Oct 18, 2018
Executives
Richard Williams - Investor Relations Graeme Pitkethly - Chief Financial Officer
Analysts
Alain Oberhuber - MainFirst Eileen Khoo - Morgan Stanley Martin Deboo - Jefferies Celine Pannuti - JPMorgan Jeff Stent - Exane John Ennis - Goldman Sachs
Richard Williams
Good morning and a welcome to Unilever's Third Quarter Trading Update. As usual, we'll review the results and have Q&A and aimed to wrap up in about 40 minutes.
Graeme will talk about market context, more detail on the highlights of our performance and the growth by divisions. I will then cover the regional performances and Graeme will wrap up with the outlook for the year as a whole.
But first let me draw your attention to the user disclaimer relating to forward-looking statements and non-GAAP measures. And now I'd like to hand over to Graeme.
Graeme Pitkethly
Thanks Richard. Good morning, everybody.
It's very nice to be talking again once more by the thing that's really most important to all of us which is our business performance. And but before I do that let me just say a few words on simplification.
Over the past few months, we had a really very rich and fulsome period of engagement with our shareholders, discussing and listening to views on the simplification proposals. They were disappointed about the outcome, but encouraged that we had strong endorsements for the strategic objectives of unification, despite there being challenges around the mechanics.
The board will now consider its next steps and will of course continue to engage with shareholders. And we've already confirmed that we'll proceed with the plan to cancel the high voting NV preference shares from there strengthening our corporate governance.
And with that let's talk about Unilever's performance in Q3. It's been a good quarter and some of you've already picked up today.
We had balance price and volume, emerging markets were strong and growth stepped up in all three of our divisions. We remain on track for a full year guidance and indeed our 2020 goals.
Let's briefly review the market context. As we pointed out before with the shifting channel landscape, it's becoming increasingly difficult to measure total market growth with accuracy, but we think the markets in which we operate have picked up a little in the last few months with improvements in most regions.
As expected, this pick up has been largely done to price with the return of commodity inflation and the strengthening of the U.S. dollar against local currencies.
Now we're always prepared for currency volatility. It's simply part of operating big businesses in others parts of the world.
However devaluation leads to inflation and that can dampen consumer demand. Nevertheless, global market volumes have remained robust in aggregate up around 1%, but with some significant bright spots, in particular India market growth remains strong and in China while e-commerce continues to be the key driver of market growth, the offline channel recovery has been sustained.
Across Southeast Asia, the pick-up in pricing has helped overall market growth in Indonesia, which has been weak for some time is starting to show some early signs of recovery. In the developed markets, we've seen a slight exaggeration in market growth in the last quarter, although the retail environment in Europe remains just as tough as ever.
In Brazil, which has been a challenging market for some time now, pricing has started to normalize but market volume is slightly down. Very high inflation in Argentina has severely impacted consumer demand.
Our local teams in both of these markets are very skilled at dealing with economic crises and weaknesses. And as you know, we usually come out of difficult economies stronger.
In our preparation for this Q3 trading update, we realize there are a lot of moving parts such as hurricanes in the comparator, the Brazil's trucker strike and Indian sales taxes to name just a few. However there is only one of these that I would like to bring to your attention which is that we have removed price growth in Argentina from our headline USG.
That prices goes with 34% in Argentina in Q3. USG will still include volume for Argentina, which was negative 10% this quarter.
This adjustment for Argentina takes overall reported USG down by 70 basis points from 4.5% to the 2.8% which you see here. Richard will explain more, later when we talk about Latin America.
But stepping back, it's been a strong quarter overall. So let's have a little look at the detail.
In aggregate, underlying sales grew by 3.8% in the third quarter with volumes up by 2.4%. Growth was high quality with an acceleration across all divisions and regions compared with previous quarters.
We increased prices in response to commodity inflation and currency devaluation and it's a good sign of the fundamental strength of our brands and our brand investment that strong volume has continued as we've priced. In the emerging markets, growth accelerated to 5.6% and we've maintained good volume growth at 3.4%, which is very encouraging.
The strongest performance is in the emerging markets were in India and in Turkey, both growing with near double digit volume in the quarter. In the developed markets, growth was 1.3%.
As expected, we saw a recovery in North America following a weaker first half, whilst in Europe, a combination of good weather, strong execution and strong innovation help the ice cream business to continue its growth. The actions were taken to evolve our portfolio and build our presence in new channels are working.
With so far launched 10 new brands this year and our e-commerce business is growing at 50% year-to-date. Of course there are challenges, for example currencies and rising commodity costs, which put pressure on gross margins, high competitive intensity in some sales and the shifting retail channel landscape particularly in Europe and in North America.
Let me turn now to a performance by division. Starting with Beauty & Personal Care.
Beauty & Personal Care grew by 4% in the third quarter with 2.8% from volume. Price growth has stepped up in response to increasing commodity prices in particular crude oil and chemicals.
We saw good growth from the core and our new brands. The good momentum in skin care continued across Ponds and Vaseline.
And in skin cleansing, Lux and the premium Miss formats and the premium mix formats in Dove continued to do well. Dove is in fact growing over 7% year-to-date and Ponds is back to mid-single-digit growth after a long spell of subdued performance.
The new Dove self-esteem campaign which leverages mainstream entertainment with Cartoon Network is landing very well and Dove was recently accredited by Pizza as a cruelty free brand. Deodorants also had a much stronger quarter helped by recovery in Brazil and purpose led campaigns by Rexona and Dove Men and Care.
Our prestige unit grew by double digits with strong performances on all brands including a recovery in Murad. Hourglass which is our most recent prestige acquisition is growing at 40% and came into our growth numbers from August.
Hourglass is not only a fast growing business, but it's also bringing purpose to price these beauty through its commitment to being entirely vegan by 2020. Love Beauty and Planet was one of the new brands that we launched in the U.S.
nine months ago. Moving with a lot of speed, it's already in eight markets across North America and Europe and has been extended from hair and skin cleansing into skin care and deodorants this quarter.
With its use of recycled plastic and vegan skin care is a very good example of how we're evolving our brand portfolio. Under connected for growth, we continue to have stronger local innovations such as in Ayush face masks in the U.S.
and Axe Ticket which is a deodorant format expansion in India. Turning to Home Care.
Home Care grew by 4.5% in Q3 with an acceleration of pricing to 3% on a pickup in Brazil following the trucker strike of last quarter. In South Asia, we see consumer upgrading and very strong growth in home and hygiene in particular from hand dishwasher Vim bars where the new Vim anti-smell bar with extracts of mint has been developed locally and delivered to the market in less than six months.
In fabric solutions, which is cleaning, growth was driven by strong performance of liquids in emerging markets. And fabric sensations which is more conditioning, China is now our biggest country and our locally relevant innovations drive market development in both the online and offline channels.
Comfort Perfume Deluxe is seeing success in both developed and developing markets. In Europe, our launch of liquid concentrate Dirt is Good continuous with a modernized pack design which reduces our waste impact by one third.
The dry wash category has launched in the U.K. with Day 2.
Day 2 is a new brand, it's a light aerosol mix that refreshes and resets your cloths to just washed, so that you can wear your clothes for another day with confidence. Food & Refreshment grew by 3.2% in the quarter.
Ice cream was the main driver helped by good weather in northern Europe but also reflecting in the overall strength of our innovation and our execution in ice cream. Kinder ice creams haven't been a big success in France and Germany.
And Magnum Pints is now the number one U.S. pint innovation for 2018.
We continue to build our out of home business through cabinet placement. Retail stores and our new on demand IceCream Now business model which enables consumers to order ice cream to their home exactly when they want it.
Savory delivered good performance in emerging market cooking products, but this was offset by slow growth in developed markets as the good weather impacted soups. New brand such as Jawara, a chili sauce in Indonesia and Red and Prepco in the U.K.
are giving us entry into higher growth on trend spaces. With good growth from Brooke Bond tea in emerging markets and the black tea segment continues to be difficult in the developed markets.
The transformation of our tea portfolio is continuing with acquisitions like Tazo and Pukka and on trend innovations like our new [Technical Difficulty].
Richard Williams
[Technical Difficulty] France which is broadly flat, the market remains very tough. Growth in Q3 was good, but the exclusion of Argentinian price, the successful completion of the spread sale and currency devaluation contributed to a turnover decline in the quarter 4.8%.
The currency impact of 5.2% as a result of the euro strengthening against almost all of our major emerging market currencies. If exchange rates were to stay as they are today, we would expect a full year drag on turnover of around 7% and a little more on EPS.
And with that I'll hand back to Graeme.
Graeme Pitkethly
Thanks Richard. Let me just try and summarize the regional picture a little bit.
We're really very pleased that volume in emerging markets has remained strong, whilst our pricing has picked up. We expect a high contribution from prices, commodities pickup and the volume will soften a little higher as higher prices impact short term consumer demand.
In North America an improved Q2 is welcome and we're pleased to see some growth in Europe where the strength of our innovation and supply network have ensured that good weather was converted into strong performance. For 2018, we expect full year underlying sales growth to be at the bottom end of our multi-year range of 3% to 5% possibly even a little higher with a nice balance of price and volume.
This is of course made more difficult on a reported basis with the accounting changes in Argentina that we expect to make it. Commodity inflation looks like it will be a stronger headwind for our sector for some time to come.
Nevertheless, we continue to make steady progress towards our 2020 margin target and expect another year of strong cash flow. And with that we'd be really happy to take your questions.
A - Richard Williams
Thank you, Graeme. [Operator Instructions] Okay, so we've got the first question from Alain Oberhuber from MainFirst.
You want to go ahead, Alain?
Alain Oberhuber
Yes, thanks so much, Richard. Good morning, Graeme and Richard.
I have one question mainly with regarding the pricing. Could you give us a little bit an inside where you expect pricing into different mark, which was mainly be on the other side where you expect the pricing in the different product segment please?
Graeme Pitkethly
Good morning, Alain. So, yeah, the price landscape, just to go through what's happening within markets overall.
I'll start with North America, I mean Nielsen is showing growth overall of about 1% to 2%, we think that could be 2% to 3% including non-track channels. The environment for pricing, as we said in the talk, we step forward with pricing in Q3 but the environment remains a little bit tough and quite promotional intense, especially in dressings.
And then moving to Europe, whilst we've seen a little bit of price moving forward in some markets for example in the Netherlands and the U.K. it's a mixed picture and as we said in talk especially in France, it's a very tough retail environment.
But as we said, we had a bit of a boost from the good weather in the last 12 weeks. Moving to Latin America, we're starting to get pricing back in Brazil, and I think that's a very important factor for us, is the first quarter out of the last three quarters we were able to get some pricing back.
So the main stuff in Brazil starting to stabilize, market volume is still negative and negative 4%. Argentina, I won't say anything else about it, because of the pricing we're taking out, but of course the volume is still in there and the market volume decline in Argentina was negative 9%.
We think as we said that will get a little bit worse before it gets better. And then we've got nice steady balance actually in Mexico, continuing to perform well.
Our business there is going sort of mid-single-digits with a nice balance between price and volume. And then into Asia, where as we said, we've had very strong volumes drive performance even as we started to push pricing through.
In India, I think you know that there would definitely be an inflationary environment. The main driver is the shift and the you know the appreciation of the U.S.
dollar relative to a number of currencies, but you know there we've been able to secure growth which is largely volume driven, I think that will rebalance between price and volume a little bit. And then across safety stage, as we said we started to see a nice balance of price and volume again in big markets like Indonesia.
So it's a mixed picture. What I'd reemphasize Alain is you know the sort of Unilever you know the diversity of markets where we have strong businesses, the fact that we're very skilled in taking prices and managing periods of higher inflation through currency devaluation and commodity pick up.
And that's evidence I think as Richard said by you know the very strong action that we've taken in Argentina, although that's a little bit of an extreme case.
Richard Williams
Okay. Thanks Alain.
Let's go to our second question which is from Eileen Khoo of Morgan Stanley. Go ahead, Eileen.
Eileen Khoo
Good morning. Good morning, Graeme and Richard.
Two questions for me. The first one is I know you said Graeme that it's getting increasingly difficult to say what your underlying markets are doing overall, but I wonder if you'd be able to put a number on what you think the overall underlying growth has been now, because you'd mentioned that has improved?
And then comment on how you see your own performance versus this? And then secondly, in terms of brand launch, I think you recently mentioned that you have 12 new brands ready to go in the pipeline, should we therefore expect the pace of new introductions to salary into the last quarter of this year?
Thanks.
Graeme Pitkethly
Hi, Eileen. Thanks for the questions.
So how to think about market growth, you know as Richard and I said you know there's an awful lot of channel shift in our marketplace and in our sector generally and that does make it harder to get an accurate read on overall market growth. But the way we see it just now, we basically have a market which is growing a little bit north of 3% with just above 1% of that in volume.
Now said against that how do we view the competitiveness of Unilever. Well, we're against the 3% market growth we grew at 3.8% or 4.5% if you include the Argentinian price which is actually you know of course recorded in the market growth number all be it with a time delay.
So we're definitely growing in aggregate faster than the rate of our market growth. And from a volume perspective with volumes growing just north of 1%, Unilever's volumes are growing at 2.4%.
So you know an aggregate we think we're growing faster than our marketplace. But with a mixed picture as we said, I mean it's not all roses, we in North America in dressings, North America hair care continues to be a tough environment.
You know we don't win everywhere obviously, but when it come to that basic question of you know how are our markets growing and are we competitive within each channel. An aggregate an overall stepping back from it, we think we're growing as I said, a little bit above the market right now, certainly from a volume perspective which is particularly pleasing with the level of pricing that we put through in the third quarter and expect to put through into 2019.
Moving your question about new brands. Yeah, we've actually launched I think 17 new brands since the beginning of 2017 and 10 new brands so far this year.
It's quite a distinctive change really when you look historically you know perhaps we've launched one of two new brands over the last decade or so. You know really this is all about the ability to enter new consumer spaces with brands, with models that are you know flexible relatively a lot of you know a lot of packaging which is in itself part of the brand communication message.
Brands being built and the weirdness of the brand being built largely through social campaigns and social media campaigns. The brands tend to be in sectors certainly in personal care which are quite premium and that means there's quite a high retailer margin attached to it, which means that you know we're able to put a brand then which is relatively self-sustaining from a you know individual product perspective.
It's quite important because you know in the past perhaps you would move, take one of your existing brands and launch it in a brand new white space market. That would require an awful lot of investment in order to build awareness of the brand.
You would make you know a period of losses for perhaps several years until the brand that establish to scale position. This is quite a different and very complementary way of addressing new consumer needs spaces.
Sometimes we acquire brands and sometimes it's better just to create the brand internally with that particular piece of consumer insight. The brands like I mean just this year K-Bright which has been launched in Southeast Asia which is focused on Korean beauty.
Prepco and Red Red which we mentioned in the speech, which are in the U.K. which are snack pots.
Jawara which is the chili sauce that I mentioned with now launched in Indonesia. Day 2 which we mentioned, which Richard mentioned which is a tier 3 brand in laundry in Latin America.
We're moving quickly. This is the benefit of connected for growth.
You know our businesses on the ground, have got the equipment now and the freedom to enable them to launch brands at speed if they see any area of consumer growth and consumer demand which is interesting to us. And I think that's absolutely essential going forward to maximize the growth opportunity that we have in our markets.
Richard Williams
Okay, thanks Eileen for the question. Next one comes from Martin Deboo, Jefferies.
You are on Martin.
Martin Deboo
Good morning, Richard. Good morning, Graeme.
Two from me please. First one is on commodities, can you just update us how you are seeing the landscape, I mean the last thing I remember you saying which you feel mid to high single-digit inflation in H2, have I understood that correctly, any change?
Second one is, can you give on Dollar Shave, how's that going, particularly how is the U.K. rollout going?
Those are the two.
Graeme Pitkethly
Hi, Martin morning to you. Well on commodities, yeah, in the first half, we had, in local currencies commodity costs were going up sort of low to high - sorry, low to mid-single-digits and most of the inflation that we saw was driven by material inflation in the first half.
And the currency impact was actually quite small because there's quite a bit of UDS weakness. What's changed in the second half and going forward into 2019 Martin is the step up in the impact of a stronger U.S.
dollar against most currencies. That's really the key feature.
And here we think that that will carry on for quite some time. We've also got higher inflation on base commodities especially in crude and in chemical.
So we do see that will be you know closer to the mid-single-digits going forward across the commodity portfolio, driven principally by a stronger U.S. dollar, but also you know with more fundamental increases and things like the crude price.
On Dollar Shave Club, the business in general in totality continues to perform quite nicely for us. We had about 10% growth in the business in the year-to-date.
We've particularly continued to grow the number of new subscribers that are coming into the business albeit that started to come in at a slightly lower rate but the new subscribers in those sitting on about 3.9 million. On the U.K.
launch in particular, we launched that in January 2018 is off to a good start but it's definitely going to take some time to scale. And you can see the activity as a lot of advertising in the marketplace right now behind Gillette and you see a lot of activity from our alternative model such as Harry's et cetera.
So a good start, but it's going to take time to scale that up. What we're doing in the business more fundamentally is moving to a more flexible business model where it's easier for the subscribers to Dollar Shave Clubs have more control over the basket size, is easier for them to add non-razor products into their mix and to really appreciate whilst they're getting the online experience.
The degree of value that's being afforded to them as they add items to their basket. So we're trying to drive up basket size and we're trying to drive up the frequency of purchases.
That's mean that meant are a fairly fundamental rewrite of the data management platform for Dollar Shave Clue and quite a different business model for it. So, and of course a new campaign, I don't know if you've had a chance to look at it, it's been on YouTube, but that targets are very broad range of users and you know it's actually I think building the brand in a very, very nice way.
It's a nice movie to watch.
Richard Williams
Okay. Our next question is from Celine Pannuti at JPMorgan.
Go ahead, Celine.
Celine Pannuti
Yes, good morning.
Graeme Pitkethly
Good morning, Celine.
Celine Pannuti
Yeah. So my first question and I would like to come back on what you said on volumes and the balance of pricing and volume.
So you said that volume is around 1% plus globally, so how do you expect this volume component to move forward as you are going to press on with pricing, if you could talk a bit about the elasticity, how we should look at that, we should get in Q4 that is comparative but probably more brought into 2019? And if you could also comment why your volume in what I would call softer despite quieter if you compare last year?
Then my second question, I would like to rebound on your commentary, so you talk about higher inflation and the challenges that you are facing with FX. And are you still expecting gross margin to be up for the year and I just feel happy with consensus expectations for the total margin?
Thank you.
Graeme Pitkethly
Okay, Celine, thanks for the questions. First on the price volume balance.
You know we expect that we'll get a helping hand on fourth quarter growth through our father acceleration in pricing as commodities do pick up across our business. We also get you know a couple of months of growth in Carver Korea.
The acquisition starts to pull in to the fourth quarter and they did a couple of weeks of growth from with from Shea Moisture only a couple of weeks and it's not a huge business. But we get a benefit from that nonetheless.
We do think that that will be offset by some softer volumes as those rising commodities in the pricing associated with that starts that we are a little bit on consumer demand. So I think we've been that moment where although we're very pleased with the strong volume performance that we had while stepping up pricing as expected in Q3.
We do think with a higher levels of pricing that are going to be required, we will see a rebalancing towards more price and a little less volume going forward. But that's why we're organized the way we are, that's why we have strong local teams in place to make that sort of very important and magical balance between price and volume market-by-market making sure we've got the brand portfolio to appeal to a hard press consumer if the consumer needs to down trade and then concentrate on value for a period of time.
So we're entering another one of those periods where it will be more price and a little less volume and we'll be watching the volume at lying very, very closely as we normally do as a means of thinking about are we making the right decisions. On the gross margin, I obviously don't want to talk about much on margin this quarter, because it's just a trading update.
But to iterate, I mean we were really pleased with our margin progression in the first half, principally because of the high quality behind it when we went forward with 60 basis points of gross margin as part of an 80 basis point improvement in underlying operating margin. That gives us a very strong base for the balance of the year.
There are factors that are going to weigh on margin across the industry such as commodity inflation of course, you feel the inflation before you're able to land the price, I mean we tend to be leaders on price but there's obviously a lag and that is a can put a little bit of pressure on gross margin and we need to watch that very, very carefully. But I do think that what we've delivered in the first half because it's a strong base for the balance of the year.
And without saying too much, I think we should do okay there.
Richard Williams
Okay. Thank you.
Our next question is from Jeff Stent, Exane. Go on Jeff.
Jeff Stent
Hi, good morning. You previously commented all the portfolio changes with about 100 basis points to grip growth.
So it's on mind, I wonder if you could just quantify on a continuing business bases what like-for-like growth would have been in the quarter? Thanks.
Graeme Pitkethly
So, 2019, Jeff, we said, we thought that everything we had done today would give us about 100 basis points to when coming out of 2019. However, those acquisitions doing relative to the expectations we had when we made that comment.
Everything with the exception of Blueair is collectively growing at double-digits. And so that if you go down in the individual acquisitions, those assumptions still remain robust.
Blueair is however declining by strong double-digits. And as we head into 2019, that's going to present something of a challenge.
We expect, as we start to analyze the drop off in Blueair, and some other challenges we had in one of our acquisitions in particular in Prestige which was Murad, we start to lap the drop off from coming over the informational channel from Murad and we start to annualize the drop in Blueair itself, and we also get some benefit on top from selective geographic expansion. So it's a changing mix as you would expect but really the only one of those acquisitions which we've got work to do on is Blueair during the course of 2019.
Richard Williams
Okay. Thanks Jeff.
We got a question from John Ennis at Goldman Sachs. Go ahead, John.
John Ennis
Yeah. Good morning.
A follow-up for me actually on the commodity comments you made. I wondered if you could tell us when you think you would have fully offset the mid-single-digit inflation through pricing.
And then in general, I wondered if you could comment and let us know how you're seeing competitors at or they acting in a similar fashion with price or are you seeing some differences between the multinationals sensation of your local competitors? Thanks.
Graeme Pitkethly
Hi, John. Well, that's a really difficult question to answer your first one because it's a real crystal ball question, but what we do is we are of course, one of the tools you need in order to deal with an environment like this effectively.
First of all, you need really strong brands. I mean the power of the brand is an inflation protection.
The reason why we spend 7.5 billion of brand and marketing investment every year behind the brands is exactly for times like this because it's strong brand equities that allow you to price, if you choose the price or indeed you could choose not to price and win a little bit of market share over the period giving you a broader base and stronger brand proposition for the future. So there's many choices that you can make.
Now we delegate those choices going to the front line of our business. But we are as I said in response to Celine's question, always very cautious about the balance between price and volume and while sure looking at price, by the way the second tool you need on price is the ability to have a lot of visibility about what your pricing is going to be you know our supply chain around the world are procurement organization the way that we hedge some commodities going forward, getting a view on currency et cetera.
All of those things are really important to give the front line of our business. Clear information that allows them to act decisively in markets where typically as I said we are the market leader.
You can't get a difference between multinational behavior and local company behavior. I think it's no secret that a lot of local businesses can be privately owned.
You know they maybe are happy to operate with a lower level of profitability for a period of time. And it's exactly the same set of choices that we face.
They may choose more often perhaps to build their brand, hold pricing a little bit more competitively and choose to gain a little bit of market share and build their brand through that period. Typically they've got smaller brands than we have and that's a perfectly rational thing to do.
But it's not really a new phenomenon number. If you think back to how long we've been in key markets like Pakistan, Indonesia, India, most of the competition we face is a combination of multinationals and local competition.
So it's not really as if there's a whole slew of arrival there. The real dynamic in local competition is when new brands enter to find a new consumer space moving very quickly, leveraging social media, perhaps social commerce to build a brand.
So the real local phenomenon is the speed with which brands can be established in response to fast changing consumer expectations. It's not necessarily the local brand behaves fundamentally differently when it comes to basic economics like a devaluing exchange rate and increased commodity inflation.
Richard Williams
Okay. Thank you.
While we have no more questions and we said we try to wrap up in 40 minutes and I think we just squeaked in.
Graeme Pitkethly
Sorry to answer all the questions, I should have put some of it in ground.
Richard Williams
We'll bring the call to a close. If you do have any of the further questions, I'm sure you probably will think of some then Becky and I'll be back at our desks and just give us a call at any point during the day.
So enjoy the rest of the day and thank you.
Graeme Pitkethly
Thanks everybody. Have a good day.
Operator
This conference has been recorded. The details of the replay can be found on Unilever's website and will be available shortly.
Thank you.