Unilever PLC ADR Earnings Call Insights: Emerging and Mature Markets and Commodity Guidance
Unilever PLC ADR (NYSE:UL) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.
Emerging and Mature Markets
Chris: (Chris) (indiscernible). Just a quick question on the growth. I mean, you talk about food and acceleration there, I mean, do you think it is likely that the asymmetric pattern of your growth between emerging markets and mature markets will shift so that we will start to see a better balance of the growth between the two? As a follow-up to that, does that have clearly positive implications for your ability to convert organic sales growth into EPS growth?
Paul Polman – CEO: You’re specifically talking of food Chris?
Chris: I am talking food and then the implications of that for the asymmetric nature of the growth between emerging markets and mature markets.
Paul Polman – CEO: So as you know, although we have 55% of our overall business in the emerging markets as (to we statistics) once more. On the food side, it is still more the 40%. Now why we’re confident in our food powerful obviously is, if you first look at it a little bit more granularly, increasingly our food business is really – if you take Refreshments out because we are not – that is food, the beverage and ice cream but I’m talking about the rest of our business, it’s basically now three big core activities, and that’s we are getting nearly to that point now, which is margarine, dressings, and then obviously savoury. Margarine, as I mentioned before, the markets are down and continue to decline, but we have actually in margarine we are growing our share, we’re growing our share in a declining market and we are obviously paid volatility cycle and manage our cash flow that will be a drag on the growth rates, but it will be a contribution to the overall financial performance of the Company and we will continue to manage it that way without expansion. So you won’t see any footprint shifts in margarine in the foreseeable future. Then the second business is our dressings business, actually a very healthy business, growing very well, by the way, and we continue to expand that business with a good pipeline of innovations that you’re familiar with and we’re very confident there. Our savoury business is the balance of the business, where again it’s about the 40-60 ratio that we have to move to the other side. Our emerging market business is growing well. Our European business where too much of that because we have a relatively small business in the U.S. our European business gets the double whamming of being in Europe already with mature shares, if you want to, in markets that are down. Then there is a little drag on the savoury business because of nonstrategic brands that we will continue to look at and find solutions for. I’m convinced that we have to focus on the savoury business for this discussion, if I may. I’m convinced that with our focus now on the emerging markets and our innovation pipeline that we can actually bring the growth rate of that business up. There is no doubt that the category on the – (South Africa) is 100% focused on that. As we do that then obviously you get also a positive contribution to earnings per share. I don’t know Jean-Marc if you want to add to that on that part.
Jean-Marc Huet – CFO: The only point that I would add is that increasingly if you look at our business, I’m referring to the last question, which was the translation of sales into profitability earnings is that despite the growth differential in emerging markets versus developed markets, we have a very, very good structural gross margin throughout our business, be it D or D&E and obviously the margins are then a reflection of where we’re spending our A&P.
Martin Deboo – Investec: Two question of I may. First is on the Refreshment business, it looks if you had very good growth acceleration and accelerating margin expansion in H2 in that business strikingly good. Can you just give some more commentary on that, but also is that momentum that you would expect to carry into FY ’13 in Refreshments? Second question, Jean-Marc is on gross margin, you’re guiding high single-digit input inflation, but obviously the other side of the equation is how you’re managing the top line in terms of maxing the mix, et cetera, so how would you expect to the gross margin outlook to be in FY’13?
Paul Polman – CEO: On the refreshment side, where actually under Kevin Havelock’s leadership we’re pretty happy with what is happening there, because ice cream now is truly becoming a global business. Ice cream was a little bit where food was before, it was very much geared towards Europe, whilst the U.S. was a bulk in Home business, which frankly isn’t very attractive. Obviously, with the launch of Magnum in the U.S. and some other activities that we have done, we are increasing our Impulse business which is more profitable also out of home and that strategy is working for us. We’ve seen the same in Europe; obviously where out of home is still an enormous opportunity. We think that could be up to a €1 billion in incremental business. So changing this footprint from margin destroying in-home (build) business to the more Impulse added value out of home. Magnum is obviously an enormous success story. Since I started in the Company, Magnum was €550 million in turnover and we just passed €1 billion barrier and that’s just in four years’ time. It’s one of the greatest success stories I think in the history of consumer goods. Perhaps not sexy for many, but certainly should sexy for our investors and we increasingly have taken that opportunity and that confidence to launch of ice cream businesses in the emerging markets, which is actually amazing if you think about it, because the weather environment there is a whole year ice cream environment. That business doesn’t need to be seasonal. With the launches in Indonesia that you’ve seen, many of you were there, which is an enormous success and continues to grow, we have added to that in all of the other places in the Far East. Tremendous success from launches in the Philippines, we’ve now opened Ben & Jerry stores in Japan. But people start queuing up, I could go on and on and the same is true by the way for Latin America. So that momentum that you see in Refreshments will also hopefully give us a better business if you look at it on a six months basis moving forward. Then tea which is the second part of that, I think we’ve seen strong growth in some of the important tea markets that were under pressure, like Russia would be an example of that, Saudi would be an example on that. Where on the one hand we have corrected the basics and on the other hand we have stepped up the quality of our products and the innovation. As you know, in the U.S. would be an equally good example of that, where frankly we have under supported the Lipton brand, tea brand there, literally under supported in quality and product and that is never a long term strategy. We’ve reinvested and continue to reinvest in quality and product, and you start seeing the results. So I am fairly positive that that business about a quarter here or there for different reasons, but that business is on the right trajectory and then coming to the gross margin.
Jean-Marc Huet – CFO: As we discussed a variety of times, the gross margin is crucial if you want virtual circle of growth to really work in a sustainable way. I would argue if you looked at our financials over the last three years, we probably had to rely solely on overheads to drive that core operating margin. So we don’t give you a view in terms of outlook for 2013, but it’s strategic it has to be positive and you see the trend between H1 and H2 for 2012. James?
Unidentified Analyst – RBC: James (indiscernible) from RBC. Two questions, if I may. Can you expand a bit more on the reasons for the Americas strength in Q4 and how sustainable that is and also just a real nerdy question, but A&P I think you said was €6.5 billion for the year. It was up (€470 million). On my calculation that means a fall of about 30 basis points, but I think there was chart where you said it was flat. What’s the difference between those two?
Paul Polman – CEO: Very quickly, James. On North America, again as I said, we don’t want to really take these discussions on quarterly numbers and (once offs), but we had this impact of this change that we had last year 2011, that for North America alone that’s probably about 400, 500 basis points by memory. So if you remember, it’s a base question on the quarter. I think the North American market on a macroeconomic level will see an economy that might be growing at around 2%. It hasn’t done that well in the last two years, but it’s slightly – there are some signs that the U.S. is slightly picking up and we should be slightly above that with our innovation program, net of divestiture obviously. On the A&P, I think what you’re probably looking at is apples and pears with the M&A – foreign exchange parts of it. But if you look at the total, it’s absolutely flat and so we can take you through the calculation if I may and then –
Unidentified Analyst – RBC: I’ll do that afterwards.
Paul Polman – CEO: Yeah, is that okay?
Jean-Marc Huet – CFO: Your point is the right one, don’t extrapolate UVG in Q4 given the point that Paul mentioned on North Africa implementation in the 12 months prior. Jeremy?
Jeremy Fialko – Redburn: It’s Jeremy Fialko, Redburn here. A couple of questions, firstly on the commodity guidance, you’re looking for low to mid-single digit increase. Now that’s certainly low than what we’ve seen in previous years, I guess, on the commodities that we look at, so things like edible oils (indiscernible) items do you look are they down very significantly year-on-year. So could you tell us as to why the guidance is not (indiscernible) lower than that and what some of the main items where you’re seeing kind of cost inflation this year are? The second question is just on your overheads in 2013. Clearly, you’re looking for gross margins be the main driver of your operating margin progression. Do you think that overheads could end up being up year-on-year as you choose to kind of invest more on your capabilities? You think it would be flat or could that be even in an additional kick out to your operating margins?
Jean-Marc Huet – CFO: So thanks for pointing out because I think someone in the audience said the commodities would be mid-single-digit and it’s indeed what we are saying is low to mid-single digits. As you know, our policy in terms of hedging, simple forwards three to six months and so that’s the P&L view that we have. So, again, we may be in a position to change our views by the half year. That’s where we stand today. If you look at your screens on Bloomberg, there will be spot prices. They can different to the actual contracts in terms of purchasing. Secondly, there are whole variety of exposures in terms of commodities that we have some that have gone up, other that have gone down, also depending on the region where you buy those, but also don’t forget foreign exchange and other which we include in terms of our calculation of percentage increase because we’re talking about the impact on our P&L.
Paul Polman – CEO: You know I tend to think on commodities that we have a good system, good people looking forward. What we hedge, what we don’t hedge, you know this is done very professionally and increasingly so as we – under Pier Luigi’s leadership have globalized that organization. But the reality of today’s market is enormous pressures that can come on you from one end to another. Just a draught of grain in the U.S. wiped out 20% of the U.S. crop there. So that has an tremendous effect on the global market at a very short period of time. Obviously, (you call) for that. So what is equally important is that we create a system that is able to deal with these increasing shocks that will be coming, climate change is being one of them. I think we’re in a very good position versus our competitive set because we spend a lot of time on how to deal with that. We’re also in a very good position with our brands and the market positions that we hold to manage these things in a way that we don’t have to take all of that pressure into our own P&L if I may. On the indirects, I think that your point on investing in capabilities is absolutely key. We continue to look first and foremost and what capabilities do we need quality capabilities to fuel the growth. Interestingly, if I go back over the last four years and take a little bit of a macro picture, we have invested enormous amounts of money in training and developing our people over a €100 million. We’ve invested enormous amount of money and bringing our sales capabilities up. We’ve invested in these state-of-the-art customer innovation centers. We’re now investing in the Personal Care capabilities. We’ve invested in R&D to be able to fuel that growth. So our investments probably in the last four years in indirect have been higher than any time we probably could find in the previous two or three decades and that we will continue to do, but that doesn’t mean you cannot drive efficiencies. If you grow, if you don’t grow, I think you’re in a (pickle). But if you grow and you grow with discipline, there is no reason why you cannot drive the indirects further down. An €80 billion business doesn’t need two CEOs either versus a €40 billion business I hope. So the efficiencies we will continue to look at in indirects, we still have a low decision-making compared to what we think would be ideal. We still have a lot of non-value-added activities in a company like this as well. We still need to do a lot of restructuring in the way we go to market in some parts of the world where we have become too complex and we will continue to drive them. But you don’t want to do them with shocks, because it will be dysfunctional to your growth. You will manage them consistently. So I think that our indirects should continue to show the 20, 30 basis points improvement.
Harold Thompson – Deutsche Bank: Harold Thompson, Deutsche Bank. I’ve just got two questions. One is a bit of a follow-up on investing in capabilities. You note in your press release that the Personal Care margin is down because of such investments. Can you may be slightly expand what you are doing, will it be price positionings of your Personal Care offering or the categories where you’re looking to compete in? My second question is kind of following yesterday’s announcement on royalty rates in India, which is on the back of Indonesia and then there’s the Pakistan move as well. Can you may be just a little bit update us on your minority participation view, which seems to be changing versus maybe three or four years ago and how do you see that over the next five or 10 years?