Hindustan Unilever : DQ'21 Earnings Call Transcript (PDF 313KB)

December Quarter 2021 Earnings Call of Hindustan Unilever Limited

December Quarter 2021 Earnings Call of

Hindustan Unilever Limited

20th January 2022

Speakers:

Mr. Sanjiv Mehta, Chairman and Managing Director

Mr. Ritesh Tiwari, CFO and Executive Director, Finance and IT

Mr. A Ravishankar, Group Finance Controller and Head of Investor Relations

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December Quarter 2021 Earnings Call of Hindustan Unilever Limited

Operator

Ladies and gentlemen, good day, and welcome to Hindustan Unilever Limited conference call for the results for quarter and nine months ended 31st December 2021. Please note that this conference is being recorded.

I now hand the conference over to Mr. A. Ravishankar, Group Controller and Head of Investor Relations. Thank you and over to you sir

A. Ravishankar Hindustan Unilever Limited

Thank you, Faizan. Good evening, everyone, and welcome to the conference call of Hindustan Unilever Limited. We will be covering this evening the results for the quarter and 9 months ended 31st December 2021. On the call with me from HUL is Mr. Sanjiv Mehta, Chairman and Managing Director; and Mr. Ritesh Tiwari, Chief Financial Officer, HUL. We hope that you are staying safe and healthy. We'll start the presentation with Sanjiv talking about our performance in this quarter, perspective on the operating environment and our outlook for the near term. Ritesh will then share deeper insights into our performance for the quarter with category highlights.

Before we get started, I would like to draw your attention to the safe harbor statement included in the presentation for good order sake. With that, over to you, Sanjiv.

Sanjiv Mehta Hindustan Unilever Limited

With good health and a lot of happiness, thanks a ton for joining us today. And I do hope not only you, but all your loved ones remain safe and well.

Let me begin by talking about our performance in this quarter and then cover the market environment and the strategy to navigate through the challenges. We have delivered what we certainly believe a strong all-round performance in this quarter. It's a result of our strategic clarity, strength of our brands, operational excellence and dynamic management of our business in an environment which has been changing rapidly. Our domestic consumer business grew 11%, significantly ahead of the market, resulting in handsome market share gains. More importantly, we have been able to build on our momentum and consistently step-up our growths when seen from a 2-year lens. In December quarter'21, our 2-year sales CAGR was 9%, an increase from the 7% we had in September quarter, and the 2% in June quarter'21. I will talk more about it in the subsequent slide. Moving on to profitability. EBITDA margin in the quarter increased by 100 bps compared to December quarter '20, driven by prudent financial management led by increased focus on cost savings and incremental pricing based on the strength of our brands.

Now what we have done here is to unpeel the 2-year CAGR at a category level for a better appreciation

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December Quarter 2021 Earnings Call of Hindustan Unilever Limited

of the quality of growth. It is a wonderful sight to see all parts of our portfolio contributing to a robust 2-year CAGR. Starting from the left side of the chart, you can see that our big categories like Fabric Wash, Beverages and Skin Cleansing have delivered a very strong double-digit2-year CAGR. Household Care and Ice Creams have done exceedingly well and also delivered a robust double-digit 2- year CAGR. So around two-thirds of our portfolio is growing double-digit CAGR. Another 30% of our portfolio, which includes categories like Skin Care, Hair Care, Foods and Oral, have grown in high to mid-single digits. Rest 3% of our portfolio, which includes COVID-impacted categories of Color Cosmetics and Water, had relatively soft performance over the 2-year horizon.

I have said this earlier and cannot stress enough that in times of such high inflation and uncertain operating environment, it is extremely important to look at our business from the lens of competitive growth and whether we are retaining and growing our consumer franchise. In this regard, I'm extremely pleased to see that our consistent strong performance has translated into handsome market share gains. We have seen the highest year-on-year share gains in more than a decade. These gains are broad-based, and we have gained in all our divisions and both in urban and rural markets across all our regions. Share gains have come not only in the mass segment, but also in the premium and popular segment. In fact, our market share gain in the premium segment is at levels similar to our gains in the mass segment. The pandemic, while it has tested us, has made us stronger, more agile and much more resilient as a business. We clearly are cementing our market leadership.

The world has never had a clearer view of the environmental challenges that faced all of us. The need for action has never been greater. We know we have a big role to play. We're a company of brands and people with a clear purpose to make sustainable living commonplace.

One of the biggest challenges that all of us face is that of plastic waste. Plastic is a very versatile packaging medium that helps us get our products to consumers safely and efficiently. It's often the lowest carbon footprint option compared to other materials, yet far too much plastic ends up in our environment. To give you some numbers, India consumes an estimated 16.5 million tonnes of plastic annually. Around 70% of this ends up being discarded and remains in the environment. We need to minimize this plastic waste and create a waste-free future for the next generation.

To achieve this, we have set ambitious targets which would all be attained by 2025.

First, we will help collect from the environmental and process more plastic packaging waste than the plastic we use in the packaging of goods we sell. All our plastic packaging will be fully reusable, recyclable or compostable. And lastly, we will reduce the amount of virgin plastic we use in our packaging through use of recycled materials and other means. We continue to make good progress.

In calendar year 2021, we became plastic neutral, i.e., we have collected and processed more plastic packaging than the plastic we used in the goods we sell. Our program is not limited to a few cities, but we have a pan-India network spanning 160 locations. We are perhaps the only company of this size and scale to do this in every state and union territory of India.

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December Quarter 2021 Earnings Call of Hindustan Unilever Limited

We have a framework called 'Less Plastic, Better Plastic, No Plastic' with which we evaluate our plastic footprint. Let me talk about a few examples. The first is an example of where we have reduced virgin plastic usage by replacing them with post-consumer recycled plastic, what we call as PCR. Bottles used for Vim Dishwash, Surf excel Matic, Surf excel Easy Wash, Rin Matic and Comfort are made with 50% PCR. Our Sunsilk and TRESemmé shampoo bottles, Vaseline Body Lotion bottles also have recycled plastic incorporated.

Last quarter, we spoke about the Smart Fill vending machine, which offers an innovative option to consumer to reuse plastic bottles by refilling their favorite Home Care liquids. We are already seeing encouraging signs from this pilot, and we intend to scale this up in future. We're also transitioning soap wrappers and shampoo sachets to recyclable structures. Another example is Lakmé, where we have created a refillable product, the Lakmé Absolute Perfect Radiance Day Creme. The Combi Pack consists of the main product and the refill pack. Consumers can order a refill pack once the product is consumed and thus save on plastic packaging.

Ritesh will cover our in-quarter performance in more detail in his section. Let me now spend some time talking about the operating environment and our outlook.

After 2 devastating waves of COVID, Indian economy is on the path to recovery. Several sectors of the economy are back to pre-pandemic levels of output. However, the recovery is still in the making with different parts of the economy improving at varying pace. From an FMCG market lens, and here I'm talking about the FMCG categories in which HUL operates, we are seeing a moderation in the market growth. We had cautioned about rural growth in our September quarter earnings call, and we do see the deceleration taking hold. With very high levels of inflation that consumers are witnessing volumes in market have declined, and this decline is more accentuated in the rural markets and in those categories which have been impacted more by the commodity inflation.

Commodity inflation continues to be a significant headwind for the industry. Palm oil remains at historic highs, while crude has rallied by more than 70% in the last year. Packaging feedstocks have also inflated significantly.

Appearance of the Omicron variant even before the economy has completely recovered from the shocks of the previous 2 waves has made the environment more challenging. COVID cases are rising, and it is a reminder for all of us that the pandemic is not yet over. We should definitely not throw caution to the wind, and we should continue to take all the precautions.

In these challenging circumstances, I'm confident that a clear and compelling strategy, together with our growth fundamentals for operational excellence, will hold us in good stead. We remain focused to deliver our 4G growth agenda, growth that is consistent, competitive, profitable and responsible. As seasoned sailors, we will dynamically adjust our sales and navigate through the turbulent external environment.

We are well positioned. The nearly 2 years of pandemic has made us a stronger, better business which

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December Quarter 2021 Earnings Call of Hindustan Unilever Limited

is much more resilient and responsive. And what makes us a formidable organization is our people who were and always will remain our #1 priority. A wide and diversified portfolio, more than 50 trusted brands across 15 categories, place us uniquely. Our supply chain has become much more agile and responsive. All this positions us well to do with the uncertainty that we face.

Let me now conclude with the outlook we have. In the near term, the operating environment remains challenging. Whilst the rising cases in COVID wave 3 are a concern, we expect a limited impact due to a robust vaccination program and the health and safety measures taken by the authorities.

FMCG market growths are moderating and consumers are titrating volumes owing to the significant inflation that they are witnessing. Further, the inflationary conditions that I spoke about earlier are likely to persist in the near term. In fact, we expect to see sequentially more inflation in March quarter compared to December quarter. These commodities affect large parts of our business and hence margins are likely to remain under pressure.

Strength of our people and our brands, a clear strategy and resilience of our business positions as well. We will continue to manage our business with agility, take all steps required to protect our business model and expand the consumer franchise whilst maintaining our margins in a healthy range. We remain confident and our focused to deliver a 4G growth agenda, growths like that we say is consistent, competitive, profitable and responsible.

With this, let me now hand over to Ritesh as he provides deeper insight into this quarter's performance. Ritesh, over to you

Ritesh Tiwari Hindustan Unilever Limited

Thank you, Sanjiv. Good evening, everyone. I hope that you and your loved ones are safe and keeping well in these difficult times.

Let me talk you through our December quarter performance in more detail. We had a very strong delivery in December quarter. Domestic consumer business grew 11%, reported turnover growth was 10%. The difference between the reported growth and domestic consumer growth is largely our export sales which had declined of a high base where we had some one-offs. This has been a strong, competitive and broad-based growth.

Underlying volume growth in the quarter was 2% and significantly ahead of market volume growth. Let me give you further insight into this. Almost 30% of our business comes from packs that operate at magic price points, like INR 1, INR 5 or INR 10. In these packs, our preferred mode of taking pricing is by reducing grammage. As a result, even the same number of units sold leads to volume decline. This had a circa 2% impact on our volumes.

Talking about our bottom-line performance, EBITDA margin was healthy at 25.4%. In the backdrop of continued input cost inflation, I am pleased that we have dynamically managed the business to deliver

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