Hindustan Unilever : DQ’22 Earnings Call Transcript

"December Quarter 2022 Earnings Call of

Hindustan Unilever Limited"

January 19, 2023

Speakers:

Mr. Sanjiv Mehta, 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 December Quarter 2022. As a reminder, all participants lines will be in listen only mode and there will be an opportunity, for you to ask questions, after the presentation concludes. Should you need assistance, during the conference call, please signal the operator by pressing star then zero, on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. A. Ravishankar, Group Finance Controller and Head of Investor Relations. Thank you, and over to you, sir.

A. Ravishankar: Thank you, Aman. Good evening, everyone, and welcome to the conference call of Hindustan Unilever Limited. Best wishes to all of you and your families for a wonderful 2023. We'll be covering this evening the results for the quarter ended 31st December 2022. On the call with me is Sanjiv Mehta, our CEO and Managing Director, and Ritesh Tiwari, our CFO.

We will start the presentation with Sanjiv sharing an overview of our performance in the quarter and the operating environment. Ritesh will then cover our financial results, outlook and also cover the details of our new royalty arrangements. 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, Sanjiv.

Sanjiv Mehta: Good evening, everyone, and thank you for joining the call. My first engagement with you this year, and I take this opportunity to wish all of you a fabulous new year with good health, success and tons of happiness. Now let me begin with a summary of our performance for the quarter, and then I'll talk about the external environment and our strategy. We have the momentum, we delivered yet another quarter of solid all-round performance.

Our top line grew 16% with an underlying volume growth of 5%. EBITDA margin remained healthy at 23.6%, sequentially improving by 30 bps over the last quarter, led by step-up in gross margin. Earnings per share grew 12%.

We continue to significantly outperform the market with over 75% of our business winning both value and volume market share.

Sustainability remains core to our business, and I'm very happy to report that we have received industry-leading ratings when it comes to ESG.

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To sum up, in the last nine months of this fiscal year, we have added more than Rs. 6,000 crores to our top line and reported a turnover in excess of Rs. 43,000 crores. Our net profit grew 14% to more than Rs. 7,400 crores. Our consistent strong all-round performance is a testament to our strategic clarity, strength of our brands, our capabilities, our execution progress, our agility in running the business, and most importantly, the determination and passion of our talented purpose-driven people.

Now let me spend some time on the external environment, the inflationary situation and the market growth. This year, the FMCG industry has witnessed unprecedented inflation across a wide basket of commodities led by supply side issues. Lately, we have seen a few key commodities soften notably palm oil. With this, the year-on-year inflation is moderating gradually from its peak, the consumer price inflation has also softened in recent months. Having said that, commodities remain at an elevated level when compared to long-term averages. This is evident when you look at inflation from a two-year lens, commodities such as crude oil, soda ash, food ingredients are seeing close to 100% inflation when compared to the December quarter of 2020. The other, of course, the source of inflation has been the currency, US. dollar has appreciated by more than 10% versus rupee this year. Overall, if commodities remain where they are, we expect the inflationary pressure to moderate gradually, and this augurs well for our industry.

Now talking about FMCG market growth with reference to the categories we operate in, in December quarter, the market grew about 8% year-on-year, which is higher than the growth in September quarter. Benefit of higher festive sales was seen in September and October months, which grew at double digit. Growth continued to be price led and volumes declined, although the decline in December quarter was lower than previous quarter. This December happened to be India's warmest in more than a century, delayed on-set and late severe winter adversely impacted the performance of categories such as hand and body care, facial moisturizers and similar categories.

Now talking about FMCG market growth from urban and rural lens, urban markets have continued to lead the growth. Rural has shown some signs of improvement with December quarter growth higher than growth in September quarter and the last 12 months. If I were to summarize the last three slides, we can say that there is a gradual improvement in the FMCG operating

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environment. Commodity inflation seems to have peaked and is moderating from its unprecedented level. With lower inflation, strong winter crop sowing and signs of pickup in farm incomes, it is likely that rural slowdown is bottoming out. The next few months will give us further certainty on this aspect.

In this context, our strategy, of course, remains unchanged. One, we will continue to operate the business with agility and remain focused on growing our consumer franchise while protecting our business model. Secondly, we will continue single-mindedly on our journey to create a purpose-led future fit HUL and deliver on our 4G growth agenda. And by now, I'm sure every one of you is conversant with this 4G growth mantra of consistent, competitive, profitable and responsible.

Now we have always believed in doing business responsibly. In fact, we believe it is the only way of doing business. A shining example of this is Prabhat, our sustainable community development initiative, which we started in 2013. In the last nine years, Prabhat has made a positive difference to nearly nine million people in the communities around the factory in depot locations, be it through economic empowerment, environmental sustainability or supporting health and nutrition. So great work done under Prabhat has also been recognized by the World Economic Forum. It also won the FICCI CSR award for skill development.

October 15th is observed as Global Handwashing Day with the aim of increasing awareness of handwashing with soap, which is an effective way to prevent diseases and save lives as we all saw during the pandemic. Our purpose-driven brand Lifebuoy has been championing this cause for several decades, building on its impact created so far and amplifying it further. Lifebuoy has partnered with children and young change makers to take on the mantle of age for handwashing, Chief Education Officers, the CEOs. Over the years, Lifebuoy has reached 500 million people in India educating them about healthier habits.

Last month, we announced our foray into the fast-growing health and well- being category. This is clearly in line with the strategy to develop a portfolio in fast-growing demand spaces. One of the mega consumer trends that we are witnessing in the Indian consumer market, is the increasing focus of consumers

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on the health in a very holistic way. From health as absence of disease, we are seeing a rapid shift towards health as a lifestyle pursuit, with the strategic investments in OZiva and Wellbeing Nutrition, we welcome two young science backed new-age brands into the HUL family.

We have completed both the deals and are absolutely delighted to partner with the two businesses. The two companies will continue to be run by the respective teams led by their wonderful founders. HUL will provide them the necessary support needed to scale up the businesses, be it our strong understanding of consumers, our R&D and regulatory expertise, our execution excellence and the digital capabilities. We will also leverage Unilever's experience of running a Euro 1 billion health and wellbeing business.

With this, let me now hand over to Ritesh to talk about the performance in this quarter and outlook in detail and then on the subject of royalty. Thank you.

Ritesh Tiwari: Thank you, Sanjiv, and good evening, everyone. My best wishes to you and your family for a great 2023. I will now walk you through our in-quarter performance and our outlook. Starting with overall results, this was yet another quarter of strong all-round performance. Our turnover for December quarter grew 16% with an underlying volume growth of 5%.

Both value and volume growth were significantly ahead of the market. EBITDA margin was at a healthy 23.6%, sequentially up 30 bps led by gross margin improvement. On a year-on-year basis, EBITDA margin declined 180 bps impacted by 480 bps increase in cost of goods sold, partly off-set by savings and leverage across other lines of the P&L. Net profit at Rs. 2,505 crores, grew 12%. Profit after tax before exceptional items grew 13%.

Let me get down further to elaborate how we are dynamically managing our business. We are seeing sequentially inflation softening in few key commodities. As we had anticipated and called out earlier, our DQ '22 net material inflation or NMI at 18% was sequentially lower than September quarter, albeit very high on a year-on-year basis. This helped partly bridge the price versus cost gap, leading to improvement in gross margin from 45% in September quarter to nearly 47% in December quarter.

With softening in commodity, media intensity for categories in which we operate, was higher in DQ '22 versus SQ '22. We continue to maintain our share

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