Unilever PLC (NYSE:UL) Q1 2023 Earnings Call Transcript

Unilever PLC (NYSE:UL) Q1 2023 Earnings Call Transcript April 27, 2023

Operator: We would like to now turn the call over to Richard Williams, Unilever’s Head of Investor Relations, to begin the presentation.

Richard Williams : Thank you. Good morning, and welcome to Unilever’s First Quarter 2023 Trading Statement. We expect prepared remarks to be around 25 minutes, followed by Q&A for around 30 minutes. Given that it’s a busy reporting period, we will end with a hard stop by 9:00 A.M. All of today’s webcast is available live, transcribed on the screen. First, can I draw your attention to the disclaimer relating to the forward-looking statements and non-GAAP measures. And with that said, straight over to Alan.

Alan Jope : Well, thanks, Richard, and good morning, everyone. In the next few minutes, I’ll give an overview of the Q1 trading performance and also a short update on our progress against our strategic priorities. In our usual format, Graeme will then provide more details on the results and cover the outlook. And then, of course, we’ll take some questions. Before that, I would like to acknowledge that this will be the last time that I’ll present Unilever’s quarterly performance. By the time that we released the half year results in July, Hein will have taken over as the CEO of Unilever. However, that’s still two long months away, and I remain fully focused on executing our strategic priorities and driving performance. The hand over to Hein will take place during June until then it’s business as usual.

Right. We made a good start to the year and again delivered double-digit underlying sales growth. And the growth is very broad based across all business groups and geographies. Although pricing remains elevated, volume performance has improved strongly. In part, this reflects some preplanned one-offs and in part, better-than-expected elasticities. Our billion+ Euro brands grew faster than the rest of the portfolio. We saw particularly strong performances from Hellmann’s, from OMO and from Rexona. We do continue to prioritize our investment behind our billion+ Euro brands which are also benefiting from the strongest innovation lineup that we’ve had for many years. And I’ll give some examples of that shortly. The new organization has landed well.

It’s continuing to deliver the impact that we designed for. Sharp prioritization, differentiated expertise between the business groups, speed and tackling difficult decisions and pockets of underperformance and actually greater leverage of Unilever’s scale in our business operations team. We delivered underlying sales growth of 10.5% in the first quarter, driven by price at 10.7% with underlying volume, down slightly at minus 0.2%. We continue to take pricing responsibly and with precision as we expected, the inflationary pressures continue, especially in Nutrition and Ice Cream, driven by sustained high material prices, energy costs, the impact of climate change on agricultural yield and rising wages. And this has required further price increases to protect our ability to invest behind our brands.

But I must say the picture is now quite different by business group, and Graeme will show those details. As we start to anniversary pricing action taken in the early part of last year, price growth has started to moderate versus the previous quarter. The stronger-than-expected volume performance in the quarter include some planned benefit from strengthened customer service levels and the associated pipeline refill, especially in Europe deodorants and across our North American business. Our overall outlook for improved volume in the full year versus 2022 has not changed, but getting there will probably not be a straight line. Business winning was 48%, in line with our expectations as we take these necessary pricing actions and streamline our product portfolio, we’re not going to get drawn on a quarter-by-quarter business winning projections.

However, competitiveness remains a key focus in the business. And our ambition is to see business winning get back above 50% as the pricing environment normalizes and as we continue to invest behind our brands. We’ve made good progress executing against our strategic priorities, starting with brands and innovation. The billion+ Euro brands, as I mentioned, they now represent 54% of our turnover and are growing at 12%, well ahead of the Unilever average. We saw further progress against our strategy to move the portfolio into higher-growth spaces, both organically and through M&A. I do want to stress that premiumization is an explicit part of the organic growth strategies of all five business groups. And on top Prestige Beauty and Health & Wellbeing have both now achieved, get this 9 consecutive quarters of volume-led double-digit growth.

And we aim to continue this momentum. For example, just this week, we’ve launched Tatcha Skin Care in China. The acquisition of Nutrafol and the disposal of the tea business, both completed in July of last year, and the recent announcement of our agreement to sell the Suave brand in North America, all reflect our strategic and financially disciplined approach to capital allocation and to portfolio evolution. And although it’s not yet reflected in our USG measure, Nutrafol continues to do extremely well. Coming to our geographic priorities, the U.S. maintained a good growth momentum with underlying sales growth at 8%, volumes were positive and underlying price growth was 7%, down from 10.3% in Q4. We saw notable improvements in customer service levels particularly in nutrition and Ice Cream as well as Deodorants, as I mentioned earlier.

We still have more to do, but the trend is very much in the right direction. India reported another quarter of double-digit growth at 11.3%, with price at 7.3% volume up 3.7. The results were driven by another standout performance from Home Care and were delivered against a challenging operating environment, particularly in rural areas where market volumes continue to be quite depressed. China reported positive underlying sales growth with performance improving as the quarter progressed. Actually, the initial recovery was slow but then gained pace in March. Emerging markets growth overall was 11.7%, with volumes only slightly negative, and Graeme will give more details on performance through the geographic lens as well. Moving on to the channels of the future.

The contribution of our turnover coming from digital commerce was 15% and we also saw underlying sales growth of 15%. Our digital marketing media and d-commerce hubs, the DMCs really are delivering leading-edge digital capabilities to help capture these opportunities in high-growth channels like social commerce and quick commerce. Most of our retail channels are becoming media platforms and many media platforms are becoming retail channels, and it’s our DMCs that are giving us the ability to take advantage of this secular trend towards convergence. Our other strategic priority, of course, is to land the full benefits of our new organization and to continue to strengthen Unilever’s culture. The five new business groups are bringing the category, focus and expertise that we want.

We’re seeing a determination to confront difficult decisions. For example, the work to simplify product portfolios or to recognize when innovation have not met their action standards and decisions are being taken very quickly. I’d like to share three quick examples with you. First, SKU rationalization, Personal Care and Nutrition have continued to optimize our product range and simplify the business. We’re tracking well versus the reduction targets and the drive to simplify is evident in all of our business groups. The second illustration is how we’re resetting on attractive parts of the business. For example, the decisive actions taken by the Home Care Business Group in West Africa or in Beauty & Wellbeing where we’ve been resetting the unprofitable duty-free channel for our AHC skin care brand in North Asia.

And in procurement, we’re seeing benefits already from what’s actually a follow-on evolution of the Compass organization. It’s a change that we’ve just made to give dedicated procurement leaders to each of the business groups, and that’s helping us to navigate the volatile commodity markets with good agility. So these many other examples give us confidence that we’re on the right track and the right course with the new organization being able to continue to deliver faster and better execution. Now I mentioned earlier that our performance is underpinned by some strong innovation. Let’s take a look at some examples. And first up is Dove Body Wash, where we’ve introduced our best-ever skin cleansing technology. This product contains nano-moisture technology, millions of moisturizing micro droplets that go into the skin to look in more moisture for longer.

The formulation happens also to be 98% biodegradable. And the bottle is a modernized design, easier to use — it uses less plastic, and it’s made from plastic that’s 100% post-consumer use recycled material, performance and purpose together in lockstep. OMO has re-launched its next-generation capsules. For example, under Persil in the U.K. or Skip in France as well as delivering winning stain removal at low wash temperatures, we’ve replaced the plastic outer packaging with a plastic-free paperboard box, which is more sustainable, it’s lower cost and it delivers a superior product experience. So real technology in the product and clever design in packaging. Rexona’s 72-hour nonstop protection uses new science, which offers significantly improved protection against sweat and odor.

You’ve heard us talk about this technology before, and you will hear about it again. This is a multiyear investment priority behind superior anti-perspirant technology and as well as using this innovation to drive Rexona, we’re extending the technology into our other Deodorants brands with very good initial results. Hellmann’s has a successful track record in combining great-tasting innovation with the ongoing, Make Taste Not Waste campaign, putting Hellmann’s as part of the — I guess, food waste in a lighthearted way, and that’s really driving sales with particularly strong impact in the U.S. around the Super Bowl campaign. On top of that, the brand is extending into the intense flavor segment with New! Hellmann’s Spicy. So Deliciously Spicy Chili’s that extends our Paris Hellmann’s’ brand into this fast-growing market segment.

And after last year’s success with the Classics remix, Magnum is now struck out in a new direction. two new limited edition, sensorial treats, Magnum Starchaser, combining thick cracking chocolate with popcorn pieces and caramel sauce, while Magnum Sunlover combines coconut pieces and mango sauce and I will be very interested to learn over time whether the capital market investors and analysts on this call comprise of more Sunlovers or more Starchasers. And last, but my no means least, Clear has introduced a premium range that tackles an important consumer need, hair loss. The new range has been carefully formulated with Minoxidil. It’s a proprietary combination to powerful active materials that together are clinically proven to reduce hair fall in just one month.

So innovation, of course, is a fundamental capability of a successful consumer goods business and underpins the pricing products that we’re discovering. Around 30% of Unilever’s turnover comes from products that have been launched in the last two years, and that’s up from 20% in 2021. Our focused innovation strategies, combined with increased investment in R&D, are providing our brands with the innovation firepower that they need fewer, bigger innovations launched in more countries. But the step-up in performance that you’re seeing was critically dependent on innovation, and that’s the reason I’ve taken some time to talk about it. Requires more success in this business doesn’t just come from getting one element right. It requires multiple variables to come together to produce a winning performance.

Clear strategic priorities, disciplined execution, strong brands, competitively superior products, consumer relevant innovation, competitive investment levels, the right organization and so on. And these strands are converging for Unilever, and that’s what gives us confidence that we’re well-placed to navigate the inevitable challenges that the world is going to continue to throw at us. And with that, let me hand over to Graeme to provide some more color to the trading performance. Graeme?

Graeme Pitkethly : Thanks, Alan. Our underlying sales growth in the first quarter was 10.5%, driven by price at 10.7%. And with volumes just slightly negative at minus 0.2%. Underlying price growth remained elevated but was lower than most of last year as we started to see moderation in new price increases and the lapping of pricing taken in the early phase of the cost inflation cycle. We’re still seeing input cost pressures, particularly in Nutrition and in Ice Cream and have taken new pricing in response. From a wider perspective, we do appear to have seen the peak in materials inflation and therefore, an underlying price growth. Ones held up well. While this is encouraging and overall reflects the broad-based performance step-up that Alan just described, I do not expect the route back to positive volumes to follow a straight line.

Q1 growth was broad-based across all business groups. So let’s take a closer look. Beauty & Wellbeing reported 9.3% growth, 6.5% price and 2.6% volume. Prestige Beauty, and Health & Wellbeing delivered double-digit growth with Paula’s’ Choice, Tatcha, Hourglass, Liquid I.V. and Onnit, all growing strongly. Nutrafol, which isn’t yet in our growth numbers, continues to progress very well. In hair care, Sunsilk, TRESemmé and Clear all performed well, and we saw very fast growth of Nexxus in the U.S. premium segment. We announced the sale of Suave, which operates in the value sector in North America, and we continue to expect the transaction to close in the second quarter. Core skin care grew through Pond’s and Vaseline in South Asia and Southeast Asia.

We saw a decline in North Asia due to the actions taken to refocus the channel priorities of the Carver brand, which we mentioned earlier. Personal Care grew 12.7%, comprising 9.4% price and 3% volume. The standout performance in Personal Care was from Deodorants, where it was volume driven. This is a business where we experienced supply restrictions through most of 2022, both in North America and in Europe. Some of the reported volume improvement this quarter is due to refilling depleted pipeline and getting our trade stocks back more normal levels. So we do not anticipate the exceptional volume performance of Deodorants in the first quarter to sustain through the rest of the year. Skin cleansing performed well powered by Latin America and South Asia.

We delivered robust growth in India despite the need to adjust prices downwards to reflect the impact of lower palm oil costs on the bar soap market prices. Home Care growth was 10.2%, with price up 13.4% and volumes down by 2.8%. So very good volume performance given the high levels of pricing, especially in Latin America. It was a good competitive performance in Home Care. Fabric Cleaning was the main growth driver with strong performances from the premium ranges within our key brands. Fabric enhancers maintained good momentum, whilst Household Care continued to recover, supported by good growth from Domestos. Growth in Nutrition was 11.9% with price up 13.4% and volumes down 1.3%. Dressings delivered another quarter of strong price led growth with positive volumes driven by Hellmann’s.

The Knorr brand grew well in both retail and Unilever Food Solutions channels with the latter performing well despite some continued disruption in China during the important Chinese New Year period. Horlicks was back to growth, but the inflation pressure on rural Indian consumers continues to restrain volumes to some extent. Our latest Horlicks innovations, which are based on millet, have made a good start, and we remain very confident in the future prospects for the Horlicks business. Ice Cream growth was 6% with 10.5% from price and minus 4.1% volume. We continue to make strong progress on our strategy to focus on our premium brands, on our emerging markets and the out-of-home and digital channels. Our premium brands grew well with Cornetto delivering double-digit growth.

And in Turkey, the local team have done a truly great job responding to the impact of the devastating earthquake in what is one of our largest ice cream markets. Out-of-home continues to perform well with a combination of positive price and volumes. In-home ice cream growth was more modest, with further price increases having an impact on volumes, which really reflects the more discretionary nature of the category. We’re also seeing share gains made by lower-priced ice cream products, both from private label and from local competitors. Service levels in the United States are improving, and we’re seeing innovations land well, for example, our new Talenti Gelato sticks. Let me add a bit more geographic detail then to those results. In our largest region, which is Asia Pacific, Africa, we saw underlying sales growth of 9.9%, comprising 9.5% price and 0.3% volume.

India saw some weakness in market volumes, especially in rural areas. Inflation remains high but appears to be moderating and the rural economy does now seem to be improving slowly., Hindustan Unilever delivered double-digit growth and continues to win by investing in product performance and innovations and, of course, through excellent market execution. Southeast Asian markets are benefiting from the recovery in tourism somewhat tempered by the impact of slower Western growth on the manufacturing sector in Southeast Asia. Thailand recovered as tourists returned and Indonesia saw stable economic growth following inflation and stabilizing interest rates. We saw continued growth momentum in Vietnam, in the Philippines and in Thailand, whilst reported sales growth in Indonesia was weak as we continue to adjust trade stock levels.

Consumer sellout rates in Indonesia are now showing good signs of improvement in response to our multiple actions to turn around and reset our competitive performance in Indonesia. China saw improving conditions as the quarter progressed, with the removal of COVID restrictions, enabling returns of physical store shopping and restaurant dining. China’s GDP is improving and inflation remains low. Personal savings are relatively high, but consumers are spending somewhat carefully, and this is weighing on overall category growth. However, we are seeing faster than average growth in d-commerce channels such as Pinduoduo and Douyin. In this environment, Unilever China delivered low growth with both price and volume positive. Growth was much stronger towards the end of the quarter than at the beginning.

African economies remain weak post-pandemic. There are many local nuances to Africa, of course, but in general, consumers are under pressure and families are eliminating nonessentials, buying multipurpose products and seeking out value. Our Africa business delivered price-led growth with declines in volumes. Latin America saw underlying sales growth of 18.7%, with 18.4% price and volume slightly positive at 0.2%, really an extraordinary performance in high inflation markets. The rate of inflation is now moderating somewhat, and so price growth is starting to ease in Latin America. We continue to see smart shopper behaviors and good growth of the cash and carry channel. North America reported underlying sales growth of 8.1% with 7.2% price and 0.9% volume.

The U.S. consumer continues to be relatively strong, and we’re making good progress in resolving the service issues, which impacted much of our North American business in 2022, although we still have more work to do. Our underlying sales growth in Europe was 9.2% with 12.6% price and a decline of 3% in volume. This excellent result was helped by a rather weak prior year comparator, but was broad-based across countries. It reflects the ongoing cost pressures, particularly on Nutrition and Ice Cream, which have a large footprint in Europe and for which we need to take further pricing. The quarter also benefited from the restoration of service levels in some key categories, notably Deodorants, which we mentioned earlier and the associated pipeline refill that goes with that.

The consumer in Europe remains under pressure, and we are seeing trading down to lower-priced products with private label gaining share, notably in the Ice Cream, Nutrition and Home Cleaning categories. Turnover for the first quarter overall was EUR 14.8 billion, up 7% versus prior year. Underlying sales growth contributed 10.5%, and we saw a reduction from acquisition and disposals of minus 2.8% with the exit from tea and the addition of Nutrafol being the main drivers of that. The total currency movement in the quarter of minus 0.4% comprises a negative impact of minus 2.1% from the Euro strengthening against key currencies and 1.8% of extreme price growth from hyperinflationary markets. Based on spot rates, we would now expect an effect of around minus 5% on full year turnover from currency translation, and we expect the impact on full year underlying EPS to be between minus 6% and minus 7%.

Let me close then with some comments on our outlook. We will continue our top line momentum by investing for growth whilst embedding the new operating model. We continue to expect another year of strong underlying sales growth in 2023, now at least at the upper end of our 3% to 5% multiyear range and an improved volume performance versus 2022. Although as we’ve said, the volume progress is unlikely to be a straight line improvement through the quarters. We will continue to invest more in advertising, R&D and capital expenditure. And finally, we continue to expect a modest improvement in underlying operating margin for full year ’23 with an increase in gross margin. We now expect first half margin to be at least 16% as we continue to carefully manage price and volume while maintaining good cost and savings discipline.

And with that, let me hand you back to Richard to get the Q&A started.

Richard Williams : Thanks, Graeme.

Q&A Session

Operator: So our first question today is from Warren Ackerman at Barclays. Do you want to go ahead, Warren?

Warren Ackerman: Can you hear me? It’s Warren here at Barclays.

Alan Jope : We can. Morning, Warren.

Warren Ackerman: Okay. Just getting used to the new system. Okay. So the first one, obvious question, could you just flesh out the one-offs in the quarter, Graeme, what would volume mix have been without the one-offs or put it another way, what would — it sounds like it was the Deodorants was up strong double digits, and you talked about U.S. Personal Care one-offs. And maybe if you could just update us on what the underlying picture is and where you are with regards to kind of inventory and how we should think about that into the second quarter, that will be super helpful. And then secondly, just on some of the big Asian markets of China, Indonesia, India. On China, could you maybe tell us how the growth progress from Jan to March, what the exit rate is in March for China and any more color on sort of Indonesia, India, the three big ones in terms of how you’re thinking about the shape of the USG for the balance of the year would be great.

Alan Jope : Thanks. Graeme, as requested by Warren, why don’t you take the first question, I’ll take the second.

Graeme Pitkethly : Okay. We are just — a comment overall. Of course, we’re pleased with the nearly flat volume performance in the quarter. But as you’ve picked up, we’ve got a number of factors behind that. Some of it is good solid stuff. I mean the UVG, for example, in Beauty & Wellbeing is driven by continued strength in Prestige Beauty, and Health & Wellbeing that Alan mentioned, and you see that the volume performance is positive in Beauty & Wellbeing and it’s positive in Personal Care, it still remains negative in the other 3 business groups. So I would highlight just that there is quite a different personality to each of the business groups with Beauty & Wellbeing, Personal Care, really coming out of high levels of inflation, price starting to moderate and volumes starting to pick up.

More pressure, as I said in the prepared remarks around Nutrition and Ice Cream where we’re continuing to see inflation. So a different personality across the five business groups. Now in terms of the one-offs themselves, in Personal Care, it was largely driven by Deodorants. The service recovery in North America, combined with the European deals service recovery and pipeline fill from retailers ahead of the summer season starting in Deodorants. They are two principal drivers of the step up. And we think if you back that out, that the UVG for the company overall is somewhere between the minus 1% and minus 2% range. That’s why we’ve commented around, please don’t expect volume performance Q4 to Q1 to continue in a straight line. I think our underlying volume performance was more in the minus 1% to minus 2% range.

We do expect that UVG, however, to continue to improve. But as I said, it won’t be linear. And in large part, you will see our UPG or price growth moderate over the balance of the year, not because we’re lowering prices, but because principally of the back year impact as we start to love that. Hope that’s useful, Warren.

Alan Jope : Thanks, Graeme. Let me address a little bit more of a drill down on some of the Asian markets. I’ll start with China. China is the third biggest Unilever countries in our lineup. It’s obviously one of our priority markets. And I would say that consumer confidence is coming back. It’s not roaring back. And part of the reason for that is that unemployment remains quite high in China. Our categories were sort of just north of flattish in Q1. And there was a marked difference between March and January and February. In particular, we saw our food service business, Unilever Food Solutions, remaining quite subdued in January and February, but coming back strongly in March. And we exited with a run rate worn in the kind of mid- to high single digits.

We are not expecting that in April at all kind of accelerate much beyond that. And I think it will be a gentle recovery in China. If you would have asked me a quarter ago would have been slightly more bullish given the levels of pent-up household savings but it’s a steady recovery that we’re seeing that kicked in noticeably in March. Let me turn to India. Well, what can I say, another strong quarter of growth in India and across South Asia, with positive volumes despite really difficult trading conditions in Bangladesh, Pakistan, Sri Lanka. The India is becoming really — we talk about winning in many Indias. It’s a real strength for our business, the ability to disaggregate India geographically. But one overarching phenomenon that we’re seeing is that urban India remains buoyant, whereas rural India is feeling the pressure of inflation.

And so there’s quite a big difference emerging between the performance of urban India and rural India. Nevertheless, this is, as you know, one of Unilever’s powerhouses and we are confident in our ability to navigate that turbulence. Indonesia is a very vibrant economy. I mean Graeme made a few observations in his prepared remarks about how well Indonesia’s economy is doing. And we are seeing green shoots in the sequential market share readings that we’re seeing. But we’re not back to the levels of competitiveness in Indonesia that we expect. Competition is aggressive. And in addition, in Q1, we chose to take further action on distribution — in our distributors. And so I think we’ve got distribution — inventory levels in our — I think I said the wrong word, I said distribution — inventory in our distributors.

We’ve taken action. I think inventory levels now are about where they need to be. And as I said, we’re seeing improvement period after period and I think Indonesia will add to Unilever’s performance as the year goes on. Let me stop there.

Richard Williams : Thanks for the question, Warren. Our next question is from David Hayes at SocGen, would you like to go ahead, David.

Alan Jope : We can’t hear you, David. Not sure if you’re there.

David Hayes : Do you hear me?

Alan Jope : Yes, we can now.

David Hayes: First thing to say, Alan, I’m going to say is, I’m a Starchaser, to your question earlier — in terms of the ice cream. Second thing I am going to say Alan, wish you all the best, hope you get a lot more football in and be careful on the motorbike. But then I’ll go to my questions now. So firstly, just on — actually, I’ll stay with you, Alan, I can. You seem to allude earlier that the first quarter performance wasn’t any better than you’d expected — that some of these dynamics were kind of expected to come through, particularly on the volumes. But I think on the headlines with an interview you’ve done, you’ve said it was above expectation across all the business groups. So I guess, which is it? And if it is better, is there any specific reason why you weren’t able to take the organic sales growth target up a little bit for the full year, anything we should be thinking about in terms of not doing that?

And then the second question on pricing. It doesn’t — it looks like and you kind of alluded again that sequentially, price increases haven’t come through that sharply as they have done in the last few quarters. You were quite early taking pricing up in some categories you talked about beginning of last year. Are you quite early now maybe promoting back a little bit? And are you seeing competitive gaps narrow in certain areas and which areas are they, if that’s happening? And will that see market share metrics improve even further from here as that dynamic takes place?

Alan Jope : Thanks, David. Glad you’re Starchasers, me too, and I certainly won’t be taking care on the bike, definitely one part of my life, where reckless abandon prevails. By contrast, when it comes to Unilever, we do want to give the sense of being in control of our own destiny. I think as you’ve seen over the last five or 6 quarters, we’ve said what we’re going to do and we’re going — and we’ve done it. And we were aware that there were going to be a number of one-offs. In Quarter 1, we saw customer service improving in North America. We have strengthened our ability to supply the extraordinary demand we’re seeing for deodorants. And we knew that there were weak comparators in Europe and in Latin America. So I think the kind of levels of performance that we’ve seen are as expected.

Volume — underlying volume elasticity has been a little bit better than we had anticipated. But I want to underscore what Graeme said that, it’s an unpredictable world out there, and we don’t want to give a full sense of predictability on the return to positive volumes, we’ll get there but it may not be in a straight line, and that’s why we’re not declaring victory too prematurely. And I think we have certainly raised top line guidance by saying that we will be at least at the top end of our range. I’m pleased to take that as a signal of some confidence that this will be a good year of growth for the company. On the question about promo intensity, we were expecting that. And Graeme, please.

Graeme Pitkethly : Yes. David, I’ll start with broad pricing. I mean, yes, we are seeing that UPG start to moderate in Q1 versus Q4. As I said before, it’s principally because we’re sort of annualizing the high levels of pricing from the prior year. We’re not generally reducing pricing. I’ll come on to promos in a minute. But we are still, as you can see, expecting inflation in the first half of 1.five billion of NMI, and we expect there to be no deflation in the second half, but we do expect it to be still materially less than the first half. So we’ll continue to price as necessary. I do want to flag that we particularly got more to do in Nutrition and in Ice Cream. And both of those businesses have got quite a big European footprint.

So that’s probably the biggest area of uncertainty when it comes to sort of full year top line performance, balance of price and volumes, et cetera. The way to think about it, of course, is that we’re dealing with the lag — the inevitable lag between the cost inflation hitting and our ability to recover that through pricing. And that takes you to a focus on gross margin. This is about gross margin, stabilizing gross margin and then repairing gross margin. And we’re making good progress on that. I mean, our levels of price coverage, we’re at now relative to net material inflation or I mean it’s 107%. And then if you include our control costs, our logistics costs and our manufacturing costs on top of that, we’re still not at 100%. Actually, we’re about 84%.

But those numbers are continuing to improve. And you’re starting to see that come through in the gross margin. So that’s really our focal point, get the recovery in place. It will be at more moderate levels, but get the gross margin stabilized and moving and then continue to invest in the brands in order to drive that top line and get us moving. So that’s what we’re going to see. Now in promotions. Actually, we’re not — we’ve done a bit of digging on it. And the latest 12-week data we’ve got, I’ll start with Europe. We’re not seeing any sign of increased promo intensity. In fact, market intensities are down a little bit, driven by Beauty & Wellbeing, Personal Care and Home Care. There are some increases in Nutrition and Ice Cream and our overall levels of volumes on promotion in Europe are flat.

In the U.S.A., there’s been a slight reduction actually in promo intensity overall, but there are some big swings by category. In particular, in Nutrition, there’s been a big increase in levels of volume on deal. And we’ve seen that behind some of the Knorr meal solution pricing on shelf. But really, overall, I don’t think we’re seeing a major shift yet in promotional intensity, and we’re certainly not doing anything around that. As I said, we’re continuing to have to take pricing and particularly in Nutrition and Ice Cream. And then finally, on your comment on market share. Yes, it’s our view as well. Our market share will begin to improve. It’s a key focus for us. We’re keeping a very, very close eye on it. We’re very conscious as we land the price.

We’ve been talking about carefully titrating pricing, volume and competitiveness. So we’re extremely focused on it. But as the price starts to moderate, I think you will begin to see our competitiveness, which is okay at the moment, begin to become — begin to drop back up again from there. But really, right now, it’s about making sure that we balance the pricing and the volume.

Richard Williams : Thanks, David. Our next question is from Alicia Forry at Investec. Can you go ahead, Alicia?

Alicia Forry: Two questions from me. I just wanted to ask about picking up on that previous question, if you could discuss your competitiveness in North America versus Europe, your assessment of what that looks like at the moment. You’ve given us some pieces around that earlier in your commentary, but a bit more detail would be helpful. And then secondly, I wanted to ask about your exit of several HPC brands in Nigeria that I think you alluded to in the broader remarks at the beginning. Just curious what your thinking was behind that. And it seems a bit of a departure from the emerging market approach Unilever has historically taken of more categories being better in those markets. So just curious if you could give us some of your thoughts on that decision.

Alan Jope : Thanks, Alicia. Let me try to share a little bit more about competitiveness in Europe and North America. The first thing I’d say is Graeme and I run performance reviews with each of the business groups every month. And those performance reviews rarely begin with a look back. We begin by with a look forward on competitiveness. And it is extremely dynamic. So I want you to kind of take this sense that month-to-month, we’re really tracking small moves in market share in our key sales around the world and remaining intensely focused on those. And there are one or two sort of perennial winners and perennial losers, but it’s quite dynamic. And roughly speaking, we have the picture that you see globally where we’re gaining share in half our categories — category country sales and losing share in half of our category country sales, that’s replicated broadly across Europe and North America.

So there’s no distinguishing pattern that we’re winning in every sale in North America or losing in every sale in Europe or vice versa. The other thing I would just like to point out is that we take — we don’t have a category of maintaining. So if you’re plus one basis point, you’re winning, if you’re minus one basis point, you’re losing, and you should just keep that in the back of your mind as you compare our declaration of 48% business winning with some of our peers who add together business winning and business holding. But I’m afraid I don’t have a handy dandy shorthand answer for you. The pattern of five0% winning, five0% losing is true roughly in North America and in Europe. But it’s very dynamic, and it might be different when we sit down a couple of months from now.

Graeme, can you say a bit about West Africa? I think I really welcome the question because it’s an easy picture to clarify what we’re doing in West Africa.

Graeme Pitkethly : Yes, I might broaden it out, if I can, Alicia and just use the questions a bit of an opportunity to talk about portfolio simplification because we’ve not — we haven’t majored on it last quarter or this quarter, but really as a consequence of the new organization and the strategic focus that the business groups are bringing. We have got tremendous step-up in our ability to simplify our portfolio and shift resources towards more profitable, more strategic SKUs. It’s happening principally — it’s happening right across the business. But in key areas, and you heard Fabian refer to this at our Capital Markets Day. Personal Care is delisting a large number of very small brands and also working on quite significant SKU rationalization across the portfolio.

It’s also taking place with momentum in Nutrition, where actually, we’ve reduced the number of SKUs in nutrition by 13% against the 2019 base. And that includes new SKUs that we’ve introduced for the purposes of innovation. So the actual number we delisted is more than that. But the net portfolio is down 13%. Things like removing unprofitable, low profitable SKUs in North America dressings and doing a lot of work in Scratch Cooking Aids in Europe. So that’s really focused on Europe. And that work will continue. It’s part of normal business, of course. But as a consequence of the new organization that’s taking place. And the same is true in Home Care. In Home Care, we actually removed 6five0 SKUs in Home Care in the first quarter across Europe and Africa and West Africa to get to the number of your question was part of that.

So we made the strategic decision that Home Care in parts of West Africa, we would — we would delist our business there, restructure the business there. In order to reprioritize investment elsewhere globally in our home care portfolio to drive competitiveness and investment behind our brands. So what you’re really seeing, I guess the core message is this is a result of the business group structures and strategy and the ability to move resource faster buying strategy.

Alan Jope : We do like broad portfolios in countries, but not when one part of the portfolio is dragging down the whole operation, and that was the situation that we were in, in West Africa, as Graeme just described, Richard, back to you.

Richard Williams : Okay. Thank you. For our next question, let’s go to Martin Deboo at Jefferies. Do you want to ask your question, Martin?

Martin Deboo: Can you hear me?

Alan Jope : Yes, we can hear you.

Martin Deboo: Okay. Yes. Okay. Sorry, just — still getting used to the new system. The question is just all about volume. You said twice on the call that you expect the sort of path of volume development in the year to be uneven, I think, was what you said. However, it’s notable that you’ve taken off the table the slightly more cautious statement in H1 volume in the guidance? And also, I just wanted to check on — I think the answer you gave to Warren of the underlying volume trajectory ex one-offs of 1% to 2%. You chose to call out the tailwind of pipeline for Deodorants, but you didn’t mention the headwinds of a planned destock in Indonesia and the comments you just made on SKU rationalization. So a specific question within volume trajectory is does the 1% to 2% include all of those one-offs. But the general question is just how should I think about volume development through the year?

Alan Jope : I think, Martin, you should think — you’ve answered your own question in a way with — by itemizing the considerations. There were — the net of tailwinds and headwinds in Q1 was helpful. And so probably our minus 0.2% is a little flattered in Q1. And as Graeme said, the kind of the puts and the calls when you offset them, we’re probably more in the minus 1% to minus 2% volume on an underlying, underlying basis in Q1. And we do expect that the kind of smooth trend through the year will be that volumes will continue to pick up as pricing moderates but we’re just trying to be a little bit cautious and not give the impression that it’s going to be a straight-line journey through the year. Graeme, do you want to elaborate on that?

Graeme Pitkethly : I think it’s a great question, Martin. But at the end of the day, there’s still a lot of variability out there because of the price volume elasticity dynamic. And I’ve mentioned a couple of times, Europe and Nutrition and Ice Cream and fresh pricing. We’re trying not to be spuriously precise here. And broadly, as Alan said, we expect our volume performance will continue to improve from a base that has been good so far with it. The reason for the range of 1% to 2% is we didn’t want to get into every single put and take from a volume perspective. But I think there are 3 buckets there. There’s the pipeline fill in deals and service recovery that we mentioned. There’s the delistings — sorry, the portfolio simplification that I mentioned in answer to Alicia’s question, and a lot of that is going on.

But we’re not going to call that out specifically, but that will continue over the balance of this year. And then, of course, we’ve got the destockings that are taking place as we remediate the business in Indonesia. And I think that all sits within that minus 1% to minus 2% range. That’s why we give you a range in there rather than trying to add up all the puts and takes. But broadly, as Alan said, the balance of tailwinds were more than headwinds in this quarter. So we thought we would just mention the deals part.

Richard Williams : Okay. Thanks, Graeme. Thanks, Martin, for the question. Next question goes to Guillaume Gerard Delmas of UBS. Do you want to go ahead with your question, Guillaume.

Guillaume Gerard Delmas : Again, on five great years leading a Unilever in very exceptionally turbulent times. So two questions for me, please. The first one is on your gross margin. A couple of months ago, to your full year results presentation, you were guiding for some continued gross margin contraction in the first half. But looking at your change in guidance for operating margin in the first half, would it be fair to assume that this is primarily driven by a better-than-anticipated gross margin development and as a result, we could see gross margin expanding as early as the first half of the year. So that’s my first question. Second one is trying to reconcile your step-up in brand and marketing investments and your market share development because you started to significantly ramp up your BMI in the second half of last year.

I would assume this trend has continued in the first quarter and yet, your market share development is below that five0% in terms of where you’re gaining shares. So my question is, are you getting the returns on BMI you were hoping for and when do you think we’re going to see a clear benefit from all these investments? Or maybe which metric should we be looking at to see the success of this BMI push.

Alan Jope : Thanks, Guillaume. I’ll first crack at the margin question. And while I’m sure Graeme might have quite a lot to say about the relationship between BMI and market share which let me anticipate his answer is not linear. So First of all, this is a trading statement. It’s a top line update and we don’t want to give too much commentary on margin at this point. You’ve picked up that we’ve strengthened our operating margin guidance in H1. And that’s basically a growth leverage that’s coming through offset by continued strong investment in BMI as well, by the way, as in R&D and CapEx. So the primary driver of the modest upward revision on margin guidance that we’ve given you for H1 is growth leverage and its growth leverage in the context of continued strong investment in the business. Graeme, you want to say a bit more about BMI and market share, exercise your inner marketer?

Graeme Pitkethly : I’d like to do that. Guillaume, the — first of all, let me caution that we’re obviously just doing a top line trading update in the first quarter. I’m not going to get pulled too far into the drivers of the P&L and investment. We’ll do that with the half year results. But just to remind everybody, we increased BMI spend last year by $0.five billion and driven principally by increases in media, not nonworking media, but working media, showing more of our great advertising to consumers. And we do expect that, that will increase further in 2023, again, with an emphasis on media. So you’re right to ask the question what — how does that correlate with competitiveness? My answer to it is that the investment in BMI has a long-term consequence on the health of your brands on penetration, on preference and then market share.

But it is a chain that does not happen instantly. And right now, when we’re leading on price, price is a bigger driver of competitiveness than BMI is. But we are very happy to be continuing to step up investment as we’re taking the price because at the end of the day, we have to be have brands that our consumers are aware of and consumers have to be clear how great our products are and how great the performance of our product is even as they’re paying more for those products. So they need to go hand in hand. But I think you’re looking for a more direct correlation between step-up in brand investment and competitiveness than existing reality. And as I’d say, pricing, particularly when you’re leading on pricing is a bigger driver of competitive dynamics in the short term than BMI, but we must continue to invest more in BMI.

Alan Jope : I can’t help myself, Graeme, but to say that we are sticking with percent business winning because we think it’s the toughest and fairest measure of competitiveness. If you were to lift the carpet and take a peek at just simple market — weighted market share, you would see us gaining market share quite substantially, but that’s not the metric we’ve chosen to use.

Richard Williams : Okay. Thank you. Let’s go now for just a final question, which is from Rashad Kawan at Morgan Stanley. Do you want to go ahead, Rashad?

Rashad Kawan: Can you hear me?

Alan Jope : Yes, you we can.

Alan Jope : You’ve directed the questions, Rashad. Graeme?

Graeme Pitkethly : Let me give you a little bit of a quick summary around the world of what we’re seeing on sentiment purchasing power and the sort of macro is very different. So if I may, I’ll do it geographically and maybe do a couple of category comments at the end. But Europe — I’ll start with Europe, where sentiment is lower than in the rest of the world. Price elasticities have been higher as a consequence. And as I mentioned earlier, private label is gaining a bit of share but only in the categories where we’d expect it to like our in-home ice cream business. And a little bit in dressings, et cetera. Private label is also pricing quite significantly. And at a macro level, we’re not really seeing any major change with private label shares at all.

North America, the U.S. consumer is more resilient than in Europe and the trade environment is a little bit easier to navigate. Consumers, we think are a little bit pessimistic, but they are continuing to spend, cutting back a bit on discretionary spending. And again, not much to say really around private label, just a little bit in Ice Cream. That’s all we would say there. Then move across the Latin America, where you still get really high inflation, but consumers there are really used to that, and they’re very smart, who really shop, I mentioned in the prepared remarks about the cash and carry channel growing across Latin America. Consumer continence is low, but in Latin America, people save by spending because hard cash in many markets just devalues.

So what they do is they come out and buy by Unilever products happens in Latin America, happens, particularly in Argentina, happens, particularly in Turkey. And just to flag that, again, despite inflationary conditions, hyperinflationary conditions in both Turkey and Argentina, we had positive volumes yet again, we’ve got positive volumes for the last 18 months now in those places. India, I’ll not cover. Alan’s covered it already. The rural-urban dynamic. China will not cover because Alan did that as well. Southeast Asia, we mentioned this in the remarks, but a combination of returning tourism is going well. Indonesia, we’ve spoken about. But Philippines, Thailand and Vietnam, all experiencing good economic growth in recovery, strong Unilever businesses, and I think a lot of optimism for the future around our businesses there, which are performing well.

And Africa, I covered. From a category perspective, if we go around the piece, in Beauty & Wellbeing and Personal Care, you can see that we’re past peak inflation, pricing is moderating. Volumes are picking back up. So we’re seeing this sort of back end of the inflationary curve earlier in those two business groups. Home Care is performing extremely well. We’re extremely competitive in Home Care. And it’s still got a mix of inflation coming through, but we’ve got a high degree of confidence and resilience there. We are seeing a little bit of consumer trade down in our Home & Hygiene Business, the home cleaning business, in particular, in that scenario, things like bleaches, where private label and value plays. But then in Nutrition and Ice Cream, that’s where the consumer challenges still remain from a category perspective because we’ve still got inflation and pricing to push through.

I’ve talked about the European dimension to that, which is important. And finally, within ice cream, the out-of-home and in-home, in-home, it’s a very discretionary category. It’s the most discretionary category we have. Our strategic focus is on the out-of-home business, that’s performing very well. But the in-home business is the one where we’ve seen some inroads from, as I said, from cheaper competitors and from private label. I’ll pause there because that’s a lot to take in.

Alan Jope : Rashad, to the dreaded legacy question. Well, first of all, I don’t envy your industry having to try and assess what’s really going on at Unilever over the last 4 years. Trying to read the true performance of the business through COVID, through extraordinary inflationary period is hard enough when you’re inside the business and have access to all the information. And I don’t envy what you guys have to do. There’s also a slight trap in the legacy question of coming over either as defensive or as overly confident. Let me just make one observation, which is FMCG is an exciting arena. It requires winning on multiple fronts to get a good overall performance. But it’s a team effort. And I think your industry over fixates on the CEO, over fixates on the impact that one individual has in the organization.

And anything that’s gone poorly in Unilever, I’ll take responsibility for, but anything that’s gone well, is the result of a team effort. And I think there’s a few things we’re proud of. Our portfolio is better. We’ve been much more active portfolio managers that I think has been recognized, and I’m particularly proud of two of our babies that we’ve kind of given birth to, the Prestige Beauty business and Health & Wellbeing. 9 consecutive quarters of double-digit growth with volume led is not bad. A number of CEOs of Unilever have tried to unify the business, and we’ve now got a simple legal structure like a normal company. Our strategic priorities are crystal clear by geography, by channel, by category, by brand. We are a more disciplined execution machine.

And maybe one of the things that I will leave for Hein is a simpler organization having blown up a very complex matrix and put in place five business groups that I hope make it easier for you to see how the business runs. I do think Hein is a fantastic choice. He understands FMCG, he understands Unilever. He’s very strategically sharp and will bring his own ideas. And I’m sure you’ll thoroughly enjoy engaging with him as we go forward. Richard, I’m going to just hold the mic for half a second and use 20 seconds to say a big thank you to the Unilever IR team who have been incredible support through 4 or five years of extreme turbulence and also to my wingman, Graeme. Good luck, Graeme in the next few quarters of doing this. And thanks to all the investors and analysts on the call.

Back to you, Richard?

Richard Williams : Okay. Thank you — thank you, Alan. Right. We’ll end the call there. Thanks for your questions. If you do have more questions, e-mail the IR team, and we’ll set up a time to speak to you. And with that, thanks and enjoy the rest of your day.

Operator: This now concludes today’s call. Thank you all for joining, and have a nice day.