Hindustan Unilever : SQ’23 Earnings Call Transcript

"September Quarter 2023

Earnings Call of

Hindustan Unilever Limited"

October 19, 2023

Speakers:

Mr. Rohit Jawa, Chief Executive Officer 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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Moderator: Ladies and gentlemen, good day and welcome to Hindustan Unilever Limited Conference Call for the Results for September Quarter Ended 30th September 2023.

As a reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during this conference call, please signal an operator by pressing "*" then "0" on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Ravishankar, Group Controller and

Head of Investor Relations. Thank you and over to you sir.

A. Ravishankar: Thank you, Neerav. Good evening all and welcome to the Conference Call of Hindustan Unilever Limited. This evening, we will be covering the results for the quarter and half-year ended 30th September 2023. On the call with me is Rohit Jawa, our CEO and Managing Director and Ritesh Tiwari, our CFO.

We'll start the presentation with Rohit sharing an overview of the operating environment, our performance in the quarter and our key focus areas. Ritesh will then cover our financial results in more detail and also share the near-term outlook. We expect the prepared remarks to take about 20 to 25 minutes, and leaving us with ample time for Q&A.

Before we get started with the presentation, 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 Rohit.

Rohit Jawa: Thanks Ravi. Good evening, everyone. It's a pleasure to interact with all of you.

Let me first start before I begin the presentation to share a milestone that you have crossed recently. We completed 90 years of corporate existence on 17th October. This is a testament to the strength of our business, dedication of our people, unwavering support of all our stakeholders, and a long-held belief that 'What is good for India is good for HUL'. It is indeed a proud moment for us to share with you.

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Starting now, with an overview of the operating environment. The demand trends in this quarter remained stable and were similar to last quarter. Market volumes grew in high single digits year-on-year. However, we need to be mindful that this came on a base period where volumes declined mid-single digits and hence, cumulatively two years market volumes remained largely flat. Urban and within that modern trade and large packs are leading growth for the FMCG market. On the other hand, rural demand remained subdued, with volumes continuing to decline marginally on a two-year basis. Price growth in the market is tailing off as expected with FMCG players continuing to pass on the benefit of lower input costs to consumers. This is reflected in a sequential reduction in market price growth with September quarter at 3% versus 8% in June quarter. Consumers are yet to experience deflation which largely explains why the volume recovery is gradual. The other lens to look at is price growth over a three-year period which as you can see is a substantial 25% increase.

FMCG market continues to witness heightened competitive intensity. As we spoke during June quarter results, we are seeing the resurgence of small and regional players in select categories and price-points, many of whom had vacated the market during the peak of inflation. For instance, when you look at Tea or Detergent bars, smaller players are growing significantly ahead of large players.

We are also seeing a sharp increase in the media intensity. Aggregate media deployment in our category increased by over 20% versus the same period last year.

In this challenging backdrop, we delivered a resilient performance in the quarter. We have scaled a new milestone by crossing Rs.15,000 crores quarterly turnover mark for the first time.

Our Underlying Sales Growth was 4% with the Underlying Volume Growth of about 2.5%.

EBITDA margin at 24.6% improved 130 basis points year-on-year. Profit after tax before exceptional items and EPS grew 12% and 4% respectively.

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Talking about market share performance - our growth was competitive with about 60% of our business winning value shares. We continue to win volume shares in more than 75% of the business, which is an important marker as we move from price lead growth to a volume lead growth.

There are certain pockets of our portfolio primarily in the mass end, where we have seen a dip in our value market shares. However, on a sustained basis we have been winning shares in large parts of our business leading to significant corporate share gains over the last two years.

Speaking about progress made on some of our key sustainability initiatives:

As a part of our sustainability goals that we had announced last year we have Net zero goals, which aim to achieve zero emission in our operations by 2030 and across the value chain by 2039. We have been decarbonizing our own operations driven by the rapid adoption of clean energy in our factories. Nearly 100% of our electricity is from renewable sources and we have replaced fossil fuels with biofuels for thermal energy.

However, large part of emissions comes from outside of our operations through ingredients purchased from our suppliers. More than half of our scope three emissions is actually in the Home Care business value chain.

With an aim to mobilize actions to achieve net zero, we hosted more than 100 representatives from our Home Care supplies across the world in our first Clean Future India Summit. As part of the Summit, we announced two major initiatives:

1. "World's First Near Zero Carbon Soda Ash" in partnership with Tuticorin Alkali Chemicals & Fertilizers Limited.
2. The scale-up of low carbon sodium silicate in partnership with Sudarshan Silicate Private Limited.

Talking about another initiative, you must be aware of our Shakti program. We work with over 1.9 lakh women entrepreneurs to transform their lives and livelihoods. A couple of weeks back I visited Kanjatapur, a village in South Bengal where I met Paromita. She is one of our Shakti entrepreneurs. She has

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been associated with us for over 12 years, I was delighted to hear her proudly narrate her passion with sales, financial independence and being able to provide for her family. She's an influencer in her own right. She also spoke about amplifying HUL's nutrition awareness project which we call 'Mera Poshan Mera Gaon' - a reminder that she doesn't just sell HUL products in the hinterland, but she also serves as a beacon of social change and entrepreneurship in her community.

Shakti entrepreneurs are up skilling and becoming digitally savvy and restocking their products using our e-B2B app, Shikhar. We have now onboarded over one lakh Shakti entrepreneurs on the Shikhar app. Shakti continues to grow from strength to strength and is indeed a testament to our belief of doing well by doing good.

As you are also aware, we were the first FMCG company which partnered with ONDC when we went live with U-Shop a year back. We are further extending our partnership with ONDC by leveraging Shikhar with an intent to democratize e-commerce for small retailers.

With the help of an integrated module in Shikhar called the Shikhar Seller app, neighbourhood kirana stores can now go on live on ONDC seamlessly and sell the entire catalogue of products online.

This is now live in two cities, New Delhi and Bengaluru, covering about 60 outlets as a pilot and we will be further scaling it based on retailer feedback.

Let me shift focus from the 'here and now' to the longer term. I'm a big believer in the India story and opportunity. We are the fifth largest economy with the GDP worth $3 trillion, growing at a fast pace and well poised to become the third largest in the few years. The demographics also stack in our favor - 20% of the world's working population, over a billion reside in India. 10 million get added every year to the workforce, giving us a huge demographic dividend.

India is leading the Digital revolution. The IndiaStack is one-of-its-kind digital scalable public infrastructures, based on identity, payments and consent-based

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data sharing. Just to give you the magnitude, we have more than 130 crore Aadhaar card holders. In the years to come, application based on the digital infrastructure, such as ONDC for digital commerce, ULIP for logistics, Ayushman Bharat for electronic health records amongst others, will spur innovations and new growth. While in several other more developed nations, digitalization is a privilege, in India digitization has been democratized to reach even the grass root levels, with the initiatives such as Aadhaar, Jan Dhan Yojana and Unified payment interface.

All these factors augur very well for our FMCG industry and offers a huge runway for growth. India's per capita FMCG consumption when compared to other similar economies is significantly low and within that rural is highly under indexed. Penetration levels for many of our large categories are still very low. Premiumization is bound to accelerate as India becomes more affluent and more urban. The more affluent population is expected to double by 2027, naturally their per capita FMCG consumption is much higher at about 1.5 to 2 times compared to national average.

In this context, we are well placed to win. As Indian's largest FMCG company we are well placed to lead this growth opportunity. Each of our three divisions by itself will be larger in size than most FMCG companies in the country.

9 out of 10 households in India use one of our products. We are proudly the market leader in more than 85% of our business. We have a wide and a resilient portfolio of 50+ brands of which 19 brands clock more than a Rs. 1000 crore turnover annually.

We have reached about 3 million outlets directly of which 2.3 million outlets are covered through our distributor network and the remaining by our Shakti entrepreneurs in the rural hinterlands.

While our supply chain one of the most complex it also gives us significant competitive edge. To give you the perspective, we manufacture and sell more than 65 billion units every year, which is about 45 units per Indian. That's the scale of our supply chain.

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We continue to be the employer of choice for many years in a row and now if you look at our track record in the last decade, we've added 33,000 crores top line to our turnover growing at a CAGR of 9%, well balanced between volume and price growth. We have improved our EBITDA margin by over 800 basis points from 15% to 23% and a large part of this has come from our culture of saving and by driving premiumization. Our net profit in the last decade grew at 10% CAGR.

Clearly we have a very strong business model, and our track record is reflective of that.

That brings me to the key thrusts. Let me now outline the key thrusts that will enable us to continue winning in the marketplace. Our core belief of 'What is good for India is good for HUL' and the integrated approach to sustainability remains unchanged. A lot of what we have already been doing has strengthened our business and we'll continue to build on it while adapting to the changing consumer trends and shopping behaviors.

Our first thrust is to grow the core, which includes the 19 large brands through product superiority and WiMI led execution.

Second, we've spoken about the opportunity to build categories of the future through market development. We will do this through persuasive communications, large scale consumer contact programs, driving mental and physical reach. Innovations and formats of the future will propel premiumization.

Third, we have the job to continue transforming parts of our portfolio to the on- trend demand spaces especially in beauty and foods.

Fourth, Winning in Channels of the future through brilliant execution, and curating a tailored portfolio by leveraging our design to channel approach remains an important thrust.

We will also need to structurally reset our cost base which will help generate fuel to invest back in growing the business. To this end, we'll continue

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leveraging our Net Revenue Management and symphony programs to drive savings across all lines of the P&L.

We will further sharpen our distinctive capabilities by:

1. Doubling down on WiMI and digital.
2. Deeply embedding sustainability in our business.
3. Building a culture of innovation, agility and intelligence risk taking through empowered teams operating with an owner's mindset.

These are the summary, our focus areas for now, as we evolve and sharpen our strategy for the next phase. I look forward to sharing more details in due course.

Now, let me hand over to Ritesh to cover our results in detail.

Ritesh Tiwari: Thank you, Rohit. And good evening, everyone. Let me now take you through our quarter results in detail.

Rohit covered the overall FMCG market context, which remains challenging. In this backdrop, we have delivered another quarter of resilient performance. Our Underlying Sales Growth was 4% with an Underlying Volume Growth of 2%. Talking about our bottomline performance, EBITDA margin at 24.6%, improved 130 bps year-on-year. Profit after tax before exceptional items at Rs. 2668 crore was up 12%. Net profit at Rs.2717 crores increased 4% year- on-year.

The quarter numbers include the benefit of a one-off credit that we received due to favorable resolution of an indirect tax litigation. This slide explains the impact of this credit.

Excluding the one-off, our Underlying Sales Growth would have been 3% with Underlying Price Growth being flat. PAT bei growth would have been 7% with net profit declining marginally year-on-year.

From a segment perspective, the benefit is entirely in Beauty and Personal

Care.

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Talking about our margin performance. Our gross margin improved 700 bps year-on-year to 52% and is back to pre-inflationary levels.

With the increase in competitive intensity, we have stepped up A&P investments by about 700 crore year-on-year to ensure our Share of Voice remains ahead of our Share of Market. This is a 420 bps increase versus September quarter 22. We will continue to invest behind our brands to protect our competitive position and ensure the long-term health of our business.

Let us now look at performance across the three segments: Home Care grew 3%, both Beauty and Personal Care and Foods and Refreshment grew 4%. Margins in all three segments remain healthy with Home Care at 19%, BPC at 27% and F&R at 19%.

When it comes to Underlying Volume Growth, the divergence between segments that we saw in June Quarter continued. Both Home Care and BPC delivered mid-single digit UVG, while F&R saw a mid-single digit decline primarily due to sustained input cost inflation in coffee and HFD categories.

I will now click down to talk about performance in each segment.

Starting with innovations in Home Care:

• Comfort expanded its range with Intense Fabric conditioners created specifically for sportswear.
• A new range of Vim Dishwashing Liquids 'Vim Pure' was launched. It is a superior 100% plant based, paraben and phosphate free formulation.
• Leveraging WiMI, Vim liquid was re-launched with an improved formulation to suit the varying needs of consumers.

Moving on to Home Care performance in the quarter, the business grew 3% on a high base of 34% in SQ22. Volumes grew in mid-single digit led by strong performance in both Fabric Wash and Household Care.

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Our premium portfolio in Fabric Wash continued to outperform with both Surf and Comfort growing volumes in double digits. Household Care delivered high single digit volume growth led by Dishwash.

We have taken further price reductions in both Fabric Wash and Household Care to pass on the benefits of lower input costs. A&P investments have been stepped-up to protect our competitive position.

Now talking about Beauty and Personal Care. This has been a busy quarter for our BPC team with the launch of several innovations. These actions reflect the key thrusts which Rohit spoke about earlier.

We are transforming our Skin Care portfolio through innovations in evolving and on-trend demand spaces. Pond's has extended its moisturizer range to build a hydration regime which includes a cleanser, gel moisturizer, night gel and a serum.

Building on its strong ayurvedic credentials, Indulekha has launched a new anti-dandruff Hair Oil and Shampoo.

Vaseline has introduced a new range of premium moisturizers for rich sensorial experience.

Lakme has introduced new 'glitterati collection' for the upcoming festival and wedding season. Lakme also launched Eyeconic Probrush liner in pen format.

Moving on to our performance in Beauty and Personal Care, we delivered a volume led mid-single digit growth.

Skin Cleansing grew volumes in low single digit with both Lux and Hamam continuing to outperform. Bodywash continues to scale up well.

Hair Care saw a high single digit growth led by Clinic Plus, Sunsilk and

Indulekha. Future formats such as serums and masks continue to do well.

Skin Care and Color Cosmetics grew in double-digit with robust performance in Vaseline and Ponds. Our focused interventions in new demand spaces such

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