Unilever PLC (ULVR) Earnings Call Transcript & Summary

The format today is Fernando is going to do a set this presentation for about 30 minutes. And then I've got a few questions for him for 10 minutes, 10, 15 minutes or 10 minutes. And then there's going to be a break out next door, which you can join. I'm going to be here because I'm doing Nestle back to back. So that's the way it's going to work. So Fernando, why don't you take the stage, and we'll go from there.

Good. Thank you, Warren, and thank you, Barclays, for having me here today, and good morning, everyone. It's a real pleasure to be with you. I have been the CEO of Unilever since March this year, before that, the CFO of the company, before that, President of Unilever and many, many other executive roles in the company. I will try in the next 25 minutes or so to really give you 5 fundamental chapters of presentation. One is for the American investors that have not followed Unilever so closely, give you a brief snapshot of what Unilever is today. Then assure you that the fundamental organizational and portfolio changes we have embarked ourselves in the last 2 years are largely complete and are fundamentally behind us. Then be clear about what are my belief system in order to accelerate performance and what are the clear priorities in terms of geographies, channels, categories and segments in which Unilever will play. I will try to show you also how we are really making Unilever a marketing and sales machine, how we are driving desires at scale as a fundamental mantra to elevate our brands and how we are really executing with rigor in every single geography. And finally, give you fundamentally glimpse in what you can expect from Unilever in '25 and beyond. We made a significant organizational change in 2022 after more than 100 years running the company on a geographical basis. We moved into a category-led organization at a global level. We set up the company in 5 business groups. Our revenue is EUR 61 billion at 24 numbers. Beauty & Wellbeing, Personal Care, Home Care and Foods, all very sizable business between EUR 12 billion and EUR 14 billion and a fifth business group in Ice cream of EUR 8.3 billion that, as you know, we are separating by November this year. These 5 business groups are led by a business group President. They have full P&L accountability, end-to-end accountability. They own 93% of the lines of investment and cost in their P&L. We run these business groups with 2 to 3 verticals in each of them. We operate 13 verticals in the company nowadays. This is the company that we have today. We have strong financials in 2024. We delivered EUR 11 billion profit, 18.4% underlying operating margin. We delivered EUR 7 billion cash. Our cash conversion has been very consistent in the last 5 years or so around 100%. Of this EUR 7 billion cash, we returned to shareholders EUR 5.8 billion, $4.3 billion in dividends, $1.5 billion in share buybacks. And we have one of the best return on invested capital in the sector at 18.1%. So strong financials and a strong competitive position. We have 80% of our revenue in leading positions in the geographies and categories where we operate. But I know also that Unilever has been an inconsistent performer. We know what are the gaps we have had, particularly since the Kraft Heinz bid in 2017. Time flies and things change a lot, as you know. But that really derailed Unilever a lot. We lost our focus in volume growth. We put -- we set up a margin guidance that really put the company very, very tight. But there are many other issues in the company that we are addressing fast, a very complex organization from '19 -- from 2005 to 2021, we run a very heavy matrix organization, very, very complex with the profit in the countries, but a very bloated organization in the center running category strategy, brands, innovation. We have been consistent in defining volume growth as our fundamental metric. I think very, very differently. I believe that what gives relevance to a company is to grow volume every single year. We have been very inconsistent in our investment behind our brands. We have used the BMI line as an adjustment to ensure earnings growth. And we have had a very inconsistent performance culture. Some pockets of excellence. I grew up in one of them, our Argentinian company, our Latin American business; India, many other companies in Unilever, but also many pockets of mediocrity in the company. So we recognize that. We know that this has to change, and we have made significant interventions in the company to really change this. What we have changed? We have announced the separation of Ice Cream in March last year. It will complete by November this year. Ice cream is a very good business. We have 5 of the 10 global brands, of the 10 biggest global brands, but it's a business with very different features to the rest of Unilever; high capital intensity, seasonality, complete different channel structure, et cetera. So we have now focused our portfolio in 4 business groups that are very complementary in terms of the R&D capabilities, technology, manufacturing, logistics channels in which we operate. So it's a more focused portfolio. The separation of Ice Cream has a significant impact in some of our financials. Our gross margin will go close to 47%. We have an expansion in our [indiscernible] and in our return on invested capital of around 100 basis points of each. So the business that remains is very, very attractive. We have also decided to focus our portfolio in 30 Power Brands. I tend to say that one of the fundamental strategic issues of Unilever is that it's not truly a global company, it's a federation of local and regional brands, and we are changing that. We used to operate with 400 brands. I'm sure Warren has that number in his mind. By the end of 2024, we have 200, but 30 Power Brands concentrate 75% of our revenue. They are accretive in volume growth. We delivered 3.8% volume growth last year in these 30 Power Brands. And we have chosen these brands because they are the brands in which we believe we can scale them regionally, globally. We can allocate our best technology because there is a space for premiumization in all of them. And this is where we are putting all our focus for growth. We have also made some significant interventions in how we organize ourselves at the country level. The top 24 markets of Unilever are now run by the business groups by each of the pillars, because these are businesses with enough critical mass to separate our organization. And because we believe that in these biggest markets to compete with pure plays like the ones we compete in Beauty or in Foods or in Home Care or in personal care, we need a significant level of specialization. We need specific capabilities and skills in order to compete with these guys. In market '25 onwards, in the other 165 markets in which we operate, we will continue operating the company at the One Unilever level. And that's fundamentally to ensure that we really get the benefit of scale, efficiency and productivity, but with a very significant difference. In these 160 markets, in 65 markets, we will support only 8 brands. And these are 8 of our 30 Power Brands, 5 in Beauty & Personal Care, 2 in Home Care, 1 in Foods. Not a single penny will go for specific local brands in these smaller markets. My ambition is to make these one Unilever markets at least the contribution of Power Brands 90% in a relatively short period of time. We have also made significant interventions. I'm talking to many of you in a very non-Unilever way in terms of our organization, in terms of accountability. In 18 months, we have reduced in reality 18% our white-collar workforce with the latest number we have. We have announced that we were going to deliver EUR 800 million savings by the end of 2026. By the end of this year, we are already in EUR 650 million cumulative savings. And importantly, we have absolute accountability now in the company, 4 business group presidents, 44 P&L units. I have their names, I have their phones. I know who they are. Nobody can hide. results are starting to show. In 2024, we delivered our highest volume growth in a decade. We delivered our highest gross margin in a decade, and we invested the percentage of turnover highest in a decade. So 2.9% volume growth, 45% gross margin, more than 15% investment in brand and marketing investment and an increase in the last 5 years of 33% in our marketing budgets. And it shows we were top 3 in our peer group when it comes to volume growth, both in '24 and in the first half this year. And I speak volume, I don't speak number. Pricing is fundamental to compensate inflation, but we are very, very happy with the development that we have had in volume in a context of very difficult market conditions. Let me now go into how we will -- particularly what am I doing personally in instilling a plane to win culture and ultra-competitive winning culture in Unilever. And what are we doing to really ensure that the portfolio we operate has more tailwinds than headwinds. First of all, it's about speed in decision-making and decisiveness in decision-making. We have taken big decisions and we are taking decisions with 70% certainty fast because 90%, 100% certainty, you are late; late in consumer goods is a very bad word. We are building a new marketing philosophy built around 2 fundamental concepts, desire at scale to elevate the aspirationality of our brands and market making because the only way in FMCG to ensure consistent share gain is to create markets, to create formats, to create segments and get a disproportionate share of the new segments that emerge. We are execution -- we are ensuring ruthless execution everywhere in every market. We have codified what are the metrics we will measure; all our operators, these 44 guys in the markets know what they have to deliver. We are fed up with the mediocrity we have in some places, we are attacking that fast. We are ensuring accountability, as I mentioned before, and we have a new breed of leadership. The Board of Unilever is different. The leadership executive of Unilever and the first CEO of Unilever coming from emerging markets, there is a clear blend of culture in new leadership team, and there is a significant influx of non-Unilever born and bred people into the leadership of the company. In terms of talent, we are now assessing our top 200 leaders with conferring one by one, ensuring the benchmarking with the market. Are they good enough? Are they at the level that Unilever deserve? Yes or not. We expect 25% refreshing from that. We are fast tracking emerging starts. We are bringing new people from the market. We have changed significantly the incentive system. We have increased the range of incentive for performance now from 0 to 200. But also very important, our long-term incentive plan now is fundamentally hard currency incentive system. That's very different to what Unilever used to have in the past. I have 7 clear priorities: more Beauty, more Well-being, more personal care, more premium, more e-commerce, more U.S., more India. And our money is going following these priorities. You can like it, you cannot like it, but we are very clear about what we want to do. These are the priorities we have in terms of our categories, our segments, our channels and our geographies. There is a fundamental transformation in the Unilever portfolio. Beauty and Personal Care now are 51% of our revenue, and our ambition is to make it 2/3 of our revenue in the midterm. You can see there the significant reduction of exposure to Foods and Refreshment that the company has achieved in the last 10 years. We're increasing our exposure to premium. We have a portfolio with probably an excess of exposure to mainstream position and to value position. It's very clear what we are doing. We are acquiring premium, we are divesting value. And this is changing the portfolio of Unilever, and we are fundamentally innovating in the premium segment to progressively increase our exposure to premium because the profit pool of our categories is shifting up in every single one of them. We are making U.S. and India our centers of gravity going forward. After the separation of Ice Cream, U.S. and India will be 32% of our revenue. In reality, 35% of the latest acquisitions that we have done, 21% in U.S., 14% in India. And U.S. is very, very important for us. Historically, our U.S. business has been a receiver of innovation for Unilever. Now we were U.S. for U.S. and U.S. for the globe. That's a fundamental change in our strategy. And you can see the evolution of our portfolio in the U.S., 76% of our revenue now in Beauty, Wellbeing and Personal Care through a combination of significant bolt-on acquisitions, significant disposal, particularly in the value segment and a significant growth of our -- significant organic growth of our premium brands LA in the market. And results speak by themselves. We have now 4 consecutive quarters of volume growth, above 4% in U.S. We believe we are building the company with the fastest growth footprint in the U.S. in the sector. We are the #7 company in terms of size, but I'm absolutely convinced we are building a structural fast-growing volume business in the U.S. and customers are starting to see that. What you see in the right of the chart is a result of what is called Advantage survey. This is 130 retailers giving general scoring, hundreds of companies in the U.S. We were #8 in the last few years. We jump to #2 this year, #1 in Personal Care, #3 in Beauty, #1 in Foods. So it's a very, very significant way in how the customers are seeing us. They measure us in vision, partnership, execution, and these are the results that we are seeing. This is a fundamental change in Unilever. India is the other anchor of our business. We have incredible positions in India. And we believe that India will be for Unilever, what China has been for some of our competitors in the last decade. This is the only large exponential volume growth opportunity in the globe. And we have incredible positions, more than 50% share in hair care, in skin care, in functional Food, in dish wash, 45% share in laundry, 37% share in skin cleansing. In all these categories, we are 2% to 4% our closer competitor. We have been growing at 4%, but our ambition is higher than that. The GDP real growth in India should be a good proxy of our volume growth in the future. That's our ambition. We have made decisive changes in terms of leadership there. the leader of the business now, has been my Chief Marketing Officer in Beauty. We are very, very confident that with the changes also in the economy of India, I believe that there are some significant stimulus going there. This should be one key growth driver for Unilever in the future. We know also that the portfolio that brought us to this position in India is not the portfolio that will propel us into the future. And that's the reason that we are acquiring new businesses in India, businesses that are in super growth stage. These are 2 recent acquisitions in India, Minimalist in skin care, OZiva in BMS, these 2 business together will be around EUR 100 million by the end of this year and growing, I will not tell you double digit. It's just much more than that. We know also that we need to digitize dramatically our distribution system. We reached EUR 9 million -- 9 million stores in India, 3 million stores directly. We are digitizing. We have the best digital platform for traditional trade coverage in India, and we believe this is a very significant competitive advantage for us. Let me now move in how we are transforming Unilever into a real marketing and sales machine. And there are 2 fundamental concepts, 2 fundamental mantras that we are establishing in the company. One is what we call desire at scale. The second is what we call perfect stores offline and online. Desire at scale is anchoring what we call the development of SASE brands. And SASE, of course, means bold disruptive, but in this case, it's an acronym for 5 features that we believe are fundamental to guide our product development strategy and our models of reach and engagement. S of Science for superior functionality, A, of premium Aesthetics, S of Sensorial experiences, S of say by others, very, very, very important. We really believe that the brands of the future are the ones that will be recommended by peers and while for young spirited brands that remain contemporary. And this is what's guiding both innovation and the models of reach and persuasion. I will show you a video of 1 minute only that encapsulate this idea. [Presentation]

We have a repeatable model, we call it the 4 Vs Variety of creators, Vitality of content, Velocity of posting and Validity of content and we are applying this in every single brand everywhere. And Dove and Vaseline are excellent examples of that. Dove is our biggest brand. It's a EUR 7 billion revenue brand. It has been growing last year, 8% in volume, this year, close to 5% in volume. And probably the most impressive one is Vaseline. Vaseline is a 155 years old brand. It was sleeping for many, many years. In the last 3 years, we have added EUR 4 million into this brand. 10% volume growth in '24, 11% volume growth this year in volume in a very, very significant historical legacy brand. We could have not done this without the capabilities and skills that we acquired in Prestige Beauty and in Well-being. So the acquisitions that we have done of Liquid I.V., Nutrafol, Paula Choice, Tatcha, Hourglass brought a set of capabilities that are very unique, and we are deploying in our core business, and our core business is starting to respond. Of course, we have issues. Of course, we have many brands in which we need to fix issues. But these are clear examples of where we want to take the vast majority of our portfolio. Let me go into execution and fundamentally how to deliver strategy only exist in the markets. Everything starts with a very clear and granular model to really assess how our brands perform in every geography against competition. We have developed a proprietary model based on public information in proprietary data of Unilever. We call it unmissable brand superiority framework. 23 metrics around the 6 Ps that we measure with absolute clarity, understanding what is the weightage of each of these metrics in any particular geography, brand, sale metric. And this is what guides how we operate in every market. And of course, this has significant implications when it comes to promotion, place, pricing in execution in the markets. We have now defined 9 very clear metrics for off-line execution, 11 metrics for online execution from price point, relative pricing, share of shelf, share of promotion, location in primary shelf, adjacency in secondary shelf, call to action of every brand in each store or in online ratings and reviews, the of quality the content. If I can't remember this by memory, imagine my people in the ground. This is what guides every single conversation I have when my people go -- when I go to every single market in Unilever. We also are building 3 fundamental hubs for what we believe is the strong expansion that we will have in e-commerce. We have already 20% of our business in e-commerce, when you go to [indiscernible] , it's already 30%. But we are making U.S. the hub for Amazon development. We are making China the hub for TikTok Shop development, and we are making India the hub for quick commerce development. We are learning in these markets and rolling out quickly. I'm a great admirer also of what some beverages company have done in terms of events and activations. And in a context of media fragmentation, this is more important than ever. And we are doing it. We are doing with Liquid I.V. in Lollapalooza. We are doing with the World Cup next year for Beauty and Personal Care. We are doing good with home care or we are doing it with NBA, helping mayonnaise booming in Brazil, for example. So events and activation, a very important part of our strategy. And also, we really believe that in-store theater, in-store visibility in physical and online stores is more important than ever. In a context of media fragmentation, how we execute in store is more important than ever. You have here images of Hellmann's in Brazil, Persil Wonder Wash in U.K. K18 in Sephora and every brand doing exactly the same. We are expanding our investing in visibility big time. We believe this is a key, key capability and skill that we have to continue developing in the company. So what can you expect from Unilever, and I'm finishing in a couple of minutes. We will deliver what we promised for this year. We will deliver between 3% and 5% in our USG. We expect to deliver an underlying operating margin of at least 18.9%. We delivered 19.3% in the first half of the year. And we expect for the remaining company an acceleration of our volume performance in the second half of the year with quarter 4 even higher than quarter 3. We will treat Ice Cream as a discontinued operations from quarter 4 onwards, and we expect to close the separation of Ice Cream sometime in November. We have absolute clarity about the model that we need to be -- to be top 30 SR in the sector. We need to deliver consistently 2-plus percent volume growth. We need to deliver a modest margin improvement based on a consistent gross margin expansion. We consider gross margin expansion, the fundamental financial by one of our plan, and we will be ruthless on that. We have 4 fundamental levers for that; volume growth, mix development, significant interventions in the procurement of some key materials in the value chain of some key materials and a ruthless discipline in our control cost management. If we do that, we believe that we can deliver profit growth in hard currency consistently at the level of the best companies in the sector. With that, let me summarize -- you can expect that we will go for more Beauty, more Wellbeing, more Personal Care. We will disproportionately invest behind U.S. and India. We will play to win, and we will do it making desire at scale the core of our strategy. And we will build a culture in which playing to win is really recognized with very, very strong incentives for our leadership and ensure that Unilever is never again an insular company. It's a company that is open to the world, that is open for talent coming from outside. And with that, we believe that we have a very optimistic future. Thank you very much.

So here we are again, Fernando, fireside chat. So thank you for that. I want to pick up on the U.S. because obviously your big claim to be the fastest-growing or the aspiration to be the fastest-growing U.S. CPG company. Do you think you can still outperform when the comps get much tougher? And how are you performing with big retailers that are winning like Walmart and Amazon? And then where you're not winning in the U.S., where you've got issues like U.S. hair care, some brands in Prestige like Dermalogica, Polish Choice, what are you doing to fix those?

Yes. Our portfolio in the U.S. has been radically transformed. And I believe the exposure to Beauty and Personal Care and to Well-being is very significant now. We believe that we have a distinct portfolio with very significant exposure to e-commerce also. So can we continue growing 4% volume consistently across time? I don't know. But do I believe that the 3% volume consistently can be delivered? Yes, I believe. Also, we have put some of our best talent in the U.S. and we have some of our best brands here. We have 45% share in Hellmann's. We have 45% share in the Deodorants. We have an incredibly strong Dove. So we believe that our portfolio has a strength. Of course, we have some, what I call, speedboats here, Liquid I.V., Nutrafol, some of these brands growing double digit very, very strongly. So we are very confident in the portfolio that we have built, and we are very confident in the capabilities that we are building in the country. Probably of this presentation, one of the most important charts is the one that is how customers are scoring us in U.S. relative to peers. This is a significant improvement in the perception that customers have about Unilever. We are growing very fast with Walmart. We are growing close to 20% with Amazon in the U.S. We have not seen any destocking. Everybody is talking about destocking. Really, I have not seen anything. I have tried to find it, but really, I have not found destocking here. And we are confident that we have built the portfolio. And what is very important is I will not deploy a single penny in M&A outside U.S. and outside India. And the role of U.S. is very, very important because I feel U.S. is the only market that offers both local critical mass to scale brands very, very rapidly, but also it gives you a help for the rollout of international brands. And I believe strategically for Unilever in a digital world without borders, having a set of powerful global brands born and with the scale in the U.S. is very, very important.

In terms of the second half of the year, Fernando, I think you did 3.8% in the second quarter. Can you talk a little bit about the -- your confidence about the acceleration in the second half versus the second quarter? Do you think Q4 will be stronger than Q3? Will it be even in the back half? And then maybe the big geographies, Indonesia, China and LatAm are the 3 big swing factors for the back half. Can you maybe touch on those?

Yes. Well, we will treat Ice Cream as a discontinued operations in the quarter 4, so probably it's better to refer to the remaining company. I see acceleration of our volume in the second half versus the first half, and I see a quarter 4 that is better than the quarter 3. So I'm very confident that, that will happen. I feel in Indonesia, we have fixed the fundamentals of the business. I don't believe that we have fixed the long-standing issues. We have a very strong local competitor. They are operating usually at 20% discount. So you have to justify a 25% premium all the time, and that requires a quality of innovation that I believe we have not had in the past, but we are improving, and we have seen -- since February this year, we have seen our run rates improving consistently in Indonesia. In China, there is a big channel shift, as you know. I spent 1 week recently there. I feel that quarter 4 in particularly, we will start to see significant progress in China. Part of that is comparator, but also we are putting some -- we have made significant changes in the distribution system, but also we are putting some particular changes in how we run some of our brands, particularly the 3 key brands we have there that are Clear, Lux and Vaseline. LatAm, we are having a relatively difficult time, and I believe for the rest of the year, it will be tough. There is a macro context there. Mexico has been seriously affected by the uncertainty on tariffs. Brazil now has been -- the famous 50% tariffs is affecting a bit the economy, but also we have scored some own goals, and I need to recognize that, particularly in laundry, we price ourselves off the market. It has been very volatile. The exchange rate going from 5 to 640. Now it's at 540. We price ourselves a bit outside. We have corrected, but this correction takes some time to implement. And particularly in the categories that is very important for us, there has been some growth of what we call contact applicator, roll-ons and sticks. These formats have a revenue per use that is significantly lower than aerosol. And I believe we have promoted a bit excessively these formats. We are gaining a ton of share. We are gaining close to 250 basis points share in Brazil, but we have affected the market growth due to the format change. So that's something that we need to rebalance. So I don't expect Latin America to be a great contributor in the second half. But our Latin American business is structurally very strong. We don't see any fundamental competitive issue beyond the laundry issue in Brazil that we are correcting. And from next year onwards, it should be back to normal.

And India is your second biggest market. You've got Priya in place now as the Head of HUL. You stepped up growth in the second quarter to 5% to 4% volume. What's your expectation medium term? What should India volume look like? And what are the building blocks to accelerate it further.