Unilever PLC (ULVR) Earnings Call Transcript & Summary

Welcome, everybody. Welcome to the Barclays Global Consumer Staples Conference. I'm Warren Ackerman, Head of European Staples. It's the time for Unilever. It's going to be a fireside chat format. And I'm delighted to welcome Fabian Garcia, who is Unilever's Head of North America. Thanks for taking time out, Fabian, today to join us. So yes, we've got about half an hour, maybe just over half an hour. And North America is clearly top of mind for many investors for Unilever. But before we get into that, would you mind just maybe starting off and spending maybe a couple of minutes just explaining your background and why you chose to head up Unilever's North American efforts? Thanks very much.

Thank you, Warren, for inviting me. It's actually a real pleasure for me to be here and to have the opportunity to talk to you about the strengths and prospects for Unilever in the U.S. So let's just speak briefly about who I am, my background. I am a 40-year veteran of this industry. I began my career with Procter & Gamble right after college in Venezuela, where I am originally from. I spent 16 years of my life with Procter in marketing and through the ranks in general management. I worked in the U.S., in Venezuela, Colombia. And the latter part of my career was in Asia, first in Taiwan then in Japan. My last posting was as the Head of Max Factor for Asia. After Procter, I joined Chanel in -- as President of Asia Pacific region. Chanel has 3 verticals. So Fragrance & Beauty, Fashion and Fine Jewellery and Watches. Dream job, wonderful. But I left Chanel to come back to the U.S. And after a short stint in Timberland when I came back, I joined Colgate. And I spent the following 13 years in Colgate in different assignments of increased responsibility. So started with Asia Pacific, which was a natural point of entry given my experience. Then I extended my geographic responsibility to then include Russia, the Central Asian countries and Turkey. And then I moved on to become the President of Latin America for Colgate, which, as you know, is their most important region. After that, I became the Chief Operating Officer in charge of growth and innovation. And I also had responsibilities for the Hill's business and for Europe. After a while, I -- after serving in Colgate for 13 years, I became the CEO of Revlon, and I served there for a couple of years. After that, a short stint in private equity. And then the phone rang, and it was Unilever. So let me now tell you why I accepted the phone call and the challenge. So I came for Unilever -- or to Unilever for 3 reasons. One was that as a competitor of Unilever for years, I always admired the company. So for me, the company stood up for the pioneer in sustainability. The company had a clear strategy. The company had very clearly articulated purpose. And of course, I have been competing for years with a portfolio of market-leading brands that Unilever has. Second, I was very attracted, given my own background, to Unilever's global footprint. I mean this is the quintessential global company in the space. And because I believe that, at least from the outside and now I know from the inside, this is the highest grade of a values-driven culture. And finally, I was very intrigued at the notion of having the opportunity to take the company's largest business and move it up to a growth trajectory after years of stagnation. So I found the challenge, absolutely brilliant from the point of view of -- at that point in my career, I thought I could make a difference.

It sounds like you're a CPG veteran baby, and you've been a lot of places. So thank you for that background. Maybe to orientate us, can you maybe just start off by explaining the weighting of North America to the group in terms of sales, profits and cash?

Absolutely. So I actually like the word veteran more than the word senior. So thank you. The U.S. business is indeed very important for Unilever with 17% of turnover, 20% of profit and about 24% of cash.

Okay. And in terms of investor perception, I mean, people who look at Unilever U.S., historically have seen it as a bit of a kind of growth laggard. I think you -- the company has shown us some figures previously of kind of sub-1% growth between 2014 and 2019. I was wondering whether you can sort of maybe, obviously before your time, but explain why growth has been so lackluster for Unilever U.S.A. and Canada.

Yes. So -- well, thank you for that question because this is the reason I was mentioning it was quite intriguing to me to come here. So important to understand the context, and I took some time to do that myself. So it is true that Unilever in the U.S., for the period of time that you described, only grew less than 1% during that period, the top line. But what is also true is that the bottom line increased by 450 basis points as the company was responding to the challenge of the Kraft Heinz takeover by the 3G group. So after that settled, if I could call it so, starting in the second half of 2019, literally right before I came here, the company restored commercial investment behind those key sales that were associated with the need to accelerate growth. So that new approach started to yield results. So literally, the fourth quarter '19 was positive single-digit territory. And that momentum was sustained through January and February, the first 2 months pre-pandemic. And then the rest, you know the history very well, the company accelerated its growth. So if I look at where we sit today, the company on a 2-year stack basis is north of 5%. So we're quite happy with what -- where we are today. So -- but it's important to reflect on why we were where we were before that time. So when it comes to that question of what challenges impacted our business prior to 2019, I think there are some comments I made in March that I would like to repeat.

Sure.

The first thing is very well known, right? So we had a large part of our portfolio in low-growth segments. Now we have been working very hard at reshaping our portfolio, as you know, towards high-growth spaces. You've seen the activity we have had with acquisitions and divestitures. The second reason was that within the categories where we competed, we did not have adequate representation in the premium segments of those categories where we compete. And that has also been changing steadily. And we have been very much focused on premiumizing, I don't know if it ever exists in the English language, but we use it here, our categories on the back of our big brands. And lastly, and I admit that this is not something that you resolve from the perspective of only one individual, we have a very complex business. And it's not just about the many categories where we play or thousands of SKUs that we sell, but it's also how we work, and there is a lot of work going on to make us more agile. So this activity and those 3 reasons.

And just taking that forward, the other kind of pillars that I've heard Unilever U.S.A./Canada talking about is improving execution, building closer relationships with your retail partners. Maybe service levels were not brilliant in the past. And you touched on it just then, reducing complexity. Maybe you can touch on those 3 pillars. And maybe give some examples of where and how those things are improving under your watch.

Absolutely. So this was an area of focus for me, and my first hypothesis of where we needed to act quickly. And it's interesting because we're starting to see the fruits of our labor in this area. So thank you for asking the question. So I'm going to start with the elevation of our relationship and engagement with our key customers. And that started with my office and my personal involvement but bringing along a multidisciplinary team to talk about and improving the quality of engagement in long-range joint strategic planning. And that was obviously with our top customers. And that has resulted in the co-creation of innovation with them, improved category competencies because we're putting our resources in the service of our customers so that they can grow their business. And also, it has resulted in incremental distribution. So literally a quick example. This week, confusing. I spent 5 hours in the process of advanced strategic planning with one of our largest customers. And we were talking about not only 2022 but 2023. And that is -- the other change that we brought to the conversations with our customers is to have a sustainable and long-term view of growth. What are we going to do for the next 12 quarters when it comes to innovation and how we're going to serve their customers. So that elevation of engagement was one action. The second elevation or the second change was to bring capabilities and expertise to those customer-facing roles, especially in category management, in planning and in promotions. Unilever has a lot of resources, and one of those resources that we have now put into play is our digital promotional planning, the use of digital tools and data and the revamping of shopper marketing. We're using a lot of our own first-party data and third-party data in the service of our customers so we can focus on our most valuable shoppers. And that is obviously yielding results. So these and other measures have helped us to do something that I -- is a phrase that I have used with our customers, which is we want to earn the right to become the vendor of choice for them. And they're starting to use that language back to us, which is we are earning that right with our actions. So that's quite interesting. And I will finalize with complexity. Complexity, obviously, is not -- is a resultant of how big we are and how -- the breadth of our business. So what I have tried to do here is to simplify how we make decisions, who makes which decisions and, obviously, making sure that we have clarity on our priorities every quarter. Obviously, when COVID came, this was easier. But we have been able to do things that we were not able to do before. I'll give you a couple of examples. So we were not in the hand sanitizer business last year. And in 10 weeks, we were. We needed to increase our capacity as the demand exploded, and we stood up 29 third-party manufacturers within 6 weeks that would have taken up to -- I mean, 6 weeks and 3 months. It would have taken a year prior to that. And even this year, we have reacted very quickly to the inflationary wins, and we were able to partner with the trade to get to price increases in record 6 weeks' time. That had never happened before.

Okay. And that's actually interesting you say that. And maybe just sort of leading on from that, I mean, the question I always get from investors, how do you actually allocate capital? How do you decide within your very -- $10 billion, $11 billion portfolio that you have in revenue terms in the U.S. which brands get support and how much support? There's obviously lots of digital tools out there in terms of analytics these days that are quite new. But just interested sort of holistically, how do you think about capital allocation for your big brands in the U.S.?

So I want to differentiate capital allocation from brand investment allocation. So let's take it in stride. So obviously, capital allocation is a corporate function. And decisions that have to do with dividends, share repurchases and M&A, those sit very -- obviously, with the Board, Alan and Graeme. The capital we deploy here, we deploy it for R&D capability and for supply chain. We have a large R&D representation here. We have 3 R&D centers, about 550 people working on innovation, that innovation that we're co-creating with our customers, for example. And obviously, there is a lot of investment that has gone on in there. And there are things that are coming from there which are very unique to our market. For example, the Love refillable and reusable deodorant that we just introduced this year, or the [ A-Time ] compact detergent, first to market, that we are marketing under the Seventh Generation brand. So this is the kind of stuff that they do exclusively for the U.S. In the supply chain, capital allocation, of course, is against 3 topics. One is capacity expansion. The second one is improving flexibility and responsiveness, especially critical now with all these changes that we're experiencing. And last but not least is the continued optimization of [ cost ]. Now let's talk about the brand investment and how those allocations are made. So if you think about -- that is obviously a P&L charge. It's not a balance sheet charge. So the way we think about it is from a cell point of view. So, I mean, you are very familiar with the term. And when you think about the sales in the U.S., given the size of the market here, most of the global business in -- for the company in the different divisions have -- their most important sales are in the U.S. market. So how do we prioritize how to invest? We do that then at a brand level. And the factors that we take into consideration are effectively 3. First is competitiveness. So are we spending enough money in a particular cell commensurate with our market share position or our market share ambition? That's number one. Number two, you need to understand that we have plenty of metrics to analyze this, whether the investment has a return commensurate with the strategic value of that cell. And the third one is affordability. Does the gross margin profile of that particular cell -- is it attractive for us to put money in it? So obviously, very dynamic. It's a conversation that we have internally and with our global peers as to how much money goes into them. And that's how we effectively allocate money, and it's a constant conversation.

Okay. Can we maybe talk a little bit about market share? Because last time we heard from you back in March, you were talking about improving competitiveness in the U.S. It's been a hot topic for Unilever group-wide. But can you talk a little bit about the percentage of your U.S. business that's taking share and maybe how that share has changed more recently? I remember that a year -- a couple of years ago, there were some hot spots, some areas that you called out, both your haircare, ice cream, some dressings. It'd be great to get some numbers in terms of how things have kind of moved on. It sounds like things are progressing positively. But from your point of view, are you able to share some numbers around that so that we can get confidence that the turnaround is really starting to come through?

Yes. Well, I am going to share the business winning numbers that we share in these kind of conversations. Obviously, market share is public domain information, so you probably have seen the positive evolution of the market shares that we have experienced in our brands. So obviously, in these times of great disruption, competitiveness and your market share evolution is the metric that truly reflects the health of your business. And I am delighted with what's going on. So literally, we just got shares a couple of weeks ago. And in that latest read, well over 50% of our business is winning share in the past 52 weeks with higher numbers in more recent periods. So we're talking about upper 60s and -- both in volume as well as in value. And the last time we talked, the volume share -- business winning share is a barometer for things to come because it reflects increased household penetration. So we're really, really happy with what's going on here. And we are turning key sales. The one that has been, most recently, in my view, very strategic for us is the deodorant cell. And in haircare, in styling, we have already turned that cell. So -- and in dressings, we have experienced very high shares since the beginning of the year because we kicked off the year with a big Super Bowl event in mayonnaise that had great traction with the trade and with the consumers. So we're really happy with the evolution. Obviously, this is a perpetual fight. And -- but we're going...

Can I talk a little bit about haircare? Because it's a big cell for you in the U.S. And we've heard about issues with TRESemmé and Suave. Particularly, Suave has been problematic. I know it's been improving a little bit, especially with Hispanic consumers, and you've done a lot with the brand. But of course, on top of that, you've got COVID now as well with channels and styling that were under pressure. Can you just maybe dig down a little bit in terms of U.S. haircare and your outlook and how you're feeling about some of those big brands like TRESemmé and Suave?

Absolutely. So obviously, this is a complex topic and a long-standing topic of conversation, so I want to try to unpack it for you to help understand the progress that we're making and the plans that we have put in place. So let's start with the basics. This is a highly competitive category globally and especially in the U.S. There are low barriers to entry, and the consumer loyalty is very low. So Unilever and our competitors have the same challenges, to gain and hold share. Now the hair care category, think of its structure as in 2 big segments. One is what we call wash and care: shampoo, conditioner, [indiscernible] treatments. And then styling, which is self-evident definition. We as a company has a very strong position in wash and care. We're a very strong #2 and very close to the market leader. And in styling, we're by far the leader. I want to start with styling. Styling, of course, was impacted by COVID because we all know what happened when we went into the lockdowns. And as we're coming out of these lockdowns and the COVID situation is starting to improve, we have seen not only the category come back, but our market share to improve within the category. So that market is -- we're very happy with the evolution of that, and it's one of those sales that we have turned. So if we talk about wash and care, let's double-click here, so the key trend in the wash and care segment has been the premiumization of brands. The top -- the growth is coming from premium segments or from the premium brands. Now we obviously lead with Suave and TRESemmé, the value segment. But what doesn't get a lot of awareness with the investment community is that we have a cluster of premium brands in those segments. Those brands are Dove, Nexxus, Love Beauty and Planet and SheaMoisture. And those brands have been growing shares steadily over the past few quarters. So we're very happy with how they are performing. So if you think of our strategy in haircare, is we need to sustain our base and hold our share in value and try to stem the decline of our -- of that segment and grow competitively in the premium tier. So let's talk about the TRESemmé and Suave business.

Yes.

When we talked in March, we talked a little bit about that we were literally deploying plans on Suave, so I'm going to get to that in a second. So if you think strategically about what we're doing, we need and we are sharpening the value proposition of those 2 brands. And we're trying to separate them because the brands are one on top of the other. So what we have done is simplify the architecture of those brands, of the variance within the brands, and simplify the pack sizes and launched premium variants within the value segment. Now we are early days. We did that in Suave already. And the results, you just mentioned them but just to give you a flavor, it's been 3 share periods since we had full distribution of the new architecture. And we have seen for the first time in 2 years a stemming of sales declines in Walmart, which is half of our business. And I cannot understate how big a shift that is.

Yes.

And we are in the process of doing a relaunch of TRESemmé. That's like literally happening. And obviously, I cannot share more details about that, but think of it as a part of the separation of the brands. So when I look -- I hope I have unpacked some of these details, but the feeling I want to give you is this. We understand what the issues have been. We have addressed those issues. We have put in place actions for the big brands. And Suave and TRESemmé continue to be the pillars upon which we build our growth. And our premium brands are growing, and we're quite happy with that.

That's really helpful. And yes, you've unpacked it. And thank you for the color. It's really appreciated. And maybe I'll have to ask you about the topic du jour, which is inflation. We know what's happening globally for Unilever, but can you maybe kind of unpack a little bit what you're seeing in terms of inflation in North America and how you're getting on with pricing? It sounds like you're making progress. I think I remember seeing in the last quarter pricing stepped up in -- to around 3% in the Q2. it looked like the volumes had some impact. I don't know whether that was an elasticity impact from the pricing or whether it was a comp issue from last year given the elevated demand. So maybe if you could talk a little bit about where you're seeing the pressure and the progress you're making pushing that pricing through. And I guess it's going to step up further in the back half.

Yes. So the topic du jour indeed. So there is inflation in the segment, obviously, and around us in everything that we consume. Now this inflation in our categories is not only driven by commodity inflation, but it's also driven by the disruption in the supply chains. And in the U.S., this is exacerbated by the labor shortages that we are all experiencing that -- I mean, obviously, those are associated with some of the subsidies during COVID, which are only now starting to lift, but they are going to have some staying impacts. So to mitigate the impact, of course we had to resort to pricing, which is one of the tools in our suite of net revenue management. And what you reference is, indeed, we took pricing. And I was talking about taking the pricing very quickly within 6 weeks. This is a process that hasn't happened here. We hadn't taken corporate pricing here that in anybody's memory, nobody could remember that we had ever done that. So we were quite gratified with the speed and the quality of the move that we made. Now on the topic of the volume. It's very difficult to make these comparisons unequivocally with conclusions that compare Q2 to Q2 simply because in Q2 of 2020, we had a record volume quarter. And we had record volume quarter subsequently in Q3 and Q4. So when we compare why was the volume negative in the U.S., it's not so clear that it is only because of pricing. What I will tell you is that we have obviously all kinds of models on elasticity. But what we're seeing in the marketplace is a more favorable elasticity to the price increases than what we have thought. So early days. The pricing literally was taken in the second quarter, but it's being reflected in the market now. So let's see. But I feel that it's very difficult to -- especially in these conditions in which we operate, to predict things. But for sure, inflation will remain not only the rest of this year but also in 2022. So I was quickly mentioning our tools of net revenue management, I mean everybody has them: price increases, price package architecture changes, trade spend optimization. There is a bunch of activities that we can take. We also play with margin -- with mix. So mix of brands and businesses. And obviously, our discipline and our agility to react to these changes. So we will continue to deploy those tools. And my expectation is that we will continue to combat inflation in partnership, obviously, with our teams and with our trade partners.

Okay. And just switching gears a little bit. I mean you mentioned premiumization a few times in our conversation so far. It'd be great to know what percentage of your U.S. portfolio you consider to be premium. How do you think about premium definition? I mean every company has got a different definition of what premium is. And then specifically, one of the areas that you're pushing new strategies is in Prestige, cosmetics and Functional Nutrition, which I guess, by definition, are a bit more premium anyway. So are you able to kind of unpack it a little bit in terms of premium and what it means for Unilever North America?

Yes. And I think the important place to start is the definition, right? So the definition, as we look at it, is -- premium is when you have brands or businesses that operate at above 120 index to the category pricing. So let's start with -- that's how we look at it. And the answer to the question is -- how much of our business is premium is it's improving. And in a way, it's a bit even surprising because a lot more of our business is premium. So I'm going to give you some facts. So if you use that definition, more than 50% of the U.S. business is premium, including Prestige and Functional Nutrition. If you zero in the legacy business, so Beauty & Personal Care, Home Care and Foods & Refreshment, the percent of premium business has increased from about 28% or 1/3 thereabouts in 2018 to more than 40% year-to-date. And that has been a combination of many factors. I will tell you about it, but let me give you a couple more facts in specific sales. So in wash and care, the percent of premium products that we're selling has increased 12 percentage points. In packaged ice cream, that number has gone up by 8 percentage points. And in skin cleansing liquids where we lead has also gone up by 5 percentage points. So we are moving it. And as always, there is more work to do as we want to continue to premiumize our portfolio. So we start with the brands, and we premiumize them at Dove and Degree. We're bringing [ variants to our premium ]. We're launching new brands that are premium: Love Beauty and Planet for example. We have bought companies or brands that are premium in their categories; Talenti, SheaMoisture. And, where we can, we take price increases so that we move the pricing for some brands that have -- where the consumer is prepared to pay. And perhaps the best example of that is Dove. So to the question of Prestige, let's talk a bit about that. So you know that we have a stated ambition to build a Prestige business. And that is obviously directly linked with the premiumization and the growth agenda of the company. Now we -- our focus today is to build a portfolio of brands that have distinctive propositions, that help us to tap in the high premium segments. And you've seen all the M&A that we're putting in place with that and how that business is growing. Functional Nutrition, same game, different categories. So we are feeling very, very positive about the suite of acquisitions that we have made and, obviously, of the progress and fast growth of that premium business. Now we are very focused on Functional Nutrition, on expanding the channel footprint of the brands that we have purchased, integrating them because there are many brands that we have now bought, and then -- first integrating them within themselves and, second, integrating them with the back office of Unilever so you can leverage the scale of the company and unlock the synergies. So feeling very, very good about the premiumization evolution of our portfolio within our brand as -- and within the new businesses.

Okay. We've got a few minutes left, Fabian, so I'm going to rattle through last couple of questions. Quick question about your tea portfolio in the U.S. You've been very clear that you're doing a strategic review of that business, which hopefully will be concluded by year-end. How big is tea for you in the U.S.? And do you think there'll be any stranded costs if you decide to exit? Once it's out, I guess it's going to be quite accretive in terms of the top line and probably margin as well?

Thank you for the question. Well, we don't disclose the specific sizes of these businesses, so I will not be sharing that with you. But I will be commenting, if I may, on the stranded costs. And obviously, when you make these divestments, there is a moderate level of stranded costs that are left behind once the separation is affected. So you know that we have had experience with that in the U.S., and that experience not only resides in the fact that we separated the baking, cooking and spreads business that we had before, but the people who did that are still here. So we already have a plan on the stranded cost management over the course of the next 3 years that would allow us to move on from the divestitures. So suffice it to say that we are comfortable with what we need to do. And the separation has been going on as planned, and the expectation is that we will be moving on from that business as soon as the end of this year.

Okay. And then just moving gears quickly to e-commerce. So it's a huge channel. It's pretty key for you. How big is e-commerce in the U.S. in terms of weighting? And I'm interested specifically in something you said back in March, which was you've got an underweight position with Amazon, but you're looking at your design for delivery in terms of pack sizes and trying to improve that with Amazon. Any comments on how that's progressing?

Yes. Thank you. So obviously, when we talked in March, I did say that e-commerce is 1 of those 4 pillars on which we are going to sustain growth in this -- in the U.S. business. So the first answer to your question is the business that we do in e-commerce is 14% of our total turnover, and that used to be 8%. So this is -- 2020 is 14%, 8% was 2019. So there was this other conversation that we had about the margins of that business, and we feel very good about the progress that we're making. So that business is accretive to our company. And that is based on the great progress that we have made both with the omnichannel business as well as with Amazon. So the challenge of being underweight is not just our challenge, but it's a challenge of the industry given the profile of what we sell. Because obviously, we sell fast-moving consumer goods that have low average unit prices. So we have that challenge. Now how we measure success here is not only by the percent of business that we do in e-com but also using 2 metrics. One metric in Amazon is what is the percent business winning that we're having in the channel. And when it comes to omni, it is about the share index offline to online. So we're really happy with the progress that we're making with the percent business winning in Amazon, which is higher than our offline, the numbers that I gave you before for brick and mortar. And we -- in our largest customers, which would be the omni business that we do with Walmart, Target, our -- and Kroger, the index that we have for online versus off-line share is higher than 100 for those 3 customers in our -- for our brands. So we are doing well, but we recognize that we're not there yet to realize the potential of the channel and the ambitions that we have for the channel. So when we talked in March, we talked a lot about designing innovation and bundles for this channel. And these are the SKUs that are designed exclusively for it. So these are higher-priced bundle packs, liquids that are concentrated, niche brand launches that are exclusive to the channel. So all of that is happening. And as -- just to refer to the very first comment, we talked about customer -- the customer intimacy that we have, it is by working with the Targets and the Walmarts and the Amazons of the world that we come up with specific innovation for them that addresses their larger needs. So just one example on that is that we're very aligned with Amazon on their climate pledge program that sits very well with our sustainability leadership positions and the actions that we're taking in that area. So the way I would characterize our overall e-commerce performance is strong with significant progress made and a lot of opportunity going forward.

And Fabian, we are almost on the buzzer on time. I'm going to ask you one final question, which is the big one, which is, what do you think sustainable growth can be in the U.S. Last year, I think it was 12%, or 8% if you include Prestige and Food Solutions that were under pressure because of COVID. Historically, it hasn't really grown. What do you think base case we should be thinking about in terms of kind of organic growth for this business, if you have a crystal ball, next 3, 5 years?

Well, instead of a crystal ball, what I would offer you is an ambition. Our ambition is to grow this business between 3% and 5% on a compounded annual growth rate over the next 3 to 5 years. And that is consistent with the company's growth profile. And it is normal that we would have that ambition because there we are 20% of the business. So we need to contribute our fair share to the growth of the total Unilever company.

Well, listen, Fabian, it's been a really great conversation with you. We could talk for, I'm sure, hours, but we've hit the buzzer. And again, thank you for your time. I'd love to see you in person. Hopefully, at some stage next year, we can get together. But yes, so I think this is the end of the session. Thanks again, and stay safe. Take care.

Thank you very much, Warren. Appreciate it.

Bye-bye.