Unilever PLC (ULVR) Earnings Call Transcript & Summary

Hello, everybody. My name is Warren Ackerman, Head of the European Consumer Staples Team at Barclays. Welcome to the Global Consumer Conference. I'm delighted to have Alan Jope, Unilever's CEO, with us for the session today. The format is going to be a fireside chat. We have about 30 minutes. So Alan, thank you for joining.

Thank you, Warren. It's a pleasure to be here.

A lot to ask you in a short period of time. But why don't we crack on and just as an opening question, I'd love to kind of hear your perspective 2 years -- almost 2 years in as CEO, lots of highs and lows interspersed with COVID. Could you maybe just share with us your learnings in that period? And any regrets that you've had as CEO? What's been the high points? What's been the low points?

Yes. Thanks, Warren. Well, it certainly has been a busy 20 months. Last year, more or less in the first quarter, we put a completely new leadership team in place, 3 people from the outside, promoted 3 internally, rotated 3 and 4 state and continuity roles. Second quarter, we worked on our new expression of our company strategy. Third quarter, we really started to dig into our operational capability, where we're executing to our full potential. And in the fourth quarter, we really embarked on a bit of a deeper portfolio review. Since then, of course, we've now got this very challenging crisis mode that we're in, where we've got a health crisis, a social crisis, people living and consuming differently. We think we're on the brink of a bit of an economic crisis, racial justice crisis, climate crisis. We've been a bit in crisis management mode for the last 6 months. And I think what we found is Unilever is quite resilient. We've attacked new levels of agility that I don't think we knew the business was capable of. And we're trying to keep going with the strategic changes, things like pushing through unification, making a move on tea and some big sustainability commitments that we might get into. You asked me this devious question about regret. Probably the thing I would say there is that I think we could have moved about 1/4 faster on really digging into our operational capability, the intensity or execution. And having identified these rather simple 5 growth fundamentals, I think they have been an unlock for us, and I wish we'd go on to that maybe a quarter or so faster.

Okay. And just maybe moving to competitiveness. It's been a theme in the last few quarters. It does seem like your competitiveness is improving, execution has stepped up somewhat. Can you maybe talk to us a little bit about what's driving that? You've got a new COO, Nitin, looking at cell methodology, is that being part of the driver? Or has it been more holistic across the board?

Well, let me just start by saying that it is an absolute priority for the company to close any gap between the potential growth of our portfolio and the realized growth. And you're right, the foundations for better execution were laid last year when we recreated the Chief Operating Officer position that Nitin sits in. We introduced a flatter organization. It goes straight from Nitin to 15 big markets. And that's really become our mechanism for managing performance and landing our global initiatives. Our 5 growth fundamentals have really brought focus in our markets organization and what moves the needle to get better growth. And what we've seen through COVID is the speed that we've needed has actually come from this simpler markets organization. We've gone from Unilever's executive meeting on a monthly basis to meeting on a daily basis. And I think the elapsed time between deciding we want to do something and it starting to happen in the market is now hours, not weeks. And our GMs are highly empowered to make decisions on the ground. And it is showing up, you're right. We can see penetration levels of our brands stepping up and a sequential improvement before and during coronavirus in our volume-led market share. And now what we're preoccupied with is how do we lock in this newfound speed and agility in a kind of new normal.

Okay. And you touched on COVID. I mean clearly, demand patterns have been turned upside down. Just interesting to hear your take on which of those do you think is transitory, which is permanent. What's sort of enduring for Unilever through this?

Well, look, we're well beyond any of those very short-term things like pantry stocking. And so we think there are things that are going medium duration and things that will be more or less permanent. So the medium duration things would be the extraordinary growth we're seeing in hygiene categories. So hand hygiene, surface hygiene, that will run for a while, but it won't -- we won't see the types of growth that we're seeing there indefinitely. But the other big one is in-home food consumption. I think we were a little slow to realize just how important a shift that was going to be on the downside from out-of-home meeting in our restaurant business, supply business, Food Solutions and on the upside in our in-home foods business. Then the more permanent effects that we're anticipating are e-everything. So how we browse, how we buy, how we pay the media we consume we think that's a onetime change, it's a ratchet-up, similarly for e-commerce. We saw this in China back in 2010 when they had pandemics out there, the step-up in e-commerce state. The second area that I think is semipermanent, is the preoccupation with health and well-being. So anything to do with immunity, health, well-being, we're seeing a big surge in our small-but-beautiful vitamins business, in Horlicks, where we've actually moved quickly to introduce some new products around immunity. And even those kind of health and well-being bits of our Prestige beauty portfolio, we're really seeing a step-up there. And the third area that we think is going to be semipermanent is conscious consumption. We are seeing that sustainability issues are mattering to consumers even more than before coronavirus. I think they feel, particularly young people, that it's time for business and brands to show more responsibility on the social and environmental footprint. If you're interested, I can go into some research, go on around that. But that's the third. And then, of course, what we don't really know is how permanent the recession-driven behavior is going to be.

I mean on that point, on recession, I mean, we can't get away from how deep the recession is. How well-positioned, would you say, Unilever is? How much down-trading are you seeing? What steps are you taking to ensure the resilience of the portfolio in that downturn?

So I think a global -- we believe a global economic downturn is absolutely inevitable. But we don't know the depth. We don't know how it will play out by country. And -- but we do know some things from the past, which is that in recessions, consumers are looking for value, and that does not just mean the lowest possible price. So we see typically a tilt back to big brands because of the trust that they bring. We see value channels. That would be the discounter channels in Europe or the dollar stores in North America or cash and carries in Latin America typically do well. And of course, you have value brands and value pack sizes benefit from smart shopping. Interestingly, the role of price value and affordability changes country to country. So in South Africa, for example, where group buying is a common behavior, big pack sizes take off in recessions, in other markets, small pack sizes. We don't compete by slashing prices. Our value portfolio, call it products at below about an 80 price index, makes up 20% of our business, given that many branded players don't play at all in the value tier, it's quite a good start. And right now, we have good squads working on where we got gaps in our portfolio market by market, brand by brand, pack size by pack size. And in general, our value portfolio has a different P&L profile. So what we would expect to see is some gross margin erosion potentially, but not an erosion of operating margin because these brands typically demand less in terms of marketing support.

Okay. And just shifting gear, Alan, to channel and e-commerce. I mean clearly, e-commerce is booming. I saw that e-commerce in your U.S. business has almost doubled H1 on H1, and you're doing very well in terms of market share. Can you just talk a bit about the resources you're putting into e-commerce? Can you do it in a margin-accretive fashion? Where are we in terms of the journey and the investment in e-comm?

Yes, this is the right area to spend some time on. First thing I should say is we have a bit of a mixed picture on our online shares versus our off-line shares. It's by far not homogenous that we always have a higher online share than off-line shares. So there's no complacency there. E-commerce represents 8% of our portfolio in the first half. That's really a function of the categories, brands and geographies that we're in. It's growing very, very quickly. I could easily see a day when e-commerce represents 30% of Unilever's business. From a margin perspective, it's accretive, broadly driven by the mix impacts. So we're not worried about the growth of e-commerce. It's important to really start moving away from one grouping because pure-play dynamics are very different from omnichannel dynamics, very different from direct-to-consumer. And maybe the most strategically important part of this for us might be business-to-business, e-commerce, which is already very significant in scale and growing very quickly.

Okay. And maybe just turning to the U.S. because that was another feature of the results. You've struggled in the U.S. over recent years to get the growth that you want, but you grew 9% in the second quarter, if I remember rightly. You got new leadership in the U.S., Fabian Garcia has taken over from Amanda Sourry. Just interested in that growth. How sustainable is it? What has the new leadership team brought to the party for your business there?

Well, without saying too much, we are seeing sustained strength in North America and the U.S., particularly. Of course, there was some crazy stocking up in March. But since then, consumption patterns do seem to settle the higher levels of demand. It's especially driven by hygiene products and in-home food. We saw a very strong growth in Foods & Refreshment. I think it was up 23% in quarter 2, when you strip out our out-of-home food business. We're getting a little bit of top spend from the stepped-up competitiveness in things like hair care and dressings. E-commerce has been a big driver. We think we're -- we've got about 2/3 of our business is winning share online in the U.S. And yes, Fabian has been a big addition. Frankly, I think we've attracted a great leader for the role. In many ways, he's a bit overqualified for the job. He has served as the CEO before. He was very explicit about being attracted by Unilever's purpose and our values. Fabian is bringing a high level of operational intensities, particularly strong on making prioritization calls. And he has led brilliantly through the social volatility that we're seeing in the U.S. So I think a really great add to the team there.

And just in terms of emerging markets, Alan, I mean, 60% of sales would asunder -- you've got 4 big ones that really matter, Brazil, China, India, Indonesia. Everybody is worried about the macro top-down in EM. But can you talk about your resilience kind of bottom-up in terms of the affordability of the channels that you're looking at, the B2B channel. I'd love to hear how you've dealt with crises in the past and what learnings you can bring this time around.

Well, the way you asked the correct question is the correct one because emerging markets is not a helpful aggregation anymore. We never use it in the company other than at results time. We need to -- we do need to decompose a bit. We don't have time for an entire world tour, but let me hit the highlights. First thing to remember is the 85% of our business in emerging markets comes from positions where we've got either the #1 or #2 brand. Let's start with China. China has been quite an important leading indicator for other markets to learn from, channel shifts, how you go back to an office. And we saw growth in China bounce back very quickly. It was 6% in Q2. We are a Chinese company in China. 97% of our managers are Chinese. We've been the top FMCG employer of choice in China for the last 3 years. We have very strong partnerships with Ali and JD, and we've got an unusual distribution model where we've now figured out how to get into the lower-tier cities, we call it [ DTX ] and there's faster growth coming from those smaller cities, and so we're quite happy about that. I won't say too much about India. Everyone knows our position there. Other than to say that the market is definitely down, but 85% of our business there is winning market share. And so the speed and agility of Hindustan Unilever means that when things bounce back, we do expect to do well. The Horlicks acquisition is going exceptionally well. But the disease progression's a worry. It's the only major country where we're still seeing exponential growth in cases. At the moment, the 7-day rolling average is about 70,000 new cases being diagnosed a day. Although the case is per million, it's still half the U.S. So we're a little bit in the watch-and-see mode in India. I think Southeast Asia will bounce back quickly. We're seeing Indonesia coming back. We know very well how to manage through crises in Southeast Asia. Perhaps the exception is Thailand, which seems to be hit very hard by the tourism slump. Now Brazil is the most interesting one, I think, again, a position where we have very strong positions. I think -- if I'm honest, I'm a little surprised that the business there continues to grow. We've landed pricing in that market very well. We've built, I think -- one of the features is we built up a strong B2B e-commerce business. If anything, you get the gist of it immediately if you just go google Compra Agora, and if there's one market that knows how to manage a crisis, it's our Brazilian team. But I -- we do think that, economically, LATAM is in a bit of trouble and will take longer to recover.