Unilever PLC (NYSE:UL) Q4 2022 Earnings Call Transcript

Unilever PLC (NYSE:UL) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Hello and welcome to Unilever’s Q4 and Full-Year 2022 Results. . We would like to now hand 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 full-year results. We expect prepared remarks to be around 30 minutes, followed by Q&A of around 30 minutes. All of today’s webcast is available live transcribed on the screen. First, can I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures. And then straightaway, I hand it over to you Alan.

Alan Jope: Thanks Richard and good morning everybody. Before we start, I’m sure you will all have seen by now that Unilever is appointed Hein Schumacher, as our new CEO as from the 1st of July, and I like to use this moment to congratulate Hein on his appointment. From the limited time that we spent together over the last few months, I have every confidence that Hein will be a great leader for Unilever, and that he will take the business to new heights in the coming years. I look forward to continuing to work with him on our Board ahead of handing over the keys as CEO at the end of June. But meantime, it is full steam ahead to sustain the current good momentum in Unilever’s business. My team and I remain fully focused on that task at hand.

Right, this is how we’ll run today. I’m going to give a quick overview, and then Graeme will take you through the details of the results. I’ll then give an update of our progress against our strategy, and Graeme will share our outlook before of course we move on to take questions. 2022 was an important year for Unilever. We navigated levels of commodity cost increases that we’ve not seen in a generation taking price increases responsibly to protect the shape of the P&L, and thereby enabling us to continue to invest in our brands. We manage the impact on volume as well and as a result delivered growth levels not seen for over a decade. We suppress €60 billion of turnover for the first time and added two more brands Lifebuoy and Comfort to the €1 billion club, which now stands at 14 brands.

And then within that group, Dirt is Good passed the €4 billion milestone and Hellmann’s and Rexona passed €2 billion. The important point here is, of course, not the rather arbitrary turnover milestones, but the contribution of our biggest and best brands to Unilever’s growth. The €1 billion plus brands collectively grew at 11% for the year. And these brands are our first priority for innovation and for investment. Through this volatile period, we landed margin in line with guidance. We exited the global tea business, and we fundamentally reward Unilever implementing our new organization model, which is delivering increase speed, accountability and focus. There is more opportunity and more value creation ahead from unlocking the full potential of Unilever.

2022 represented a big step forward, and we come into 2023 full of energy and ambition to accelerate the pace of our transformation. First, let’s review our performance in 2022. We delivered Q4 underlying sales growth of 9.2%, that was driven by 13.3% price, with volumes down 3.6%, and that resulted in full-year growth of 9% with price up 11.3% and volumes down 2.1%. While the volume impact was greater than in previous quarters, it is still less than we would have modeled at these levels of price growth. We saw a measure of competitiveness percent business winning a dip below 50% on an MAT basis in Q4. This was not altogether unexpected as we’ve trailed clearly in our previous calls. It is a consequence of the necessary pricing action that we’re taking in the face of extraordinary inflation, and also some decisions that we’re taking to streamline our product portfolio.

We faced further commodity cost increases in the first half of ’23, as Graeme will explain. However, our brands are strong and we are investing for growth. As things stand, I expect business winning to be back over 50% in the second half of 2023. Underlying operating margin for the year was 16.1%, that’s down 230 basis points versus 2021, bang in line with our guidance. Absolute underlying operating profit was up slightly at €9.7 billion, helped by favorable currency. Underlying earnings per share were €2.57, that’s down 2.1% as reported, down 8.2% in constant exchange rates. Free cash flow was robust at €5.2 billion, and that’s reflecting a cash conversion ratio of 97% and after financing an increase in our capital expenditure of €400 million.

Let’s take a closer look at these results through the lens of the five business groups. I hope you’ll see how the business group structure is allowing a differentiated focus on categories that are seeing different consumer behaviors through this inflationary period. Beauty & Wellbeing reported 7.8% underlying sales growth for the year, 7.5% price and positive volume of 0.3%. Fourth quarter growth was 7.7%, that’s 8.4% of price, minus 0.6% on volume. Prestige Beauty delivered another year of double-digit growth with a strong performance by Paula’s Choice, which was included in underlying sales growth from the third quarter onwards. Hourglass, Tatcha, Living Proof all finished the year strongly. Health & Wellbeing also maintained double-digit growth through the year, powered by Liquid I.V. Although Q4 did see a slowdown in the vitamins, minerals, and supplements market globally.

Skin Care grew mid single-digits with volumes only marginally down, and we saw particularly good performance from Vaseline in Southeast Asia helped by the continuing success of the Gluta-Hya innovation. Carver’s performance was negatively impacted by reduced consumer demand in China and by disruptions in cross-border trade. While Carver’s recent performance has been disappointing, we remain confident about the future opportunity for the AHC brand as China reopens post COVID. Hair also grew mid single-digits with a strong performance from our largest Hair Care brand, Sunsilk, which benefited from its naturals relaunch. Nexxus also had a very good year and is a good example of our strategy to premiumize our portfolio in Hair Care and Skin Care.

Personal Care reported 7.9% underlying sales growth for the year with 12.1% price and volume lower by 3.7%. Fourth quarter growth was 9.1%, 13% of price and minus 3.5% volume. Deodorants had a particularly strong year with positive volumes despite double-digit pricing, Rexona, Dove, and Axe, all contributed to this excellent performance. Rexona’s 72-hour nonstop protection product is a particular highlight. It’s a great example of where we have a significant product superiority which we will continue to drive as a multi-year growth initiative. Skin Cleansing grew well with double-digit pricing, partially offset by volume declines. Dove saw the introduction of the improved deep moisture body wash, while Lux introduced new bars with enhanced skincare benefits.

Oral Care also grew well helped by the launch of Pepsodent — sorry, the relaunch of Pepsodent. Dollar Shave Club, whilst marginally profitable continued to decline in a fiercely competitive market. We’ve been clear that performance of Dollar Shave Club has not met our expectations. And consequently, we’ve taken an impairment charge on DSC for our full-year 2022 results. Home Care reported 11.8% underlying sales growth for the year, 15.9% price, with volumes lower by 3.5%. Fourth quarter growth was 12.3%, driven by 16.7% price, with volumes down 3.8%. Price elasticity has remained stable and volumes have held up better than our models predicted. The Home Care business group has undertaken a rigorous program to reduce complexity, and this has led to some short-term volume loss through 2022 with a greater impact in the second half.

Fabric Cleaning had a particularly strong year, growing double-digit overall and in all formats and all main brands. And this growth was very broad-based across geographies with South Asia, Brazil, and Turkey, all delivering double-digit growth. Fabric enhancers also grew well helped by the Ultimate Care range, which protects clothes from damage as well as leaving them smelling fantastic. Home & Hygiene grew more modestly, in part due to changing consumer habits in Europe as people dial down their need for disinfection in the post-COVID era, but also because Surface and Toilet Cleaning is a relatively more discretionary category with higher elasticity in the face of rising prices. Nutrition. Nutrition grew 8.6% in the year, price up 10.9% and volumes down 2.1%.

Fourth quarter growth was 10.1% driven by 14.7% of price and volumes down 4.1% and that includes the impact of lockdowns on our large food solutions business in China. Dressings grew double-digit in 2022, driven particularly by Hellmann’s and particularly in North America. We benefited from the continuing success of the Make Taste Not Waste campaign. And I must admit we are looking forward to seeing the business impact of this year’s Hellmann’s Superbowl campaign. We also took advantage of the good growth momentum to exit some unprofitable lanes, which impacted the volume and market share but strengthens the long-term health of our dressings business. Scratch Cooking Aids grew mid-single-digit with Knorr successfully introducing zero salt bouillon.

And despite the lockdowns in China, our global professional food solutions business delivered double-digit growth in 2022 and actually returned to pre-pandemic volumes. Ice cream grew 9% in the year with price up 9.7%, volumes down only 0.7%. Fourth quarter growth was 2.9% with pricing of 14.2% and a volume decline of 9.9%. And we really need to break down these results to understand them. And let me do that for the full-year results. Our out-of-home Ice Cream business, which is roughly 40% of total Ice Cream recovered very strongly, and that was helped by favorable summer weather in Europe. The volumes in total are not yet back to pre-pandemic levels. And that partly reflects the closure of some Ice Cream sales outlets. In-home Ice Cream, which is 60% of the total also grew in the year with strong price growth and this came on top of lower volumes, which reflects a step down from elevated sales during the lockdown period.

Nevertheless, in-home volume and value indices are still both above 2019 levels. In the fourth quarter, in-home delivered positive underlying sales growth with lower volumes for the reasons that I’ve just described as well as higher levels of pricing and some choices we made to step away from unprofitable volumes. Out-of-home volumes in the fourth quarter were impacted by an early close to the season. What was happening was that shopkeepers in some markets responded to fears about rising energy costs by switching off their cabinets earlier than they otherwise would have done. In practice, the fears did not materialize. And so we don’t anticipate this having a big impact on the start of the 2023 season. Magnum and Cornetto are both in great shape.

They grew double-digit in 2022. Magnum driven by the classic remix innovation, and Cornetto benefiting from the introduction of the new Premium Format, Cornetto Rose again an example of a successful multi-year growth initiative, we remain very optimistic about the outlook and prospects for our Ice Cream business. So that completes a quick run-through of the business group performances. And I’d like to hand over to Graeme, who’ll cover the 2022 full-year results in a bit more detail. Graeme?

Graeme Pitkethly: Thanks, Alan. Good morning, everybody. As Alan just said, full-year underlying sales growth was 9%, driven by price at 11.3% and with volumes modestly down by 2.1%. All five of our business groups grew driven, as Alan said, by the €1 billion plus brands. Now prices stepped up sequentially for eight quarters in response to rising costs. Volumes have held up well overall, and we continue to carefully manage the triangle of price, margin and competitiveness market by market. Turnover for the year was €60.1 billion. That’s up 14.5% versus 2021. Underlying sales growth contributed 9%, as we’ve just seen, and we saw a negative impact from acquisitions and disposals of 1% with the inclusion of Prestige Beauty brands Paula’s Choice and neutrophil offset by the exit of the Global Tea business.

Currency had a positive impact of 6.2% as our basket of currencies strengthened against the Euro. If we look now at performance through the regional lens, our largest region, Asia-Pacific, Africa, grew by 10.3% in the year with 11.3% from price and minus 0.9% volume. In the fourth quarter, growth remained strong, driven by India, Southeast Asia and Africa. China declined due to the period of strict lockdowns, which impacted our large China foodservice business in particular. Indonesia saw negative volumes as we reset price and promotional strategies and reduced trade stocks in a number of categories across selected channels. The market context in Indonesia remains highly competitive. But every one of our business groups is focusing attention on this very important market.

And from a base of mid-single-digit growth in 2022, we are confident that performance will continue to improve in the coming year. North America grew 7.9% with price at 9.4% and volumes down only 1.4% despite constrained supply during the year in a number of our categories. Pricing remains strong at 10.1% in the fourth quarter, with volumes down 4%. This in part, reflects the proactive steps we’ve taken in Nutrition and in Ice Cream to remove unprofitable business, as Alan just highlighted a few seconds ago. Latin America grew 14.9% with price up 20.4%, offset by volumes, which declined 4.6%. Price elasticity remains stable and lower than our historical models would have predicted. This reflects a well-positioned portfolio and the strength of both our brands and our in-market execution across the region.

Photo by Jason Jarrach on Unsplash

Europe grew 4.1% in the full-year, with price up 8.3% and volume down 3.9%. The fourth quarter saw a step-up in price to 13.2% and a volume decline of 6.8%. All our business groups were down in volume with Ice Cream, the most heavily impacted. Price elasticity in Europe has increased during the course of 2022, and we’ve recently seen share gains by private label in Europe in most categories as the economic situation weighs on shoppers. This brings me on then to margins. Underlying operating margin for the full-year was 16.1%. That’s down 230 basis points from last year and in line with our guidance. Gross margin was down 210 basis points, reflecting the fact that despite stepping up pricing and landing higher delivery from our savings programs, we were very mindful of the pressure on consumers and chose not to fully offset the extraordinary level of cost inflation through pricing.

We did, however, continue to invest more behind our brands with brand and marketing investment up €0.5 billion in constant currencies versus the prior-year and with more than 80% of that investment going directly into media. BMI as a percentage of turnover was down 10 basis points though this is perhaps less useful as a measure when turnover has been driven so high by pricing. That said, however, media investment as a percentage of turnover was up in Beauty & Wellbeing, in Personal Care and in Home Care. Now our tracking measures reassure us that our support levels are competitive, and the business groups have built strong plans for 2023, which will reflect further increases in brand and marketing investment. Overheads were up 30 basis points with productivity programs and turnover leverage more than offset by further capability investments in areas like our 29 digital marketing, media and e-commerce hubs around the world, which Alan is going to comment on a little later.

We also have a mix effect in overheads caused by the higher growth of Prestige Beauty. As well as looking at percent margins, we look at absolute profit delivery in Euros. Underlying operating profit was up 0.5% at €9.7 billion. This reflects the fact that the lower underlying operating margin was offset by strong turnover growth with a little benefit from favorable currency translation. It’s important to put the decline in gross margin into perspective, and this chart sets this out quite clearly. The net materials inflation, or NMI, that we’ve experienced this year has been the highest for decades. Inflation was already rising before the war in Ukraine and the conflict only served to put more pressure on commodity and energy costs. The total increase in 2022 landed at €4.3 billion, only slightly below the €4.5 billion that we indicated in our first half results call.

We reacted quickly to the cost inflation and implemented price increases through the year with underlying price growth stepping up sequentially across the quarters and reaching 13.3% in the fourth quarter, contributing to a full-year increase of 11.3%. Even with these increases, we fell a little short of recovering the full amount of the NMI reaching price coverage of around 95% over the complete year. This is, however, not the whole inflation picture. You can see from the chart that we saw a further €1 billion of cost inflation in our production and logistics costs, of which €0.7 billion fell in the second half. Now these cost lines have not moved very much historically. So we don’t normally cover them in detail, but 2022 was different, and we saw significant increases in fuel, energy, and labor costs in our supply chain.

This theme is relevant for 2023, and I’ll come back to it a little later. Taking both NMI and production and logistics inflation into account. Our price coverage to date sits at around 75%. So still some way short of the 100% needed to hold gross margin. And as a results of this, the gross margin was down by 210 basis points. This is normal in an inflationary cost environment, and we will need to see higher price coverage together with continued delivery from our savings programs in order to build gross margin back up. Underlying earnings per share were down 2.1% in current currency with a favorable foreign exchange tailwind contributing 6.1%. Constant earnings per share were down 8.2%, mainly due to the lower operating margin, higher financing costs and tax, partially offset by the impact of the share buyback program.

The higher tax rate reflects changes in profit mix and favorable one-offs in the prior year, which led to an underlying effective tax rate of 24.1% versus 22.6% last year. Free cash flow for the year was €5.2 billion, down by €1.2 billion. This includes an increase of €0.4 billion in CapEx, which is now back to 2019 levels. Also reflects investments in higher inventory to support customer service levels and a higher tax outflow, including €330 million tax paid on the Tea disposal. Our net debt-to-EBITDA ratio fell from 2.2x at the end of 2021 to 2.1x, which is in line with our broad leverage target. Our net debt level stands at €23.7 billion, down from €25.5 billion at the 2021 close. The reduction was driven by our free cash flow generation and the net inflow from M&A partially offset by dividends, the share buybacks, and an adverse currency movement.

Our pension surplus fell from €3 billion at the prior year end to €2.6 billion. The decrease was driven by negative investment returns on pension assets and foreign exchange, largely offset by lower liabilities as interest rates increased. Turning to restructuring now. We spent €0.8 billion in 2022, that’s around 1.3% of turnover, and we delivered savings as expected at €2 billion. Return on invested capital ended the year at 16%, down from 17.2% at the prior year end. The main driver of this was higher goodwill and intangibles, which is a result of both a stronger dollar on balance sheet translation and the acquisitions of Paula’s Choice and Nutrafol, partially offset by the disposal of our Global Tea business. We continue to adopt a very disciplined and focused approach to capital allocation.

The first priority is to invest in the business. Brand and marketing investment increased by €0.5 billion and R&D increased by around €50 million, both in constant currency, so on a more representative like-for-like basis. At the same time, we increased capital expenditure by $0.4 billion to 2.7% of turnover. That’s back to 2019 levels and it actually sits well above 3% if you factor in our volumes that are produced by manufacturing partners. Secondly, we made good progress in reshaping the portfolio into higher growth areas with the acquisitions of Nutrafol and the disposal of the Global Tea business. And thirdly, we return cash to shareholders through both dividends and our share buyback program. We completed the second €750 million tranche of the €3 billion program in December and expect the next tranche to commence in due course.

It’s a good point, I think for me to hand back to Alan to review overall progress against our strategy.

Alan Jope: Thanks so much, Graeme. Let me take this moment to give a short update on the progress that we’ve made against our growth strategy, and I’ll start with brands and innovation. I mentioned earlier our 14 €1 billion plus brands now make up 53% of our group turnover and delivered underlying sales growth of 11% in the full-year. Our growth is being underpinned by bigger, better innovation and a relentless focus on functional product superiority. As Graeme mentioned, brand investment was up significantly in absolute euros and will grow again in 2023. We will ensure that brand support remains at competitive levels in 2023. We’ve also made good progress on our second strategic pillar to move the portfolio into high growth spaces.

The Tea disposal was completed on the 1st of July, and we completed the acquisition of Nutrafol at around the same time. Thirdly, our priority geographies: the U.S., India, China, and key emerging markets. The U.S. maintained strong growth momentum in 2022, 8% driven by price with a modest reduction in volume. Growth in the U.S. continues to benefit from our portfolio changes with Prestige Beauty and Health & Wellbeing, both contributing strongly. And we continue to see ongoing customer service challenges in the U.S. caused mainly by labor availability. You may have picked up our announcement yesterday that we are going to invest $850 million on the transformation of our North American supply chain over the next three years. And that reflects our commitment to invest behind the U.S. growth opportunity and our determination to increase resilience and deliver outstanding customer service consistently.

India posted 15.6% growth, price up 11.2% and volumes up 3.9%. And the growth is broad-based, because it’s driven by strong competitiveness and a portfolio that’s been built with brands competing across all price tiers. Market growth in India remains stronger in urban areas than in rural areas and that reflects the high impact of high food inflation on low income consumers. We’re seeing rural markets broadly flat in value terms with lower volumes. But we remain confident that we can continue to grow ahead of the market in India. China declined by 1.3%, volumes down 2.2%, and that reflects basically the impact of the lockdown on both consumers and supply chains. The changes to the COVID policies came too late to have a major impact on 2022. And the first quarter will still reflect some disruption as life returns to normal.

We are optimistic about the outlook in China, especially for the recovery of the out-of-home food business and our beauty categories. Nearly 60% of Unilever’s turnover, some $35 billion came from emerging markets, which together delivered growth of just over 11%. They remain a key source of competitive advantage and growth for Unilever and the business groups will continue to invest a further build strength and depth through 2023. We saw particularly strong performances from Vietnam, the Philippines and Brazil. Our priority digital commerce channels grew 23% in the full-year. They now represent 15% of Unilever’s turnover. We saw faster growth in B2B and more modest growth in B2C as consumers in some markets return to physical stores, though often after searching online and purchasing offline.

These channels are going to remain a key source of growth, and we’re seeing rapid changes in the landscape as different channels, different models compete for consumers’ attention and spend. As Graeme hinted earlier, we’ve invested in 29 leading edge digital marketing, media, and e-commerce hubs. We call them our DMCs. They’re aligned to our five business groups, and those DMCs comprise experts in media, in data-driven marketing, in content excellence and sales capabilities, and they will ensure that we deliver seamless consumer experiences and optimize our investment across all channels. And these DMCs represent a key investment to ensure that Unilever continues to win in this important channel of the future. At the start of the year, we set out our intention to implement a new organization and new operating model, and that new model went live on the 1st of July with the objective of making Unilever simpler and faster, more focused in our categories and with greater impairment and accountability.

And it’s a model based, as you know by now on five business groups on a lean corporate center and on a low cost technology-driven transactional backbone Unilever business operations. The new business groups are now in place. They’re fully responsible for their portfolios from strategy all the way to monthly performance, which Graeme and I reviewed carefully. And Unilever business operations is now responsible for all transactional processes, technology and infrastructure that benefit from Unilever skill. We call that the power of one. Now it’s still early days for the new model and we’re cautious to avoid declaring victory too early and what is a very substantial change for the company. But I must say the first six months have gone very well.

We’re already seeing benefits in the speed that decisions are being made out, sharper accountability for improving business performance. And for example, we’ve seen Nutrition and Ice Cream taking tough decisions to exit unprofitable businesses. And Personal Care and Home Care working quickly on simplification and SKU rationalization. And such actions are simplifying the business and releasing funds that we can invest behind growth. The business groups have defined their distinct strategies. And as this chart is one that we presented in our investor event last December, I’m not going to laboriously dwell on it now. The key point is that all the business groups have a role in driving growth. Remember, each is capable of growing faster than Unilever’s historical growth rate.

They have differentiated approaches based on their geographical footprint, the consumer they serve, the channels they operate in and the competitive dynamics of their categories. Our primary focus is on organic growth and acquisitions will be focused and disciplined mainly, though not exclusively, in Beauty & Wellbeing. Disposals to prune the portfolio will continue where they are needed, and that will be across all business groups. As we look forward, we do so with some optimism. We’re benefiting from the progress we’ve made in improving our end market execution, better products, better innovation, better advertising, better distribution, increased savings. Our portfolio is stronger now, and we’re well placed in several new high growth spaces.

Our strategic choices by brand, by category, by geography, by channel, are crystal clear and are driving resource allocation and the new organization is off to a good start. We remain laser-focused on executing our strategy and will continue to invest for growth. And with that, let me hand back over to Graeme to share some reflections on the outlook. Graeme?

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Q&A Session

Graeme Pitkethly: Let me start with this chart, which is really just a reminder of our multi-year financial framework. It’s exactly the same as I presented at our Capital Markets Day back in December. The headline message really is that growth is the priority. We aim to deliver USG at the upper end of our 3% to 5% range, helped by a step up in volume and with continued strong competitiveness. We want to deliver this with higher consistency, reflecting our global leadership positions within the staples sector. We do expect modest margin expansion on the back of that higher growth profile, and that’s going to be led by gross margin and we’ll continue to reinvest in brand support and in R&D to fuel our virtuous flywheel of growth.

Unilever is a strong cash generator, and we aim to deliver long-term value creation by driving sustained constant currency earnings growth with high cash conversion alongside an attractive dividend. Narrowing in on 2023, our priority remains to drive organic top-line growth. In the first half, we expect price growth to remain high from a combination of carryover pricing and in quarter price changes and volumes will remain negative. For the full-year, underlying sales growth will be at least in the upper half of our multi-year 3% to 5% range. We will continue to increase investment behind our brands, while managing the inflationary pressures, which will persist. We expect to again increase levels of investment in brand and marketing investment, in R&D, and in capital expenditure.

We’ll continue to deliver the benefits from our new operating model with continued cost discipline and high savings delivery. Overall, we expect a modest increase in underlying operating margin for the full-year with UM landing at around 16% in the first half. Let me give more color on this by sharing our latest views on the outlook for gross margin. Now as we said earlier, cost inflation is going to remain a key theme in 2023. We successfully managed the trade-offs between price, margin, and competitiveness across 2022 and are confident that we can continue to manage these relationships dynamically as the cost landscape evolves through the year. In our last quarterly update, we shared our views around net material inflation or NMI for the first half of 2023.

One quarter further on, we expect to see around €1.5 billion of NMI in the first half. One-third of this comes from the underlying commodity costs, one-third comes from supplier conversion costs and one-third comes from transactional currency impacts, mostly a strong dollar versus local currencies. I think it’s important to remember that our NMI reflects transactional FX impacts, not just quoted dollar commodity prices. 65% of our first half NMI cost is now covered by physical contracts or paper covers, and so we have better visibility now on the H1 cost outlook. Because of the mix of inflation across commodities, nutrition and Ice Cream will be more negatively impacted in H1 than Beauty & Wellbeing, Personal Care or Home Care. We will also continue to experience inflation in production and logistics costs, mainly from labor and energy increases.

The high inflation in production and logistics costs that we saw in the second half of 2022 will continue into the first half, and we expect this to result in an additional €0.5 billion of cost inflation in H1. Carryover pricing will be supplemented with further price rises where needed. With this continued pricing, we expect price coverage to continue to rise but still be below 100% for the first half. And so the first half gross margin should come in lower than the first half of 2022. For the second half, we still have much less cost inflation visibility. As things stand today, we are expecting significantly lower cost inflation, but this comes with a wide range of possible outcomes. Net material inflation should slow as will the inflation in production and logistics costs, though we are not expecting overall cost deflation.

We expect second half underlying price growth to moderate, but we will see an improving picture for price coverage and gross margins should then begin to improve. I’m not going to provide estimates as to how much since there’s still too much uncertainty around the various moving parts. Coming to the key financial metrics for 2023, we’re expecting that CapEx will be higher again at around 3% of turnover. Restructuring will return to being 1% of turnover, as we’ve previously communicated. We expect that the underlying tax rate will be around 25%, and that net debt-to-EBITDA will be in line with our model at around 2x. Our expectation for net finance costs is unchanged from the information I shared with you at the Capital Markets Day in December.

That’s between 2.5% and 3%. Based on spot rates, we would now expect a full-year currency translation effect of around negative 4% on turnover and a little more negative than that on underlying earnings per share. Our modeling also shows that currency translation, as things stand today, will be a headwind on our underlying operating margin of some 20 to 30 basis points in 2023. So we will have to pedal harder to deliver the increase in margin that we’re guiding to for the year. To wrap up, we’re going to remain focused on delivering higher growth. We will invest for that growth and improve our competitiveness while continuing to carefully navigate very high, but moderating cost inflation. That concludes our prepared remarks. With that, let me hand you back to Richard for Q&A.

A – Richard Williams: Thank you, Graeme. Thank you, Alan. So our first question will come from John Ennis of Goldman. Go ahead, John.

John Ennis: Hi, good morning everyone. Thanks for taking the question. I’ll stick to one actually because I know we’re quite tight on time. But it’s around your investment plans. You’ve obviously been quite clear that you’re stepping up investments again in 2023. So I’d just like to hear a bit more color on where those investments are going, either by division or region or whether it’s more promotional or versus advertising? A little bit more color there would be great. Thank you.

Alan Jope: Thanks, John. Well, let me just say, when we talk about investment, it actually involves at least four different parts of the P&L. We’ve been investing in an area that we don’t speak much about, which is in some overhead costs, where we’ve really beefed up our digital capability with these digital marketing centers that I talked about earlier. Secondly, our R&D investment was up by around €50 million last year. And we expect that to continue as well. CapEx, as Graeme pointed out, is up as we support the expansion of capacity to support growth but also actually to build in resilience and higher levels of customer service. You will have seen that yesterday, we announced a substantial program in North America. But the biggest space will be in brand and marketing investment.

And I would expect as we look into 2023, all of our business groups to be building plans. In fact, they have all built plans that involve aggressive savings, continued pricing and therefore, the ability to step up their BMI investment. It won’t surprise you if I say that, I would expect Beauty & Wellbeing to probably be the biggest beneficiary of increased investments. So it is quite broad-based. It’s targeted in multiple lines in the P&L and the biggest single number will be in brand and marketing investment.

Richard Williams: Thanks, Alan.

John Ennis: That’s great. Thanks a lot.

Richard Williams: Next question from David Hayes at SocGen. Go ahead, David.

David Hayes: Thank you. I’ll go for two, if I can. Firstly, just on the new CEO appointment. I guess you guys were involved with that. So I’m just trying to understand, obviously, you came in October was when that appointment was made at a Board member, was there an option of thinking that, that may extend into the CEO or when you joined or does that change after he joined. And I guess just in terms of your headline proposition to the Board during the process of assessment, what was it that you would say was this kind of key vision point that kind of differentiates you from the other competition that I’m sure that was very severe. And then in terms of sort of going into the beginning of the new year with the new division set up. Just wondering if there’s any impact on inventory or volumes in terms of those businesses being sort of reconfigured so that as we go into 2023, everything in place, where there’s any volume impact from that kind of process? Thanks so much.

Alan Jope: Thanks, David. Good questions. I think it’s appropriate if I take the first one and Graeme has raised his hand on the second one. If you look at the chronology, Hein joined our Board and was going through the interviews to join our Board, long before we announced my intention to retire. And before we initiated what was a substantial external and internal search, — so Hein was brought on to the Board as a non-exec for what he brings in that capacity. No other part of that story. However, when emerge that we were looking for a new CEO, he checked so many of the boxes and the Board included Hein obviously in the search process. It’s not for me to comment on what Hein’s agenda would be. But what I can tell you is that in an internal video that he recorded unscripted, unprompted, he highlighted three things: number one, his absolute focus on performance and value creation; number two, his commitment to the organization that Unilever has put in place.

I think that’s important, A, as validation of the organization, but also to keep our troops come. And the third thing is his belief that performance can be enhanced by staying the course on Unilever’s long-standing commitment to sustainable business. So those are some of the messages that Hein chose to put into the organization. And apart from being very experienced in consumer goods with a good track record, outstanding values. He happens to be an extremely clear communicator, a hell of a nice guy. So I’m looking forward to seeing what he does at the home of this great company. Graeme — down to the earth subject of year end volumes and the

Graeme Pitkethly: Good morning, David. Yes, I mean, it’s a great question. So we are seeing — and we saw in the second half immediately really from the establishment of the new organization, some really fast and decisive decisions from each of the business groups. We touched on a few of them. I’ll just comment on one or two that came through in the prepared remarks. But let me turn to Indonesia. So actions in Indonesia to address promotional and pricing strategies were taken by all five of the business groups very, very quickly, and we’ve moved to reduce trade stocks in some channels just to make our overall supply chain more efficient as we start to learn better innovation and our products in Indonesia. So that’s one example for you.

Turn to Nutrition. We made — we touched on this as well, some decisions in U.S. dressings to exit unprofitable lines of business. That actually tipped our very big U.S. dressings business from winning into not winning just at the end of the year. You see that in the drop-down in percentage business winning. It’s the right thing to do for the business, absolutely the right thing to do for the health of nutrition, and we’re very confident that we’ll get that big sell back into winning performance around about the midpoint of the year. So that’s another example. Also in Ice Cream, removing unprofitable volume in Ice Cream tubs. I should talk a bit about Personal Care, tremendous SKU rationalization happened very quickly in personal care. We delisted about 5,000 SKUs in PC already.

and we’ve actually discontinued 50 or 60 local brands, which frankly add up to less than 1% of PC’s overall sales. And I could tell you a very similar position in Home Care. So much work happening by the business groups to — and you see some of it reflected in volumes and some of it reflected in inventories. But the end to the year in good shape with good strong plans — and much of that tidy up work happened in the first — in the last — second half of last year and will continue as we go forward.

Richard Williams: Thanks, Graeme. Let’s turn next to Tom Sykes at Deutsche Bank. Go ahead, Tom, with your question.

Tom Sykes: Yes, thanks Richard. Good morning everybody. Just I wondered if you could say some things about how the levels of net revenue management have progressed over full-year ’22 and what the expectations are going into full-year ’23, particularly thinking about in response to pricing what’s happened on sort of pack sizes and promotion? And then thinking specifically, I suppose where do you think you’ll end-up promotion levels versus sort of 2019, ’20 by the end of ’23 please?

Alan Jope: Yes. Let me take that, Tom. So when we talk about net revenue management, there are multiple levers. So of course, it includes list price changes. We’ll frame it, first of all, list price changes, pack, price architecture is the second lever, and that’s the idea of upsizing and downsizing and developing specific sizes to meet specific consumer or channel needs. The third is the way that we use mix. The fourth is consumer promotion and the fifth is trade margin management. And I think the overall story for last year was that we use that first lever of straightforward list price increases more than we have for eight years. And in full candor, I don’t think our muscle was as strong on landing list pricing as it should have been going into this period.

And in a way, we were surprised how quickly we were able to fire up that machine after many years of avoiding list price increases. It’s almost impossible to give you a flavor of the work done on pack, price architecture. Because it is literally done brand by brand, category by category, pack size by pack size and channel by channel in every country. But many examples of introducing different pack sizes as a way of satisfying consumer preferences. In different parts of the world, we see different big consumer behaviors. We’ve talked about this before. So in places like South Asia, Southeast Asia, small sizes, affordable unit pricing is really important. In South Africa and Latin America, some of the most price stressed consumer environment actually big sizes take off at times like this where people realize the superior value that can be realized even through group buying and things like the stock well phenomenon in South Africa.

So we are using pack, price architecture a lot. We believe looking forward, there’s more opportunity in mix. And the final one I want to talk about is promo levels because there’s been some coverage around that. For quarter four, actually, we see Unilever’s deal promotion — sorry, proportion of our turnover sold on deal is down year-on-year in the fourth quarter, particularly so in Europe. And this is not surprising because when you are trying to land and establish new pricing, if you accompany that with promotional chaos, it certainly does not help the landing of the new price levels. So that’s a bit of a comprehensive towards on the last year characterized by heavy levels of list pricing and pack price architecture, lower levels of promotion.

This year, we will need some list pricing and probably we’ll use mix more in 2023 than we have historically.

Richard Williams: Thank you, Alan. For our next question, let’s go to Martin Deboo at Jefferies. Go ahead, Martin.

Martin Deboo: Yes, good morning everybody. I got one on Q4 volumes and one on FY ’23 margins. On Q4 volumes, you’ll be aware there was a lot of apprehensiveness coming into the quarter on that. Can you just sort of disentangle the minus 3.6% a bit more for us? How much was underlying consumer price elasticity? How much was planned SKU rationalization? And then was there any trade destocking effect in there given your peers have pulled that out. On FY ’23 margins, guidance of modest improvement relative to lower level of NMI in H1 than you expected, capture of the bulk of the €600 million savings. And I would also assume positive gross margin category mix. So that seems worth a lot to me at the gross level. So why the caution on margins?

Is it that you expect pricing to come off more quickly than you expected? Or is it that you’re pumping in a lot of investment? You’ve talked about investment directionally, but I’m wondering if you can be a bit more precise on that. Those are the questions. Thanks.

Alan Jope: Hi, Martin, I’ll take the first one, and I’ll let Graeme comment on the second one. So Q4 volumes, you’ll have noticed that a large proportion of the volume deterioration was in Ice Cream and Nutrition. Now at a macro level across the company, the majority of the negative UVG is a straightforward response to the pricing that we’ve been taking. In Nutrition and Ice Cream, it was complemented by some strategic choices to exit unprofitable business. So we’ve talked, Graeme’s shared an insight on in Nutrition, in particular, Dressings North America at a time when Almonds is absolutely flying, we took the opportunity to ease back on some frankly, structurally unprofitable business in our preferable brands in Dressings North America.

Also Nutrition was impacted by Unilever Food Solutions in China where there was obviously a marked slowdown as COVID restrictions were actually enhanced in Q4. Ice Cream, a slightly different story, where we exited some tubs, unprofitable tubs business in Europe, so sort of a low value in-home. And we also were up against difficult comps in in-home Ice Cream volumes in Q4 of 2021, which were partially offset by an acceleration of our out-of-home business in 2022, but not fully. So you see in the numbers that the UVG was particularly pronounced in Ice Cream, somewhat in Nutrition. And it’s a combination of primarily price elasticity, a little bit of exiting bad business and some year-on-year effects for Food Solutions and Ice Cream. Graeme, do you want to talk about the other part of Martin’s question?

Graeme Pitkethly: Yes. Hi, Martin, on the ’23 margin, let me — I think my first reflection is we’ve got a pretty good grip on this. We were one of the first to call out the original inflationary environment. And our estimate for net material inflation in ’22 proved to be pretty accurate. We landed at €4.3 billion, and I think we guided to €4.5 million. So we feel we’ve got our hands around it. It is, however, inherently more uncertain in the second half than it is on the first half. And as we’ve said, we currently see a drop from €2 billion of NMI inflation to €1.5 billion in the first half, but we do see continued inflation in production and logistics of about €0.5 billion. So that’s the bit that we have got a good grip on where we have the visibility.

Second half, not so much visibility, but we do expect, as I said, it to be materially lower in the second half. I think the key thing to bear in mind, Martin, is that at this point, we are only at 75% price coverage to get our gross margin and our margin — bottom-line margin will be driven by gross margin improvement. We’re only at the 75% point as we exit the year. So we’re still some way adrift from the 100% that’s needed to get the gross margin moving forward. We will have the benefit of continued high savings programs, again, €2 billion plus of savings. Obviously, the mix of that changes over time. Within that, we’ve got — and you mentioned the €600 million savings from the Compass organization, that’s landing well. And we’ve got a big contribution for that factored into those savings plans.

We will get some benefit in gross margin from mix. We’re driving mix hard. Alan just mentioned it there in the context of net revenue management. We do need to push mix harder. And one final point, and I touched on this, we will continue to invest behind resetting the company to a higher growth profile. We’re guiding to a higher growth profile today, and that requires investment. And when we manage all that to get to what we think will be a modest improvement in the bottom-line UOM for the year. Bear in mind that we’ll have transactional currency headwinds — sorry, against that. We think that currently sits at 20 to 30 basis points. So as I said in the prepared remarks earlier, we’re going to have to pedal a bit faster than you see in current exchange rates in order to deliver that number, because we are going to face 20 to 30 basis points of headwind to the margin from transactional foreign exchange.

Richard Williams: Thank you, Graeme. Let’s go to Warren Ackerman at Barclays for the next question. Go on Warren.

Warren Ackerman: Yes, good morning everybody. It’s Warren here at Barclays. Good morning, Alan. Good morning, Graeme. First one for me is on market share. You said 47% on your 12-month MAT. I think you also said it wouldn’t go back above 50% until the second half of ’23. Is that a concern where we’ve got maybe three quarters in a row below that kind of 50% threshold. I wonder whether you can kind of dig into that. Where are you losing? Why are you confident it improves about 50%? And how does it all marry with your brand equity health scores, which I think at the CMD, you were talking about 80%. Just trying to sort of triangulate all of that? And then the second one is really around Europe, in particular. I know you’ve called out some moving parts already, but with volumes down almost 7% as pricing has really stepped up there.

Can you maybe sort of dig into what you’re seeing on the ground, maybe by country, what’s the U.K. looking like versus Northern Europe, Southern Europe? Any kind of de-listings you’ve seen as that price has really stepped up? And are you expecting pricing to step up further as you finalize negotiations with retailers and could that volume even get worse? So I’m just trying to sort of work out at what point do you start to worry where the volumes are down kind of mid to high single-digit that you might need to look at other kind of bit more draconian measures around factory utilization or dialing up promos? Yes, those are my two.

Alan Jope: Insightful questions. Warren, I’ll let Graeme talk about Europe. Let me just say a word or two about market share. First of all, our percent business winning is well above 50% in three of the five business groups. So in Health & Wellbeing in — sorry, Beauty & Wellbeing, in Personal Care and in Home Care, our market share percent business winning is above 50, it’s below 50 in Nutrition and Ice Cream. And those are particularly impacted by two big cells. One is U.S. Dressings and the other is India Tea. And the India Tea position is that that market has shifted into very, very, very low price, low margin powdered tea where we choose not to compete. In the Premium Tea segment, in fact, we’re gaining share, but there’s a shift within the market to very low cost teas, where we frankly see no margin to be made and don’t want to participate.

And then I think we’ve talked a lot about cleaning up our U.S. Dressings portfolio and accepting some short-term dips in market share. Our brands are in terrific shape. You’ve seen the step-up, a very substantial step-up in constant currency. In fact, it looks like an even bigger step-up when you look in current money in the brand and marketing investment. Our brand health measures are very strong. And our biggest and best brands was 12 no 14 as two new brands who joined our top 14 €1 billion brand portfolio. Those are growing 11%. And so all I can say is that even on an MAT basis, the quarterly percent business winning is quite volatile with different cells coming in and moving out. And as we continue to make progress in Indonesia, as we continue to make progress in North America, I think we’ll see that business winning figure repair from where it is right now.

And in truth, Warren, we just don’t want to be too optimistic on when exactly it might repair, but the underlying signs are all very positive. Graeme, Europe.

Graeme Pitkethly: Yes, good morning, Warren. I think the first thing to say about Europe is that the current pricing environment is a bigger step change versus history than we’ve seen. I think you need to bear and this applies to everybody, I guess, European elasticity in the context of taking price for the first time in many, many years. It’s gone into price inflation from a situation where it was in long-term deep price deflation for many, many years. So the net move from deflation to inflation is bigger than it is in other region. It really is quite a step change. We had really strong growth in Ice Cream and Nutrition in Europe, modest growth in PC, a slight decline in home care and a slight decline in Beauty & Wellbeing, which is quite small for us in Europe.

And we did see positive volume growth in Ice Cream where we took a lot of price in dressings and in Unilever Food Solutions. So it’s quite a mixed picture across the piece. I would point out in terms of retailer negotiations and retailer dynamics, all very positive, to be honest, never easy in Europe, but we’re working very constructively with the grocers in Europe. They’re very demanding in terms of the information that’s required around granular cost inflation data at an SKU by SKU level. We’re not really seeing any destocking in our categories, but that’s going okay so far, never easy, but we’re working very, very collaboratively with them. One thing to point out, I mentioned in the prepared remarks that the material inflation that we’re seeing for the first half falls disproportionately in Nutrition and Ice Cream.

And both of those business groups have got a higher footprint in Europe. So it is a focus area for us. And certainly, we’re concentrating on that. And then finally, just to come back to something Alan referred to earlier on promotional spend in Europe, we are seeing far less volume on deal in Europe compared to normal. That’s obviously quite understandable when we’re trying to land price increases with our retailers and our retailers are moving prices. So hopefully, that gives you a little bit more color on the European situation.

Richard Williams: Thanks, Graeme. So we’re over the hour. Let’s just take two more questions. Can we go to Pinar, would you like to ask the first one, at Morgan Stanley?

Pinar Ergun: Hi, thanks for taking my questions. Just two quick follow-ups to Martin and Warren’s questions are there. The first one is, could you please talk a little bit about why you’re not expecting a deflationary cost environment in H2? Is that because of hedging, FX? Or are you making certain assumptions on commodities beyond where the spot rates are. And then the second one is coming back to Warren’s question. Unilever’s volumes are holding up a little better than some of your global peers despite strong pricing. But I guess at what point the declining share of business winning share becomes a longer-term concern for you that you might reconsider the balance between pricing volume and competitiveness.

Alan Jope: Pinar, let me take both of those. They are two of the most important areas that we’re focused on. We’re not expecting a deflationary environment in H2, but there is a wide range of potential outcomes. And I think there’s two things that are going to — two bellwethers to keep an eye on, on what’s likely to happen in the cost environment. The first is what happens to demand from China. We’re anticipating quite a strong opening up and recovery of China. There’s $1.5 trillion to $2 trillion of excess household savings in China. There’s limited places for the Chinese consumer to put that, the housing market is not an attractive investment option. There are limited financial investments they can make. And so we are expecting to see a little bit of a consumption boom in China.

And if you look at things like air flight bookings, travel and hotels, cinema occupancy, China is coming back quite quickly. And that demand will have an impact on global commodity pricing. Second is, frankly, what happens to crop yields, of which the soy crop in particular is very important. And the soy crop yields are very affected by weather patterns and have a knock-on effect on the cost of other soft commodities like palm, et cetera. As far — we will take advantage of spot pricing to lock in contracts. Frankly, most of our forward cover is through contracts. It’s not through hedging arrangements. And we’ll take advantage when we think that there’s a particularly low moment to lock in a contract. But watch China and watch the crop yields in particularly the soy crop.

And then in terms of volumes are holding up, but should we be concerned about competitiveness? Yes, of course, we’re concerned about competitiveness. It’s a very high priority measure for us. It’s in our team’s long-term incentives. And I can assure you, when Graham and I sit down and do the monthly performance reviews with our business groups, literally, the first thing we look at is not the rearview mirror of what happened over the last month or the last quarter. It’s what’s the outlook for competitiveness in the coming months and the coming quarter. Our best estimate is that we’ll start to recover across the 2023 quarter-by-quarter. And whilst we don’t hedge much on commodities, we are hedging a little bit on giving an exact moment when we think we’ll move back into positive shares.

The one thing that we’re very comfortable with is our innovation and investment plans behind our brands for 2023 are stronger than any of us can remember in the last 10 years. So let’s watch the space but we are very focused on market share.

Richard Williams: Thanks, Alan. Okay. Let’s squeeze in one last question and for that last question, let’s go to Celine Pannuti at JPMorgan.

Celine Pannuti: Thank you very much. Good morning everyone. So one last — I’ll try to make two small ones. The first one is on volume. You said that volume would be worse in H1 and potentially still negative in H2. Should we expect to be sequentially as bad as Q4? I mean I understand that in Q4, there were some extra elements that you mentioned earlier, Graeme. So can you give us a bit of a scale of what we should expect if volume effectively would continue into that same level for the first half? And then my second question is — you spoke about Europe. Just about emerging market, a lot of your emerging markets, Southeast Asia, excluding China or Latin America had benefited from a recovery in ’22. What is your view on how the consumers are behaving in those emerging markets as you enter ’23 with higher pricing. Thank you.

Alan Jope: Celine, I’m going to ask Graeme to talk the SCA situation, but he is not going to have much time to prepare that because the answer on volumes are very straightforward, which is, for the first half, we expect a sequential recovery in UVG from Q4, although not crossing into positive volume growth until the second half. Now of course, there’s the usual caveats around difficulty of predicting the future. But just to be crystal clear, what we’re guiding to is volumes still negative in the first half, but sequentially recovering versus Q4. Graeme, Southeast Asia.

Graeme Pitkethly: Good morning, Celine. Yes, I think we — in the 60% of our business in emerging markets and in the sort of powerhouses that we have in South Asia and Southeast Asia, we are in optimistic mood. If we look at Southeast Asia, Indonesia and Philippines have got sort of mid-single-digit or slightly higher GDP growth, consumer confidence is starting to return in Indonesia. Our markets are currently driven by price as we sort of — as we reset the business in Indonesia, we will be benefit from that. I said in the speech that all five of our business groups are extremely focused on getting Indonesia back to its strength. Philippines, consumers are looking for value. We’ve got a lot of value in our portfolio. Thailand, the market is recovering from COVID, I think there’ll be a big beneficiary.

I think as well Vietnam actually from the return to Chinese tourism, Alan just mentioned that. But as Chinese tourists start to venture overseas, Thailand and Vietnam will be big beneficiaries. Our business in Vietnam is extremely strong. And there’s an economic recovery happening there. So at Southeast Asia, yes, we feel good about it. And obviously, our performance in Southeast and — South Asia, strength continuing in India. It’s very important that we continue to hold on to that. That’s strength for us. It’s the Urban markets are up in value. Rural is a little bit more flat. The monsoon was good overall. But food inflation is rising fast. And that’s having a bigger impact on the less affluent part of the Indian population than elsewhere.

The rest of South Asia, we’ve got some challenges to manage. We’ve got a big and successful business in Pakistan, which had terrible floods and is rather challenged economically as a consequence. We’re having to manage that similarly in Bangladesh. But overall, I think we’re feeling good about the prospects for emerging markets in ’23.

Richard Williams: Thanks, Graham. We’ll end the Q&A there. Thanks for all the questions. If you’ve got any further questions, just e-mail the Investor Relations team, and we’ll set the time to speak to you. Alan, would you like to make any closing remarks?

Alan Jope: Yes, I will actually, Richard. A little bit of a break with traditional close. I would like to take this moment to thank the 150,000 or so women and men who make up the Unilever team around the world and who have worked incredibly hard through extraordinarily difficult external conditions and a major internal structural change that we imposed upon them as well to deliver a set of results that we’re proud of. So to any of the Unilever team who are listening on the call and on behalf of the whole company, a massive thank you. Richard?

Richard Williams: That’s it. Thank you. Thanks, everyone. Thanks for the questions. Thank you, Alan. Thank you, Graeme, and have a good day.

Operator: This now concludes today’s call. Thank you all for joining. You may now disconnect your lines. Goodbye.