protocol. So please bear with us if the things are not as smooth as they normally are. As is customary, we will start the presentation with Sanjiv sharing his perspective on the markets. I will just draw your attention to the safe harbor statement for good governance sake and then hand over to Sanjiv. Sanjiv, over to you.

Yes. Thank you, Suman. Good evening, everyone, and thank you for joining us on the call today. I hope that you and your loved ones are all well and safe. It makes no gainsaying that the crisis is unprecedented and of a huge magnitude. We are deeply saddened by the terrible impact that the pandemic is wrecking on lives and livelihoods. I speak on behalf of everyone at HUL in extending our deep sympathies to all those who have lost their loved ones and who are all struggling to cope with the crisis. Equally, we express our gratitude to all those people who are working heroically at the front line and managing this pandemic. In these times of extreme ambiguity, we are falling back on our fundamentals. Our values are providing us the much needed clarity and direction. We are discovering the true responsiveness of HUL and the value of our closeness to consumers. There are many unknowns today, the trajectory of virus, the success of containment efforts, the scale and duration of containment measures, the development of effective treatments and vaccines, the [ specific ] integration of the result in the economic crisis, the impact on demand, whether it has been deferred, shifted or lost and whether there is a structural damage to the economy. In our opinion, we cannot, at this stage, reliably assess the extent of impact on the economy and the FMCG market or on our business. But we certainly do know that we have a strong portfolio of trusted brands, a very sound balance sheet and extremely capabilities. We are built to survive in times like these. We have seen several challenges over the decades and HUL has always been able to navigate through the crisis and come out stronger. Even though the current situation is very volatile, we are confident about our ability to manage the crisis and come out of it in a strengthened competitive position. Now let me take you through the market context and our imperatives who are navigating through the crisis a bit more in detail. Now we need to look at the market performance in this quarter in 2 parts: before the acceleration of COVID-19 situation in India; and post the containment measures we saw in the second half of March. Even before COVID-19 outbreak in India, the macroeconomic environment had become challenging and the GDP growth rates are slowing, liquidity crunch was there, the demand was sluggish and there was a weakening of consumer sentiment. In DQ 2019, GDP growth, as all of you are aware, about less than 5%. The government and Reserve Bank of India, of course, initiated various measures, including reduction in corporate tax rate, lowering of interest rates by cumulative 135 bps for the last 1 year before COVID-19, increased allocation to key sectors like infrastructure, agriculture, et cetera. While we believe these measures were in the right direction, sustained green shoots and recovery of demand, especially in rural was not yet visible. The resultant low consumer confidence was reflected in continued deceleration of FMCG market growth. Before COVID-19, rural as well as urban growth were lower in comparison to DQ 2019. If you look at on the last 3 months, February 20 basis, the FMCG market in all relevant categories grew by 2.5%, with volume growth at 1.6%. For the same period, the market growth, value and volume of Beauty & Personal Care, which has more discretionary categories have turned negative. In this challenging context, our brand fundamentals on an overall basis remains strong. We were gaining corporate value share and increasing penetration and market share in a large majority of our business. The outbreak of COVID-19 in India came on the backdrop of this weakening economy. The overall FMCG market growth in our relevant categories had turned negative territory in the month of March. March 20 market value growth stood at minus 0.6%. And volume growth at nearly minus 1% on L3M. March 20 basis, market value growth was 1.6%, with 1% volume growth. Crude has seen the biggest drop since '91 with WTI crude plunging below 0 for the first time in history. With the unprecedented swings in global markets and currencies under pressure, the volatility has increased multifold, ensuring that we do our best to keep the supply lines of essentials open, protect our business model and maintain a competitiveness, continues to be paramount for us. Now moving to the adverse impact in March in the second half. The market slowdown was exacerbated with the outbreak and the ensuing nationwide lockdown. You are aware that even before the national lockdown started, various states and local administration had sprung into action, with containment measures such as sealing borders, closing public places, suspending transport services and state-specific lockdown. Hence the adverse impact of COVID-19 on operation was felt even before 25th with breakage in supply lines, shorter demand line, disruption in procurement and transport. Immediately following the nationwide lockdown, operations fell and came down to below 5%. In summary, the second half of March was severely impacted with operations running at significantly scaled-down level. It will be fair to conclude that a large part of the negative growth in the month of March will be attributed to distributor and trade inventories coming down. In April, our supply line has actually improved, and now we have reached about 75% to 80% of a normal level. We have been working very closely with the government at different levels to reboot the supply line. Yes, the next slide, please. Now in these circumstances, our focus is around 5 key imperatives, drawing strength from our values. They are people, supply, demand, community and cost and cash. At HUL, our utmost priority has been health, safety and well-being of our people, not only our frontline heroes in our factories and the sales force but also our partners and the employees. We implemented work-from-home for all our office employees with effect from March 17, we have implemented strict standards of access control, social distancing in supply chain and sales force, use of PPE as well as strict hygiene and sanitization procedures. For our customer development and supply chain team, new work protocols were laid down and clear classification were established at the board level. We're also protecting our frontline back end teams of distributors and depot staff with reimbursement of insurance cover. We've also initiated COVID-19 helpline number, daily health tracking line app regular sentiment analysis, upscaling initiative of HUL learns together, and continuous communication with our own people and our extended ecosystem. The second area of focus is ensuring that we keep the supply lines open and meet the demand from our consumer for products which are extremely necessary under the current circumstances such as hand wash, sanitizers, floor cleaner and then hygiene products. As an example, we have ramped up production of hand sanitizers by a factor of 60x from the pre-COVID level. Anticipating that the crisis will continue for some time, we have taken several steps to make our manufacturing and distribution system much more resilient. As far as demand is concerned, even during this time, we are staying close to our consumers, with frequent digital interactions and through our social listening channel, gauging the change in the consumer behavior patterns. Many of our category and brands have moved quickly to replan the innovation, adjust to consumers buying in different channels and rework brand communication to make sure that it remains consumer and contextually relevant. At HUL, we believe we have a proven mindset. For the last several years, we've had a very aggressive savings agenda. We have now put extra focus on every line of P&L to identify more areas of saving to boost our financial strength. Last but not the least, this crisis has highlighted the importance of a commitment to use our scale and brand as a force for good in society, throughout the pandemic and beyond. I'll now talk a bit more in detail about the initiatives of helping the community, whereas Srinivas will take you through our plan of action and the rest of the 4 pillars in the later part of our talk. Yes. Now in a crisis like this, HUL stands for the nation. As I mentioned earlier, it's a purpose to go beyond the business and ensure that we play a part in helping the community. HUL stands united with the nation in the fight. After announcing a commitment of INR 100 crores to help the nation fight the coronavirus recently, a lot of work has been carried out by our teams to help combat the situation. Our focus is on 3 main stakeholders, our customers and consumers. To provide value to them in challenging times we have reduced the price of essential products such as Lifebuoy liquid hand wash and Domex floor cleaners. And we have worked relentless to make the products with the reduced prices available in the market in just few weeks. We're also protecting the interest of our distributors and partners, with selective and targeted flexibility in managing credit terms and judicially extending credit. On society, we believe that we have to play a bigger role. We are amplifying our efforts right from donating Lifebuoy soaps to the needy to strengthen health care infrastructure, through spreading awareness to our purpose-driven brands, Lifebuoy and Domex. Now for us, collaborations and partnerships are extremely important because we believe that none of us can help in the crisis alone. So we have come together as a nation, and we believe in supporting each other. Hence, we have collaborated with various institutions and government bodies for strengthening infrastructure and creating awareness. UNICEF, the need of the hour is simple and effective communication. And we have a partnership with UNICEF to do just that. Our campaign #BreakTheChain, #VirusKiKadiTodo has simple yet powerful 5 to 15-second assets based on 3 key themes: social distancing, hand washing and generosity. This, we believe, will help create awareness and empower public at scale. We partnered with Apollo Hospitals, SBI, OYO Rooms to help create isolation rooms in different parts of the country. We have partnered with BMC to create a public awareness campaign, Corona se Mat Darona, wherein tips on handwashing to prevent the spread of virus has been shared. Since handwashing is so important and healthy, hygiene habits is part of Lifebuoy's purpose. We are urging consumers to use any soap that is available to them and not just Lifebuoy. We've also entered into partnerships with various local administration, from Uttarakhand, UP, Karnataka to upgrade medical facilities for COVID patients as well as provide them with protective gears and our products. In Haridwar, working with the local administration, we have built a 30-bed isolation facility in a record time of just 3 days. Now coming to our M&A. Our recent transactions have given us strong foothold in the hygiene and nutrition segment, which are so critical in the current environment. We completed the merger of GSK Consumer Health on April 1. We are delighted to have the iconic brands of Horlicks and Boost under our fold. This will transform our Foods & Refreshment business, giving us a strong footing in the wider nutrition and HFT category. We view this as an opportunity and privilege to work towards broadening our social impact and helping our country address the challenges of malnutrition and micronutrient deficiency. On the other hand, we also announced the proposed acquisition of VWash. This gives us an entry into the underpenetrated but rapidly growing female intimate hygiene segment. We look forward to completing this acquisition and strongly believe HUL is well positioned to scale up this business given the strength of our market development and distribution capabilities. Now let me focus on the full year performance. Against a tough marketing backdrop of a slowing economy in the first 11 months and COVID-19 outbreak in March, we have delivered competitive and profitable growth. Our full year growth was 2% domestic consumer growth. With 2% UVG, we registered a healthy 100 bps EBITDA margin expansion on a comparable basis. Our PAT grew by 12, cash from operations before tax was INR 9,770 crore. This resilient performance is a reflection of the strength of our brand, execution progress and the rigor and discipline we have in implementing a consistent strategy. We have grown competitively overall in the segments in which we operate and in full year 2019, '20 as well as in the current March quarter. Looking forward, while the near-term market outlook is extremely uncertain, we are confident of the medium- to long-term growth prospects of the FMCG sector. We remain focused on delivering consistent, competitive, profitable and responsible growth through our fundamentals of growth and sustainable business model. With this, let me hand over to Srini to cover the details of our quarter performance and the differential plan of action to navigate through COVID-19. Over to you, Srini.

Thank you, Sanjiv. Good evening, everyone, and thank you for joining us on the call today. Sanjiv has spoken to you about the unprecedented headwinds that we have been seeing in this quarter. And the market has been very challenging even prior to the outbreak and the ensuing national lockdown really exasperated the slowdown situation. I think it's important to first start by putting a lens on the growth because I think the headline numbers, as Sanjiv explained, has got a different story to what was happening pre-COVID and post COVID. And the first message really is that our performance has been competitive. We're also giving a flavor to it this time. At an aggregate level, in the last 3 months, we have grown our corporate share over 50 basis points, and close to 80% of our business is actually winning share. COVID-led disruptions, as Sanjiv explained, resulted in our USG declining by about 9%, with volumes being lower by about 7%. I think it's important to understand that the impact started to happen from mid-March and not to be seen as an impact which came through only after 25th of March. Of course, following the lockdown, our operations then went to near 0 before coming back to the 70% to 75% levels that we have spoken about. I think it's also important to give a bit of a flavor on the growth. As we said, we were on track with our plans for the first couple of months and growing competitively. As Sanjiv also mentioned, if you look at our market growth for the quarter being in the range of about 2%, our plans of delivery, if we had actually been able to deliver in full would have taken us to about sales closer to 3%. So against what we believe is a normative 3% USG, we actually had a decline of about 9%. I think we believe that about 50% of this loss can be attributed to reduced stock levels at our distribution locations as our primary distribution network got impacted. The balance would have come from lower stock at retailers and loss of actual consumer demand. There was near cessation of sales in some of our out-of-home businesses and ice creams business, right from mid-month, and these contributed to the drop. During that period, there was also a bit of an uplift to some of foods and essential categories, which also meant that some of our discretionary categories took a bit of a beating. Now hopefully, that starts to give you a bit of a flavor on the first box, which is all about growth. Let me give you a bit of a flavor from an EBITDA and some of the bottom line point of view. And I'll walk you through some of these numbers so that you get a good understanding of what's underlying and what could somewhat be the noise in the system or because of some of the reclassifications and one-offs. Now we delivered an EBITDA of INR 2,065 crores. On a reported basis, you would see this as a 40 basis points reduction in EBITDA margin, but it's actually on a comparable basis, about 160 basis points, adjusting for Ind AS 116. I think it's important to highlight one reclassification we have done during the quarter. There were certain lease-related payments, which earlier used to be accounted for, of the credit used to go into the materials line. Well, we have made a comparison and corrected that, some of it has come into materials. So there's a bit of a reclassification which has happened between other expenses and materials. This does not have any impact on the EBITDA margins. With this correction, if I were to talk to you, the material cost actually increased by 40 basis points, and that's really come through because of the inflation in various commodities such as oils, and key materials across foods such as SMP, tomato paste, et cetera. So that's the first element to understand. Versus the reported number, the material cost actually increased by 40 basis points, if I correct for the reclassification. I think it's important to understand that in the quarter and in the month of March, we continued to invest behind our brands. It's important to really build salience. It's important to really focus on the core. And it is also important for us to spend in some of our categories ahead of actually the season, be it skin cleansing or really, ice creams. So that is really reflected in our P&L. And when the sale is not translating the way we had planned, this has actually led to a significant deleverage. And therefore, when you really look at it, the BMI will give you a deleverage of about 180 basis points. I think that's the second element important to understand as we look at our spends and as we look at our bottom line. There has been improvement in some of our other expenses. As we have mentioned in the prior quarter as well, we have been seeing benefits in some of our supply chain costs coming through from efficiency, saving initiatives, our settlement of some costs and the work on the footprint optimization that has happened through the year. We've also had some benefits from currency mark to markets, which were adverse in the base year. So combination of this means that we were able to mitigate some of the increase in material costs through savings in the other expenses. A combination of all of this would mean that our profit after tax, but before exceptional items was lower by about 8% at INR 1,469 crores. You will see an increase in the other income. And that is really coming because of interest we have received from certain old income tax assessments. Our net profit effectively stood lower by about 1%, and there is also a benefit of INR 90 crores that we have received on the tax line from prior period assessments that I've spoken about. So I have given you a flavor of our growth. If I were to give a summary, versus a normative of 3%, we had a decline of 9%, and I explained to you some of the elements to it. From an EBITDA perspective, while the EBITDA numbers are comparable at 160, there is reclassification between materials and other expenses, and our continued investment in BMI in the -- as a consequence of the drop of sales, landed up with a negative deleverage effect or rather, landed up with a deleverage effect. If I were to give you a flavor from a division perspective, health, hygiene and foods have been resilient given the nature of the crisis that we have been going through and the nature of the consumers buying patterns. As a consequence of this, because it was primarily disruption led, you would have seen a negative growth across all our categories of Home and -- Home Care declined by about 4%. Beauty & Personal Care declined by about 14% and Foods & Refreshments declined by about 7%. Within that, I think it's an important element to call out that while categories such as Health, hygiene and foods, which are more essential, have done relatively better, we have seen an impact in out-of-home channels. We had our -- yes, food services business was came to a standstill. Our ice cream business started to really see a sharp decline right from mid-month. And our water business, which was more in durables, really fell to 0 levels. Some of the sales in terms of hair, skin and cosmetics also got accentuated in the background of a slowing market growth. I think Sanjiv spoke about fundamentals. And even during the quarter, our focus on fundamentals continue to remain. Having said that, with the progress of the COVID situation, we continue to fine-tune some of our initiatives and activities during the quarter. And I think we'll have a few examples, which have really been shown on screen here. I think one important element to call out would be how actually Surf Excel changed its communication from a [Foreign Language] campaign to really [Foreign Language], reinforcing the need and the message to stay in home and look at future with optimism. Similarly, given the constraints, we also looked at different models for market development and shifting to more digital medium in the short term. And if I were to also talk about execution, I think it continued to remain our top priority. We have enhanced our sales and operation planning system for a bit and to respond with agility, and that continued during the quarter. And as the quarter progressed and as we're looking into April, we are innovating with new delivery models to ramp up our distribution in this environment, and I'll also cover a little bit about that in the later part of the presentation. So if I were to look at from a segmental perspective, I think there's a difference between the USG and the segment revenue, which most of you will recognize. I think the declines in revenue at segmental performance would be 4%, 13% and 7%. Now I think it's important here when you look at the margins to actually also call out for you, one other exceptional item or let's say, an element relating to some one-off expenses. I wouldn't call it exceptional because they are part of the normal results -- one-offs that are in the results. While the one-offs from old tax and prior period-related matters constituted about 30 basis points at a company level, this had a positive impact of 70 basis in Home Care, and a negative 130 basis in BPC. So therefore, what you see is that the reported margins look a little higher in Home Care by about 70 basis points, and BPC looks negative to the extent of 130. A combination of all of this really means that at a corporate level, we have 30 basis points adverse in the overall margins. In F&R, we would have seen a drop in the margins. And this came through because of the adverse effect of significant inflation seen in our material cost and a net absorption because of our terms of trade given low sales. Some of this was also a calibrated strategy, given the quantum of inflation. For example, SMP prices, others had gone up by about 60%. And therefore, I think it was also a calibrated strategy in terms of how we were managing the margins before we got hit by the COVID crisis. So in summary, I think what you see on the results are clear, a negative growth of about 9% and a net profit increase of 1%, but good order. I have called out 3 of 4 elements from a financial perspective. I think those are clear. The first is, in fact, talking about the reclassification between materials and other expenses. The second aspect being the 30 basis points one-off at an aggregate level, but with really, a 70 basis from Home Care and a 130 basis from BPC, and some benefits from the other income, coming from interest, and a benefit coming in the tax line from an old assessment. Hopefully, these 4 or 5 elements will give you a better understanding of our financials and will help us take in the underlying business performance in a better light. It's also important to talk about from a full year perspective, I think Sanjiv mentioned it; our domestic consumer growth for the full year stood at about 2%. If you actually recollect for the 9 months ended December, we were upwards of 6%. The last quarter having a big impact on our total growth. But the EBITDA margins continue to be attractive over 100 basis points and net profit actually being up by about 12%. Overall, if you were to see from a full year point of view, growth has been competitive, profitable and resilient. This also gives you a very quick snapshot view of the performance at the 3 division levels. The growth is really understood and explained by what we have seen in the March quarter. And at an aggregate from a full year perspective, the margins across all the 3 divisions continue to be healthy. Now in this context, it's also important to understand that the Board has taken a view of the total performance for the year. I looked at the cash position, looked at the robustness of our balance sheet. And we are delighted to share that the Board of Directors have actually approved or proposed an increase of INR 1 in the final dividend, which at INR 25 for the full year, this will be about a 14% increase to the dividend payout. And with this, we believe, is actually going to be in the interest of our consumers and us and our shareholders. I have -- just one second, I'm just having some connectivity issues. Just give me one second, please. Yes. I think it's important to spend a little bit of time talking about the future. You would have seen this chart. I think our strategy remains unchanged, and our model is one based of consistent, competitive and profitable and responsible growth. And as Sanjiv has spoken about, it's really dialing up and focusing on the fundamentals. Sanjiv also talked to you about our 5 key trust areas. And what I will now try and do is give you a little bit of a flavor of some of the aspects that we are talking here. We have taken utmost importance to the health and the hygiene and safety standards of our people, whether it is by getting some of our office space people to work from home or providing the best-in-class facilities in our operation speed in factories or actually, even in some of our extended areas such as distributor operations and third-party operations. We've also worked with the government in terms of the Suraksha Stores and building the awareness so that, that actually helps our partners, which is really the retailers. And I think one important aspect to call out would really be that we have actually extended special medical insurance coverage to our frontline people, people at our distributor points, depot staff and contract workmen, all in all, over 20,000 people to make sure that we take care of their well-being in this hour of need. The other piece is really on supplies. We have spoken about, and Sanjiv has talked about a few examples of actually ramping up of capacities in key categories such as sanitizers, and he talked about the kind of increases that we have done, more than 60%. And we are taking various initiatives to really bring back operations to normalcy. From what started as below 5% progressively moved up. If you were to look at the last 10 days, we would say our operations are from the range of about 70% back to normalcy. And Sanjiv also talked, if we look at the recent numbers, it's also moving up to 75% and 80%. Now what are we doing? I think we are actually focusing on some of the key SKUs, taking into account the portfolio, taking into account the geography. And actually, we are focusing on a few key SKUs. And in the short term, we are not looking at the full assortment, and we're also making some choices there. This enables us to expand capacity. This also enables us to get the right kind of product mix in front of our consumers. From a supply perspective, I think we are looking to really increase the dispatch capabilities. Today, that's come up in a much better space. We're also working through procurement and supply chain reliance -- resilience plans to make sure that our operations continue to get packing material and raw material. In some cases, we are also looking at tactical opportunities to tie up capacities to really serve the needs of our consumers. And I think that also becomes an important one. On the distribution side, I think we have continued to look at various models, which included partnering with some other partners of the likes that we have mentioned there, Swiggy and Dunzo. In some cases, working with our customers and the customers have actually come up and picked up stocks, we have worked on such models. And we are continuing to dial up both Humarashop as well as our Shikhar, our B2B ordering app and this has been useful as time has progressed in terms of taking orders and actually making sure that we are managing deliveries. The next piece is really all about demand and portfolio. We will see a definitive shift to some of the changing patterns to demand. Health, hygiene and nutrition will become focus areas. And I think there, we will continue to bring a lot more innovations to the marketplace. In the short term, we also expect some bit of negative impact from discretionary categories, and we'll continue to watch that. You'll also see that there are some host of consumer-relevant innovations we have put out and also contextual communications. What we have done is given you a flavor of some of the innovations which are either in the marketplace or are likely to come through very, very quickly. Also, we've got a range of sanitizer SKUs which have come through. We're also bringing in Lifebuoy Germ Kill Spray and Domex disinfectant sprays into the market. And there will also be other innovations such as the germ removal wipes, cloth sanitizers and actually, germ wash boosters. So some of these innovations are happening as you speak. And then more will come over the next 4 to 6 weeks, and to land in the market. Sanjiv has spoken extensively about our community initiatives. And it's important for us to say that -- and I will not repeat them, but this continues to be a super important pillar for us, and it's integral to how HUL does business, and how we win in the marketplace, and we will continue to keep a focus on all of these initiatives. And the last piece which I will talk is really about cash and cost, and the importance of the need for protecting our financial model. And I think we're looking at both from our sources and use of cash as well as stepping up our fuel for growth. So clearly, there is going to be a laser focus on receivables. Having said that, we will look at judiciously deploying credit to support our partners and bring back normalcy in our operations. Through our enhanced SNOP and focusing on key A class and B class SKUs and bringing data and analytics, we will continue to bring more science to inventory management, and that will help us manage in this evolving situation. Over the next few months, we will continue to look at all CapEx and restructuring expenses with a sharp focus. And to some extent, we will be deferring some of the expansion plans unless they are really supporting us in terms of capacity. And we'll also balance it with our ability to execute. Therefore, there will be a clear focus in terms on what we do in terms of our spends here. Equally important is we'll continue to unlock opportunities to get surplus assets and realize cash, which will actually shore it up. And finally, while we do all of this, I think it's important that there's a lot of turmoil happening in the credit markets and debt markets. We will make all efforts to ensure that there is safety of our investments, and there is liquidity. Equally, as we continue to do that, I think there is a need to really step up our fuel for growth. We almost have -- moving into a mindset of earn and then you spend, and this really means that we're dialing up savings across the value chain. We'll also be looking at a dynamic reallocation of spends in line with the markets, and what gives us the right ROI. So for example, in the quarter, we have looked at a bit of a rebalancing of our media expenses across channels. And this is something we will continue to keep a close eye, both from a competitive context as well as a consumer demand context. All expenses which are noncore or which do not really add to growth, we will actually be very brutal about them. And we will have decisive reduction in all nonessential costs. Some of the examples of travel and some of the other expenses are very visible. And I think this lockdown has also taught us of new models, of how we can actually manage costs and be very efficient and effective. In all of this, it also becomes super critical for us to continue to drive our synergy savings from the nutrition business, and we will implement those plans with rigor. So if I now come to my last chart before handing over to the Q&A section. I think we'll all agree that where we are is actually in unprecedented times. We are dealing with lockdowns, we are dealing with spread of the virus, and we're all working towards a new normal. Therefore, it will only be fair to say it will be difficult to estimate the market growth on or the consumer demand at this stage. Volatility input costs and currency is likely to continue, and liquidity pressures will remain elevated. And I think, therefore, if you really look at the approach, I think the best way to summarize it, we will protect our business model. We will grow competitively, and we will contribute to the nation, and we have spoken to you about the 5 pillars through which we will do it. And on this note, I will hand it back to the operator to enable us to take the Q&A. Thank you.

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

Yes. My first question is on the distribution. HUL has done the tie-ups with Swiggy, Dunzo, et cetera, many other innovations they have done. So how is the cost structure different in this distribution? And is there any pushback from kirana because same consumer might be targeted by the kirana and by these players? Third is, do you see this as a long-term trend or once normalcy comes because of the cost structure, things will go back to the earlier [ table ]?

Yes. Thank you, Abneesh. Thank you for your being -- continuing to remain the opening batsman. Yes. What you're talking about is what is going to be the trend in the future? And what is going to sustain from the changes that is happening now. When supply lines got disrupted, our main motive was that we should manufacture as much as essential and reach them to the consumers through whatever route was possible. So in the short term, you don't focus on cost versus the normal operating procedure. Your entire focus is on ensuring where goods reach the consumers. From a long-term perspective, I believe that first, this could also be possibly a renaissance of the grocery store, where people have realized how important your neighborhood grocery is. But this will also give an imperative to -- for the grocery to adopt technology, things like our Shikhar app or Humarashop. That will become very critical. The second is, yes, it will give a fillip to e-commerce, and even the traditional e-commerce as well as new models of e-commerce will emerge. And the third is, even the modern trade, I think, will have a big thrust towards the omnichannel. All these things will play out and only people who have got sustained business model will be able to survive in the long term. So I would say right now, too difficult to think as to what will survive and in what shape and form. But yes, the 2, 3 big things that I talked about, the omnichannel for modern trade, the renaissance of the grocery store with added technology. And of course, e-commerce, this will give a fillip to all 3 ways of reaching the consumer.

The next question is from the line of Percy Panthaki from IIFL Securities.

My question is if you can give your views on how the current situation is going to affect urban versus rural. Last couple of years, we have seen rural growth falling below urban. Now with the lockdowns being much more severe in urban areas, et cetera, do you see the situation reversing? And on a relative basis now rural becoming more attractive or performing better than urban? That's my first question.

Yes. Okay. I trust you're well. Now coming to rural, there are a couple of variables at play. First is that there has been a direct benefit transfer to a large number of rural consumers and -- which will have an impact on demand, there's no question about that. The other big variable at play is that the recent harvest, to what extent have they been able to get the workers to work on the harvest and to what extent they have been able to transport the stuff to the [ Mundi ] so that they can get proper realization. And the third variable, of course, will be -- is the rains for the subsequent harvest. So these are the 3 variables at play, but I feel confident that the transfer of benefits to rural consumers, and if the virus does not spread to rural areas, and if it remains contained as it looks like today, then yes, it will occur good for the rural consumers.

Right, sir. Sir, second question is on cost savings. You mentioned that in this kind of environment, you will look even more closely at costs. So can you give some more granularity on this? Typically in the last couple of years, you have been saying that your CEPs are around 7% of sales. To what extent do you think this can increase from 7%? To what extent do you think it can increase this year? And also, which particular line items -- you did mention travel, et cetera, but any further light if at all you can throw on this.

Srini, would you want to?

Yes. So I think Percy, the object -- I think the need is very clear, yes? When you look at an economic environment as such, any cost, which is not really adding value to the business or to the growth is under question. So obviously, with all of this, with the new models that we have learned, and I think many more that we can do in terms of some of the normal ones, we use new ones. Some aspects such as travel, I think it's both from the safety and health of our people as well as with the technology available, becomes the very easy and the obvious ones. For example, we've also looked at our own people costs and our own committed costs, whether it is across the value chain. Clearly, we have now made some decisions in terms of putting any recruitment on hold, any fresh recruitment on hold. We will honor the commitments that we have made for some of our trainees coming in. Absolutely, we need to do that. So that's another kind of look at what we're looking at costs. We are for temporarily, also pausing and reviewing some of the increments, which will come to mid management from middle of the year, that's something which we'll also want to pause and review into the future. This will also throw up opportunities for us. If you've given our scale and our ability to leverage cash better, we also expect to start seeing better savings coming through in all lines. It could be in procurement. It is likely to be in media, to some extent and non-media. So that's again something which will become one of our key and focus areas. And then last piece also is going to be a mindset, which I spoke about. I think the whole organization is fully aware and conscious and working into a mindset of saying, we earn and then we spend. And you'll really be surprised, the resilience and the agility with which the organization moves in an environment like this. So for us, I think the ambition continues to be, we need to drive savings. How much and how much more, I think, will come through in time. But that's really the kind of approach that we will take to actually driving and taking costs out of the system.

And one more philosophy, if I may add to what Srini has alluded to, is our endeavor would be to create optionalities, depending on how the things open up. In the long term, all costs are variable. But in the short term, there are some fixed and some variable. And our objective will be that to an extent, some of the fixed costs, we can convert it to variable, that will then give us the flex to take the right actions, depending on how the economy pans out.

Understood sir, very helpful. Just a related question to this. You have consistently mentioned that on a full year basis, you will always look at modest operating margin expansion. Now these are very, very exceptional times. So just wanted to understand if that sort of mindset or that kind of guidance still remains this year?

You are absolutely right, my friend, these are very exceptional circumstances, yes? Now our first thing would be to ensure that we keep growing competitively, yes? That's number one. The second focus would be on ensuring that as much growth as we can get, we bank it. That would be the big thing. Because for us, a lot of leverage on cost comes from the top line. So that would be it. And the critical aspect of our business would be that we have to preserve our ecosystem, not just us. We have 3,000-plus distributors. We have millions of stores we cover directly. We have hundreds of suppliers who are part of the ecosystem. And our objective will be that we are able to ensure that they keep running the business so that we keep running our business together with them. So that would be. And last but not least, we have to focus on ensuring that the integrity of our business model remains intact. Yes. Margins at this stage, when you don't have visibility to how the economy will pan out, it will be very difficult to predict how, what we will do. But we will always look at it from a long -- that we are here for the long term, and we have to preserve the business for the long term, that's where our objective will be.

The next question is from the line of Manoj Menon from ICICI Securities.

Sanjiv, Srini and Suman, thanks for a very detailed presentation and a very different presentation also. I have only 2 questions addressed to Sanjiv. Sir, one, thought process. Is that -- at least in my understanding, the marketing fraternity, is that -- this force staying away from using a lot of product categories, particularly in personal care? Does this lead to a reset of excess consumption? So in simple terms, if I'm to say, let's say, something like a shampoo category, the consumer probably is consuming a lesser quantity, assuming that's the right assertion to make. Is there a challenge for the marketer to build back the penetration and the per capita consumption? That's question number one.

Yes. All right, Manoj, thank you for that question, yes? Today, what has happened is people's perceptions are being swayed by what has happened in the last few weeks. And the last few weeks have been very abnormal because the supply lines have collapsed. People have not had access to go to the stores and their entire focus has been on getting the essentials like food products, hygiene products into the homes, yes? But we have to understand that the relevance of the categories and also the focus of germs from hands, clothes and services will move to hair, mouth and face. Yes, that's bound to happen. The second important bit is, you have to realize that the need for things like moisturizing or the things like, for instance, if you wear a mask, the whole day or for a long period of time. Yes, you get -- clearly, you need face care products to ensure there are no marks left. Yes, so there would be need for, certainly, Beauty & Personal Care products going into the future. There would be some shift in demand, some may be temporary because top of mind is your health, hygiene and nutrition. But then, who in the world, a man or woman doesn't like to feel good or look good?

Fair enough. Fair enough, sir.

Just to add just one small comment to this. I think some of the elements that Sanjiv has spoken about, we've also started to see some of this come back in markets such as China, yes? So that's clearly -- the hypothesis is playing out, and we've started to see that come through in the markets.

Understood, understood. A related question here actually on this is that one thesis about the market shares is that any such dislocation essentially ensures that the stronger players comes out stronger, even stronger. But the only question here is that, given that at least, I've been reading that consumers are now buying categories and nonbrands, just on availability. There's a lot of per sampling, which would have happened for a lot of brands, which would have otherwise kind of struggled, too. How do you look at the next year in terms of -- again, is there a question of necessity to increase the value portion, et cetera, to bring the consumers back to the fold?

Yes. Thank you for that question, Manoj. You are right. When your supply chain has been disrupted, people would want to get any product in the category that they can lay their hands on, yes? But this is not going to remain forever. India needs the economies to go back and we have already reached up to 75%, 80% of a normative level. And we will certainly go up. And once our brands are available, then the consumers, when times are tough, they will veer towards more trusted brands, yes? That will always play out. Just think of it, if you have a Lifebuoy sanitizer versus a sanitizer whose name you have not heard before, and Lifebuoy sanitizer has technology of immunity booster, won't you veer towards Lifebuoy? Similarly, when we look at clothes and surfaces to clean, you would want to veer towards a brand like Surf Excel or a brand like Domex with proven credentials and manufactured by a company which is trusted by billions. The second question is, this will, Manoj, really depend on how the economy fares, yes? And one thing you have to look at it from a lens, that a company like HUL, we always pride ourselves that in all the big categories, we straddle the price benefit pyramid, yes? We are not a one horse player. Look at our laundry, look at our hair care, yes? In all big -- look at tea -- in all the categories, we have brands or formats or [ accesses ], which provide access to nearly every consumer. And that one, that's our strength, portfolio is our strength.

Understood. Sanjiv, in fact, that was just a follow-up, which I had on -- god forbid, if the dreaded world of down-trading is to make a comeback, the readiness of the portfolio was something which I wanted to ask...

Thank you for the question. Look at it like this. If you look at our tea business, we have Taaza. If you look at our hair care business, we have Clinic Plus. If you look at the laundry business, we have Wheel. In all our big categories, you will find this. And then even when it comes to our big brands, we create value through access packs and low unit price packs. So that is where, how we play the game. And when the times are good, we have brand, which captures the premium in, and when times are tough, we have brands which capture the value add.

Sir, one last question, if I may push in here. One, if we are to do a crystal ball gazing, would you believe that, let's say, the likely scenario is an SKU down-trading versus, let's say, brand down-trading? Which is a higher probability?

Consumers, when times are tough, look at value. Yes. And to them, the value becomes the most important part. Even when times are tough, I believe, Surf Excel INR 10 pack will still keep selling because consumers think that it gives them great value. It might happen, Manoj, that there might be some shift from, say, bottles of shampoo to more of sachets, for instance, or more like a INR 10 pack are sold. That would happen, depending on what is the economic condition. But we are -- we have a portfolio which is completely ready for this kind of scenario.

The next question is from the line of Aditya Soman from Goldman Sachs.

Sir, 2 questions from my end. Firstly, you talked a lot about cost saving and even things like maybe holding back on some of the increments of the mid-level staff. And obviously, this is coming from probably, one of the most profitable and cash-rich companies. We are seeing across different industries that there's probably going to be a lot more of cost savings and savings initiatives of that sort. Don't you think that will have an impact on medium-term demand? And then how are we seem so confident that medium-term demand will come back?

That's a very valid question. And that is the reason why we have still given a dividend increase because we believe that we have a strong, healthy balance sheet and then there are a huge number of shareholders, noninstitutional shareholders. And in many cases, also institutional shareholders because the money again goes back through the mutual funds, et cetera, back to consumers, the individual citizens of the country, yes? And so that is the reason we took that call of not cutting back on the dividend, but increasing the dividend on a yearly basis. And the second bit is in the first quarter, we are ensuring that we don't lay off any people. And when I say the first quarter, it's the quarter of June, and we have not cut back on salary. That is what we have done. Because we also have to look at it from a perspective of the nation. But then when we say that it will depend a lot on what is going to be the economic conditions, to what extent the lockdowns will continue. And then we also have to ensure that we preserve the sanctity of our business model. Yes. That's important. So cost, during this time, which will not -- let me give you an instance, example. We have a very extensive house-to-house sampling program, which comes under market development. Now market development, if things remain under lockdown for extended period of time, might become very difficult to execute, right? Then we will think to ourselves that how do we retain the essence of the capability within the organization, but trim the cost which doesn't add value today. So that's the perspective we will bring here. But whenever we look at bringing down costs, we will ensure that we won't erode the organizational capabilities of the business.

Very clear, sir. And second question is, basically, in terms of -- you talked about supply coming back to 75%, 80% of levels. Any update on the -- what the demand situation is? Or what you can see from sort of end retail where demand is at this point?

See, you know what -- if you remember what Srini was alluding to, that in the month of March or what our numbers are, that we should normally have delivered a value growth in the vicinity of 3% because we were gaining shares. And the market was at about 2.5%, whereas we ended up with 9%. So this 12% spend -- the difference -- 50% of that was distributor stock. And the balance, 2/3 would have been trade stocks, and 1/3 would have be demand when everything came down, would have either been deferred or it would have been -- the demand would have gone a bit. Now today, our challenge has been to get the supply lines running. And when I say supply lines running, it is not just the sourcing of raw material [indiscernible], but it is also manufacturing and then distribution. Today, with the lockdowns, today with the restriction, a number of workers who are deployed today and so many, many of the stores across the country not having opened. We have not been able to gauge to what extent the stocks in the trade have gone up. And when things return to a modicum of normalcy, what would be the pent-up demand of the consumer and of the stores to fill up the inventory. Both these aspects would be there. But it is not yet possible for us to gauge how much of that would be.

[Operator Instructions] The next question is from the line of Arnab Mitra from Crédit Suisse.

My question was, as you look at the 75%, 80% production moving or supply levels moving to 100%, the current bottlenecks are -- is it still to do with some permissions on factories? Or is it more to do with you have permissions, but the factories can't operate due to social distancing norms or supply issues? Or is it transportation? And in this period from, let's say, end March to, let's say, mid-May or end May until your supplies are not there. Is there -- is your sense that there's a stock out at retail levels? Or retail and stocks are still there, and therefore, there is no loss on the offtake side during this period of time?

Yes. Supply chain works in a synchronized manner. You see what is happening, for instance, whenever the government finds that a zone becomes red, then anything within a certain radius is dropped -- is shut down. So we have had cases because we have a large number of factories spread across the country. The factories have started running, and then we have seen rate cases sprouting in the neighborhood, and then they have dropped the factory again down. And again, we have to seek permissions to make them run. Similarly, for instance, the ports have been working at a very low level. And we would have issues about raw material, et cetera, coming in. So then there is an issue of transport, then there is an issue of workers and laborers. So all that has to move to a synchronized fashion. But I think I will give full credit to my operations team, the way they have innovated. And the way they have stepped up, that despite the constraints, they have taken the production and sales to the 80% level using many innovative scheme. Yes, the workers working long, selling full truckloads to distributors so that they directly reach without any interruption and all. And then innovative means of distribution, so many things have been used to reach. Now what you were talking about, that will there be a trade stock coming down as well as possibly offtake? Difficult to gauge. My sense is that there would be both, because for many of the products, our whole focus has been on, first, with just essential products. And many of the things, yes, which like the shampoo, for instance, or skin care, for instance, there would be a pent-up demand with the consumers because they would not have got access to the products in the stores because they would have got over. And also, the inventories in the stores where they are available would have come down significantly. So there would be both factors in play. Just a 15 days disruption, gentlemen, impacted 10% of our sales, 6% on distributor inventory and 4% on the trade inventory. So you can gauge that how when a [indiscernible] were resilient so that even if these constraints remain, like slowly, we have moved up to 75%, 80% level. Yes?

Sure. And just one follow-up on this. In terms of the Horlicks, I mean, so GSK's business, which is now this quarter onwards with you. You have put it in the essential list of -- in your slide of essentials. Just wanted to understand because in the past, we have considered this category is somewhat as a bit of a discretionary category, not absolutely essential to the day-to-day requirements. So any thoughts on that?

I'm glad you have raised this question. Besides hygiene and sanitation, the other very important bit is nutrition and immunity. Yes. And a brand like Horlicks does provide you immunity. In fact, today, if you go and see, we have given a news release that Horlicks with added zinc has been provided to scores of hospitals in the country to help boost the immunity of the health worker. And this is a proven science.

The next question is from the line of Vivek M from Jefferies India.

My first question is, again, on the utilization rate. So when you're talking about, Sanjiv, 80% utilization rate, and there is a clear demarcation between essentials and discretionary. Does that mean that the increase of essentials, the utilization rates will be even higher, further higher, whereas in case of discretionary, will be far lower? Is that understanding correct?

You are right. Because even our focus has been on first making products which are essential under the current circumstances. Srini alluded to a figure or I spoke about that. Sanitizer, for instance, from a normative level, it has gone up by 60x. That's the quantum of products that we have manufactured this month compared to, say, average of December quarter. And so our focus has been on this. But now as we go up, we are also shifting to other categories where the demand, we believe, is very much there.

Okay. And this 80% utilization is at, let's say, at the factory or the plant level. If you were to kind of -- so I'm guessing some part of this is like the initial build-up rate of inventory, which will be shipped to your warehouses, et cetera. But from a distribution perspective, will that distribution...

Whatever -- my friend, whatever we manufacture, we are able to sell.

Okay. That's good to know. Okay. And the second which is on this AC Nielsen, minus 1% market -- or rather declining 1%. Isn't that number looking too low in the context of the way which you have described the issues that you faced at HUL? That minus 1% looks too low, right, for the month of March? Or am I misunderstanding here?

The figure that Srini gave you was that we had -- if you look at it, the swing between what could have been a normal growth for us of 3% value and a 4%, 5% volume, yes, moved to a 9% negative. So there was a 12%, right, out of which our estimate is that about 6% is distributor, where we have a clear precise hold on it because we measure it on a regular basis. And we believe of the balance 6%, there would be a distributor to trade, they would not have been able to sell. And that would have been about nearly 3/4 of the balance, 6%, yes? So these are not very precise numbers because in this kind of environment, you would never get a precise answer. But from a trend perspective, in the first 1 month, March month, the offtake impact would have been relatively lower. In April, there would be a different story on the offtake because the economy has come down. People have not been able to get. And if you don't have a shampoo at home, when you lay your hands on a bottle of shampoo, it is not that joke [Foreign Language]. It doesn't happen like that.

Right. Sure, sure. And if I could just ask you one more, which is on the AMP spend. So shouldn't AMP worldwide -- Srini did mention about this fact, but shouldn't AMP be highly discretionary at this point of time, particularly with respect to portfolio where utilization rates are high? And also from a margin perspective, why so much caution?

Srini?

So yes, the answer is right. And I think as you look into the month of April and beyond, we are working through in terms of what's the level of spend and what do you need to do. The intensity in the marketplace has come down to a large extent. We are also looking at our reach objectives and what we want to do, and we're also calibrating spends. So that's absolutely what we are doing. But I think the reason for overall picture on this, Vivek, is we are in uncertain times. Even today, as you speak, 1 month down the line, we are still at about 75%, 80% levels. It still means we're 20% lower than where we are. And we are still in a lockdown phase. We still have uncertainties in terms of how it will open up. And I think a number of variables that we need to counter are too many. The other aspect, I think, which will also come through, is that today, we are focusing in selling essentials. By tomorrow, we'll have to start looking at the total portfolio. And given how the picture emerges, there could also be some shifts between what parts of your portfolio sell. In some cases, it's quite possible that you will have higher sales of low unit packs coming through, at least during the next couple of months. Obviously, when you want to do all of this and when you add it up, you want to protect your business model. And that's the reason for it to be -- for us to be calibrated about all spends, but we absolutely want to invest behind our brands, but I think we need to really think about protecting our business model. Because we will come out of this, and we will come out of this and there will be a certain demand, and they should have enough ammunition to really invest behind your brands. So that's the reason for our thinking in terms of the way we're articulating.

The next question is from the line of Sanjay Manyal from ICICIDirect.

Just a few questions, specifically, as you have mentioned that you have seen a higher production of sanitizer. But what about the Personal Wash category? What about the soaps? Have you seen -- or do you really think that the structural change can come in the Personal Wash category? Per capita spend probably can increase dramatically and probably this -- the kind of growth, probably this segment would see -- would remain probably for next 1 or 2 years?

We believe that the heightened need for hygiene and sanitation is not going to disappear overnight, yes? It will come down from the peak levels, definitely, but it's not going to disappear. And people will hopefully understand that having the right kind of behavior with sanitation and hygiene is a proposition which keeps you healthy and safe. There will be a spike in liquid soaps. There will be a spike in soaps with health credentials. And not just health credentials, any soap is -- I'm sure people will be much more conscious about washing their hands more number of times and becoming -- whether also using a disinfectant, cleaning surfaces, making the environment more hygienic. These are some things which are, I think, I believe, will be there for some time. They are not going to go away. And hopefully, it will translate into some permanent shift of consumer behavior.

Right, sir. So just in the -- in a similar...

[Operator Instructions]

[Operator Instructions] The next question is from the line of [ Shreya Thakur ] from Societe Generale.

I just wanted to know what the impact of pantry loading is in terms of different categories and on the group level.

Too early to assess.

So anything posted in the second half of March? Sorry.

Second half of March, yes. Second half of March, we are very difficult to assess because at the end of the day, we were not even able to service our distributors. We were not even able to service retailers. So very difficult to assess how much would have been the uptake. There is one impact of -- you have to understand that when Nielsen comes out with a figure, they are saying that the FMCG is a category where we are [ operate in ] March was down by a negative number. That would indicate that there wasn't much a pantry loading.

So I think anecdotally, and just look at some trends, there was definitely a little bit of pickup in cleansing, sanitizers, a little bit of nutrition. So we saw a little bit of that, but that's hard to happen. But we also then started to see sharp deceleration in some of the discretionary categories, for example, ice cream. So some parts would have seen it. But as Sanjiv said, it's very difficult at this stage to get a number in its aggregate. But clearly, we did see a bit of a move up in sanitizers. We saw it in soaps, and we also saw it in some of our household cleaning products.

The next question is from the line of Prasad Deshmukh from Bank of America.

One question on your warehousing strategy. So until now, the focus was always on -- like post GST the focus was on reducing the number of warehouses. Considering it is becoming difficult to reach even distributors, as you're saying, would there be some change at least temporarily in terms of opening more warehouses so that the supply is streamlined? Or how is that?

So I can answer that. So look, I think the important piece in the short -- I think fundamentally into the medium term, I don't think there's a change to the strategy. Now I think in the short term, I think we have to deal with a few variables. And I think we spoke about containment zones keep happening from time to time. It's really linked to what's happening to some of the outbreak. So we are looking at multiple models, including in -- obviously, the closer you have the stocks to the retailer and the consumer, it is better for you. So to that extent, we are looking at multiple models. And in some cases, including looking at space with some of our distributors to make sure that stocks reach there. So in the interim, we are looking at multiple models, direct dispatches. Stock trade distributors comes from temporary space. And I think in the medium term, let's say, the next near term, it's about continuity of supplies and getting it to the consumers. But I think then when you come back, I think to the fundamental strategy, I don't think there should be any change. In the next couple of months, we are taking many of these steps to make sure [ stock fill will ].

Will you have any short-term cost implications? Or will that be all distributors, sir?