Hindustan Unilever Limited (HINDUNILVR) Earnings Call Transcript & Summary

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

Thank you, Stanford. Good evening, and welcome to the conference call of Hindustan Unilever Limited. We will be covering this evening the results for the quarter ended 30th June 2020. On the call from HUL end is Mr. Sanjiv Mehta, Chairman and Managing Director; and Mr. Srinivas Phatak, Chief Financial Officer, HUL. We hope that you are staying safe and keeping healthy in these uncertain times. Given the exceptional circumstances created by COVID-19 outbreak, we are presenting results from our respective homes. So please bear with us if things are not as smooth as usual. As is customary, we will start the presentation with Sanjiv sharing his perspective on market and an overview on how we are managing business through the impact of COVID-19. Then Srinivas will share with you aspects of our performance for the quarter and our outlook for the future. Before we get started with the presentation, I would like to draw your attention to the safe harbor statements included in the presentation for good order sake. With that, over to you, Sanjiv.

Thank you, Amit. Good evening, everyone, and thank you for joining us on the call today. I do hope that you and your loved ones are staying safe and keeping well in these uncertain times. This is a societal crisis threatening lives and the well-being of our society with the potential to fundamentally reshape the world. On behalf of everyone at HUL, we extend our deepest sympathies to all those who are struggling to cope with the crisis and equally, we express our gratitude to all the frontline heroes in managing and helping us manage this pandemic. One of the unusual features of the crisis is how it feels like the world is at a standstill, yet things are also changing at such incredible speed. It is in this context of rapid and unpredicted change that we are discovering true responsiveness of HUL and the value of our achievements to consumer. As a company, we are privileged to be serving the everyday needs of consumers. We hail our own frontline heroes in factories and at home who have been working tirelessly even during the peak of the lockdown with a higher purpose of ensuring availability of essentials like Lifebuoy soaps and sanitizers, Domex disinfectants to fight the virus and a good cup of Red Label Natural Care tea or Horlicks to boost your immunity. Now let me take you through the market context and our imperatives from navigating through this crisis in detail. The economic fallout of this crisis is inevitable. In India, the economy has slowed down even before COVID-19. With the pandemic and ensuing nationwide lockdown, the immediate impact was severe supply chain constraints. As businesses pulled down shutters, it manifested in empty shelfs and shrinking pipeline. So from a demand perspective, the fear of loss of job, dwindling earnings and eroding investments have made people circumspect with their spend. Progressively, as the country started opening up, the lopsided concentration of cases implied a shift from absolute lockdown to more localized lockdown or vertical lockdown. And as you can see in the chart, as number of cases continue to rise, the macroeconomic environment is becoming more challenging with slowing GDP growth rate. We should be absolutely clear that no one can predict with a high degree of accuracy of what is going to happen. A lot will depend on the trajectory of the virus, what happens to the economy, to what extent is the demand postponed or impaired, the unemployment trend, et cetera. So there are various variables at play. I would not want to hazard a guess, but I do hope that by the end of this year or early next year, we'll see the economy picking up and the demand coming back. Right now, the challenge for us is to get the supply lines going. It is difficult to gauge the end consumer level demand. Once supply is normalized and trade pipelines fill up, we will get to understand the underlying demand trend hopefully in the September quarter. Steps taken by the government, such as increasing daily wage rates under MGNREGA, increasing the budget allocation are all positive and should boost rural consumption. We're also delighted that the harvest has been good. Similarly, the steps taken to provide liquidity by underwriting loans to MSMEs is also a step in the right direction. We are hopeful that the government will take necessary steps to stimulate demand. We are a consumption-driven economy, and it is vital to get the consumption growing so the economy gets into a virtuous spiral. Crude and currency continue to be volatile due to geopolitical imperatives, unprecedented swings in global economic cycles and trade dynamics. We're also witnessing inflationary trend in select commodities such as vegetable oil, tea, SMP, and tomato paste. Our strategy is serving us well. It remains unchanged by agenda. We continue to dynamically manage our business to deliver consistent, competitive, profitable and responsible growth. Our 5 growth fundamentals are the key levers for driving growth across the categories. These are, as you know, purposeful brands, improved penetration, impactful innovations, design for channel and fuel for growth. We continue to progress a purpose-led and future-fit agenda, which is even more critical during this time and reimagining HUL is critical to drive digital transformation in all aspects of operation. I believe we have made good progress in our focus areas. Last quarter, we had called out 5 imperatives, which draw strength from our values and enable us to navigate through this difficult circumstance. Let me share with you the snapshot of our progress in all the 5 work streams of people, supply, demand, community, cost and cash. The most important priority for us is and will remain the safety of our people, not just people who are on our rolls, but the entire ecosystem that work for us. Based on global best practices, the WHO guidelines and the government requirements, we set up and implemented tiered SOP for health and safety in our operations, accompanied with training and readiness drills to ensure that we minimize the risk of transmission across our value chain from suppliers to customers. We set up contactless operations at the interfaces where risk of virus is mostly high. We also set up a supply chain to deliver more than 5 million PPE items within our ecosystem to support 100% compliance to world-class health and safety standards. We were one of the first companies to provide insurance to our distributor sales team. There is no debate on cost when it comes to people safety. This has and will always be the philosophy of the organization. Despite all the precautions we may take, there will be instances like in our Haridwar factory when the infection spread amongst our people and more so because people are asymptomatic. In all such instances, our first focus is to get all our people tested and look after our people who have tested positive, decontaminate the premises and restart the operations only with people who've tested negative. We are also clear that we will not be in a rush to open our offices. We have also plans to innovate across our financial model. For example, we have implemented the entire internship program virtually. This is also an opportunity to train and retrain our people. We, in fact, have seen a huge spike in the usage of our learning portal. The second important aspect has been to keep the supply lines going. I'm extremely proud of my teams for the way they've risen to the occasion and have adopted new and innovative practices. We were able to restore operations immaculately after the precipitous drop in operating levels with nationwide lockdown. We shortened the entire planning to execution cycle to a daily horizon and ensured the dynamic response to an everyday changing environment. Over 100 instances of critical material supply disruptions were handled with speed by on-boarding dozens of new suppliers. HUL trucking capacity was restored at twice the rate of national trucking recovery, thereby eliminating key logistic bottlenecks from our operational velocity. Our supply chain today is well positioned both on just in time and just in case requirement. In June, we were also able to build back a distributor stock pipeline, which had reduced significantly towards the end of March due to the lockdown. The third important area for us has been to keep the pulse on our consumer, their behavior, perception, their unmet needs so that we can adjust our innovation and communication agenda. To address the critical needs in the space of health, hygiene and nutrition of the aggressive market, we have been able to assess the demands for our category. We have also accelerated our innovation pipeline in the health and hygiene category. And this quarter, we launched Lifebuoy Germ Kill Spray and Domex disinfectant sprays and Lifebuoy cloth sanitizer. Fourth and most important aspect is helping the community. This is a crisis where business, civil society and citizens must join hands with the government. As you would recall us saying, it is our purpose to go beyond the business and ensure that we use our scale and brand as a force of good for the society. As a responsible company, we stand united with the nation in the fight against the virus. Last but not the least has been a heightened focus on cost and cash. Even though we are one of the most valuable companies in the country, we pride ourselves in being a frugal organization with a middle class mindset. Our balance sheet strength will be a source of competitive advantage. We are driving cost ability, judiciously reviewing cash flows and reallocating spends with rigorous discipline. And Srini will throw more light on our deft P&L management in the latter part of this presentation. We have taken significant steps to reduce complexity in operations. We have reduced by nearly 80% our SKUs during the height of the national lockdown. As the country started to open up gradually, we increased our SKU assortments, and we are currently operating at about 50% of our pre COVID level. Every crisis, we believe while posing a danger, also provides opportunity. We are leveraging this opportunity to reduce the complexity in operations, and we believe that even as we go forward, we will bring down the SKUs to about 80% of our pre COVID level. There is a clear financial case for this in terms of cost, cash and organization bandwidth. These measures will enable us to respond with speed and agility in the evolving environment. We also responded with agility to major shifts in consumer demand. As an illustration, the production of sanitizers was ramped up by a factor of 100x and hand wash by 5x. The golden triangle of procurement, quality in R&D and EBITDA, to qualify and adapt scores of new pack design, new material, new formulations and prototype. We launched over 50 new products and packed innovations to cater to the rapid changes in demand in hygiene and sanitization products. We also formed tactical sourcing alliances to utilize spare capacity for addressing the categories of Health, Hygiene & Nutrition that are seeing demand at home. Several innovative disaggregation models of distribution were also tested and launched to ensure that suppliers reach the furthest corners of the country. More importantly, the most we've been building under our Reimagining HUL digital agenda has been a clear competitive advantage during the crisis. Our B2B app Shikhar is now available in more than 150,000 stores. And our retail offering MyKirana is also available across many pockets of 6 cities. This has been a clear competitive advantage for us with Shikhar tracking almost double the average order value and line items per order compared to pre COVID level. The merger of GSK Consumer Health Nutrition business with us has brought great brands built on proven scientific credentials with great purpose into our fold. This merger could not have come at a better time. We are privileged to address the nutrition and amenity needs of consumers in the midst of COVID-19 pandemic. A merger of this scale requires sharp focus, and our team has delivered seamless cut off. Despite the lockdown, we were able to successfully close and consummate the merger on the appointed date of 1st April, with all activities, including the legal transfers and IT systems transition orchestrated virtually and flowing seamlessly. The nutrition business is off to a good start with domestic business delivering a robust 5% growth in the quarter and tracking well ahead of market on back of wallet share gain. Within a few weeks of GSK merger, we reformulated the full Horlicks portfolio with a higher level of zinc, updated the pack and communicated the benefit of immunity supporting nutrients like vitamin C, D and zinc. We also launched pouch packs in Horlicks and Boost to drive consumer value and build access. The structural growth and margin opportunities of this merger remains intact, and we continue to make good progress against the milestone. This pandemic can have a lasting impact on human behavior. One clear trend, of course, is a heightened awareness of hygiene. The pandemic has clearly raised the need for clean living, protection, immunity and wellness. With iconic trusted brands such as Lifebuoy, Domex, Horlicks, Red Label, Surf Excel, around 80% of our portfolio addresses the space of health hygiene and nutrition needs of consumers. We have seen in India and in many of the global markets that consumers in this time do gravitate towards large and trusted brands. And there is no other company in India which has built many such brands over the years that deliver strong functional benefits and instill trust and confidence in consumers. Right now, people are grappling with a sense of fear of getting infected, and hence, they will remain wary of going out for some time. This gives a fillip to in-home consumption categories, and we are well placed with our in-home portfolio of ketchup, jams, soups, tea, coffee and atta. With the incomes under pressure and economic uncertainty, consumers will gravitate towards conscious consumption and search for value in each purchase occasion. Our portfolio across categories straddles the pyramid and caters to different price points and benefits segments. Hence, even in this difficult time, we as a business are placed to meet all needs of consumers, even if they were to downtrade and [indiscernible]. The crisis is also a massive opportunity for e-everything. I've spoken about the Shikhar app and the digital orders that are taken directly from retail outlets, given the social distancing norms, mobility restrictions and sales force manpower issue. MyKirana is currently, like I said, in more than 6 cities and proven very helpful. In light of the current environment, we pivoted to a complete digital marketing and home delivery led model. With Smartpick, we are resorting to new ways of driving market development through targeted digital sampling. Smartpick delivers a sample box of HUL brands specially curated to algorithm and is targeted to consumers who have digitally enabled end-to-end experience. Not just traditional e-commerce, but it could also be the possible renaissance of the humble grocer. Consumers have realized the benefit of proximity. With Connected Stores Program under our Reimagining HUL agenda, we are empowering the grocer with technology. Connected Store provides a brand agnostic platform for the stores to go digital, capture online orders, digitize its billing and offer the option of digital payments to shopper. Against the challenging market backdrop, we believe we have delivered a resilient and competitive performance in the quarter. Our reported turnover growth stood at 4%, including the impact of merger of GSK Consumer Health. Excluding for this nutrition business, our domestic consumer growth declined by 7%. With the headwind on costs, we saw 110 bps decline in EBITDA margins. Nonetheless, our EBITDA margins are healthy at 25%. Our performance is a reflection of the strength of brands, execution progress and rigor and discipline in implementing a consistent strategy. While we continue to focus on delivering consistent, competitive, profitable and responsible growth, our compass is calibrated by a sense of purpose. When COVID-19 hit India, we immediately earmarked INR 100 crores to help the country fight this crisis, and we are spending the money in a systematic way. We're helping augment the capacity of health care infrastructure by donating several ventilators and about 75,000 RT-PCR test kits to hospitals. We're utilizing our pan-India reach to distribute food and sanitation kits to needy people, both in urban and rural areas. The first 150,000 packs of Horlicks with higher zinc was donated to hospitals across the nation for the benefit of medical care professionals taking care of the COVID patients. We also donated 2 crore soaps across India to hospitals and vulnerable communities. We also partnered with Apollo Hospitals to set up isolation facility. Finally, we are a marketing company and have expertise of changing consumer behavior. We are utilizing our prowess in partnership with UNICEF to come out with mass communication, with campaigns which featured memorable and positive messages that are the need of the hour, reaching over 100 million houses. 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. Our strength of agility and responsiveness gives us confidence to navigate the current challenges as well as capture the structural opportunity in medium to long term. With that, let me hand this over to my colleague Srini to cover the details of our quarter's performance. Over to you, Srini.

Thank you, Sanjiv, and good evening, everyone. So the quarter for us, I think, has been business most unusual, both on growth and cost, and the end results are indeed satisfying given the current context and the environment. As Sanjiv explained, agility and responsiveness across the value chain has enabled us to stabilize the operations and deliver a competitive performance. Our reported turnover growth stood at 4%, including Nutrition, which is the GSK merger. On a like-for-like basis, excluding the impact of the merger, our domestic consumer growth declined by about 7%. And the UVG decline was about 8%. Our competitive -- competitiveness is key. And in this regard, 86% of our business is winning share on volume when we compare on the last 3 months basis as per the Kantar Worldpanel. As you would all be aware that given the challenges and the limitations and the restrictions, Nielsen data is not available and likely to be so for the next couple of months. And to that extent, therefore, the consumer panel becomes an important indicator for us to look at our competitiveness. And even on value terms, around 80% of our business is actually gaining share in the last 3 months. It's important to understand the construct of growth. About 80% of our business addresses the health, hygiene and nutrition needs of the consumers, and this has grown at about 6%. However, the out-of-home consumption being impacted and some disproportionate impact on discretionary categories, the remaining 20% saw an adverse impact, dragging the overall growth down to a negative 7%. I will talk more about this when we come to the later slides in the presentation. In terms of month wise progression, April was at about 70% from an operational perspective due to the lockdown and restrictions and our manufacturing-only being limited. We saw a relative better performance in May. And in June, our growth was in the mid-single-digit growth as we recovered lost distribution inventory. We also benefited from rationalizing trade spends, and this has enabled top line growth. Now in September quarter, with the trade pipelines normalizing, which is pretty much we're referring to our distributor pipelines here, we need to get a better sense of the underlying demand, and that becomes critical. Let me give you a bit of a flavor on the bottom line. From an EBITDA perspective, we delivered about INR 2,644 crores. And now let me split the EBITDA margins. And these are some sections where I will ask you to just focus because I'm going to call out some important elements. So when you really look at our EBITDA margin decline on our base business, the decline was about 170 basis points. And we got a benefit of about 60 basis points coming from our nutrition business, which, therefore, translates to about 110 basis points on an overall basis. So in this chart what you really see is all these numbers are reported. From a growth perspective, we have called out what is the reported growth and what is the growth excluding the M&A effect. Therefore, you've seen that from a net profit perspective at INR 1,881 crores, we were up about 7%. Important to highlight 2 one-off or exceptional items here. We have received a benefit of some prior period assessments in the tax line approximating to about INR 96 crores, and you would also see an increase in the exceptional costs due to M&A, which is predominantly related to the stamp duty cost for Horlicks -- for the GSK acquisition and for VWash and there are also integration costs which are there. I think this gives you a very good snapshot picture across the 3 divisions. And therefore, I think the headline message is that Health, Hygiene & Nutrition have performed well. Having said that, the headline numbers do not do a full justice to the story, and we will unpeel this to give you a better flavor when we talk through from a divisional perspective. I mean, let me first start with Home Care. Home Care has delivered a solid performance across household care and fabric wash. Household care delivered strong performance in the home and hygiene portfolio driven by penetration. This has been a key one and has delivered good growth. Domex is staying true to its purpose, it's spreading awareness about the importance of home hygiene, and its credentials are resonating well with the consumers. Fabric wash registered a steady performance across the mass and the premium portfolio. Our laundry portfolio straddling the price pyramid benefit holds us in good stead and enables us to activate relevant parts to match consumer needs. For example, our Surf Excel brand continued to remain consumer relevant with access offer packs and a contextual messaging through Daag Ghar Pe Hi Rahenge (sic) [ Daag Ghar Pe Rahenge ] campaign. Purifiers, due to its consumer durables nature, and given the restrictions in terms of many of the stores being shut, was severely impacted in the quarter, pulling down the overall growth rate. When I talk about from a Beauty & Personal Care point of view, skin care was clearly an outperformer, and we had a stellar performance, given the heightened awareness around hand hygiene. Growth was really led by our purpose-led brands such as Lifebuoy and Hamam. Lifebuoy grew in strong double digits and across all the formats. Oral care had good growth delivery during the quarter with accelerated momentum on CloseUp. Hair category was initially impacted primarily coming because we couldn't manufacture in the month of April. And we also saw some bit of pressure in oral care -- in hair care in terms of large bottles, but we started to see the demand pick up in the latter half of the quarter. We are also confident about this category as it forms part of consumers' consideration set for hygiene needs in the current context. Skin, color cosmetics and deodorants were adversely impacted, both on account of supply constraints and muted consumer demand in the discretionary categories. Having said that, we have started to see some green shoots in skin care. Now if I come to Foods & Refreshments, clearly, I think consumer trends of in-home wellness and immunity auger well for our Foods & Refreshments business. Important to highlight here that our foods business delivered broad-based double-digit growth driven by consumption shifting to in-home. Our tea and coffee portfolio also registered strong double-digit growth. Red Label extended its long-running Taste of Togetherness campaign through a simple yet contemporary message of we can be socially connected even when we are physically distant. As Sanjiv already called out, our nutrition business performed well with mid-single-digit top line growth. Our immunity was -- immunity boosting Horlicks added with zinc was launched in the quarter. Having said that, our out-of-home business, which includes ice creams, food solutions and vending, was adversely impacted given the out-of-home consumption. I think it's also important to clarify when we say that Horlicks or the GSK portfolio domestic consumer growth has been about 5%. I think to give it into a perspective, there is no base because the whole business comes in and gets added into our financials only from 1st of April. What we've done is actually used the June quarter numbers reported by GSK in the prior year and compared it with the current set of numbers to give you a flavor, and that's really the definition for a 5% growth. I hope that clarifies for you when you think about it in the overall context. I think this is an important chart. Given what's really happening in the marketplace and to give a better understanding and appreciation of consumers, we've actually split our portfolio into 3 different segments. Health hygiene is really what consumers are looking for, and this has actually grown at about 6% while addressing the critical needs of our consumers. On the other hand, 15% of our business comes from discretionary segments such as skin, color and deodorants. And this has actually registered a decline of 45%. A big impact of this was lack of supply, especially in April and parts of May. There's also been some adverse impact on demand as people have remained at home. We are confident that skin will soon see a step up. Colors and deodorants are likely to remain a bit muted for some more time. Our out-of-home categories such as water, ice cream, food solutions and vending business, while they contribute only about 5% to our business, were disproportionately impacted due to consumption loss and saw a decline of 69%. I think the recovery in this part of the segment will be linked to what happens to the overall spread of the virus. Let me now shift focus to the P&L and make some important aspects here. We've had many headwinds on cost, be it adverse mix, both from a category perspective and as well as pack. You also saw that we operated with what is a consumer-relevant pack, which has meant that making different choices in different parts of the country. We've had fixed cost leverage and increased cost of operations because of supply resilience as well as safety. In order to navigate these headwinds, we stepped up our cost agility, and we have taken various steps to stretch and dial up our savings. And Sanjiv has actually spoken about the methodology and the philosophy that we operate when we look at this. We have indeed calibrated our BMI spend. So if you really see in the month of April, we had taken a big reduction. However, we continue to invest back as the country started to open up. And in doing all of this, we've maintained competitiveness in a throughout basis. So when you really start looking at it on a year-on-year basis, our share of spends and share of voice is actually higher than what we did in June quarter '19. I'm also very happy to share that the synergy benefits from the nutrition business are ahead of the business case. When it comes to understanding the cost at a line level, and therefore, the margin this quarter will be a bit complicated. It will not fit into your normal trend lines, which would actually input into your models and extrapolate. And let me give you a little bit of a nature of what happens. And here is where I request your indulgence because this is an important point. If you don't catch this, we'll have lots of questions, and I really want you to take this head on. Let me first talk about our base business, which is excluding nutrition. And it's got lots of elements, moving parts even on a normal basis. We talked about adverse mix. We talked about deleverage. We talked a lot about the COVID on-cost. We also had commodity headwinds in vegetable oils and tea. We did not see the full benefit of lower crude, given some of our stock positions and inventory which we had. Then I also talked about rephasing of some of our BMI expenses and calibrating our expenses. There was also a bit of a step-up and phasing in terms of our CSR spends as we looked at it from a point of view of HUL in the fight against COVID. So that starts to give you a bit of a flavor of many ins and outs from the perspective of our base business, which is excluding nutrition. The nutrition business, if I now focus on it, also had certain adverse impact coming from mix and inflation. There were significant on-cost in key items such as SMP. However, we were able to take out a lot of savings in BMI and overheads. The benefits of scale and the benefits of HUL media buying started to come in right from day one. There are no royalty payouts, given that we had bought the brand -- the Horlicks brand effective 1st April, and this helped us actually handle the higher cost of transition services. We are actually paying for IT and some of the transition services to GSK till we switch over to SAP. So this will continue for a period of 1 year. In addition, we've also had changes to our OTC service income. While the net margins were maintained, there was a little bit of reduction in the gross amounts. And the last piece is our exports has actually got reclassified into our subsidiary. So again, it starts to give you a flavor that both in our base business as well as in the nutrition business, there were a lot of elements which are unique to a quarter or there also -- some of them are structural. So now what I will therefore do is rather than trying to reconcile this at a line level, I'll give you a bit of a flavor at a headline basis and the likely impact nutrition has on each of our lines. Before I do that, to recap, our base business had lower EBITDA of 170 basis points, Nutrition gave us a positive 60, therefore, making it at about 110. Now if I take some of the key elements to this, and the first one really being material cost, on a reported basis, you would see that reported material costs were higher by about 234 basis points. Here we had a positive impact from nutrition. That means if we did not have nutrition added into the numbers, you would have seen a higher material cost when you compare it on a bps basis. When you look at other operating income, on a reported basis, you will see an improvement of 18 basis points. Here, the nutrition business brings us a positive effect due to the service income related to the OTC portfolio. On reported employee costs, you will see about 170 basis points -- 117 basis points. When I look at it from a nutrition perspective, we took a lot of cost out from the nutrition business from an overheads on a Y-o-Y basis. Therefore, that was beneficial there. But having said that, given that the employee costs are high in nutrition, it has an adverse impact on HUL. And when you look at BMI and other expenses, now this is a combination including Nutrition, and as a percentage of turnover, this does not have a material difference, yes? So hopefully, it gives you a bit of a picture to understand some of the moving numbers. It is indeed complicated. So that gives you a bit of sense on that. What we're also doing is, tomorrow, we will be setting up some time to actually give you a broader update on the Nutrition business and to talk through some key elements in terms of the growth and the margin potential. In that context, therefore, if you now look at it, I think this gives you a good sense in terms of growth as well as margins. I think the important point to call out, and I think Sanjiv made here was really saying that if you look at a segmental levels, our margins are actually very healthy. Home Care at about 19%, Beauty & Personal Care at about 28% and Foods & Refreshments about 20% really demonstrate the strength of our business and of our financial model. This is a quick summary, therefore, in terms of the overall results. And I think we have covered most of these elements in fair amount of detail, including exceptional items, with which I started with. I think this is an important aspect. If you really look at it, our business operations are well funded, and our financial model continues to be strong. If you remember, in 2016, we had actually formalized a scheme of arrangement for transferring the balance, which was sitting in general reserves into the P&L account. This was approved by the shareholders. And subsequently, we had obtained the approvals of the National Tribunal, NCLT, in 2018. Immediately thereafter, we actually went into a GSK merger, which, therefore, meant that we could not have distributed these reserves to the shareholders at a particular point in time. With the merger now having been completed, our business operations are being well funded, our financial model continuing to be strong and given our confidence in our overall business model, the Board has actually approved the distribution of reserves to the shareholders by means of a special dividend of INR 9.5. This will entail a total payout of about INR 2,232 crores. And if I now come to my last slide, I think it's really starting to give a perspective about looking ahead. The outbreak of COVID has disrupted the business massively in the short term, and it is -- actually the road to new normal is likely to be uncertain. And Sanjiv spoke in detail about some of these aspects. In these unprecedented times, therefore, it is a little difficult to have a demand prognosis at this stage. What's clear is liquidity pressures remain elevated, and there is volatility in costs. I think there's another important -- there are 2 important dimensions, I think, which we need to be cognizant of. The first is we are continuing to see many more lockdowns in the month of July. There are vertical lockdowns, localized lockdowns. This is indeed putting a lot of pressure on the operations. The second part, I think which Sanjiv started by talking about, was really the pipelines with respect to our distributors. In the month of March, we had lost a lot of our distributor pipeline, which we gained back in the month of June. But given the uncertainties, I think what we should not do is to really take the June performance and extrapolate it going forward. I think the important aspect when we look ahead is to really focus on demand generation. And in this regard, I think we have the right portfolio, and we have the right execution capabilities. And to that extent, I think HUL is positioned better than anyone else to really capture the opportunity in this market context. Our organizational strengths are very clearly articulated and you're well aware of. I think they will enable us to drive our model, which is really around future fit and purpose driven. And I think we will focus on really a competitive volume growth and really protect our financial model by looking at absolute profits as well as focusing on cash delivery, yes? So therefore, I think that gives you a bit of a flavor in terms of the overall performance from a strategy perspective and the financial numbers. And now I'll hand it over to Amit for us to really begin our Q&A.

Thank you, Sanjiv, and thank you, Srinivas. With this, we will now move to the Q&A section. In addition to the audio, as always, our participants will have an option to post questions through the web option on your screen. We will take up those questions just before we end. Before we get started with the session, I would like to remind you that the call and the Q&A session are only for institutional investors and analysts. And therefore, if there is anybody else who is neither an institutional investor or an analyst but would like to ask us a question or engage with us, please feel free to reach out to the Investor Relations team. With that, I would like to hand back to Stanford to manage the next session for us. Go ahead, Stanford. Over to you.

[Operator Instructions] The first question is from the line of Manoj Menon from ICICI Securities.

First of all, a very, very comprehensive and useful couple of slides actually, importantly, which has been [Technical Difficulty] very good presentation. I have 4 questions, I'll ask 2, and I'll come back later for the other 2. The first is, I understood that some of the categories like hygiene, et cetera, now would have actually got a boost and possibly, there is a fundamental reshaping into the medium term. What I'll be interested to hear some thoughts from Sanjiv and Srini would be on, let's say, any such similar opportunities exist for pack-size reconsideration also? The example what I have in my mind is, let's say, something like a shampoo. But is this opportunity where consumers are buying large packs, et cetera? I know that it's a bit of crystal ball gazing, but is there an opportunity to fundamentally reshape the pack-size, which can have significant impact on the profit [indiscernible] into the medium term? That's the question number one.

Okay. So what you were talking about is whether there are opportunities like shampoo to basically scale up the reach and accessibility of new category. Take sanitizer, for instance, we have launched sanitizer in sachets also. But sanitizer, during the peak of the pandemic, of course, people are clamoring for it, and it's a new habit and it has really gone through the roof in terms of demand. But I don't think this demand will sustain once the vaccine comes into the market. Of course, it is not going to go back to the pre-COVID level. It will remain at a high level, but it will not be today. Today, I would believe it's at an obsessive level, right? Any surface, you touch, you want to clean your hands after that. Any packet that comes from outside, you want to sanitize it and use the sanitizer for disinfecting your hands. So that is not going to remain at this heightened level. But certainly, the practice of people carrying sanitizers, I believe, will remain. The big shift, I would certainly see, is in hand washing. We have been investing huge sums of money over the years in cultivating the right behaviors for people. I think this market development work would have been done by pandemic. And people will certainly transform and realize that washing your hands with soap, which can cost you just INR 0.10 if you use a Lifebuoy, can do wonders for your health. So this is, again, something as a practice will remain. The other would be a shift towards liquid, I would believe. India has been very slow in adopting liquid. This will give a big fillip to it. The fourth will be the entire range of disinfectants. We have a lot of surface cleaners, toilet cleaners, et cetera. There would be a heightened need. So these are the areas where clearly one should see the market developing and the habit sustaining. That would be my pitch.

If I can add, Manoj, I think you were referring to also hair and trying to see if there was a big portfolio shift towards bigger bottles and therefore, a better value creation or a better profit. I think 2 parts. One is, if you see from a rural perspective, I think this is important to understand India on a disaggregated basis. If you see rural, I think the focus still continues to be a lot more on sachets in Tier 2, Tier 3 towns. Wherever there is an income stress, I think that, that still continues to be relevant. Having said that, we've also seen in some of the urban areas, large packs and large value consumption items have come into play. But it's an important aspect to see whether it was actually people buying in because there was a scarcity mindset or there is a fundamental shift to demand. So I think the important aspect is, I think we have a very good sense of what's really happening in different parts of the country. At this stage, it's difficult to call whether we will see a big shift in those dynamics. I think Sanjiv explained well what is visible to us, but we'll continue to keep an eye on some of these trends and to capture the value.

Got it. Got it. The second question is on the GSK portfolio's 5% growth in the quarter. I understand that one dog doesn't really make a lion. So it's just a very small sample size. The only context of asking this question is, so how do I think about this 5% number? Is it good, neutral, not so good, the way you're looking at it actually. The reason I'm again asking is because there was a great enabling environment for this category in the last 3 months and possibly it continues as well. It is just a question of the immunity and those repositioning messaging probably happened in May and June and the adult target audience, et cetera. So the thought process, what I'm trying to understand is, is these tailwinds of the immunity plus the good-for-you proposition of the product versus Horlicks or MFD actually discretionary within staples sort of a headwind. How do we look at the next year for this?

That's a good question, Manoj. Our immediate task was to ensure that the baton did not fall. And from the numbers, you would realize that, indeed, it did not fall. The second big task for us is to grow the market. And we have started with pouch pack. We have started with innovation, and you will see more about it as we grow about developing the market. I am very optimistic that this is a category, which we have acquired at absolutely the right time.

Okay. Yes. Sure.

And it would take some time if we are able to get the benefit of distribution, et cetera.

Got it. Got it. So this is really not an underlying sort of a situation. Okay. But just if I may push it little bit on, what's your initial thoughts on this discretionary within staple construct of this business? I mean without COVID actually?

What is the construct of the business? Yes?

No, what I'm -- maybe I'll ask this question tomorrow, Sanjiv. So I think you have the Horlicks GSK day tomorrow. I'll come back actually in the queue. So I'll ask this question tomorrow.

Okay.

The next question is from the line of Abneesh Roy from Edelweiss.

Sir, firstly, congrats for good set of numbers in a very tough quarter. So last 3, 4 years, you have closed the portfolio gap in a very good manner. The premium hair oil, nutrition, feminine hygiene, regional ice cream, et cetera. If you see last 4 months, the 2 categories which have seen one of the highest growth, noodles and biscuits, your presence there is very notional either through own or through the acquisition. Now biscuits and Horlicks did not succeed even after multiple interventions. Similarly, Knorr Noodles also, you have tried a lot of stuff. But in most consumers' mindset, it is not there in the consideration set, it's the top 2 brands only. So what could be required here? Because we are seeing definitely even IT companies are saying that 4, 5 years down the line also, most employees, for them and lot of other sectors, will remain work from home. So in that context, what is the strategy? Because these are very large categories. Biscuits, in fact, is the largest category. So what would be the strategy here? It will be mainly through the inorganic only this is possible? Because you or GSK has tried earlier, but we haven't seen really any meaningful success.

Abneesh, first is, not every company can be good at everything, yes? We have to accept that. And biscuits is not a category where we have any heightened focus. And you're right that noodles, we tried with it, but I don't think we've got, you're absolutely right, accepted. I would still believe that we have a portfolio which, to a large extent, is recession resilient. And we should not get carried away by the inherent demand looking at one quarter, yes? We have a portfolio where our tea and coffee is on a great rhythm. Our soups, our ketchup, they are on a fabulous rhythm. We have massive opportunity to grow our Horlicks business, yes, which is -- the penetration is just at 25%. And then we have the entire portfolio of cleaning and from a hygiene perspective, whether it is in a laundry perspective, whether it is in household cleaning, whether it is in skin cleansing, so we have a good solid portfolio. So I remain very confident that we have a portfolio, not only good from a long-term perspective and also from a medium-term perspective, a short-term perspective, yes? And let's not -- I hardly believe there's no person in the world who doesn't like to feel good of himself. So let's not, in any way, feel that beauty doesn't have potential. There will be a massive bounce back in the beauty category.

Right. Sir, one follow-up here. So this quarter, in fact, coming back to biscuits, breads has done better than biscuits, in fact. So have you seen in the adjacencies to bread, for example, jams and sauces, have you seen similar sharp pickup? Or is it the more modest pickup similar to the overall food category?

Jams, ketchup, they are growing at a very robust pace. And it is but natural, where people are cocooned in homes. These categories, with kids all locked up in home, there would be demand for these products. It is very natural that there would be a big burst of demand for these products.

Sir, my second question is on the hygiene and sanitizer. You mentioned a good point that after vaccination, we would need to be realistic. Now you have scaled up the capacity here by 100x. I think it will be mostly outsourcing. My question is, if you see paint companies are entering here, liquor companies are entering, every personal home care company has entered here, so even after the vaccination, this will remain a much larger category than what it was in 2020 -- FY '20. So how do you see the construct of the market share? Will it be similar to the deodorant wherein there's no sticky market share for any player? It will be driven by trade spend and ad spend? Or it will reflect the personal wash kind of market share? What's your perception, sir?

I would believe it will be more like the personal wash market, yes, where there would be some brands with credibility on hygiene, which will have a larger part of the market. And today, because of the pandemic and because of the heightened need, I think more the merrier. Let more players come in, and let them grow the market.

And sir, this 100x capacity is obviously outsourced, right? So that's not a problem.

No. We have -- first is there is outsource. There is also internal. But our internal capacity is fluid. We can shift it between different liquids.

Right. And sir, one last one. Distributor pipeline, you mentioned in June, there has been a benefit because of that. Is it possible to quantify that?

You remember, during the March quarter, we had said we had destocked by 6%. Yes? So what we have destocked in the March quarter, we have upstocked in the June quarter.

Okay, sir. That's all from me.

One question for you, Abneesh.

Yes, sir.

Why have you decided to come down in your batting order?

Sir, I tried, but couldn't succeed, sir.

But #1 also -- one down also is a great batting spot. You know that?

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

Congrats on a good set of numbers in the current environment. Sir, I'll just start off where Abneesh left off in terms of the pipeline restoration. So last quarter, you had mentioned that there is a total 12 percentage point swing because of pipeline, maybe 6% distributor and 6% retailers. So that 6 percentage points of distributor you are saying has been regained. Any idea on where we stand in terms of the 6 percentage points of retailer pipeline? Have we regained any part of it or not?

Yes. If you remember, what we had said is, there is about a 12%, out of which 6% is the impact of distributor. The balance 6% we had said some is trade stock, and some is underlying demand, which would have come off because of the shutdowns that have happened. Yes? So you can safely assume that the estimate would be about 3%, 4% would be the trade stock. Trade stocks, it is very difficult to gauge at this stage because we are not getting Nielsen data. And a lot of stores remained closed during this period. Yes? Even towards the end of June, about 20% of the outlets, which we were serving were closed. So I think you will have to wait for some more time to see whether the trade pipeline has completely filled up.

Right...

And the other aspect to add, Percy, is, let's say, even in the quarter in certain categories such as ice creams in out-of-home consumption, it will be fair to assume that, that's not going to come back because summer was a big season, let's say, from an ice creams perspective or, let's say, some of the food solutions, which was supplying to restaurants. So some of those elements, we have definitely lost. And therefore, it will take us a bit more time to get a good handle on the total picture.

Sure. And Srini, did you mention during your initial comments that the June sales growth is somewhere in the region of mid-single digit?

Yes, I did that.

Okay. So would it be fair to sort of assume that after accounting for the pipeline refill, the sort of secondary sales growth is approximately flat in the month of June?

I don't have that number straight away. But definitely, if I see from a quarter perspective, secondaries are lagging some of the primaries, and that's only natural because, first, we would just get the distributor pipeline going. And then in due course, we would start to see the secondaries.

Sure. Sir, second question is on gross margins. You did allude to it in your opening comments. So I'll not go into too much details on the moving parts. But as you said, it's a 230 bps contraction. And if I include the GSK mix effect, it would be somewhere in the region of 350 to 400 bps on an organic basis. So just wanted to understand, one, is there any COVID-related costs in these, which would go away as the sort of COVID impact fades? And secondly, if there is no COVID-related costs in the -- in this line item, then this -- such a big swing of 350 to 400 bps Y-o-Y, how much do you think is sort of a very short-term thing? And how much do you think can really continue for a few quarters more?

So let me split that up. They're definitely COVID related on-costs. As there are COVID related on-costs both in the materials line, for sure there are also COVID related costs in our conversion costs. And there are also COVID-related costs in some of the other expenses, just given the nature of what's happening. Some of that, we hope to take it out because supply resilience has come back, but some of it is also something, which is likely to continue on an ongoing basis. Because the overall management of safety, PPE equipment, taking care of your outer core are inherently higher. I think the other important aspect is that we also had a big negative mix in the quarter. I think we had a negative mix because of the BPC parts of the business, let's say, the skin and some of the others having muted or negative growths. We've also had -- given that we operated with a very tight SKU mix, which also meant that it was attuned to what the consumers were buying. So we found adverse mix there. So I think it's difficult at this stage to put a pen on all of them. But going forward, we definitely expect some of the mix to improve, for sure. Some of the COVID on-cost, we hope will not be at the same intensity, but we'll have to see how the lockdowns will happen. And this is something I think we just need to be watchful, Percy, that in the next couple of quarters, we'll have to be very dynamic with all of these things. And that's what we will do. I think important to get that volume growth construct going well. And if you get that going, I think margin restoration is not going to be difficult. But again, having said that, we also start from very, very healthy margins, while we'll all get to a lot of these bps calculations Y-o-Y, even if you look at on a sequential basis and if you really look at each of our divisions, I think the margins are very, very healthy.

Sure. And last question, if I may, the core hygiene categories, that is the hand wash and hand sanitizers and maybe include Domex brand also, just these 3. I mean some companies have been sort of saying that these core hygiene categories on our low base have grown like 3x or 4x also. So what is your experience? Could you like give some kind of ballpark idea what percentage sales contribution do they have this quarter? And what was it in the base quarter 12 months ago?

So Percy, I don't think at this stage we are splitting all of this at that level. It suffices to say, for example, hand wash, hand sanitizer, Cif or Domex or Vim for that matter, have all actually registered very good growth. And I think the potential is immense. I think one is what has actually happened in the quarter, where you're also reacting in some cases to demand where you're leading demand in some cases. But I think there is a better picture, we will start to see in September quarter and December quarter because some of these are actually going to be sustainable over the next 6 to 9 months before there is a structural solution or a cure to the pandemic.

The next question is from the line of Vivek Maheshwari from Jefferies.

My first question is last quarter, there was quite a bit of debate about -- I know these are still early days, but to the extent you have intelligence on organized versus unorganized and some reports talking about unorganized being more agile and gaining share, whereas your point was that it's ultimately the organized guys who will benefit and brands will be favored. Any update since the last time that we spoke on this issue?

Yes. As you know, Vivek, what Srini indicated, that we are gaining share in over 80% of our turnover. And in many of this, they are very handsome share. So I wouldn't be worried about. I think the important bit is it's not about organized and unorganized. There are 2 things which stand out. One is which is a company which is agile can maneuver or manage the disturbances or handicaps that come on the way. And the second, also, it is very clear that during these times, people do gravitate towards trusted brand. That would be my pitch to you.

Sure. Sure. And second, I know there is a GSK call planned tomorrow. But this 5% growth what you mentioned, is it possible just to -- given that April must have been a tough one, any comment on the exit rate in the month of June?

June has also actually started to pick up in the same context. I think the degrees will vary. But if we compare from an April, May and June point of view, we have seen an improved trajectory but again, again, Vivek, it's important not to, whether I have said that, we shouldn't take June and start extrapolating because this is a fairly uncertain environment and a fairly volatile environment given the supply chain constraints that we are having. Having said that, the momentum has been positive as the months have progressed, and that will remain our objective to see how do we continue to have -- and have that going.

Sure. Okay. And Srini, one another thing. The others -- just a bookkeeping one. Others in segmental, this INR 49 crores EBIT, what does that number represent?

Amit, can you just clarify that, please, if you can?

You wanted to understand what is the other segment, right, Vivek?

Right. I mean from a run rate of, let's say, plus/minus INR 2 crores, that number has jumped up to INR 50 crores. So is it GSK BAI? Or can you just clarify what is the quantum -- given the quantum?

Sure. Sure. So first of all, what compromise (sic) [ comprises ] of the other segment, that is important to understand. Then obviously, EBIT is a follow-through of that. So traditionally, our exports business is whatever we sell related to exports is housed there. Now in addition to that, we are also exporting the GSK portfolio, right? So we'll sell it to our [ Capital ] subsidiary and then that exports it out. So that is one business which is housed there. And also, the GSK OTC OH business is housed there. So these are the 3 primary things, which compromise of the -- which comprise of the other segment. And hence, the margins to these 3 businesses are reflected in the EBIT margins of others.

Got it. That is useful. And lastly, Sanjiv, is it possible since we are speaking now, is it possible if you can give some -- your views about Glow & Lovely and the fact that can this create a bit of a disturbance in the transitioning phase?

Yes. I'm glad, Vivek, you raised that. Why I'll say is I'm very confident about Glow & Lovely. First important bit is that this is a work which has been on for the last few years. I'll recap the bit of the history. The second is, we first in the communication. Then after a lot of research, we went in for a major relaunch last year when we changed the proposition and went away from fairness to HD glow. And since the relaunch, our penetration and market share have been unprecedented, which gave us immense confidence that the last lap was to move towards changing the name. So I am very confident that Glow & Lovely will not only take with it the franchise and the consumer base of Fair & Lovely but it will also add consumers who hate -- who are not with Fair & Lovely. That's my very clear feeling based on the work that has been done, the results that we have achieved and the plans that we have put together. But it's a big relaunch and let's see the results. I'm very confident.

The next question is from the line of Arnab Mitra from Crédit Suisse.

Given the big income effect on consumers, and now it's been 3, 4 months into the situation, are you seeing the lower or the mass end of the portfolio for you in many categories, either growing faster than the overall category growth or actually the gap between that growth and the premium growth narrowing? And is it like a broad-based trend or is it specific to certain categories? If you could throw a bit of light on that.

I'll give you some structural answer because as yet, we don't have all the information. First is, yes, the frequency of purchase has gone up. So there are more trips to the grocers now. Second is, we are seeing many consumers gravitate towards low price point packs. That's also a very clear phenomenon. Is it from a perspective of moving to lower price brand, that is yet to become completely discerning. In some pockets, we see it, but it's not a very big trend as yet, that is at this stage, but if the economy continues at this pace and if it doesn't pick up, then it could become more discernible. And from our perspective, Arnab, the critical bit is that in most of the categories, we have the brand or the portfolio straddling the price benefits for consumers. So if there is a move, then we have a brand like whether you look at laundry, whether you look at skin cleansing, whether you look at hair, whether you look at tea, we have the brand, which can cater to the consumer. So we have to be a bit more watchful to see how trends shape up. But we are keeping a very close watch on it.

Sure. That's helpful. And the second question was, Srini specifically mentioned 3 commodities, SMP, tea and veg oils where you had inflation. So my question was that, one, are the trends currently improving in terms of the commodity costs going down or up? And secondly, any thoughts on pricing in some of these categories in the current macro environment?

Srini, would you...

Having the picture -- yes, I'll do that, Sanjiv -- and the picture varies, Arnab. Clearly, when you see tea, tea is actually a new crop coming through. Given that there was scarcity in the month of early season, we have seen significant inflation come through in tea and now it's a bit broad-based, not only from the premiums point of view. So I think that's something which is playing out. Second, if you really see from something like an SMP, clearly, going forward, we have seen a lot of softening in the prices of SMP, given where they were earlier and some time back. So I think that augurs well from a category point of view. If you look at veg oils, and again, it's year-on-year. We had seen a big dip last year and subsequently we had seen increases. So to that extent, I think we have seen an increase in veg oils and the trend is slightly upwards as we speak. But again, this is a situation which continues to be a bit dynamic given some of the international developments and a read on demand and supply. Specifically, in your question with regard to pricing and how we are approaching this, in tea, we are taking some judicious price increases in parts of our portfolio. Some of it has already landed and some of it will land in due course because the quantum of inflation there is a lot. And also we'll do it in parts of the portfolio where it makes sense. When we look at from a home care or a laundry point of view, while crude has picked up on a Y-o-Y basis, crude is much lower. And there, we are actually looking to pass some benefits to the consumers by reducing prices, and parts of it will now start to land. So that's the case of where we are actually looking at price reductions.

Sure. That's very clear. And just one last question, if I may, which is on the soap portfolio. So this is one category where you had been losing market share, relatively doing worse than the industry in the last couple of years. Now have you seen, while your growths are very good, any sense on how you have been able to turn the needle on market share significantly given that Lifebuoy is one of the few germ protection equity brands, and any sense on market share movement in that category?

We have stopped and gaining volume shares in the entire skin cleansing portfolio, soaps as well as liquid. And I do hope, Arnab, you also use Lifebuoy.

Yes, absolutely.

The next question is from the line of Latika Chopra from JPMorgan.

Good to see your resilient performance in the current macro. Just one bit from my side. You did mention that you saw rural growing slightly better than urban. But given the localized lockdowns that you're seeing now, do you see -- this could challenge or put at risk the more resilient small town rural performance? And the second part is on distribution channels. As you exited June, it seemed that skin care, you mentioned you have started to see green shoots emerging. How have the channel behavior on modern trade and e-commerce panned out for you?