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.”