Hindustan Unilever Ltd. Earnings Call Nuggets: Gross Margin Expansion and New Royalty Agreement

Hindustan Unilever Ltd. (HUL.BO) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Gross Margin Expansion

Abneesh Roy – Edelweiss: My first question is on the soap and detergent business. We have seen gross margin expansion, but ad spend has been ahead of that, due to which EBITDA margins have contested. Wheel has seen some issues. So wanted to understand these ad spend, very high ad spend, is it because of expected gross margin expansion further? Is it because of issuing the Wheel? Is it because of the new product innovation in Lifebuoy? If you could give clarity on what is happening in Wheel?

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Sridhar Ramamurthy – CFO: So, I think you are absolutely right in the first observation that gross margins have expanded in the segment and A&P levels have gone up even faster. The result of the segmental margins have come up, we have stated time and time again that we should – this is the contention to analyze quarter performance in terms of how these movements are and draw conclusion beyond what are necessitated. You would have noticed that this segment has shown strong expansion in margins over the last many quarters, over the last September quarter, into this quarter A&P levels were stepped-up based on what we found in the marketplace and upward, policies of making sure that we remain competitive in terms of our investments in the marketplace and some of the innovations that we has. So primarily the guiding factor in this quarter was to make sure that on principles and criteria which we have in terms of (indiscernible) market et cetera we stepped up reflecting the competitive intensity which have gone up in the service.

Abneesh Roy – Edelweiss: If you grow further, is it that whenever we see the gross margin to expand and then you see the local players come back. In Wheel also we’re seeing some issue. So on the lower-end are you seeing marked increase in the lower players competitive intensity?

Nitin Paranjpe – CEO: Firstly, I would just make a comment on Rin which you say, I think I don’t want to overstated with words and issue in this quarter, but like I mentioned in my comments, it is a brand which response quickly the actions that have been taken and we are already beginning to see. It responding to the interventions which have been made, as a general point what you may cannot be denied as commodity cost soften et cetera, there is a tendency for local players to start coming in. At this stage, I would not want to say that there are – we are seeing extreme pressure or excessive reentry of local players, but as a business, we need to be adhered to address all those situations whether it is in terms of players at the top-end or bottom-end organized or unorganized deals.

Abneesh Roy – Edelweiss: One follow-up on that any color you can give on Wheel, what exactly we have done and you said some recovery has already happened? So, is it in terms of pricing, innovation, branding, some color on that?

Nitin Paranjpe – CEO: Relatively, so couple of interventions we managed Wheel very carefully looking at competitiveness on a state-by-state, and geography-by-geography basis because nature of competition often varies, there were a couple of geographies where we have made product enhancements and improvements and there have been a couple of geographies where we have ensure that market is competitiveness is stepped up and in general advertising intensity has also been increased. So it’s been a holistic fund as appropriate to the geographies like I said, a couple of geographies where we made product enhancements that was required there. A couple others where there was marketplace competitiveness in the form of strong trade activity and in general a step up in advertising intensity across the board.

Abneesh Roy – Edelweiss: My second question is on the tea business, you said this has been one of the strongest quarter; Also what we see is, tea raw material prices are shooting to the roof. So, again, is it – your performance, is it again linked up because of the inflationary conditions? We see that the stronger players and the larger players gain when the inflationary condition is there. Could you give us some color on teabags? You spoke on that. So what’s our share in the teabags and how do you plan to take it up further and some insights on where do you see teabags as a proportion of tea business three, four years down the line?

Nitin Paranjpe – CEO: So first comment is, I think our performance on tea has little to do with the inflationary effect that you talk about. The inflationary effects are there. The impact of those are likely to be experienced into the future, you’re aware that tea is brought into two seasons and you will see this effect as we move forward. So, performance in December quarter has less to do with the inflationary pressures and the impacts on local players. So that isn’t the reason. As far as teabags are concerned, no, absolutely zero doubt in their minds that that will determine how the categories will move into the future. At this moment, it is a very small and an insignificant contributor to the overall. It is growing very well. The market needs to be developed, but I wouldn’t think that this will be the most material part over the next two, three years. We will keep growing it as we start future proofing our business for the future.

Abneesh Roy – Edelweiss: Sir, one last question on modern trade.

Dinesh Thapar – IR: Abneesh, sorry to interrupt, but I think it’s only fair we come back to you later. Let’s give the opportunity to others on the call and thanks for (meeting), we’ll come back to you.

New Royalty Agreement

Prasad Deshmukh – DSP Merrill Lynch: My first question is on just, how much of the revenue actually comes from brands which are owned by Unilever, and how has this percentage actually changed over the last two or three years when the royalty was revised before this?

Sridhar Ramamurthy – CFO: I think, as far as this is concerned, it’s pretty dynamic thing, I am not sure that we’re getting to those specificities externally. I think I understand the context of your question, which is in the context of the new royalty agreement and I am assuming a context of your question the new royalty agreement, is that correct?

Prasad Deshmukh – DSP Merrill Lynch: Correct.

Sridhar Ramamurthy – CFO: I think the most important part is, as we very transparently shared, A, the rationale for the change, what is the benefit that HUL is getting and will continue to get and from a royalty cost perspective, what is the change that this agreement will maintain? As I mentioned earlier, 1st February, 2013 to March 2014, we estimate this to be about 50 basis points (up the NAV).

Prasad Deshmukh – DSP Merrill Lynch: Yes. The second question on Modern Trade, what has changed in last one quarter where it like – not structurally, but till Q2 Modern Trade was one of the key driver and which in a way is also important for premiumisation that we keep talking about. What has changed in Q3 overhead? We are seeing slower growth there.

Sridhar Ramamurthy – CFO: I think we mentioned in the beginning there are certain dynamics which are taking place in Modern Trade. Growth in the past has been a combination of same store growth as well as new store openings, in the quarters prior to the current one which has gone by, we had net store addition. This quarter we have seen more closures and less new store openings as a result of net store addition has been negative. That has impacted the aggregate growth of modern trade channel. Like I again said that, I won’t read and think of this as a big trend. It does mean that organized players maybe consolidating their business, getting their (shift drive), but going forward there is absolutely no doubt in any one’s mind that modern trade become a larger and larger contribution to the overall trade and to our business. We remain committed to it. We are in a fortunate position that we have presence and leadership positions and a presence in modern trade is stronger than our presence in general trade, that as this trade and this channel increases its contribution to the total market, we will stand to gain.