Jan 20, 2015
Executives
James Allison - Head, IR Paul Polman - CEO Jean-Marc Huet - CFO
Analysts
Celine Pannuti - JPMorgan James Targett - Berenberg Bank James Edwardes Jones - RBC Capital Markets Warren Ackerman - Societe Generale Javier Escalante - Consumer Edge Research Alain Oberhuber - MainFirst Bank
Operator
We are about to hand over to Unilever to begin the conference call. [Operator Instructions] We will now hand over to James Allison.
James Allison
Good morning and welcome to Unilever's Full Year Results Presentation, which as usual will be given by Paul and Jean-Marc. Paul will share his reflections on the year as a whole and then Jean-marc will cover the financial performance.
Paul will finish by highlighting some of the areas where we want to step up our performance in 2015 and beyond and after that of course we’ll have plenty of time for Q&As. As usual I draw your attention to the disclaimer relating to forward looking statements and non-GAAP measures.
And with that let me hand over to Paul?
Paul Polman
Thank you James, good morning everybody. The speed of business these days is so fast that even in a few weeks a lot can change or be accomplished.
So it seems odd for me to be wishing you a Happy You Year but I do. And I hope that you will all be rewarded for your efforts in a year, which may well turn out to be just as challenging as the last one.
So let me start with giving my perspective on our performance. Over the last six years we have delivered consistent, competitive top and bottom line growth.
The 2014 results again demonstrate this. We grew ahead of our markets, with 2.9% underlying sales growth and 60% of our business building share.
Core operating margin was up by 40 basis points. We increased EPS despite some very significant currency headwinds and we again delivered a strong cash flow.
Importantly we achieved this whist continuing to invest in the pillars of long-term growth, building our core business, expanding our foot print, investing in our operations and our people and sharpening the portfolio through M&A. In so doing we’ll be building a more resilient Unilever, more able to withstand the external shocks.
And it’s worth reflecting for a moment on just how difficult the year it was. First the slowdown in emerging markets continued.
China stands out but almost all of the major economies weakened. Growth in consumer spending in 2014 hit multi-year lows in many countries.
In South Africa it is half to less than 2% and in Brazil it had fallen to just 1%. Exchange rates were again volatile, with further rounds of devaluations.
It was a mixed picture, with some currency slightly recovering at least part of their losses from 2013. But even so in many markets consumers have struggled to cope with imported inflation, higher interest rates and reduced fuel subsidies.
World oil prices fell towards the end of the year and looking forward this should help to build back consumer demand, but it will take some time to work through and into the cost of living. And of course it puts further pressure on the producer nations.
In other categories, market growth in emerging countries slowed to around 4% in the second half. All of this came from price.
There was no volume growth in these markets. It is many years since we actually have seen that.
And conditions remain very tough in developed markets as well. In the U.S.
there was some strong recovery or some recovery in our markets in the second half of the year, but it’s still modest at only around 1% to 2% and still fragile as a dip in the latest reading show. In Europe conditions actually deteriorated and our markets contracted.
And after several years of austerity measures a mindset of economizing and making do has become engrained. This doesn’t mean that people want to trade down everywhere.
In fact the premium segments continue to better than the mid-tier ones. But most consumers will look to make savings on many of their purchases, so they can afford to spend it on the brands and products they value most.
Discounters have thrived in this environment and have expanded rapidly, particularly here in the UK, posing major challenges to the traditional retailers as you have seen of late. On a worldwide basis, value growth in our markets slowed to around 2.5% for the year with volumes down and with growth hard to combine, competitive intensity is high.
We also saw in 2014 a continuation of the kind of geopolitical instability and climate related incidents that wreak havoc on communities and supply chains, from typhoons in the Philippines to floodings in Pakistan and draughts in the U.S. And of course the instabilities in the Middle East and in Eastern Europe.
In this very uncertain and unpredictable environment, there is a premium for reliable performance, which we define as the 4Gs. Growth that is competitive, profitable, consistent and responsible.
So we have continued to build what we call the long-term pillars of growth. Our innovations are stronger than ever.
Most are now accretive to margins as we’re able to charge more for the additional benefits provided. The Dove Advanced Hair Series is a good example.
It is now well established in North America with Dove Oxygen Moister doing particularly well and that is now lending in Europe, or take the new Baby Dove range, which we launched in Brazil in the first quarter. This is the natural next step for the brand.
The product looks great and is off to a flying start. Knorr continues to add new benefits at our relevant to local consumers, like fortified with iron and five times more chicken flavor, both of them in South East Asia.
Now this has helped drive 14% growth for our cooking ingredients in that region alone. Ben & Jerry's grew 10% in 2014, helped by the success of the new course ranges.
Breyers Gelato and the latest Magnum editions are also doing well. And in Brazil, we’re gearing up capacity to meet the strong demand for our new Omo stain remover and pre-treater launch.
It launched in the middle of the year and it has already achieved over a 7% share. We’ve also taken our strong global brands to more markets and more consumers.
With white space launches like Omo in the Gulf where we are running well ahead of expectations, or Clear in Japan which has also made a great start. And we continue to invest behind our brands, increasing our share of spend relative to competitors in all four categories.
Of course it’s not just what we spend but how we spend that really matters. For the second year running we were the most awarded advertiser at Cannes, and we’ve again been recognized as the most affective marketer, winning the Effie's award for the third year.
It’s no coincidence that in the counter ranking of top global FMCG brands this year, Unilever has more brands in the top 50 than any other company in the world. At the same time, we have further deepened our distribution reach in places like Myanmar or the Islands of Southeast Asia or the rural areas of India and Brazil.
Goble capital expenditure is also particularly focused on emerging markets. This is bringing our supply chain infrastructure up to where it should be.
Over the last five years we have built 25 new factories with the latest technologies. We have acquired another 15 and we have actually closed 60.
And we’re starting to see the benefits of our investments in IT systems. To take one example, here we are on the January 20th and almost the first FTSE 100 Company to report results in a New Year.
This would have been hard to imagine a few years ago. It means we spent less time and money looking backwards, releasing energy to focus on the future, and we have continued to invest in developing our people.
Our new leadership 2020 management development program is a substantial investment, but one which I am convinced will be key to meeting our long-term business ambitions. It better equips leaders to tackle tough business challenges, like how to reach Muslim consumers or scale our Halal approach, how to deliver 1 billion consumer relationships in this increasingly digitally connected environment.
Now in 2014, we also continue to sharpen the portfolios through M&A as well. We completed the acquisition of the Qinyuan Water Purifying Business in China.
This has grown more than 20% in the first nine months and will start to contribute to our organic growth on the second quarter of the year. We have built our presence in premium segments.
T2 has grown 25% in its home market Australia and New Zealand alone in its first year since acquisition and has now added three stores in London and one in the U.S. And last month we acquired a Talenti Premium Gelato ice cream in the U.S.
And here on the chart you can see the Camay and Zest skin cleansing brands. This acquisition was announced just three weeks ago.
This was particularly important for our Mexican business, increasing our scale in personal care by nearly a quarter. These brands are complementary to our skin cleansing portfolio, where we are already global number one with fragrance and freshness positions and price points that we now have that we didn’t cover previously.
\At the same time we have continued to prune around the edges of the portfolio. During the year we have disposed of seven slow-growth local food brands.
So by investing in our core business and sharpening the portfolio through M&A, we are building a stronger, more reliant set of core brands. So I hope the message is clear.
We remain focused on the long-term. Now looking at the shorter-term, growth in the fourth quarter was disappointing at 2.1%, with volumes slightly down at minus 0.4%.
In any one period, we make choices and tradeoffs to ensure a balanced top-and bottom-line performance, always with an eye to maintaining our overall competitiveness in the market. With the third quarter’s result, we talked about a decline in China.
We’ve chosen to reduce the level of promotional intensity to allow stock levels to reduce rather than keeping them artificially high. As expected, sales declined by a similar amount in the fourth quarter.
The impact was biggest on personal care and home care. We believe that the destocking is now largely complete, but the first quarter will be down again as we’re up against a strong base, albeit not by as much as in the last two quarters.
Elsewhere in personal care in Europe and India for example, we saw high levels of competitive intensity in the fourth quarter, which we didn’t match leading to somewhat weaker volumes. Going forward, we will continue to drive our savings programs very hard to ensure we have the funds to be competitive across our portfolio and deliver another year of profitable growth ahead of the markets in 2015.
I will return to this in a moment but let me first hand over to Jean-Marc to take us through the financials. Jean-Marc?
Jean-Marc Huet
Thank you very much Paul and good morning to everybody. Let me also wish you a very happy new year.
Now you’ve heard me talk a number of times about our financial growth model and over the last 12 months or so I have stressed the importance in a lower growth environment of applying all the levers of earnings per share growth. The 2014 performance demonstrates the robustness of our model.
As Paul said at the start, despite markets where there is no volume growth, very significant currency headwinds, we have delivered another year of competitive top line growth, margin expansion, EPS growth and strong cash flow, and we have done this while continuing to invest in our brands and in our infrastructure. So let’s have a look at each of the levers in turn, the first being top line growth.
Underlying sales growth of 2.9% for the year included 1% from volume, 1.9% from price. Our emerging markets business grew 5.7%, volumes up 1.3% and pricing at 4.3% up.
Developed countries declined by 0.8%, Volumes here grew 0.5% but pricing was negative with deflation in a number of European markets. M&A reduced turnover by 0.9%.
Now this as Paul said includes the effect of disposals, brands like Wish-Bone and Skippy in 2013 and the U.S. pasta sauces and Slim-Fast in 2014.
It includes the acquisitions of T2 and Qinyuan, but importantly does not include Talenti which we just closed, nor Camay/Zest, which is expected to close in Q2. Turning to foreign exchange, exchange rates had a negative effect of 4.6% for the year.
This comes from the weaker emerging market currencies, particularly Argentina, Indonesia and Brazil, but also significant movements from Turkey, Russia, India and South Africa, and as a result of this turnover was down 2.7% to $48 billion, $48.4 billion to be exact. In the fourth quarter however, the net currency effect on turnover finally turned positive with a 1.6% benefit.
If rates were to stay as they are today, through the whole of 2015, and that’s a big if given the recent volatility that we’ve all seen, we would expect to tailwind. So that’s positive of around 3% this year on both turnover and the bottom line earnings per share.
Let me now turn to the second lever, operational leverage. Just for simplicity all the numbers presented here for the full year are at current exchange rates.
In summary, core operating margin up 40 basis points and this despite some very significant currency headwinds. If you look at the weaker emerging market exchange rates in 2014, they put pressure on the imported component of our costs in local currencies, and this was the main driver of mid-single digit inflation in commodities for the year last year.
We did not recover all of this in pricing. So despite a strong delivery from our savings programs, positive results from our maxing the mix initiatives, gross margins were 20 basis points lower.
Turning to brand and marketing investment, this was up, in line with underlying sales growth, so maintained as a percentage of sales. We increased our advertising spend in the market in absolute terms, around mid-single digits and our share of spend relative to our competitors was up across all of our four categories.
Now within this, digital advertising again up nearly 20% and is now around 20% of our total advertising spend. Now this higher spend was fully funded by savings of €130 million from our programs to reduce the costs of producing the advertising, which we’ve talked about many times before.
So very good progress in terms of efficiencies within brand marketing and investments. Turning to overheads, reduced by a further 60 basis points, notwithstanding the lower growth last year.
In fact over the last five years the reduction of overheads is now just shy of 200 basis points, with a further 130 basis points coming from lower restructuring over the same period, i.e., over the last five years. As you all know we launched the project simplification and cost reduction program just over a year ago as we saw the markets beginning to slow.
You can see the benefits clearly in the lower overheads of last year. As markets slowed further we accelerated and extended the program, and this allowed us to exceed our original targets.
By the end of the year we had reduced the management and administrative headcount by 4,700 and this was 1,300 more than we had originally planned and importantly we’re on track to exceed our target of 500 million savings with more than 250 million already realized in 2014. You will remember that we explained with the half year results that in 2014 there was an adverse currency translation effect on our core operating margin, and this primarily from the effect of a stronger sterling on the UK part of our global costs.
In actual fact, this was around 40 basis points for the year adverse. We have been able to largely offset this by accelerating our broader margin improvement programs.
As part of this we have made important changes to pension plans in the Netherlands, Turkey and the U.S. These will all give long-term benefits, lower operating costs but also resulted in one off gains in 2014 from the reduction in the historically accrued liability.
So this is really good stuff. In addition we also realized gains on property sales in India in the last quarter.
Turning to the categories; all four categories contributed positively to overall business performance. Each played a different role as we discussed at the Investor Day last month.
Personal care growth was at 3.5%, which remains above our markets, which actually slowed from 4% two years ago to around 3% for the year. The mid-tier segments, where we have a strong presence were the most subdued.
We have a strong innovation funnel and this allows us to build and extend our global brands. In addition to the examples that Paul gave earlier, there are a whole bunch of others that we could call out.
The list does go on but one is the compressed deodorant spray in Europe. Two, the recent launch of aerosols in the U.S., Sunsilk Naturals in Asia or lastly TRESemme 7 Day Keratin Smooth range.
Profitably is already good as you know in personal care, and improved by further 90 basis points last year, boosted by savings, maxing the mix advertising efficiency in this and the category with the highest level of spend. Performance in foods more mixed.
In emerging markets we had mid-single digit growth driven by market development activities adapted to the local needs so important. Emerging markets are now 40% of our total foods business and this will inevitably increase over time organically but also most likely through some continued although modest pruning of our non-core brands.
Today the reality remains that the majority of our food sales are still in the developed markets and here and we have been facing two big headwinds. The first one is the difficult consumer and the retail headwind I spoke about earlier, and this is being giving soft volumes prices deflation across all categories.
And secondly, there is the continued decline in margarine consumption. We talked about all our plans here at our Investor Day, highlights including the new emphasis on cooking and baking, launches into the growing segments of blends of vegetable oils and butter.
22 were launched last year, many more to come in 2015. The new unit, baking, cooking and spreading was set up and will inevitably provide much more focus and will be fully up and running by the middle of the year.
It’s got a clear objective, let me reiterate, stabilize sales while maintaining strong cash flow. The profitability in foods is already good and it improved further in 2014.
Gross margins were up overheads were down, particularly in Europe. The growth of refreshments improved quite a lot last year at 3.8%.
Here again the more premium brands, Paul mentioned Ben & Jerry's, but also Magnum grew well, but Cornetto also had a strong year with multimedia advertising building the core brand and new smaller products launched at lower price points. Tea grew with a better performance in the U.S., offsetting the weaker sales in Saudi Arabia and Poland.
More work to be done with tea specifically. Now the profitability in refreshments does need to improve, and in 2014 margins were slightly down due to the significant headwinds from higher dairy and chocolate prices, but the margin did improve in the back half the year in H2.
We want that to continue, and as Paul said earlier finding the right balance between sustainable top and bottom line growth is so important for our ice cream business. Finally homecare, we continued to grow well ahead of the market despite heavy competition, both from the global and the local players.
This is the result of a strong portfolio of brands across price points, the depth of our distribution, sustained investment in product performance and white space expansion. Profitability last year slightly down despite all the strong savings delivery, as this category basically felt the largest impact of cost increases from weaker currencies in the emerging markets.
Here again, there was strong improvement in the second half. This was however important to note how boosted by the gains from the property sales in India, which added around 40 basis points to the H2 homecare operating margin.
As we said at the Investor Day last month, we’ve got a very clear objective, double the laundry core operating margin over time whilst remaining competitive. So different contributions by the categories, but overall a picture of competitive, consistent, responsible and profitable growth.
Turning to the bottom line, core earnings per share increased by 2% at current exchange rates to €1.61. Now at constant exchange rates, this increase was 11%.
So good double-digit bottom line growth. Operational performance, which is the combination of the first lever, growth, the second lever, margin contributed 8.9%.
The third lever is financial leverage, including the way we use our cash. Now a lower minority share of profits added around 1% to core PS, and this includes the effect of our increased share holdings in India and Pakistan.
You then have the purchase of the Leverhulme family rights and that adds around 1.5% through the reduction in the diluted share counts. And this will give a further benefit of approximately 1% this year in 2015.
Tax rate on core EPS was just shy of 26%, which is in line with our long-term guidance of around 26%. And then you have currencies, which had an adverse impact of 8.9%.
Outside core EPS, non-core items after tax represented a gain of 537 million and this comes mainly from the disposal of our U.S. pasta sauces which only partly was offset by the impairment of Slim-Fast goodwill.
Turning to cash flow, the reported measure for the year was 3.1 billion, but as I explained at the half year results, this measure excludes the proceeds of disposals, but it does not exclude the tax paid on disposal profits. So while this is not normally a major issue, this year we paid €800 million of tax on disposals.
So were you to exclude this, free cash flow would be at 3.9 billion, very similar to last year’s level, and this achieved despite the adverse impact of FX of around €300 million. Working capital at year-end was at the same level and absolute as the end of 2013.
If you look at the average working capital for the year, this continued to improve from negative 3.8% two years ago to negative 5% in 2014. Capital expenditure, 4.2% of turnover remained above the historical levels, as we continue to invest in infrastructure and catch up with the earlier years of under-investment.
Now for this year 2015, we expect CapEx to reduce slightly, less than 4% and to be in the range of 3.5% to 4% over the longer term. Finally, just a brief snapshot with respect to our balance sheet.
Net debt at the year-end was 9.9 billion. That’s up 1.4 billion, a lot of that driven by the cash purchase of the Leverhulme family rights.
IS19 pension deficit increased from 2 billion to 3.6 billion and the accounting standard makes this number as you know intrinsically volatile, the long-term liabilities are discounted by the shorter term corporate double AA bond rate and this rate felt significantly during 2014 pushing the net deficit up, despite the investment returns and the cash contributions that we made. In terms of cash contributions in 2015, we expect the level to be around 700 million, and the increased deficit does mean that the pension’s finance charge will increase by approximately 20 million this year to around 115 million.
Finally our quarterly dividend is unchanged at €0.285 following increase of around 6% nine months ago, more to be discussed at our Q1 results. Now let me hand back to Paul for his concluding remarks.
Paul Polman
Thank you Jean-Marc, and let me finish by looking ahead. At our Investor Event last month, we set out our priorities for 2015 and beyond, an agenda for growth that is consistent, competitive, profitable and responsible.
I won’t repeat everything I said then, but let me just remind you of some of the headlines. First, we need to recognize that we are in a lower-growth environment and this is not likely to change in the near future.
So as in 2014, it is essential that we keep driving cost savings hard. We are building on a strong track record here but I believe that there is still ample room.
Disciplined cost reductions is now becoming ingrained in the organization. We will continue to deliver the 1 billion plus savings each year across our supply chain.
As we extend the low-cost business model approach to new countries, we can even do better. You have seen the strong improvements in overheads in 2014.
I’m convinced that there is still more opportunity here as we drive to best in class levels. We will drive further efficiencies in brand marketing.
Just take for example the cost of production of our advertising alone. This has reduced by more than 10 percentage points over the last five years.
And in 2015, we will focus on increasing the return on digital, which is still only 20% of media actually as Jean-Marc said and where we’re learning fast. The second part of the agenda is making sharper category choices to get more out of our core categories.
For example in laundry we have good growth momentum and have now set a clear target of doubling the core operating margin over the next few years, while still growing ahead of our markets. In spreads, consumer habits have been changing faster than we have.
People are eating less bread and spreading less margarine. We need to speed up our plans and have already started to do with the Melange launches.
The next step is the new business unit and unlocking the opportunities in cooking and baking and we’re underpinning these with sharper targeting. The third focus area for 2015 is operational discipline.
This business is more resilient than it was. We have improved product quality with around 60% of our products now beating competition.
We have improved on-shelf availability by 9% percentage points and we have invested in bringing our supply chain and IT systems up-to-date. But in my opinion still too many own goals, still some quality issues leading to disappointing consumers or even recalls, or delivery failures because of warehouse system breakdowns or innovations that land later than planned or with advertising that is not as good as it could be.
So plenty of scope for us to keep sharpening our executions. And the final part of the agenda is continuing to shape the portfolio towards faster growing, more value creating categories and segments.
Specifically that means increasing our presence in more premium segments, more acquisitions in personal care and some limited disposal of non-core brands in other parts of the business, if value creating opportunities are limited. In food, there are pockets of excellent growth opportunities.
We need to still get better at seeing the trends more quickly and acting faster, either organically through our own grade brands or via acquisitions. It’s another example of the agility that we’re seeking.
So to conclude with a few words on 2015, we are not expecting any significant improvement in the market growth overall and in that light we expect a similar performance in 2015. With oil sitting today at less than $50 a barrel, it now seems evident that market pricing in our categories will ease in 2015.
Volume should return to growth through the course of the year as disposable incomes and consumer demands hopefully picks up a little bit. The net effect is that market growth is likely to remain around the 2% to 2.5% level for the year, just the same as it was in 2014.
We expect our own underlying sales growth to be in the 2% to 4% range at it has been in 2014. Growth in the first quarter is likely to be at the bottom end of this range.
Of course the price of crude oil is just one of many variables in the so called FOOCA [ph] world. We will continue to strengthen the foundations of Unilever, building resilience and agility and always with an eye on the long-term.
So our priorities for 2015 remain unchanged, growth ahead of the market, steady improvement in core operating margin and strong cash flow. Let’s now open it for Q&As.
A - James Allison
So thanks very much. You’ll be happy to note that our disciplined cost-reduction programs have extended to the heating of this building.
It’s absolutely freezing in this room. So I just hope that I can get Paul and Jean-Marc to continue for another 20 minutes so here in the subzero temperatures.
So let me just tell you the format as usual. (Operator Instructions).
Please begin by telling us who you are, use a telephone handset and please no more than two questions, because there is always more people than we can accommodate. So first of all I think we’ve got Celine Pannuti on the line.
Celine, hello.
Celine Pannuti
My first question is just regarding on what -- as it has been said in terms of market pricing in the category to ease, could you give us an idea of your overall material cost spill for the year? What would be the level of deflation if this is what should one expect, and the level of pass through, I noted yesterday that there was already some price for investment in India.
So if you could comment on that. And on the same question why you would expect volumes to return, or is there any specific regions you can pinpoint?
My second question is the competitive environment that you called out in personal care, if you could give us a bit more background on that. And I also wonder in personal care whether there was any positive from India one off or why was it just in home care?
Thank you.
Paul Polman
Yes, so why don’t we start Celine with the cost picture and I’ll hand it over to Jean-Marc and then I’ll pick up in a minute on some of the volume questions and the competitive environment if you don’t mind.
Celine Pannuti
Yes.
Jean-Marc Huet
Sure, hi Celine. This feels like four or five questions.
So let’s do our best. The first one is on just raw materials and commodity cost for 2015.
At this point in time we expect low single digit tailwind. Crude oil, obviously the reduction benefits, plastics, chemicals, specifically in home care and personal care and if you take our commodity cost base of $20 billion, around 20% to 25% is either indirectly or partly affected by the oil price.
So, if you take forwards stocks takes around 4, 5 months to work through, I would say at this point in time the favorable impact on commodity costs is basically low single digit.
Paul Polman
So if you just take the volume side first if I may start there and then I’ll just talk a little bit about the competitive hot spots if you don’t mind, but I think on the volume side we’re sort of hitting the bottom. We see now -- partly helped by the oil price in my opinion, we see in some countries, the disposable income going up and that gets translated a little bit more into the volumes.
Whilst pricing might ease in this environment, we see volumes starting to pick up a little bit in the U.S. for example.
You’ve seen the global forecast again this morning from the IMF. Although that is lower, for example China is still forecast to be north of 7%, the lowest growth they’ve ever seen, but 7% still is a healthy volume component and when our China issues are out of our base, as we are getting into next year, again I think we will see there our volumes picking up a little bit.
I’m less optimistic about Europe if I may be honest, where we continue to see the markets being under pressure both in volume and value terms, but we think a modest volume increase should be possible as pricing probably eases a little bit. In terms of competitive battles, we have many and we’ve decided not to enter all of them in the last quarter.
As you know I’m adamant that we stay competitive, but it’s also important that we maintain both top and bottom line progress. We’ve seen especially intensive battles on hair in the U.S.
where Nielsen doesn’t pick up the enormous amount of coupon activity that is out there by some of our key competitors and we are not participating in that. So we’re careful about that and we’ve seen the same with deals where one of our competitors, it feels sometimes is giving away the products, and again we’re not competitive there in some of the markets by choice.
If that situation continues, we’ll obviously have to adjust, but I think for the moment we feel comfortable with the balance that we’re achieving on the top and bottom line.
Jean-Marc Huet
There was then a question Celine that you had on the real estate sales in India. It also benefits personal care but to a lesser extent versus home care and I think most important for us is no false illusions about the margin of home care and where we’re starting from and our need to double the margins there.
James Allison
Yes, so if we can just try and keep that discipline of two questions please, not a five and two that just Celine has made into a fine art. So James Targett now on the line.
James Targett
A couple of questions. Just firstly I guess on home care margin, you’ve obviously called out the impact from the India disposal, but looking at momentum in the second half and thinking about the -- at least about the oil price and FX, is that the sort of momentum, the underlying momentum we should be expecting in home care margins as we go into 2015?
And then secondly in terms of -- just a clarification Paul on you said on in Q1. I think you said Q1 will be down again due to the strong base.
I just wanted to check what you’re referring to. Was that just the personal care because of the destocking or was there anything else I was missing?
Thank you.
Paul Polman
James, I think we can do this fairly quickly. On the last one, it’s an affirmative.
It’s actually -- I was referring to China. If I was not clear I apologize.
Although the absolute numbers will go up, we will still be down a little bit because of the first quarter effect of last year, but we see an improvement coming through now. I just came off the phone with Sam Moraine [ph] yesterday.
It was an extensive discussion and he feels really comfortable about that. So I was talking specifically China.
On home care margins were actually fairly pleased. As we have mentioned to you, we have the competitive battles and we will stay competitive, but at the same time you’ve seen a big improvement over the second half, and again lots of the factors were against us in home care, notably the high oil prices.
We cannot claim that twice. Now that these oil prices are coming down, we should also see a little bit of positive effect there.
So Nitin is squarely focused on growing ahead of the market, perhaps a little bit more moderately than we have done in the past but then was a firm focus on improving the bottom line situation. We’re doing that extremely well in home care, a household cleaners, which is doing very well for the Company.
It’s actually one of the best performing if not the best performing category that we have, with brands like Cif and Domestos. We now need to get that translated into the laundry side.
Obviously the other factor that has played a role on laundry, which I’ve pointed out at the investor meetings is our investment in the future, was the Omo launches in the Middle East and the Omo stain remover launch in Brazil. We will continue to look at these opportunities, because obviously that builds this category for the longer term.
James Allison
Thank you very much. James.
From one James to another, James Edwardes Jones joined on the line.
James Edwardes Jones
Two clear ones for me as well please. Your gross margin stand 20 basis points.
How would you reconcile that with the whole Maxing the Mix agenda, and particularly, is Maxing the Mix more about having some flexibility to optimize some competiveness rather than having absolute potential for gross margins to increase. And secondly should we read anything to change in wording in your outlook statements.
I know in the presentation you refer to the same growing ahead of the markets and EBIT margin growth, but that wasn’t on the competitive statement. Is there anything in that or nothing at all?
Jean-Marc Huet
Okay. So just on the first one, if you look at gross margins, please don’t forget the impact of the decline in China as well to a lesser extent lower leverage from volume.
Maxing the Mix remains strategically very important in driving gross margins, a very important part to our business model. That was the first one.
The second question --
Paul Polman
Yes, on the outlook statement it’s very simple. I tried to make it a little bit more human.
But if you change one word, some of you are getting very excited and I was getting a little bit pleased by this excitement that we are creating, but we are running the business with the same way and outlook as we have done in previous years, and that’s basically what we’re trying to say there, no change.
James Allison
Warren Ackerman.
Warren Ackerman
Warren Ackerman here. Couple of questions.
So just market shares generally, with personal care volumes down in the quarter and home care sort of flattish, I was just wondering what’s happening to market share generally. I think at the Q3 stage you said at the company wide level you’re gaining share in 60% to further the portfolio.
Just wondering where we are now and specifically in those two categories. And then just secondly on Europe, Paul you’re sounding obviously a bit more cautious.
I guess with oil well below $50 a barrel, I can imagine some difficult price negotiations upcoming. Where do you think pricing might be?
I know it’s a very difficult one to answer, but where do you think -- could pricing in Europe in 2015, given oil and the importance to your COGS, could we be looking at price deflation down 4%, down 5% in Europe in 2015 or some sort of quantification or some sort of thought around that would be very helpful. Thanks.
Paul Polman
Warren let me just establish the market shares for a second. The whole year we have about 60% market share growth and at the end of the year, it has come slightly down but not significantly and based on these competitive battles I mentioned that we’ve decided not to join, but if you look at the categories that you are talking about, in personal care we continue to grow ahead of the markets.
Even with the growth of 3.5%, we think that the growth of the markets are about 3%, which are the numbers that I have seen from our people. In home care its well ahead of the market in both developed markets and emerging markets.
In food we’re holding more or less share and actually declining markets. We are just in segments that are not growth and it’s more of the segment issue than it is a competitive issue.
And while the refreshments, just to complete the picture for us, I would say it’s mixed, if I may be honest. We have actually seen very good market share gains on ice-cream across the board, about 90% winning plus.
So that business has done very well for us. But our tea business is a mixed picture.
We have reinvested back in North America. As you know we’re doing well, but we are down actually in too many other places, and this is excluding the T2.
On the European, now the second half definitely has been a little bit softer than the first half. I’m the first one to acknowledge that.
So we need to be sure again that we rebuild that momentum for next year and we’re all geared to doing that. I would have liked to do a little bit more over the second half, which was not our best performance, but I also think that we have identified the key reasons for that and are addressing them.
Regarding Europe, where the oil prices are coming down for sure, in some of the cases, I think what you are seeing in Europe is the risk in our categories at least of a slightly deflationary environment. We’re seeing that already in some countries.
I don’t think it’s going to be minus 4% or minus 5% but it would certainly be fair to say that there is very limited, if at all pricing power in Europe right now, and we need to get it from innovations which we have plenty coming out and trying to grow volumes again in the right segments and that is where young and as people are focused on. I don’t think we’ll sit here a year from now with all the things that are being worked in Europe and say prices have come down 4% to 5%.
That frankly for me would be a little bit too much in this environment.
James Allison
I think we’ve got Catherine [ph] on the line now.
Unidentified Analyst
Just a couple from me. Firstly on your guidance, and in terms of margins, as you talked about the further cost savings.
Are you really expecting another 40 basis points of margin improvement in FY15 or do you expect it to be a margin improvement that is perhaps a little more modest? And secondly if I can ask this, on your sort of softer outlooks for Q1 particularly versus the rest of FY15, is this sort of based on [indiscernible] to the market.
I know you mentioned China. Perhaps if you could give some clarity on some of your other regions, that would be really helpful.
Paul Polman
So we don’t go into the margin for the year. We will say margin expansions.
So I won’t answer that. But I think we have enough elements going.
What we have shown in 2014 is really that even in a low growth environment we are increasingly becoming very disciplined. I think if I want to comment on the positive side of the organization’s delivery, it is certainly on the stellar work that they have done in cost management.
Not to be indirect, but also in many of the other elements. And I think we’re getting far more disciplined of taking these cost out of the system, even though we are already in many of the areas very competitive.
I just believe that as we continue in this low growth environment; which undoubtedly will be there for 2015, we will continue to maintain that same pressure on our cost structure. How we at the end bring some of it to the bottom line and some of it invest in long-term growth depends also on the opportunities that arise during the year.
But we feel that we are now in a system, as we’ve talked many years, that we’re finally in a system where Unilever can deliver that consistency. This is the 6th year in a row.
The quarter one softer outlook, obviously there is already some transparency of quarter one, because we’re in the middle of it, but -- the China situation I talked about, but it’s also some of the innovations that we’re spacing out. We have the stronger comparisons of the first half of last year.
Some of these markets are still weaker and some of these effects that we’ve talked about of the lower oil prices et cetera need to come through into these markets still. So all in all the forecast that we’re getting from the markets, especially on some of the other regions still, the Middle East, the Russian region, I think we’ve not quite seen the bottom yet.
Argentina is obviously rumbling. So we have a little bit more issues that need to be shaken out over the first three months, if not the first half and then we’ll see a pick up coming in over the second half.
James Allison
Javier Escalante.
Javier Escalante
I have actually a couple of clarifications. One with respect to the guidance.
So basically you are saying that with respect to currency neutral EPS growth to be similar to the one in 2014, this is what you meant to say? And number two, coming back to the gross margin compression in the second half, currency was less of a factor.
I understood that it was mentioned that China there was volume deleverage, but to what extent is also the negative mix that you’re growing through refreshments and Home Care that are low margin businesses. And what do you need to do to accelerate personal care, given that food is very unlikely.
Jean-Marc Huet
Javier its Jean-Marc. On the point of margin progression, absolutely personal care slowing down, being high gross margin goes against us and China with an important personal care business as well.
Those are two important factors going against gross margin in the second half next to the lower leverage from volume, as well as the full effect of devaluations working through our cost of sales. On the point of guidance for 2015, let me make it crystal clear.
We expect a foreign exchange tail wind on top line as well as bottom line. So a positive impact from foreign exchange, no other mention on bottom line except for that and at this point in time its approximately 3% impact positive on top line, 3% positive impact on bottom line.
James Allison
And we have Alain Oberhuber for the last question. Please Alain.
Alain Oberhuber
I have just a question again on gross margins. How does it look about the shaping of the gross margins?
Now you said that China will be -- destocking should be over in Q2. So we could expect gross margins to improve in the second half?
Or will there be earlier? And coming back to the gross margin of the refreshment, seeing that milk prices are down, cocoa input costs are stabilizing, could we already expect refreshments improvement in gross margins in Q2?
Jean-Marc Huet
It depends how the Swiss franc is doing. I hope you’re still sleeping at night.
For us fortunately, the 99.99% of the world population that we cater to don’t live in Switzerland. So we’re little bit fortunate there.
If you look at -- I just want to take one step back here on the gross margin issue. If you look at the personal care, we’re up 90 basis points in profit.
We don’t have a gross margin issue there. As the business grows, the gross margin grows.
By the way we have now -- 75% to 80% of our innovations are margin accretive. That’s about where you will be at a cruising speed.
This is a very good performance from coming from less than 5% or 10% five years ago. And that will be the engine of margin pool has slowed down a little bit the overall growth of personal care, but a very healthy gross margin expansion.
On Home Care, we’ve seen the second half. Although the total year is more or less flat now, we have seen the second half significant improvement in gross margin.
Here again, although there is a little bit of property sale in there, I think where we’re starting to benefit from the actions that Nitin and his team is taking, and I think the trend is our friend is this case with the raw material cost. So can we have the discipline?
Is competition pricing it away? There are some factors, but I would say that we have a good opportunity to move our gross margins forwards there as well.
Then you look at food, food we have always said in the low-growth environment we’re are -- because of market shares are well placed to manage costs. You see the same on margarine.
If you take the total food business, although the growth is disappointing, it’s again 90 basis points up in overall profits and it is a good gross margin management. In fact our BMI or AMP levels is actually up on food.
And then you take refreshments, there we have a slight decline and that’s basically driven by our tea business where we have had tea prices that have come off and some of the markets that have had to react to competitive activity, but our ice-cream business, which are running increasingly on a cash flow basis is getting stronger as well. So the overall effect that you see over the second half on the gross margins is a mix effect by category.
We have solved the Maxing the Mix effect within each of these categories now more or less and we are now from quarter to quarter and sometimes six months to six months dealing with the effects of the growth -- relative growth between all of the categories. We will not compromise our individual category competiveness for managing the margins, that I want to be very clear about.
In the last six months, faster growth on the lower margin categories has pulled us a little bit down. I think over the total year next year, we will be in a slightly better position to manage that and will certainly work hard to get positive gross margin improvement for the whole year.
So that is really where we are on the gross margins story. With that Alain, I hope I answered the question.
I will sum up now and thank you once again. First of all Happy New Year once more and thank you once again for your interest and support.
I want to be clear again on the outlook statement to avoid any confusions, consistently delivering top and bottom line growth. We’re doing that for six years now, continuing to invest in the pillars for long-term growth.
In a low-growth environment, we will continue to improve the resilience and agility of the Company, all with an objective of outperforming the market on the top-line, providing continuous operating margin improvement and the discipline on working capital and cash flow, I don’t need to talk about; the numbers speak for themselves again this year, even though we haven’t discussed it too much; a stellar performance again, and again negative for the total now for five years in a row. So we believe a slow start to the year, undoubtedly don’t run ahead of yourselves, then hopefully picking up over the rest of the year.
Thanks for your support and hopefully see you soon in the markets. Thank you very much.
Operator
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