Unilever PLC (UL) Earnings Call Transcript & Summary

Good afternoon. Good morning, everyone. I'm Celine Pannuti, Head of Consumer Staples at JPMorgan. Thank you very much for joining me. Today, I have the pleasure as part of a CEO fireside chat series to be at Unilever with Fernando Fernandez, CEO of Unilever. Fernando, thank you very much for hosting us.

No, thank you for having me, Celine. It's a pleasure.

It's my pleasure. Obviously, there was a lot of change this year. You became CEO during that year. And yesterday, the Magnum company has started its life as an independent company. Obviously, you came with the remit to accelerate change, and we saw as well there's been some disposals, some acquisition. But what I'm interested to know is from within, what acceleration of change has been like at Unilever under your leadership?

Well, yes, it has been a very important day yesterday. We completed a process that started on March 2024. We announced the separation of Ice Cream. It was very important for us to complete that during this year, and we have done it. It has been a complex process. It was not easy. But now it's behind us. We will be cheering for Peter Tercoru and his team on the in company. I'm sure it's a very exciting business. In our case, yes, I took over in March this year as CEO. It has been a very intense period. In January with the separation of Ice Cream for me, it was very, very important to continue accelerating our performance and our competitiveness. I believe we have done it. You have seen our results. Our volume growth has been accelerating around the year. Quarter 3 at 1.7%, we expect at least a similar performance in quarter 4. And our competitiveness is really improving. So we have been putting a lot of emphasis in how to do things differently in Unilever, particularly in elevating the quality of our portfolio, the quality of what we are doing in our brands, ensuring that execution is flawless. And I would say the other 2 elements is fundamentally working in our talent and in our culture. One of my principles IS really to be compromising on talent and ensuring that we have real -- the right leadership team in place. And in terms of culture, I have always said that there is a coexistence in Unilever of pockets of excellence and pockets of [indiscernible] , and we are trying to elevate what we do in every single geography, in every single category. So a lot of work. It looks much more than 8 or 9 months, but I believe we are doing significant progress.

So maybe if I can go a bit deeper in that point about culture because obviously, you've been close to 40 years at Unilever. You are really a Unilever product and yet you are pushing for culture change or elevation. Can you explain what you are trying to achieve? Where is it? And like with example maybe? And then how you measure that and how it's linked to compensation and rewards?

Yes. Well, you are reminding everyone that I'm too old, but I believe that my 37 years in Unilever is a big advantage when you have to drive change. It's a complex company, 120,000 colleagues. It's important that you align them, that they are very clear about what is important in the company, what are the metrics that we are following. And this is anecdotal, but every time I join a meeting in Unilever, before saying hello, I say volume growth, positive mix, consistent gross margin expansion for profit growth in hard currency. Hello. And it looks silly, but it's very, very important to align company and to ensure that everybody knows what is important. We are also aligning everywhere about how to do business in Unilever, how we are really running our brands, what is the framework to run our brands, what do we want from our marketing machine, the same when it comes to execution. And I think we are doing progress in all these areas. Regarding incentives, there have been significant changes. The vast majority of our long-term incentive plans are now hard currency linked. It was not the same in the past. When you look at our 8,000 managers in the company, the annual bonus is really linked to what is line of sight for them. So if you run Personal Care U.S., you are paid for the performance of Personal Care U.S. or if you are in Home Care Europe, it's Europe, it was not the same before. And finally, we have made a significant change also is for the leadership team until now, but for the whole company from 2026 onwards, we are including restructuring in the calculation of profit growth. And I feel it's very important because Unilever restructuring cost has been historically above the level of the sector. So these 3 changes in terms of incentives are important. And now basically, we don't expect any significant changes beyond that.

'25 was also quite a specific year because it's the first year that the 4 business groups are operating with 24 markets or business group market, and then you have the One Unilever structure. So can you explain how you think this has gone? And like how do you measure that it's been effective? The other point is that your biggest division Beauty &and Wellbeing is still without a head of divisions. So can you talk about what are the skill sets that you are looking for this person to join? And when do we expect to have an announcement?

Well, first of all, I feel if I look in a bit longer stretch, we moved from a geographically led organization into a category-led organization in 2022. And now basically, we run the P&L of Unilever through 4 divisions that are what we call the business groups. I believe this change has been very, very important to ensure that we build a more consistent and coherent portfolio. Also in order to focus our innovation plans. I believe that -- the impact that this has had in our product development capabilities, it has been very, very significant. This year, we have gone all the way. We have divisionalized our sales force. Now we are running the company with 63 different sales force in our top 24 business group markets, top markets. These top 24 markets represent around 85% of our revenue is very, very important. For the rest of the organization, we decided to adopt a simpler model. That is what we call One Unilever. These markets from market '25 onwards are not big enough. They don't have the critical mass to go for the divisionalization of the company. In these markets, we are really simplifying the way we operate in a dramatic fashion. We are also making our power brands much more important because you can accept some complexity in a market like U.S. or in a market like India, but you don't want complexity in smaller markets. And that's something that this year has been important because we have done all these changes, and it has been pretty smooth. You have seen our performance has been good despite all these changes. And now I can say that the heavy lifting of all the organizational changes is behind us. So basically, focus now is in continue elevating the quality of our brands and our execution. Regarding the business group President of Beauty, this is a decision for the next 10 years. We are looking for somebody that really understands how to run business models of high margin, high investment. This is a category in which digital fluency is very, very important. And also the ability to scale brands globally is very, very important because in beauty brands tend to travel well. So we will take the time that is necessary to find the right candidate. In the meantime, the team we have leading Beauty is a high professional team. And as you have seen, it has been our fastest-growing category and continue performing very well.

Okay. So now that the Magnum company has life on its own and early in 2024, when you announced that, you announced as well your ambition to grow mid-single digit and with modest margin expansion and to be top TSR company. At that time, the world was looking in a certain way, the world has changed and somehow as well slowed if I think about CPI across many regions. Now mid-single digit, the market is interpreting that at 4% to 6% in an environment where some of your competitors are calling out category slowdown. We heard that last week again in the U.S., but as well even in beauty, the category has not been as buoyant as it used to be. So how do you -- I mean, how do you relate to that 4% to 6% ambition in an environment where things are a bit tougher?

Our medium-term guidance remains unchanged. And if you look at our 2-year compound annual growth rate in volume terms, it's about 2% already today. And as I mentioned, quarter 3 volume was 1.7% for us, and we expect quarter 4 to be at least in line with that. So it doesn't change in the kind of guidance that we have given. It's true that the market is a bit tougher when it comes to -- there is a bit of decoupling now between GDP growth and market growth. The market volume growth today at which a company like Unilever is exposed is more in the 1% than the 2% that has been historically. But I don't want to project the long term basing what has happened in the last 6 months or something like that. When you look at the last decade, this is -- Unilever is exposed to a kind of 2-plus percent volume growth markets. And it's true that CPI has been a bit slower. But when you look at wage inflation globally, it's clearly now in the 4% to 6% territory. So that kind of alignment between wage inflation and CPI at one point of time will come. So I'm not so concerned about what will happen in the next quarter. We believe in the long run, I don't expect the market growth rates that we will see in the future to be the ones of the last 6 months or so. But we are focusing what we can control. We cannot control the economy. What we can control is the quality of our innovation, how we are elevating our brands, the quality of our execution. And I believe we are doing a better job. Our competitiveness is improving. We have close to 60% of our revenue winning share now. I know you look at the same data that we look, you look particularly in Europe and U.S., we are gaining significant share in these markets. So our absolute focus is in continual outperforming the markets, doing what we need to do. And this is what the plain to win culture is. So whatever the conditions you have, you go for more. I don't want journalists in the company. People telling me what is the context there? I want people that whatever the context in which we operate, we outperform.

It's absolutely true. I think in an environment where growth is slowing, the ability to outperform will set you apart from competitors. And that was, in fact, my next question, and you already said the keyword, which was marketing machine, and I wanted to hear because I think it feels that there is a lot of change happening in Unilever. It's not just changing your portfolio, you need as well to be able to outperform in this new faster growth category. So traditionally, Unilever has not been seen as really at the forefront of beauty and personal care. So can you explain what -- how changes, how Unilever is different in terms of its agility, its digital frequency, which you mentioned earlier, its innovation and the ability to premiumize? I know you presented that SASE model a few months ago. But yes, try to put some color on how you can effectively change this company to operate at the highest level and win share in this category?

Yes. First of all, I just say we are outperforming practically in every single category. When you look at our food business, outperforming the food industry. When you look at our Beauty & Wellbeing business, I feel the numbers speak for themselves, the same in Home Care. So -- but this SASE framework and just -- sometimes you need simple language in the company to align the whole organization about what needs to be done. SASE is an acronym that stands for science, aesthetics, sensors, set by others and young spirited brands. Fundamentally, it defines the way we approach product development and the way we approach our models of reach, engagement and validation by consumers for our brands. So we are talking about science for superior functionality, aesthetics and sensors as a driver of consumer preference. So a much more holistic approach in how we address up our science than what we have had in the past. And a real revolution in social first marketing that we are really putting in place. When I took over, I made some bold statements about the number of influencers that we would like to have in the company. I can say that in Beauty & Wellbeing now, we are operating with close to 170,000 in the total company, close to 300,000. This has happened in a relatively short period of time that basically shows how important is this point of validation by consumers of the offering of our brands. I have mentioned before that I believe that broadcasting messages from big brands now can become suspicious. And as we all go to a restaurant after looking at rating and reviews today, brands have to have a very solid infrastructure to deal with what we believe is called -- what we call set by ours or recommendation by ours. And I believe we are doing significant progress on that. I really -- I'm standing to be proud when I stand in front of some of our shelves. So I was in U.S. recently, I stand up in front of the Walmart shelf for DAF, look at that, and it's a very different brand to the one that was 3 years ago. I went to U.K. and to France recently, looking at what we are doing with Pepsi, with Omor, the innovation that we are bringing there with -- and again, the brands look very different to what we used to be a couple of years ago. So I believe that our product offering is improving dramatically. And as I mentioned before, our social marketing machine is gaining a very significant infrastructure. When we put all these things together, we have what we have, for example, with Vaseline, a 155 years old brand that in the last couple of years has been growing volume at 12% per annum. That didn't appear in any ranking of brands in the digital space and now it has wiped out with all the current awards, really rank in the U.S., for example, #4 brand in the skincare space. So we are making progress. All this said, there is much more that has to be done. I always say that if I have to score in a 1 to 10 scale, the quality of what we are doing, I probably give us ourselves 6.5. My mom used to say that 10 doesn't exist, but we need to put the company in a level of 8, 9 in everything we do. But there is a significant step change in how we are doing marketing in Unilever. And it really goes from product development to models of rich engagement persuasion, validation of our brands. I'm very, very intuit. It's just where I spend 80% of my time is on this. The other 20% is on talent. And I believe we are doing progress here.

So following on that premiumization, and there will be 2 parts to my question. We talk about Prestige & Wellbeing in the second part. But first, if -- I think you said overall for the group, you expect -- the ambition is to be 50% premium right now is about 1/3. When you look at the core brands, which are the brands which you think have the right for that premiumization? What are the geographies which I think are there to premiumize? And in an environment which we discussed earlier where, okay, maybe the salary inflation is still there, but a lot of consumers feel under pressure. How -- I mean, is that the right time to think that premiumization is going to work for Unilever?

Well, let me say first that we don't see significant consumer down trading in categories of high involvement. So categories of low involvement tend to have significant down trading in economic downturn. But at this stage, in the categories in which we operate, we don't see significant consumer down trading. We don't see private label expansion, neither in beauty, nor in personal care, not in home care. In -- probably in the most basic food space, yes. But even in the condiment category, we see significant premiumization opportunities. And why I'm obsessed with premiumization, I believe there are 2 fundamental significant shifts that are going on. One is related with the impact of digitization in the amount of knowledge consumers have. So I always say that digitization has a step change the consumer power to now. And with that, there is an increased interest in science. People is much more interested in what is in the jar, what is in the bottle, and they are prepared to pay more for products that really perform. The second is, at the same time that we see a significant reduction in the population growth rate, we see a significant increase in household numbers. That fundamentally means that the household structure is changing dramatically. And you see an incredible amount of households of 1 to 2 people. In these households, people tend to spend more in self-indulgence, in categories in which you buy fundamentally for yourself. So that's what we see as a fundamental driver of premiumization in the long run. And we have seen this happening in our portfolio. We are putting a lot of focus on this. We have around 30% of our revenue above what we call 120, 130 price index, but the intention is to bring that into at least 50%, and we are making progress on that. So we are really going for premiumization because there are some fundamental consumer household trends that really -- are structured and are there. The important point is that the only thing you can be sure is that in most of the market, there will be more retailer concentration. And with this retailing concentration, it's very important that you are in the right parts of the profit pool. And the profit pool is really shifting into premium. And that's why we continue shifting the portfolio into that direction.

So 7% of your sales are in Prestige Beauty & Wellbeing. And these have been growing double digits, adding close to 1% to total group, so showing that the power of premiumization. Now maybe I would like to dig a bit more because you always ask about the sustainability of Nutrafol and of Liquid IV. I think those 2 brands alone are getting closer to be billionaire brands. They are quite young brands. So what do you think makes -- or what makes you believe that there is sustainability in that growth? What is different in terms of the science, the barrier to entry, the investment that you're making? And can those U.S.-based concepts travel outside of the U.S.?

Well, we have had double-digit growth in that space of our portfolio for 5 years now. And I have received this question for 5 years. But it's fair, I cannot promise that we will have double digits forever, but I'm absolutely convinced, but these are spaces that are accretive to Unilever overall in top line. So I'm very excited by the well-being opportunity. I believe there is a soft spot today in some categories that is what I call the urban wealthy female opportunity and wellness is really driven by that. So it's an urban female that is really adopting wellness, taking their health on their own. And if you can find spaces there that you can really establish a strong position of leadership, it's a very attractive territory because you can scale up brands very, very fast. So it's true Liquid I.V., we acquired Liquid I.V. in 2020. It was $120 million brand. This year will be around $1 billion. We acquired Nutrafol in 2022, April '22, it was $220 million, and it will also hitting close to $1 billion this year. So it basically shows that if you establish strong leading position there in power hydration in U.S., we have more than 45% share. In hair fall, we have close to 80% share. You can establish very, very strong brands that also have a lot of headroom because penetration of LV is in high teens. Penetration of Nutrafol is less than 2%. So I'm very, very interested in this space of well-being. It's fragmented. New segments are emerging. We are looking at that with the potential of adding new brands in that space but we only have brands that can have the possibility of really scaling to this kind of level that we are talking. In the case of Prestige Beauty, we look at that -- fundamentally as an extension of our skin care, hair care strategy. Prestige used to be a channel play. But with the impressive development of e-commerce, I believe it opened opportunities for people like us that were not in the Prestige space. And it has been a very successful unit for us. It has seen some slowdown in the last year, particularly in the U.S. But the high end of Prestige Beauty for us continue growing double digits, the likes of Hourglass, K18, Tatcha, where you have items of $80 or more continue going very, very well. Potential for international rollout is very, very significant, but we took -- I took a very conscious decision when we saw a slowdown in China of solidifying our presence in the U.S. first because when China started to slow down, where people were going to go. They were going to go back to U.S. and they would go into scatter India. So for us, it was very important to solidify our position in the U.S. And now that we have built very profitable profile for this business, we are ready to internationally roll out, and we are starting to do that.

So the U.S., obviously, 75% of your business now is in Beauty, Personal Care and Wellbeing and you've been growing volume mix above 4% for the past 2 years. So it's quite a good playbook if effectively you can replicate that elsewhere. We just discussed about the well-being and Prestige Beauty brands. So if I think about the core personal care and food portfolio in the U.S. Can you talk about what kind of growth rate you are seeing in an environment where your peers are saying that the market is slowing? What are you doing differently in terms of go-to-market channels but as well brand? And food, you mentioned earlier that there was demand for premiumization. What about GLP-1? Is that something that could impact your food business in the U.S.?

Well, our core in the U.S. is doing very well. We just received what is called Advantage salary that is fundamentally the top 130 retailers of the U.S. scoring their suppliers. We're ranking #2 in the U.S. We're ranking #1 in personal care, #3 in beauty, #1 in foods. This is completely unprecedented for Unilever. We are growing with people like Walmart, close to double digit or with Amazon mid-teens. And that's not only the Prestige or Wellbeing. There is significant growth in the core. We are having a spectacular growth in Dove that is a power brand in the U.S. And as I mentioned before, Vaseline, we're having some issues in hair care, but our helmets business in food is doing very well. Our DS business that went through a rough period, now gaining share in every single segment of the category. So we really believe that we have built a footprint in the U.S. that is very strong. It has gone a bit unnoticed for investors, I believe that it has been now 5 consecutive quarters of more than 4% volume growth in the U.S. I cannot promise that it will be 4% volume growth forever, but we are confident that we have built one of the best growth footprint for any big company in the U.S. So we are happy with what we are doing. We have put an excellent leadership team. Our intimacy with retailers is at a level that I have not seen before. And we continue winning with the winning retailers there. So it's a good setup, the one that we have in the U.S. Regarding -- and by the way, some of our power brands there are reaching price points that they have never reached before. We continue to have an offering for the mainstream, but we are now stretching our brands into segments in which we can put our best science there and consumers are really recognizing that in their demand. In terms of GLP-1, at this stage, we have not seen a significant impact. Hellmann's is doing very well. It's a very strong business, 46% share in the condiment category. The condiments category is probably one of the most attractive categories within foods. There are huge opportunity for premiumization. People are sitting hotter and they are paying more. And I feel everything that is related with dipping sandwiches, there is a trend into more, I would call it, French kind of stuff than the one that historically we have seen in the U.S. And Hellmann's is really profiting from that and doing a good job. So we have had a good run with foods also. In GLP-1 until now, we have not seen any significant impact in the volume of adoption of the categories in which we play. But it's true that in the U.S., we are fundamentally anchored around condiments.

Yes. So in Beauty, if I look at the different subcategories, right now, the category that's doing super well is hair care, and it's a fundamental category for Unilever. I think it's about 11% of your sales. I must say growth has been flattish this year. It was up 4% last year. And if I look at some of your global peers or even regionals, they are much -- growing much faster than you. So I know there has been some issues in the U.S., which you try to fix. But -- so can you talk about how -- I mean, are you ready now to really step up that opportunity in hair? And do you need, by the way, to go more premium? I know you have 8. Is there another brand, professional? Like how you see the whole category and the channel performance?

Well, hair care has been our -- one of our fastest-growing categories for a decade. And it's true that this year, we are underperforming in hair. Our performance around flattish. Some of that was conscious decision we take to streamline our portfolio, particularly in the U.S. We have removed 3 brands in the U.S. We are the leading these brands because we wanted to focus our portfolio in our power brands there. We have pockets of strength. So that hair relaunch is really proving a big success. We are growing more than 20% in U.S. in the last quarter, and we have seen the same in every single market in which we are relaunching that. Our styling of TRESemme has been doing well. But at the same time, we took some decisions on pricing in our shampoo and conditioner business that probably went too far, and we have adjusted that. So regarding the portfolio -- and of course, we have been affected by China. China is very big for Clear. The issues that we have had in Brazil this year have affected some. So there are a couple of geographical issues that have affected our overall hair performance. But we have a great portfolio in hair covering every single price point. So it's really very well suited for the different geographies in which we operate. And the acquisition of K18 is very, very important to enter into the, let's call it, the professional space of hair care that, as I mentioned in the case of Prestige before, we want to do it without investing in physical infrastructure. So I believe the expansion of e-commerce, K18, for example, is a massive brand in TikTok. The emergence of e-commerce really open opportunities to continue expanding our portfolio into more professional propositions in hair care. And if there are good opportunities, we will go for that. And if not, we will develop that organically. So we are happy with the portfolio we have. We will continue to look into additions in that portfolio. And I feel next year will be a good year for hair care because the innovation that we are hitting, the market and the momentum we are getting now in the end of the year with some of the relaunches that we have put like TRESemme styling, or Dove in shampoo, conditioner and treatments are really doing very well.

Being an emerging market company, you have more pricing ability. Nevertheless, we -- as I was mentioning earlier, CPI has been slowing. Your pricing around -- is around 2%. In an environment where COGS inflation are not that great, where there is consumer pressure where some of your competitors are talking about higher promotions, is it a sustainable level? We've seen times where Unilever was pricing less than that. How do you feel about your pricing ability as we go next year?

Well, first of all, I feel it's important to look at what cost inflation the industry is exposed. And if I look at the categories in which Unilever is playing now and I look at 2026, I have around 2% inflation in the material side, and we have between 4% and 6% inflation in the wage side. Both are important. So that's the kind of cost environment that we have. And it's true that the CPI has slowed down a bit, but is a difference between 3% and 2.5% or 3.5% and 3%. It's not so dramatic. So when markets get a bit tougher in volume, of course, there is some downward pressure on pricing. But we have not seen irrational promotional intensity in the categories in which we play. And we are really trying to elevate our portfolio to ensure that we get this kind of short-term trap of pushing a lot of volume through promotions. So we have not increased our promotional volumes. By the contrary, it's slightly down for us this year. And let's see. Let's see what happened in the market. And...

In Europe, it has been always a challenging market and pre-COVID pricing effect was negative almost every year in Europe. Obviously, post-COVID, things have been better, but why shouldn't we be looking back and say, yes, maybe we're going to go back to an environment where there's not much pricing. There's competition, retailers are buying power and putting together their procurement. So specifically for Europe, do you think that we would go back to the old Europe that we knew? Or you think the pricing still remain? And then Europe, on volume mix, I must say you've done quite well. You've gained market share. It's a bit different than the U.S., but still quite a good level. Do you think that there is more room for you to gain share when effectively some of your peers have mentioned a weaker environment, especially in laundry, in DO. How do you see the competition evolving?

Well, I think our performance in Europe is testament for the kind of a step change we have done in innovation in the premium segment. We are doing very well, particularly in 2 categories, Home Care and Personal Care. In Home Care, I feel the innovation we have brought in laundry, particularly around the short cycle washes -- washing machines in 15 minutes instead of 2-hour wash. This is the kind of shift we want to do in the portfolio when it comes to innovation, move our portfolio into areas in which science is more demanding. It's not the same to wash in a machine for 2 hours, where a lot of the work is done by a machine, now working in 15 minutes where a lot of the work is done by the product. And this kind of innovation has allowed us to really move into higher price points, driving the liquid segment very, very strongly. So the same in deodorants in which we brought whole body the proposition that initially we [indiscernible] in the U.S. and now we are expanding into Europe. So when you look at the pre-COVID period, the negative pricing was not there for all the industry. In average, there was negative pricing. But for a company that has been able to really shift their portfolio into premium and that has been able to really come with very powerful innovation, they were able to sustain positive pricing. So it's a difficult environment in the European one. At this stage, I can say that our relationship with the retailers is good. We have not seen any dramatic conflict in the last couple of years. We are trying to demonstrate them that we can grow the pie that we can bring initiatives that grow markets. Innovation and renovation are both important to ensure that there is no price dilution. So we are gaining significant share in Europe, both in Personal Care and in Home Care. We expect to continue that -- doing that. It's not easy because other players also play. But all our focus there is in increasing our investment that we have already done and ensuring that we can with innovation in premium segments that retailers value and that our consumers are prepared to pay for.

A region that is close to your heart, Latin America has been a bit the center of mini storm, I would say, for the past 12 months. Obviously, the environment has been a bit more challenging from a macro perspective. But also you acknowledge that there's been maybe some missteps in terms of the pricing in laundry and then promotion in deodorants. So I know you mentioned that Q4 will still be challenging. But do you think that -- can you grow volume in 2026 in that region? And what is the midterm outlook and how you feel that you have addressed these issues?

Yes, it's true. The macro environment in LatAm suffered. I feel Mexico has suffered a significant decline in remittances that is very important for 40% of the households in Mexico. The Brazilian political instability is also having some economic slowdown. And in Argentina, there is economic contraction, but I believe situation will get better. And I would say that, that probably explains half of the problems in LatAm. Then as you said, there were a couple of missteps and probably to have missteps, but it has been very difficult to price in Brazil given the volatility of the exchange rate. We have to roll back some of our pricing in a country in which taxation is very complicated, putting prices backwards takes some time. But I believe in Home Care, in particular, in Brazil, we are gaining momentum now. So we expect to close the year better. And definitely, for the whole Latin America, I see next year with positive volume, no doubt, structurally continuing probably our strongest region with, I would say, with India. We have some of our best operating companies there. We have great talent that I don't see any structural issue in competitive terms that should really make ourselves very, very concerned, but we have to improve our game there. We are doing it already. And in category like DS, we are gaining share at the scale there. We are gaining close to 250 basis points of share, but we need to reignite growth in 80% of that category that is the aerosol format. That is very, very important for us, and it has been a bit soft this year. We have put all the plans in place. We have an incredible plan also around the World Cup next year that, as you know, for all the Latin America is a very important event. So we expect DO also and the whole business in LatAm to be in a much better shape in 2026.

Excellent. So another company that has gone into some transition has been Unilever India, a new CO, GST tax run rate around mid-single digit for a market where it feels like the opportunity should be much wider. So how do you feel about 2026? Do you think -- do you see -- do you expect to see an impact from consumer demand from GST? And what are Prior's plan to accelerate volume? But more widely, I think one of the major discussion points with investors is while recognizing the strength of Unilever in that country, how others are also trying to take a share of that pie? And how you have to balance maybe the turnaround of your historical portfolio with some investment in pricing, in competitiveness and then balancing top line and margin?

Well, I'm sure many companies would like to swap their portfolio in India with our portfolio in India. We have 55% share in hair care, 80% share in functional, 80% share in Functional Nutrition, 45% share in skin cleansing. 50% share in Skin Care, and I can go on and go on and go on. I was recently in India, opportunities there are massive. You have 60 million, 70 million people in India with the income per capita of France. You have 700 million with the income per capita of Indonesia, Thailand, Philippines and another 700 million with the income per capita of East Africa and West Africa. There is growth for everyone in India. And we believe that we will be the main beneficiaries of what will be a much more dynamic economic environment in India. I feel the government in India has taken very relevant measures lately. So GST reduction, that is the VAT of India, personal income tax reduction, interest rate reduction. When a government does something like this, because things in the economy are not right. And really, that's what happened in the last couple of years in which India consumption was affected significantly by -- in 3 years for double-digit food inflation. Now that's not there anymore. We are seeing some food deflation. And you have seen that immediately in the GDP growth in India actually in the last quarter, it was 8.2%. So I see a lot of opportunities in India. The GST reduction affects 40% of our portfolio. But I believe the GST reduction, the impact in the whole economy will be very, very significant. We have made changes in our leadership team there. The CEO now is [indiscernible] that she used to be my CMO in beauty, then she's succeeding me in beauty is one of the best Unilever Resources. I have 100% trust on her. We have brought also another 2 CEOs into our Indian leadership team, the CEO of Hero Motors as the CFO of the company, the CEO of Britannia as the Head of our Food business. They have the mission of really putting our volume growth in similar levels to the one of GDP growth. It will take some time, but I'm very confident about the opportunity. I was recently in Central India, 4 states there, 500 million people, GDP growth 10%, income per capita of Pakistan among the rest. These people aspire to that to into bonds. Our brands are perfectly suited to really take advantage of what will be an explosion of wealth expansion. So I'm super excited with India. And I always say India is 14% of our revenue, U.S. is 21%. If you put these 2 companies together and we can deliver in these 2 thresholds, let's say, close to 4% growth in volume, we have 1.6% at company level. So that's fundamentally the anchor of our 2% volume growth plan for the whole company.

Earlier on, you mentioned that you have to run a business with higher margin and -- higher gross margin and higher investment. And that's my next question. Your gross margin, if I look at how you account for distribution costs, would be post ice cream in the low 50s. Some of the beauty peers are 60% and well above. So it feels like there is a structural margin opportunity. Happy to hear your view on where you think you can go there. But at the same time, your P&L, you have a 20% EBIT margin. It is one of the best in Europe. It is close to the top level in the U.S. So how do we think about the gross margin opportunity, but maybe the investment, A&P at 16% of sales, is that enough? And how as well do you marry your ambition to grow mid-single digit, but as well to grow EPS in euros and therefore, which means some margin expansion. So how do you know?

Well, first of all, I feel our underlying operating margin for the second half of this year after separating Ice cream -- excluding Ice cream will be at least 19.5%. So that's the kind of level -- the base of our margin after Ice cream. And our gross margin, yes, you're right. We include logistic costs in the calculation of our gross margin. Our people have that in the SG&A. If you would exclude the logistic costs, our margin -- gross margin is in the low 50s. But of course, there are big difference between our Beauty business and our Home Care business. So there is a big divergence there. There are 4 levels of gross margin expansion we are working on. The first one is volume growth. The next -- the margin in our next unit of volume is close to 55%, 60%. So for us, if we achieve 2-plus percent volume growth, our overall margin expansion start to pick off. Then it's mix, category mix, segment mix, channel mix. The third one is some interventions we are doing in the value chain of some key materials. I have talked about surfactants in U.S., oleo chemicals in Asia. We are investing heavily in fragrances in which we invest $1.3 billion, and we see there are big opportunities for savings and for quality there. And of course, also, we are allocating a much more significant fraction of CapEx to margin expansion initiatives. We are now allocating close to 60% of our CapEx into margin expansion initiatives, and this should give us 30, 40 basis points of margin expansion every single year. The level of competitiveness of our investment in 2022, we were investing 13% of BMI -- of revenue in BMI. We moved to 14.1% in 2023, 14.3%, 15.1% in first half last year, 15.9%. And this year will be somewhere between 15.5%, 16%. And we believe this is competitive levels. It's an implicit recognition that we were not investing competitively in the past. And I always say that not being consciously uncompetitive is a criminal offense. That's how I see it. So whatever it takes, we will invest in line with our ambition of 2% volume growth. And this is what we are doing. We believe our level of investment is competitive now. And if we put all these things together, we believe that 4% to 6% top line growth with a moderate or modest margin expansion will position us in the top 30 ASR of the sector. So that's the kind of model we are working on.

When we look at your ambition to position more the business into Beauty & Wellbeing, I think one of the key question is now that you have deconsolidated ice cream, food seems to be the elephant in the room. What are the impediments for you to not dispose food? And can you talk about maybe other -- I mean, I know you are doing some organic disposals. How does, for instance, Olic fit in the overall portfolio you are building? And we have seen this year an acceleration in M&A even in the consumer sector, some bigger M&A. You've always mentioned that you are focused on India, U.S. and Beauty. How do we -- first of all, can you talk about whether a big acquisition is something that you completely write off or it depends? And whether there will be adjacent categories like maybe color cosmetics, perfume, OTC that you would consider in that beauty framework?

We continue focusing bolt-on acquisitions. In our algorithm, we are allocating around $1.5 billion a year in net M&A. And the focus remains in Beauty, Personal Care and definitely in the U.S. and in India. Why in the U.S.? Because we believe that strategically it's very important for Unilever to build a new leg of portfolio that can travel internationally in the premium segment. And the U.S. is probably the only market that gives simultaneously critical mass and a platform for international brands. So that's the reason that we are allocating 90%, 95% of our capital of M&A into the U.S. We have a very clear strict process in M&A -- in choosing M&A targets. It has to be lifestyle brands. You have to be digitally native brands. It has to be seriously exposed to e-commerce. It has to be in categories in which we can add science, channel or marketing capabilities. It has to be in super growth stage, and it has to be brands that can be globally scalable. So we have a very, very, very strict process now that we follow with rigor, and we will continue doing that. Transformational acquisitions are off the table. So we are not looking at that at this stage. And regarding foods -- sorry, regarding color cosmetics and fragrance are not priority for us. We are much more interested in skin care, hair care, personal care territories and Wellbeing. I'm very excited about the wellness opportunity. As I mentioned before, it's very fragmented. There are many, many new segments emerging. We believe that we can establish strong positions in leadership in what we call narrow verticals that allow us to scale fast and to become profitable very, very fast. So these are the areas of focus. Regarding foods, we are outperforming the food industry. You have seen our numbers. You compare particularly with American Foods, we are doing well. I believe we have a food portfolio that is envy of the industry. 60% of our food business is in Hellmann's & North. After completing the disposal of around 1 billion, 1.5 billion business in what I call the peripheral foods particularly in local food brands in Europe, Hellmann's and Knorr will become 70%, 75% of our revenue, and this will give us a lot of optionality in the future. At this stage, our food business is margin accretive, is cash accretive, has low capital intensity. It's a very attractive business. And it has to outperform the market as the same happened to the other part of the portfolio. They have to gain the right to stay in the portfolio, being called Hellmann's, being called Knorr or being called Dove or being called TRESemme. So that's the way we are approaching that.

All right. I think we are close to the end of this. So I have 2 more questions. So a quick one on free cash flow. Post the disposal of the separation of Ice Cream, how do you feel -- I mean, it was EUR 7 billion free cash flow that you achieved in 2024? What do you think is the right level of free cash flow? And should we expect continued share buyback as you have done maybe at a higher level, but you've done EUR 1.5 billion in the past years? And it's my last question.

Well, as I mentioned before, our underlying operating margin after the separation of Ice cream will be at least 19.5%. And our working capital is very strong. So we operate with a negative working capital of 89%. So if there is good top line growth, our ability to generate cash conversion at around 100% is very, very high. If we do that, we will continue with the kind of disciplined approach in terms of capital allocation that we have. First of all, we invest for growth, meaning the support of our brands in our R&D, in our CapEx, they will ensure a good dividend payout ratio, probably in the 55% to 60% range. Third, allocating EUR 1.5 billion to net M&A every single year. And then if there is excess of cash, we will not sit upon that, and we will continue doing share buyback. But if in 1 year, there is an opportunity to acquire for EUR 2 billion or EUR 3 billion, I will privilege that because it's more important for us to ensure that the portfolio rotation keeps accelerating in the same way, there could be a year in which no target is available, and I will put 0 into M&A, and that can give us a space for more share buyback. But overall, I like the balance between 70%, 75% of our capital return to shareholders in dividends and 25%, 30% in share buyback, but I will not commit to share buyback as a routine practice. We will do that in case that there is excess surplus of cash in the business.

Fernando, thank you. 2026 is a big sporting event year, and I know you like football. And I'm not going to ask you who you're going to share, especially given my nationality. But rather, if you are a TikTok influencer, what would be your beauty tip?

My beauty tip. Yes, football is a great year, big, big year. And I feel we are really doing a lot around the World Cup because I really believe that event marketing is more important than ever, and we will be the sponsor in Personal Care and Beauty for next year. So it's just -- we are very, very excited about the prospects of that in our top line growth. TikTok, as a TikTok influence for beauty, I'm not the best on this, but probably what I would say is just a good face care routine probably require only 3 or 4 steps when you choose the right brands, go for the ones of Unilever. They are great science and go for that because it's great stuff.

Excellent. Well, thank you, Fernando. And thank you, everyone, for joining us today. We wish you a good year-end and looking forward to seeing you again and discussing in 2026.