Unilever 2Q17 Earnings Call Notes

Paul Polman

Significant disruption in a number of markets

“In the short-term, there has been some significant disruptions in a number of markets. Political uncertainty is high in several countries. This is hampering their recovery. This is particularly so in Brazil, where the trade has reacted to contrasting demand by reducing stock. In India, the welcome introduction of the new Goods and Services Tax prompted distributors and wholesalers to cut back their stocks during the transition period. And in Indonesia, we’ve seen changes in effects of calendar that led to a few less shipping days.”

We’ve had a prolonged period of weakening in emerging markets

“we have had one headwind that is consistently stuck us which is really in the emerging markets where since the financial crises, interest rates, currencies etcetera, we’ve had a prolonged period of about eight, nine years now where we have seen significant weakening of emerging market currencies. Well, with unfortunately we have to price as many of that is being imported, and as we price for that, we have seen in these countries that rate-related increases or productivity-related increase were actually trailing the pricing that we have to do on our products and the markets have been subdued. So despite seeing in this six months for example, a 5.5% increase in the emerging markets, you actually see the volume component of these emerging markets continuing to be very, very low, while historically it was all volume-driven growth. I am convinced that that is coming back now. We are starting to see these currencies stabilizing.”

Unilever 1Q17 Earnings Call Notes

Graeme Pitkethly – Chief Financial Officer

Prospects for global economy looking brighter

“I think it’s fair to say that the prospects for the global economy are looking a little brighter than they have done for a while. While last year’s GDP growth was the lowest since 2009, the forecast for this year are now looking a little better. Employment levels in the developed markets are improving and many of our key immerging market currencies like India, Brazil and Indonesia appear to be bottoming out.

Commodity inflation is returning

“Commodity inflation is returning and well there is adds to the cost pressures for us particularly in the first half of this year. It will of course be better and use for the economies of the producing countries themselves, many of which contain large Unilever businesses as you know.”

Changes everywhere

“We have faster changes in consumer trends at both our global and local level, or in our customer channels with the rapid rise with an online sales in convenience stores so progressively a little less reliance overtime on traditional big box retailing, or in media with a changing path to purchase now requiring multichannel digital mobile first approaches everywhere, or in the political environment with economic and political volatility.”

Brazil interest rate are 13% compared to inflation around 4%

“Okay, Alain. Let me tackle the Latin America question first. You’ve hit the nail on the head really, the Latin America was really a tale of two halves in the first quarter. We’ve seen just turning to Brazil which you’ve spoken quite a lot about in Q4 as well, but we saw a 10% volume decline in Brazil. Now the market was down between 5% and 6%. Now encouragingly that is an improvement from the negative 10% market volume decline that we saw in Q4. So there’s been a slowdown in the rate of decline in Brazil but the market is still declining between 5% and 6%. Added to that we’re in a situation where I think interest rates in Brazil around about 13%, inflation is around about 4%. What you see within the within our distributors and wholesalers and within the trade is a bit of a credit crunch if you like, you see a lot of tendency to put and take money out of inventory investment and put it on deposit where you make a 13% return against only 4% inflation, so it’s quite a good place to invest at the moment. ”

Overall message for Asia is we’re getting back

“overall message for Asia is that we’re getting back. I think we’re starting to see the start of normalization back to more historic levels of pricing growth hopefully in Asia going forward and a nice balance of mix and volumes.”

Unilever 4Q16 Earnings Call Notes

Unilever’s (UL) CEO Paul Polman on Q4 2016 Results

Demonetization has affected underbanked areas

“We really have looked at the demonetization and what our business in India is, is an enormously well distributed business, both in rural India and in urban India. We have that as an enormous strength. And the main effects of demonetization have been in the regions where you don’t have a banking sector that is well developed, like central India, so better developed in the south and the west but underdeveloped in the central India. And secondly, in the distributor trade, wholesalers and small trade where there’s really been a cash crunch, lots of daily cash transactions.”

Brazil negative volumes deepening recession

“Yes, Martin, these are two good questions. Let me go to LatAm very, very quickly. Brazil, negative volumes in a deepening recession, volumes are down for the year. I don’t think that will change in the near future. We have strong price growth there to recover the devaluation-related cost increases. ”

Graeme Pitkethly

Brazil down trading accelerated in second half of 2016

“In Brazil, rising unemployment and reduced consumer confidence meant that the contraction of consumer spending power and down-trading accelerated through the second half of the year. In fact, in the fourth quarter, market volumes declined by almost 10%.”

Have had to increase pricing in emerging markets which can have significant impact in emerging markets

“These sharp cost increases require pricing, and sometimes a temporary decline in volumes, as consumers and retailers adjust. In emerging markets, the key points we watch are the affordability of our products for consumers and the actions of local competitors. In some cases, as was the case in skin cleansing in India, the impact of the transition to the new consumer price levels can be significant.”

Unilever 2Q16 Earnings Call Notes

Unilever Plc (UL) Paul Polman on Q2 2016 Results

Environment frankly not getting any easier

“Undoubtedly, reading the newspapers, you would agree with me that this is a challenging trading environment that frankly is not getting easier.”

Dollar shave club is more than just a grooming company

” yesterday, by coincidence, we announced the acquisition of the Dollar Shave Club. And I’m very excited about this move, as you can imagine. Let me explain why. First and foremost, it takes us further in the male grooming category, where Unilever, if you’d exclude the shaving segment, is the outright number one. This is much more than just a razor company. Their portfolio and their dialog with consumers extends across male grooming into hair styling, skin care and skin cleansing.”

Will have to take price in UK with devaluation of pound

“We think what we will see is a slightly less deflation in Europe, more pricing in Asia, no change in Latin America. The outlook that we have on pricing is cautious on pricing for the rest of the year. In weak markets that we see in many of these emerging markets, its price increases will still be difficult. But where we see cost going up, take for example the UK with the enormous currency devaluation we’ve seen in the British pound, we will look at pricing.”

We liked Dollar Shave Club because it could teach us about the subscription model

“The second reason that we like this is because the fast emergence of these subscription models. Big companies like us, like we’ve seen also with our competitors, have a hard time establishing those things because of the culture, the knowledge is just simply not there, not a good thing, not bad thing as long as you recognize that. And we were able to acquire the knowledge that they have built very quickly and undoubtedly will apply it also on other brands.”

It has also built a loyal following among millenials

“And then lastly, this is a very attractive proposition that has been built, growing very fast with a very loyal following amongst millennials, which is equally attractive to us. So, there are many elements that are good in this acquisition, and that’s probably why the market overall reacted positively.”

We definitely see a worse environment in Latin America in the second half

“We definitely see in the second half a worse trading environment in Latin America than the first half. We want to be unequivocally clear about that. Brazil is in recession. I’m actually going there in a few weeks’ time, but it has a high devaluation of its currency and incredible drop off of consumer demand. The market is negative and it’s more negative than people think unfortunately.”

Argentina still needs to go through a significant economic adjustment

Argentina, I was there two months ago and had extensive discussions with Macri, the new President and many others there. And here again, we’ve seen a significant sub devaluation of the peso. We are obviously having more currency, but it’s at a significantly reduced level. The country has to really go through a significant economic adjustment”

Mexico is slowly gaining traction

” Mexico, the economy is slowly gaining traction. I think that’s probably a little bit of the brighter light, but disproportionately smaller for us in terms of the business that we have there. But it’s not really to write home about yet”

US economy is growing 1-2%

“The reality is that the economy is growing and the market is growing in the 1% to 2% range. We are currently putting in a performance of 0.7% over the first half. So, we are slightly disappointed by that. I don’t want to call it differently.”

North America volumes are probably actually down

“And then in North America, I would re-guesstimate that the range of growth is between 1% and 2%, with volumes actually slightly down but driven by price growth. And if you look at that price growth, it probably comes from where you – what you identified which is the premiumization of Personal Care”

It’s very hard to read the Chinese market because of the shift to e-commerce

“China is a story in itself. It’s very hard to read the Chinese market. I think you’ll be hearing a lot of our other colleagues when they publish their results to talk about the Chinese market, because the rapid shift to e-commerce is confusing and the rapid move away from the tier 1 cities to the tier 2 and tier 3 cities. You can go to China now and really see empty stores when you go into hypermarkets and supermarkets that we’ve not seen before. So, we think that growth has significantly slowed down and, again, everybody has to draw his conclusions from that.”

No Chinese millenials go to the store anymore

” it’s frightening the speed at which this is changing, just like they leapfrogged the landline and moved to mobile phone. You now see the millennials – and it’s interesting if you go to China one day, just let them show you all the things they can do on WeChat, and it’s – you take Amazon and YouTube and Twitter and Google all together in one app and PayPal and whatever; it’s incredibly frightening. None of the millennials go to a store anymore. So, the speed with which this is changing is mind-boggling, and I think not many people predicted it.”

Our estimate is that e-commerce could grow to about 20% of retail sales

“13% of the retail sales is now already in e-commerce and our estimate is that it might be growing with about 20%. We are outgrowing this. We’ve put in a significant organization. Globally, we are 600 people, 700 people now just totally focused on e-commerce. We are continuing to ramp that up.”

Sometimes what you can gain is not compensated by what declines in other channels. Although 80% of people are still buying at retail, the marginal customer is driving the profitability

“But sometimes you feel that what you can gain there right now in China is not compensated with the decline in other channels. I am thinking about this and we’re diving deeply into this, but I think because of the phenomena of the e-commerce, the rest of the retail is struggling. And although there’s still 80% of the people buying in the rest of the retailers, if you look at these statistics, they’re aggressively adjusting the stocks and they’re aggressively looking at the business models, and their financial exposures, because it’s the gearing that they’re missing, it’s this incremental sales that was giving them the profitability that is disappearing.”

This is one of the reasons we bought DSC

“So the dynamics will be interesting and we need to closely follow them, but they will rapidly change in the Chinese market. You need to work much harder to fish where the fish is. And as I’ve mentioned before, you need to take different fishing rods. One of the reasons the Dollar Shave Club is attractive and why Michael has done such a great job creating this company is indeed the knowledge of the subscription model and we will be certainly looking at that also as well for the Chinese market.”

Unilever FY 1Q16 Earnings Call Notes

Graeme Pitkethly

Business environment has proven to become more challenging

“In January, we said that we were prepared for the business environment to become even more challenging and that has proved to be the case. In Europe, markets continue to decline with stable volumes but falling prices; while in North America growth in our categories has eased back to only around 1%. In Brazil and Argentina, market volumes are contracting as consumers struggle with rising unemployment and the high local inflation brought on by currency adjustment.”

Prices and volumes across categories are flat but trading up and trading down beneath surface

” Looking on aggregate and taking a broad global average, market volumes in our categories are flat and pricing is around historic norms. But within these aggregates we continue to see some strongly diverging trends. Many consumers are up-trading to higher value items for at least part of the daily or weekly shop. Well at the same time those consumers are looking to economies by down-trading for other purchases.”

Comps do get tougher in the second half of the year

“The Group comparators do get tougher in the second half of the year, but we remain confident of delivering against our objectives, which remain unchanged.”

The UK has been a particularly competitive environment

“in the UK, the market was particularly tough as an environment, but in Q1 we did see good volume growth and some value share gains, but that was all offset by price deflation. I don’t want to go specifically based on one quarter into details of the UK’s performance, but it’s a continuation of a very, very competitive marketplace across all categories. You’re aware of the consumer changes in the UK, very value conscious, continued growth of discounters, but above all very competitive on a high level of the promotional intensity, which was particularly sharp in the first quarter.”

North America continues to see a bit of trade destocking

“Obviously North America, and I will let Andrew have a bit of a think about the sequencing of cost versus benefits for the programs, if I may. First of all, your question about sellout, we do continue to see a little bit of trade destocking in North America. Sellout continues about 2%. Our selling is about flat, so that’s our main litmus test of the impact that exists there. To get into the balance between what’s winning and what isn’t so much rather than HPC in foods and personal care, we are seeing pretty – we are continuing to see share gain driven by deos and hair, but we are down in skin and oral. And overall share gain in North America has been driven by refreshments and PC. Foods is declining a little bit as you said driven by spreads. I don’t want to get into the detail on a quarterly update of really with spreads by geography.”

Consumers have been trading up in India

“The consumers are trading up and down. The example, if I go across categories perhaps where we see that more strongly could be in personal care and home care. They’ve all been expensive category, home care in particular and just wanted to share the example of laundry in India where I was a couple of weeks ago and the more fundamental, because I mean India has been less impacted, stronger economy, currency less impacted and therefore the deflation that we’ve seen in a couple of categories in India is much more function of the commodity cycle, but more fundamentally in the laundry business in India, a brand like Surf Excel, a little bit above we are continuing to see consumers trade up from the bottom brand of [indiscernible] into a position like Surf Excel and that thinking more longer term is exactly the sort of thing we expect to see and continue in very much what our strategy is focused on.”

Andrew Stephen

JS Earnings Call Notes – Unilever & Bank of America

Unilever (UL) CEO Paul Polman said they actually saw strength in its emerging markets business

“Underlying sales growth returned to a solid 4.1% which was ahead of the markets. It was driven by emerging markets where we grew a strong 7.1%, with 2.7% of this coming from volume despite the challenging environments there as well.”

They are increasingly focused on return on invested capital

“Free cash flow was particularly strong at €4.8 billion that is up from €3.8 billion in 2014 if we adjust for the tax on disposals in that year. And return on invested capital, something we said we would focus on increasingly so, improved to nearly 19%.”

Unilever (UL) CEO Paul Polman said the global macroeconomic environment will remain challenging

“The consistencies of this sustained profitable growth contract sharply with the increased volatility and challenging market conditions that we see. The downturn in the global economy has been more prolonged than I suspected which is saying something. At the beginning of last year I said that we were starting to see more tailwinds than headwinds, but unfortunately the tailwinds proved short-lived.

Unilever (UL) CEO Paul Polman is seeing deflation in certain segments of the business

In developed markets consumer demand for our categories remains weak and prices are still falling in Europe. In the U.S. our market are now growing at around 1% to 2% but this time it’s offset by ongoing customer destocking making them effectively flat. At the same time the level of uncertainty has never been higher. Geopolitical instability has intensified in many places, not least in the Middle East.”

But he also believes they are gaining market share

Now the good news is that our business model is not much more resilient and better able to withstand the external shocks and 2015 once more was a proof of that. We see that in market shares which are picking up, especially volume shares and our performance compares very well to others in our peer set.  At the same time, as I mentioned before, we need to continue to keep a close watch on local competition. Our consistent and competitive growth is driven by stepped-up innovations as well as renewed focus on the core.  In the U.S. we exited the year with over 65% of our business building share. In China we’re growing well ahead of, China as a country itself, well ahead of the economic numbers that were just reported on the growth rate, so our market shares are healthy there as well.”

Unilever (UL) CFO Graeme Pikethly said they raised prices in certain emerging markets which had high cost inflation

“Growth accelerated towards the end of the year as we implemented price increases in countries that have seen high levels of cost inflation, particularly in Latin America. As we flagged last quarter, volumes in Latin America were strong in Q3 ahead of these increases and we saw the corresponding decline in volumes during Q4.  Now this may sound a little counterintuitive, but commodity costs in local currencies actually increased in 2015 by low-to-mid-single-digits. This was entirely driven by currency devaluation, especially in Latin America which more than offset falls in most commodities in U.S. dollars.”

Unilever (UL) CFO Graeme Pikethly said they are reviewing the legacy methodology with which they are pricing their products

In a relatively low growth environment we need to work harder on all of the opportunities to grow revenue in the core of our business, so we’ve been piloting a net revenue management program. Now you could call this the art of pricing, but it simply means having the right packs at the right price in the right channel for every shopping occasion. It helps us optimize pricing and realize new growth opportunities.  So net revenue management in some parts could be seen as back to basics, it’s  really about understanding a consumer’s perception of your brand and your product value and aligning that around product pricing, placement and availability which is nothing new, it’s basics, but it’s a refocus back on those basics.”

Unilever (UL) CFO Graeme Pikethly mentioned they are spending ¼ of their advertising budget on digital initiatives

Brand and marketing investment was up by 20 basis points. Within this digital advertising again increased as a proportion of turnover and now sits at 24% of our total advertising spend.”

Unilever (UL) CEO Paul Polman aims to make the company a more agile competitor that is able to bring products to market quicker

We’ve set aggressive internal targets for reducing cycle times including new country rollouts. And obviously digital marketing we will be driving to the next level by putting mobile first with an emphasis on engaging effectively with consumers wherever they are. By moving from mass marketing to individual marketing through our people data centers and by developing pioneering new models through the Unilever Foundry, like using artificial intelligence for instant and personalized conversations with consumers.  But the general environment is changing rapidly so we will continue our rapid capability building in ecommerce. “   

Certain countries in Europe are performing better than others

On Europe, without going into all of the countries, we obviously have some challenges, but fortunately the challenges are in the smaller parts of Europe. Greece, as you can imagine, is very challenging and will continue to be. The Nordic countries are actually challenging. But if you look at Italy, France, Germany, the UK and Spain, we’re performing well and we’re actually growing share there on more of our businesses than not. So the core of it is healthy. You’ve actually seen a strong volume component in Europe, offset by a slight negative on pricing, but still an overall positive.”

Unilever (UL) CEO Paul Polman said he doesn’t see a pickup in global growth coming in the near term

It’s tough out there. There’s no doubt about it. It would be irresponsible to assume that it’s getting better right now.  The year has certainly started more volatile. There are some major issues that need to be solved in the global economy to get the growth back. The low commodity prices are not helping for many of the emerging markets which have seen large capital outflows, increased financial market volatility, unfortunately and that is translating through in a very difficult environment to navigate.  If China cools down a little more, that some people expect, it will again affect other countries. And then you have the issues of the Russias, Brazils and Indonesias. These are major countries. Not to make you all cry, but just to be realistic, this is a tough environment that we’re facing.”





Bank of America (BAC) CEO Brian Moynihan said that in its current form, the bank’s revenue is more recurring in nature

What’s clear in these earnings despite the gyrations of markets especially at the end of the year last year is annuity nature that we get from our franchise by driving customer and client flows. That’s the power of our company is balancing the scope and a strong customer base and we aim to continue to improve it every day for our clients and customers and our shareholders. These results reflect the work we’ve done over the past several years to help to more straightforward and simplify our operating model and focus on responsible growth.”

Moynihan’s leadership has been centered around simplifying the bank

We began new BAC in 2011 and completed it in 2014. Since then we have been using our Simplify and Improve initiatives to find savings that more than offset increased compliance, merit and other inflationary costs.  Our strong organic growth is the result of hard work in improving the customer satisfaction in our franchise by making it easier for customers to do business with us.  All this has been done where we’ve optimized our delivery networks, reducing our financial standards, divesting certain markets and also expanding our award winning mobile capabilities in the customer base that uses them.”

Bank of America (BAC) CFO Paul Donofrio said the firm’s oil exposure amounts to less than 2% of their outstanding loans

“The pie chart breakdown or $21 billion of utilized exposure to the energy sector represents a little more than 2% of our total loan balances.  Less than 1% of the total loans is loans to borrowers in two subsectors, Exploration and Production as well as Oil Field Services. We consider these two subsectors to have significantly higher risk than the rest of the energy portfolio.”

Bank of America (BAC) CFO Paul Donofrio quantified the loss potential to their portfolio of energy loans

As an example, if we have oil around the current trading level for the next nine quarters. we estimate our potential losses on the energy portfolio would be roughly $700 million.

Bank of America (BAC) CFO Paul Donofrio quantified how much net interest income would increase if the Fed raised interest rates by 100 bps

As of 12/31 an instantaneous 100 basis points parallel increase in rates is estimated to increase NII by approximately $4.3 billion over the subsequent year.”

The bank has higher expenses than some of its peers but CFO Paul Donofrio said investors should expect improvement 

And then we are not satisfied in the mid-60s efficiency ratio of the company and we should be able to drive that down and it will come from both, its hard work as we say with the rate and stuff which affects we’re still affected a little bit more by the low rates structure and other people we should take it backup there.”

Bank of America (BAC) CEO Brian Moynihan revealed the firm’s loan exposure to mining company as well 

“We feel good about our metals and mining exposure. It is about $8 billion and but most of that exposure is much more short dated and much more collateral.

Bank of America (BAC) CEO Brian Moynihan wants his team to remain focused on expenses

“Expenses are on our mind every day at Bank of America. We have – everybody focuses on expense discipline that’s translating to our culture under our simplified and improved program where the teams are always coming up with ideas to make it simpler for our customers, to make it simple for our employees and improving expenses of the company that is how we’re going to achieve our objectives around core expenses that we talked about on this call. We’re all very focused on expenses.”

Unilever 4Q15 Earnings Call Notes

Unilever’s (UL) CEO Paul Polman on Q4 2015 Results

Currency boost

“Turnover grew by 10% which was helped by currencies. Underlying sales growth returned to a solid 4.1% which was ahead of the markets. It was driven by emerging markets where we grew a strong 7.1%, with 2.7% of this coming from volume despite the challenging environments there as well.”

Tailwinds proved short lived last year

“At the beginning of last year I said that we were starting to see more tailwinds than headwinds, but unfortunately the tailwinds proved short-lived.”

A second consecutive monsoon failure have put pressures on rural demands in India

“Crop failures for a second consecutive monsoon failure have put pressures on rural demands in India.’

Have to work harder on costs in a low growth deflationary environment

“In a low growth and deflationary environment we have to work the cost part of the equation harder. ”

Global ice cream helps improve seasonality

” one of the beauties that we now have in our ice-cream business from what it was six, seven years ago if you want to, that we have made it global James and Latin America has had a reasonable summer and strong ice-cream plants in that part of the world, but the pricing component to recover cost increases is much higher there than in other parts of the world. ”

The middle market is disappearing in the US, but prestige brands well positioned

“Combined, despite what you see at the global economy, we think that these prestige brands, small as they may be, are well positioned. Because you take the U.S. as a great example. You announce a growth rate of the GDP, but what really happens is — Oxfam just reported that the 1% in the wealth now has the same wealth as the bottom 99%. The U.S. is the extreme of that. The GDP growth goes to a very small amount of people and they’re not eating more products. The middle market is disappearing which is the bulk of the business. That’s why you see a lot of retailers struggling. But the prestige segment is continuing to grow amongst that target and we’re very well positioned for that.”

Europe has been strong

“Greece, as you can imagine, is very challenging and will continue to be. The Nordic countries are actually challenging. But if you look at Italy, France, Germany, the UK and — which is the other big one? Spain, we’re performing well and we’re actually growing share there on more of our businesses than not. So the core of it is healthy. You’ve actually seen a strong volume component in Europe, offset by a slight negative on pricing, but still an overall positive. A very strong performance in Europe.”

Currency adjustments should be less enormous this year

“if I may take one step back here, there is undoubtedly the enormous currency adjustments we’ve seen in these emerging markets. I think there will be continued pressure to the downside, but not the enormous adjustments. So it is fair to say that there will less — pricing component will be less moving forward as a result of that.”

Pricing is not going to be higher this year than last year

“The pricing on a macro level on a global basis is not going to be higher than last year, that you have to take. That is separate from commodity cost being the same or not. There are currency effects, there’s mix effects, there’s the net revenue management that we’re doing. So the pricing component is not going to increase.”

See irrational competition in home care in some markets like South Africa/Middle East

“the competitive pressure has not been really significantly eased either. We see very irrational behavior still of our competitor in some of the markets, like South Africa, the Middle East. We’ve just seen the buy one get one frees on all of the Middle East volume which to me is puzzling. But anyway, we deal with that and we get these results. So that’s it.”

India is very affected by weather events

“In India it’s still a very rural environment, with 70% of the people living in the rural environment. And if you really have this climate stress — they’ve had tremendous droughts there again and not the right monsoon seasons. So the rural income that was growing at, let’s say, 150% or 170% versus average, has now moved down again.”

Graeme Pitkethly

Argentina nor Venezuela have triggered hyperinflation accounting quite yet

On the technical question of hyperinflation which I think is, memory serves, IAS 29. Neither Argentina nor Venezuela have triggered the criteria for hyperinflation accounting and I think that’s pretty much consistent with their peers.