Unilever PLC (NYSE:UL) Q3 2023 Earnings Call Transcript

Unilever PLC (NYSE:UL) Q3 2023 Earnings Call Transcript October 27, 2023

Hein Schumacher: Good morning, and welcome to Unilever’s Third Quarter Trading Statement and CEO update. Today’s agenda will run as follows. Firstly, Graeme will update you on our quarter three performance and the outlook. I will then share my action plan to lift Unilever’s performance to achieve our full potential. We will leave plenty of time to take your questions at the end. Before I hand over to Graeme, let me share a few key messages with you. The quarter reflected solid progress. Price growth moderated as expected and three of the business groups, Beauty and Well-being, Personal Care and Home Care delivered volume growth. Nutrition and Ice cream, however, continued to see volume declines and weaker overall performance.

In part, this reflects the fact that these business groups are later in the commodity cost inflationary cycle and had to price in the first half of the year, but our performance in Nutrition and Ice cream needs to improve from here. Overall growth remained above our 3% to 5% long-term range. It was driven by the biggest brands and the largest innovations, more of these teams later. I’m not happy with our overall competitiveness. And although there are positions where we are fully competitive and some areas where we have made conscious choices to delist unprofitable volume, there are still too many situations where we are losing share because for example, competition is premiumizing faster or executing better than we are. This is a focus area for my action plan.

A retail employee stocking shelves with consumer packaged goods/manufacturing products.

Overall, we remain on track to deliver our full year guidance, and our outlook remains unchanged. Let me hand over to Graham, who will take you through the third quarter trading performance.

Graeme Pitkethly: Thank you very much, Hein. We delivered underlying sales growth of 5.2%, driven by 5.8% of price, with volumes down 0.6%. This leaves year-to-date growth after nine months at 7.7%, with price up by 8.1% and volumes down 0.4%. Price growth has continued to moderate as expected, and as Hein just indicated, Beauty and Well-being and Personal Care are now delivering balanced volume growth and Home Care moved into positive volumes in Q3. Nutrition and Ice cream are still responding to high input cost inflation and also working on portfolio improvement, especially in Europe, and this has resulted in continued negative volumes for those two business groups. I’ll provide more detail in a few minutes, but although the landscape remains volatile, we do see the path back to positive overall volumes at group level as pricing moderates, and this gives us the confidence to maintain our outlook for the full year.

Business winning came in at 38%. Now that’s a drop versus the half year. Our competitiveness is simply not good enough, and Hein will lay out our action plan to address this in just a few minutes. Here is our third quarter underlying sales growth in perspective against the last four quarters. It shows that price growth has moderated as cost inflation eases. Volumes, whilst remaining negative overall, were positive in Beauty and Well-being in Personal Care and in Home Care. They were negative in Nutrition and Ice cream, which, as I said, are later in the inflation cycle with a larger footprint in Europe where we have not yet recovered the full extent of the cost inflation. Now this is important because our profitability in Europe has declined quite significantly, and European margins are now well below the Unilever average.

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Q&A Session

The €1 billion plus brands accounted for 56% of turnover and continue to outperform with 7.2% growth in the third quarter. And the d-commerce channel grew by 17%, and it now represents 16% of the total business. Beauty & Wellbeing reported 7.4% growth in the quarter, which was nicely balanced between volume and price, which both came in at 3.6%. This is, in fact, the third quarter of volume growth from Beauty & Well-being. The growth there was driven by Prestige beauty and Health & Well-being with brands like Liquid I.V., Nutrafol, Olly, Dermalogica, Paula’s Choice, Hourglass and Tatcha, all performing strongly. Growth in Prestige Beauty and Health & Well-being was volume-led and ahead of their markets, so it was competitive. Sunsilk grew well in here, helped by the success of the core relaunch whilst the premium Nexxus brand performed strongly, combining professional salon heritage with molecular protein science.

Core Skin, which is our skin care business outside the Prestige Beauty unit, grew through Vaseline, which continues to reflect the success of the multiyear glutathione innovation in Southeast Asia. The AHC brand in North Asia continued to decline due to the channel reset we’re undertaking for that brand. Personal Care reported 8% growth in the quarter, again, well balanced with 3.9% volume and 4% price. Here again, volume was positive for the third quarter. Deodorants delivered double-digit growth, driven by Europe and Latin America. Rexona continues to invest strongly behind our 72-hour nonstop protection technology, and Dove deodorant grew well through a global brand relaunch. Both of these are large, multiyear, big scale innovation programs.

Skin cleansing delivered balanced growth with improving volumes as pricing moderated. The LUX brand benefited from a superior product relaunch, which offers clinically proven skin care benefits, and we also relaunched Dove Men Plus Care in the U.S. and in the U.K. Together with the strong performance in the deodorants, this led to the Dove brand overall delivering double-digit growth for Personal Care. Home Care growth was 5.3%, with a return to volume growth of 0.4% and price up of 4.8%. Volumes were positive in most regions with the exception of Europe, where we saw pricing largely offset by reduced volumes. Fabric Cleaning grew well. OMO benefited from a relaunch with naturally derived stain removers delivered through our Easylift technology.

Surf also grew strongly. Whilst on Fabric Enhancers, which is a more discretionary category, we had a mixed picture with strong growth in Turkey, but more muted growth elsewhere. Home & Hygiene saw good performance from Sunlight Dishwash and strong growth from both the Cif and Domestos brands. Nutrition grew by 5.6% with price at 9.8% as we responded to continued material cost inflation. Volume was down by 3.8% in Nutrition with Europe, the main driver reflecting the impact of both pricing and portfolio reshaping to exit unprofitable SKUs. This also impacted the headline competitiveness of Nutrition. And as Hein said earlier, we are very, very focused on building this back. At global brand level, we saw good growth from both Knorr and Hellmann’s.

Knorr benefited from the launch of snacking cups in the U.S. whilst Hellmann’s vegan and flavored mayonnaise ranges continue to supplement our core make taste, not waste campaigns. Unilever Food Solutions also delivered good growth with a return to out-of-home eating in China. Ice Cream had a very challenging Q3, reporting negative 2.8% growth in the quarter with price up by 8.2%, but volumes down 10.1%. The main drivers of the volume reduction are our in-home ice cream businesses in Europe and in North America. That’s a result of the pricing we took in response to higher costs. These price increases did not recover all of the cost inflation that we faced, but we saw meaningful price elasticity as cost-conscious consumers moved across to value brands and private label.

We also had some impact from portfolio reshaping and Ice Cream as we reduced SKU count and exited unprofitable loans. Out-of-home ice cream grew in Q3, with a strong summer season in Turkey. However, in contrast, both Europe and China had disappointing ice cream seasons with poor weather relative to last year and some down trading to value-oriented less premium products. We remain confident that our relatively premium ice cream business will prosper with continued investment behind the top brands and a strong funnel of innovation to bring to the market. We’ve now covered all of the business groups, but let me briefly give some additional detail through our regional geography lens. Asia Pacific Africa had underlying sales growth of 6.1% in the quarter, comprising 4.3% of price and 1.7% volume.

India saw a gradual recovery in the market with growth led by urban areas, whilst the rural market remained subdued. We saw the reentry of smaller players in the more commodity-driven categories, categories like skin cleansing. And consequently, we also saw some increased media intensity. Our performance in India remains competitive with price and volume both positive. The return of economic growth in China has been far slower than expected, with several headwinds, be it from lower exports or higher unemployment or lower consumer confidence. This has had an uneven impact on our categories with, for example, food service growing strongly as people return to restaurants, but the beauty categories in decline. Our China business declined mid-single digit in the quarter, pulling the year-to-date growth down to mid-single digits.

Indonesian market growth shows weak value growth and negative volumes. Our competitive reset of Indonesia is showing good progress and we are seeing a return to share gains in six of our 13 product categories and also volume share gains in the aggregate. We have significantly adjusted pricing for key brands and continue to invest behind superior products with a strong innovation program. For example, in Skin Care, we relaunched the entire core Pond’s range and introduced premium serums. And in here, we strengthened our position in the growing anti-dandruff segment by relaunching Clear and introducing an anti-dandruff variant for the Sunsilk brand. In Latin America, underlying sales growth of 14% reflected a good balance between price and volume.

Inflation is falling in Brazil with consumers moving to smaller formats and lower-priced products and our growth there pivoted from being price led to volume led. Our business in Argentina is navigating a difficult economic situation very well with a very weak currency and price controls in place. Our team on the ground there is hugely experienced, but the situation is tough, and we have some concern that the pressure on consumers will result in lower consumption levels before things improve. Mexico is benefiting from a much more positive economic backdrop and delivered double-digit growth. In North America, growth was 1.7%, with 1.9% of price and minus 0.2% volume. Consumer sentiment remains strong overall, although we do see signs of more caution with the trend towards larger pack sizes and a little more volume on deal as consumers seek value.

Our large Prestige Beauty and Health & Wellbeing in the U.S. performed strongly. We did see, however, a decline in Ice Cream, as I mentioned earlier, and growth in Dressings was muted as we lapped a strong prior year. Europe delivered 1.1% growth with price of 13.2% and volumes down 10.7%. Although inflation is slowing, consumers remain under pressure, and we see down trading, the growth of discounters and a move to smaller basket sizes. The extent of price increases, whilst historically high has still not been enough to cover the cost inflation that we’ve experienced. And as a result, Europe’s margins remain well below the Unilever average. The main drag in our European volume came from Ice Cream and Nutrition, as I’ve already explained. We saw good growth from Personal Care, with brands responding well to new innovation.

Turnover for the quarter was €15.8 billion, down 3.8% against last year. The underlying sales growth of 5.2% was offset by acquisitions and disposals with the sale of the swab brand being the main factor there. Currency impact was a negative 8%, which comprises a negative impact of minus 10.3% from the euro strengthening against our key currencies and 2.6% of extreme price growth from hyperinflationary markets. Based on spot rates today, we now expect an exchange rate effect of around minus 5.5% on full year turnover. On the same spot rate basis, the currency impact on full year underlying earnings per share will be around minus 9%. Our outlook for the year remains unchanged. We expect underlying sales growth to be above 5%, with price growth continuing to moderate.

We will continue our top line momentum by investing for growth in BMI, in R&D and in CapEx whilst further embedding the new organization of our five business groups and Unilever business operations. Net material inflation for the year is expected to be around €2 billion, and we’re confident that we will deliver a modest improvement in underlying operating margin for full year 2023, with the recovery in gross margin, reinvested in marketing spend behind our brands. And with that, let me hand you back to Hein.

Hein Schumacher: Thank you, Graeme. When I spoke to you in July, just a few weeks after taking up the role, I said that I would come back to you in October with a more considered view of the business. And I’m delighted to have that opportunity today. Over the course of the next 40 minutes or so, I will set out my initial reflections, look at strength and in particular, the opportunities as I see them, outline how those opportunities are being captured in a target detection plan; and finally, set out what all this means in terms of value creation. And of course, I will leave plenty of time at the end for questions and comments. The last three months have been very intense, but also, I believe, productive. And in that time, I have followed up my earlier trips to the U.S., China and India with visits to other important Unilever markets in Southeast Asia, Africa and parts of Europe.

I heard the views of our own people through a highly structured listening and engagement program, which has enabled me to connect with or hear the views of several hundred Unilever employees. Engaged extensively with Unilever leadership executive and with a wider group of the Company’s most senior leaders, including through a number of specific work streams, the relevance of which I will come back to later. Gone through an annual strategy review exercise with the Unilever Board of Directors and followed up my earlier engagement with investors by meeting with key business partners, including customers, banks, agencies and suppliers. And finally, I had the privilege to engage on Unilever’s sustainability agenda with policymakers and with some of our NGO partners at last month’s UN General Assembly meeting in New York.

And throughout this time, I’ve listened openly, intently and respectfully. I’m now a little over 90 days as CEO of a company that has been around just in his present form for over 90 years. I stand before you here today, therefore, with humility, but also with real conviction, the conviction that there is potential to be realized and value to be unlocked. All the activity of the last three months has reaffirmed my initial view of the business, namely that Unilever is a company of many strengths. Whether in the strength of its category positions with 80% of the business in number one or two positions, in the penetration of its brands, with over 3.4 billion daily users of Unilever products, in the depth and sophistication of its channel footprint in the caliber of its people in the scale of its reach, especially in future growth markets.

In the quality of its R&D capabilities, with 20,000 patented innovations and in its leadership and know-how on sustainability, and these strengths and qualities are felt across all of the five business groups. I’ve reviewed the business groups in some detail over the last three months, assessing the contribution each can make to Unilever. And from all this, I am clear that the best value creation opportunity we have comes from driving accelerated levels of growth, quality organic growth across all of these businesses. In the interest of time, I don’t intend to dwell further on our strengths today. Not because they aren’t important, they are, of course. But from all my engagement so far, I feel that these strengths are widely recognized, understood and obviously a tribute to all who have built this business over a long period of time.

But the best way to honor the past is to be honest, about the present. And that means recognizing that across a number of important metrics, the quality of performance has fallen short. Taken over the last six years, volume growth has been lagging. Competitiveness has struggled to get to and stay at the levels expected and that’s not good enough. Gross margin has been in decline and EPS growth stagnant. And we see this reflected in the TSR performance on a three-year basis that falls below the Company’s stated ambition. Remedying that and returning Unilever to the top three of its TSR peer group is a top priority. And we know what it will take. Stepped up volume growth, the rebuilding of gross margin, consistent delivery and generating strong cash and attractive returns, and I’m confident that we can do that.

But it does mean confronting some harsh realities. For example, we have outstanding science and technology capabilities, yet I see them dissipated across too many small projects and not leverage sufficiently across big multi-category platforms, our product superiority scores are good and actually improving, but we need to be brilliant at executing across all consumer benefits, and we’re not there yet. And this means going from technical product superiority to a consumer perceived overall brand superiority. Let’s turn to our work on sustainability, which is truly pioneering. Unilever’s reputation in this area is well deserved. But again, our efforts are being spread too thinly. We have too many long-term commitments that fail to make a sufficient short-term impact.

And the latter is what the world needs right now. We have a modern globally connected supply chain, but not yet the disciplined focus on net productivity that I would expect. In other words, we need gross margins to improve faster then the trajectory we are currently on. We have an outstanding global talent base, but not the performance culture to match and converting the talent of our people to step up performance could be one of our biggest unlocks and I have a great passion for that. We have incredible global reach and a wonderful portfolio of brands, as I said, but insufficient discrimination when it comes to prioritizing the biggest brands and the biggest opportunities. Our focus on purpose is loadable and it inspires many people to join and stay with Unilever.

So we must never lose it. But I don’t think we advance the cause of purpose by force fitting it across every brand. These are the realities. And it is important to confront them early on and head on, not least because they are not only resolvable, but actually represent our biggest opportunity. And that brings me neatly to the crux of what I want to cover today. The actions we proposed to take over the months ahead to unlock those opportunities. And these actions are the output of an intense program of work undertaken over the last few months and they’re all predicated on the idea of growth acceleration, where can we accelerate in order to better exploit what is working well. And where do we need to accelerate to close gaps and swiftly improve our trajectory.

And taken together, they add up to three significant shifts in the way we think about the priorities of the business. Shifts, we are capturing under the headings, faster growth productivity and simplicity, performance culture. Underpinning all of them is the need to focus on fewer things done better with greater impact. Let me take them in turn, highlighting some of the principal actions we will take under each, and I’m starting with faster growth. This is built around five levers. First and foremost, an unrelenting initial focus on our top 30 power brands, then driving unmissable brand superiority, scaling multiyear innovations and increasing brand investments and returns and selectively optimizing the portfolio. Let me start with prioritizing our power brands.

Now what do I mean by a power brand. These include our biggest brands by turnover. The 14 in the €1 billion club, like Dove, Magnum and Hellmann, whose growth has been accretive to Unilever, delivering higher volume and price, there are then 16 other brands which have the most potential to join them, like Cif, Vaseline, Nutrafol and Liquid I.V. prioritizing these 30 brands which represent more than 70% of our turnover, gives us a real opportunity to improve Unilever’s growth profile. Hence, these brands will have the first call on capital and resources. They represent our biggest value creation opportunity which means they need to be brilliantly executed and consistently supported before anything else. And this doesn’t mean other brands are not important or will be sold or under invested, but it does mean we can address the issue I referred to earlier to many projects competing for in-market execution and brand support.

Let me come now to the growth levers, all designed to give these top brands the best chance of success starting with what we are calling driving unmissable brand superiority. Consumers today view our products in an increasingly rounded and sophisticated way. We have to be ready to respond. It starts with product superiority. And we’ve made good progress here with 70% of measure turnover now superior to competitors. However, winning the hearts, minds and pockets of consumers requires us to broaden the way we measure and deliver superiority. We already have a proven concept on how to do this as well as some great examples of where it is working well in practice, including the Master’s Power Foam and Dove Deep Moisture Body Wash. In both cases, the focus on product superiority has been expanded to a quantitatively measured composite score of how brands perform against each of their key attributes.

And that is unmissable superiority. And by including the other key attributes alongside product and price we can give proper weight to increasingly important determinants like desirable packaging and to sustainability, which is key now for many consumers. That’s why we’ll continue to convert our strong know-how in this area into products that mitigate or even better, eliminate environmental impact. We know that consumers are increasingly prepared to pay a premium for this. And this revised way of thinking about superiority will allow us to identify the distinct drivers of superiority for different brands with real precision, enabling our business leaders to improve overall performance by addressing those attributes that make the difference.

Our next step is to embed the approach across all business groups in a rigorous and systematic way using clear and measurable KPIs and I’m excited about these fundamentals of consumer products. Details matter. It all needs to come together. The next growth acceleration lever relates to innovation, the lifeblood of a company like Unilever and again, I see good progress of late. The average project size is 2x to 3x larger than it was in 2020, boosting our in-market incremental turnover from innovation by the same factor. However, as mentioned before, we are still spread thinly, prohibiting consistent execution. We’re also behind our best peers when it comes both to the size and time horizon of our innovation programs. Our acceleration plan will, therefore, be built around the following objectives: prioritizing multiyear scalable programs that drive category growth; extending the time horizon and focusing more on new benefits and formats as opposed to relaunches; making better use of strong science and technology platforms.

The aim will be another doubling of the average project size to over 5x the 2020 figure. And as category leaders, we will give increased priority to ensuring our innovation is driving market development. This is a capability, frankly, that has not been used to its full potential in recent years. This is especially true in the Super Premium segment in which we under index in four out of five business groups. I have gone particularly deep into this area of the business over the last few months. In fact, some of my first visits around Unilever were to our key global R&D labs around the world. And from all this, I am convinced we can leverage our science and technology capabilities and platforms even more effectively and across brands. We actually do have good examples of this, such as the use of micro technology in deos, applied across the Rexona, Dove and brands or eco design technology for outstanding cleaning in both laundry and dishwash.

But in keeping with the other elements of this plan, the time is right to commit to a smaller number of bigger opportunities to maximize impact. This will also mean leveraging our strength in key relevant cross-category platforms such as biotechnology and specific relevant spaces within microbiome science. These are examples of science and technology platforms with direct relevance to our business and where we already have advanced capabilities. Now we need to get the maximum benefit. And done well, this will help us to drive category growth and will be the most effective and sustainable way through which to deliver increased competitiveness. We will support this part of the plan with consistently growing our R&D investment. Turning to the next growth lever, increased brand and marketing investment and return, in short, we will increase the absolute level of brand and marketing investment, just as we did in 2022 and are on course to do in 2023.

This is a must but we will also ensure that our brand and marketing investment spend is more focused with deliberate allocation behind bigger platforms, more consistent, fully funding our power brands, more digital and more effective increasing returns of marketing spend. Taken together, these levers driving unmissable superiority scaling multiyear innovations and increasing brand investment can positively impact our growth profile. And as I said, we will maximize their effectiveness by prioritizing their application across our top 30 power brands. The next element of our faster growth plan is the selective optimization of the portfolio. The reshaping of the portfolio through M&A since 2015 has undoubtedly benefited Unilever overall. The portfolio today is structurally more attractive than it was.

In total, some 20% of the portfolio has been rotated over the last eight years with sizable lower-growth businesses divested and 22 businesses added. And these have included some great acquisitions. such as Dermalogica, Paula’s Choice, Liquid I.V. and Nutrafol, all of which are growing strongly and are supporting the development of Prestige Beauty and Health & Wellbeing and are poised to make an ever more meaningful contribution to Unilever as a whole. But equally, we have to accept that not all acquisitions have delivered in the way that was hoped or expected. The likes of Blue Air or Dollar Shave Club were unsuccessful attempts to move away from our core. And we need to learn the lessons from what has worked and what hasn’t and be open in the way we share relative successes and failures, and we will.

In the case specifically of one of our biggest and most important acquisitions, Horlicks, while the value creation case has been met the business is not yet growing at the level that we expect. However, we are committed to ensuring that it will. Since 2019, our acquisitions performed better because the deals have been fewer in number. They are more strategically aligned and where the opportunity for Unilever to add value was very clear. And based on these lessons, there are some M&A criteria that will guide and inform the way we think about the evolution of the portfolio in the future, enabling us to set an even higher and clearer bar for acquisitions. So let me sum up this section by being crystal clear. Our approach to optimizing the portfolio will be based on a recognition that there is more pruning to be done.

A continuation of bolt-on acquisitions with a higher bar for acquiring in line with the criteria I have outlined. No major or transformational acquisitions in the foreseeable future. Let me turn now to the second shift we are making what we are describing here is productivity and simplicity. In other words, fewer things, done better and with greater impact at lower cost, this won’t just be an action list, but rather a guiding philosophy for the way in which I think we should run the business. And for today, let me tell you about three important and accelerated actions that we will take. Each of which demonstrates this philosophy. They are built back gross margin, a more focused sustainability agenda and driving more benefits from the new organization.

First, build back gross margin. This is the source of funds for our organic investments. That is why I like to think of it as the bank of gross margin. I’ve already spoken about the gross margin decline over the past few years. Rebuilding gross margin is an opportunity and a necessity. The recovery started in the first half of 2023, driven by a more balanced cost price equation and positive mix from SKU rationalization and portfolio change. Under this plan, we now have to accelerate the gross margin recovery through working the cost side harder. We will shift our focus from a growth savings approach to net productivity to shine the light on what’s actually landing in the P&L and filling our gross margin bank. This focus extends across all P&L lines.

Starting with material costs which comprise raw and pack materials as well as products bought from third parties. It is our biggest cost line, and we have an ambitious program to beat market inflation and contribute to gross margin progression through competitive buying, value chain interventions and product reformulations. For production and logistics costs, we have done extensive benchmarking and set challenging productivity targets to reduce the cost per unit produced. We will deliver these through an end-to-end network optimization, such as the supply chain network resets that we announced for North America Personal Care and Beauty & Wellbeing this year and which we will invest in over the coming years. We will also deliver through operational improvements with crystal clear targets set for labor productivity, energy efficiency, warehouse and truck utilization and material waste reduction.

And these are stretching targets, but I’m confident we can deliver them. We have best-in-class manufacturing and logistics efficiencies in emerging markets and will apply investment and knowledge to achieve the same in our developed markets. Each business group has developed specific implementation plans for cost and mix improvement. To deliver these plans, we will step up capital expenditures from 2.4% in the 2019-2022 period to above 3% of turnover. We will deploy a very disciplined approach to restructuring expecting costs of around 1% of turnover for the next three years, down from an average of 1.6% over the past four years. The second action we are taking under the heading of productivity and simplicity relates to our sustainability agenda.

And of course, sustainability permeates all aspects of the business. It gets to the heart of what the Company stands for. It was a key factor in my own decision to rejoin Unilever and its importance to the business and the world at large is only going to grow in the years ahead. You may be surprised, therefore, to see it appear under the heading of productivity and simplicity. But for me, that is just underlines how important and how integral it is. Everything we do in this area must have material impact for the benefit of Unilever as well as for the environment and the societies we serve. I’ve concluded that the best way we can do that is by radically focusing our sustainability efforts. Our desire to play our part across the piece has led to efforts being spread increasingly thinly with a very real risk of the law of marginal returns setting in.

By contrast, Unilever’s work in those areas of most critical importance to the business has been industry-leading. We will now accelerate that industry-leading work by focusing our Unilever-wide efforts and resources on four key pillars: that is climate, nature, plastics and livelihoods. This is a huge agenda by itself. The need for focus is vital. And let me be clear, we are not walking away from sustainability. Rather, we are stepping into it in a different and I believe, even more impactful way. And we will do that not by setting a lot of aspirational goals that are so long term that none of us will be around to be held to account for them. But instead, by short terming our work that is by making real steady, meaningful progress on the big issues quarter-on-quarter, year-on-year, time bound.

Costed road maps will ensure we stay on track, and we will hold ourselves accountable to targets that are explicit, stretching, transparent and measurable and I’m excited to be leading for this next phase of the sustainability journey, building on the great traditions of the Company and the fantastic work of my predecessors. But I also want to take the process of simplification here further by simplifying what it all means for our brands. In recent years, the debate around brands sustainability and purpose has arguably generated more heat than light. The topics have been conflated and the business case has got confused. My approach is simple. All of our brands or businesses will be expected to be full and active participants in delivering Unilever’s four big sustainability priorities.

Some priorities, of course, will apply to certain business groups and brands more than others. For example, our Home Care business has a larger plastic footprint than Nutrition, but this is an enterprise-wide endeavor. Some brands will want to include the work they are doing on sustainability as part of their brand proposition to drive unmissable superiority. That could be through the use of recycled plastic packaging or a sustainable sourcing claim. Many are already doing this, and that will continue, as I explained earlier. In fact, I expect it to increase in line with the acceleration of our work on the big four pillars. And then some brands we also want to go — beyond the four areas: leveraging their expertise and insights in other areas of social and environmental concern and make this a part of their brand proposition, what has become known as brand purpose.

And when done well and with credibility, this can be highly effective. Unilever knows how to do it well, brilliantly in fact, think of Life Bouy, Domestos or, of course, Dove campaign for real beauty. For these brands, and others like them in our stable, they will receive every encouragement to go on developing a social or environmental purpose as a part of overall brand proposition. But we will not force fit this across the entire portfolio. For some brands, it simply won’t be relevant, and that’s okay. Again, the approach here is based on being simpler going deeper, maximizing impact. And this is what will characterize the next stage of the sustainability journey. I hope that makes the thinking clear. The third action under productivity and simplicity is driving the benefits of the new organization.

In all my meetings so far with investors and others, I found widespread support for the new organizational structure, and I can see why. It is working well and is already increasing speed and accountability. However, this was a significant change introduced just over a year ago. The speed with which it has been adopted, is impressive. But inevitably, there is more to do to finalize the changes and ensure we reap the full benefits. We can’t yet say job done, Hence, I have, together with the leadership team, given priority to ensuring that we eliminate remaining points of ambiguity in order to drive single-point accountability. This is essentially done. We take the opportunities that are certainly there to simplify further and we strengthened frontline roles, especially in the area of customer development, where we have a clear program for the next 12 months.

This level of organizational change only happens very occasionally. This one can be of significant long-term benefit to Unilever. But for that reason, it’s vital. We get it right in all respects. That is why I’m calling it out as an important part of driving productivity and simplicity and why I intend to stay close to this area personally as we finalize the new structure. Let me turn now to the third shift. Dialing up our performance edge. Of course, this starts at the top with me and with the leadership team. A good moment, therefore, to share with you the details of the new team that will lead for this agenda. You will have seen the announcement this morning of a number of changes to the Unilever leadership executive. Let me share them briefly with you again now.

Following a very thorough and open search process, Fernando Fernandez currently President Beauty and Well-Being, will succeed Graeme as Chief Financial Officer. I couldn’t be more pleased with this appointment. As I indicated in the announcement, Fernando brings the full range of financial, strategic and operational know-how that is vital to the role and which I believe will mark him out as an outstanding CFO of Unilever and a great partner to me as we go about executing this plan. You will have also seen that Hanneke Faber, President Nutrition and Matt Close, President Ice Cream, have both decided it is the right moment for them to move on. They have each made an outstanding contribution to Unilever in that case over a 31-year career with the Company.

I want to thank them for what they have done and wish them every happiness and success in the future. Hanneke’s successor as President of Nutrition will be announced shortly. Peter ter Kulve, who many of you will know, will move from President Home Care to President Ice Cream. As such, he will be returning to a part of the business he knows well and where he has enjoyed considerable success in the past. Peter is an exceptional business executive with a proven performance record, and I’m delighted to have him on the team in this role. Less known to you, perhaps at this stage, is the next generation of leaders who are joining the Unilever executive. Priya Nair, who succeeds Fernando as President, Beauty & Wellbeing; Eduardo Campanella, who takes over from Peter as President Home Care and A.C. Eggleton Bracy, who takes on the new role of Chief Growth and Marketing Officer, all great talent with impressive performance track records to match and all now part of what I hope and expect will be a great team to lead the next stage of Unilever’s development.

Leadership throughout any organization is always key but the organizational changes Unilever has gone through over recent times have highlighted the need for our leaders to have real breadth and depth. In other words, own the whole P&L. That is the inevitable consequence of a structure predicated quite rightly on delivering higher levels of speed, expertise and accountability than ever before. To help our leaders and to support them in delivering this plan, we are therefore going to make some important shifts in the way we think about and systemize our approach to performance culture. And again, it is all about simplicity and impact. For example, there will be fewer, clearer priorities, more single point accountability. Simpler, more visible in-year targets, more differentiated reward, new streamlined standards of leadership to help set expectations and guide behaviors.

And we will be putting forward a new reward framework linked more overtly to value creation. Measures such as underlying sales growth, ROIC and TSR will be included in our long-term incentive program. The new framework is designed to sharpen the link between actual performance and reward as well as strengthening alignment with shareholders’ expectations. These are important changes in their own right, but they will also send a clear signal of what we expect of our leaders and how in return we intend to support and reward them. This is a wide-ranging action plan based on some important changes and some significant shifts of emphasis. You are going to one time to digest the detail. You are also going to want to know when you can expect to see the benefits.

Well, we have moved with real speed over the last few months to get to this point. And this sense of urgency and momentum will continue. I can assure you of that. There’s real hunger among the senior leaders in Unilever, who have all contributed to this — but just to give you a flavor on how we see different elements being adopted over the next 12 to 18 months. The new leadership team will be in place by the first of January, but will start to transition from today. Our new unmissable brand superiority framework will be in place and fully operational across all the business groups by the middle of next year. A similar timetable will apply to the way we embed our new approach to innovation. The changes to the new organizational structure will be complete by the end of this year.

The new standard of leadership that will underpin the changes we want to make to performance culture will be rolled out by the end of the year. The radical focus we are bringing to our work on sustainability will be reflected as part of the climate transition action plan, we will be presenting to you at the next AGM, time-bound actions for each of our business group to help reduce our footprint on our journey to net zero. Next year’s AGM will also be the occasion to get agreement on our new remuneration policy, another important bank in driving enhanced performance. This is all illustrative, but will I hope will give you a sense of the urgency with which we will intend to introduce these changes. Let me try to bring this all together and first, by reconfirming what this plan means in relation to capital allocation.

As I have said, we are prioritizing organic growth, and this is reflected in how we deploy our capital. Our first priority is what I call organic investment to grow what we own. Hence, we will always invest in our business first as this creates the platforms for value creation in the future. We will further increase brand and marketing support focused on our 30 power brands to ensure strong execution. R&D investment will grow consistently in order to support bigger innovations. Capital expenditure will increase from around 2.4% to above 3% of turnover to create leading-edge manufacturing, distribution and technology assets. We will fund this organic investment by building back our gross margin. Second, we have significantly reshaped our portfolio since 2015.

Looking ahead, we will continue to prune the portfolio in areas that are less strategically attractive. This will be accompanied by selective bolt-on acquisitions, focused in specific high-growth areas provided they meet the higher bar for M&A criteria and parameters for value creation. This is particularly relevant in a world where financing costs have sharply moved up. And third, we will continue to return capital to shareholders. This will be done primarily through an attractive and sustainable dividend. We expect our dividend payout ratio to remain above 60% of our underlying earnings. Surplus capital will be returned via share buybacks as we have done through the recently completed 2022, 2023 share buyback program. Summing up. The fundamentals of the business are strong.

These strong fundamentals are now coupled with a focused 10-point action plan to step up performance and deliver fully on Unilever’s potential. To repeat, we will do that by, first, aiming for faster, high-quality growth. This will be through bigger — priority and increased support with a focus on the top 30 power brands. Second, by driving greater simplicity and productivity, funding investments by building back the gross margin bank and creating impact through a focus on the most impactful sustainability commitments and by driving the benefits from the new organization. And third, we will sharpen our approach to performance through a renewed team that drives and rewards outperformance. This combination of strong fundamentals and accelerated action plan will enable us to solidify our ambitions and deliver consistent value creation through underlying sales growth of 3% to 5% modest margin expansion, 100% cash conversion, mid-teens ROIC, EPS growth and attractive dividend and top third TSR.

Hence, this is not about communicating a new ambition or setting out a new strategy. This is an action plan for delivering performance in line with our ambition. If we do it well and consistently, then the business will be better positioned for the future and shareholder returns will improve. Thank you for listening, and I look forward now to taking your questions.

A – Jemma Spalton: Good morning. Many thanks for joining the call. My name is Jemma Spalton, and I recently joined Unilever as the new Head of Investor Relations. [Operator Instructions] So I see our first question is from Rashad at Morgan Stanley. Rashad, please go ahead.

Rashad Kawan: A couple from me, please. So first one, back in December when the team laid out the multiyear framework of 5% organic growth you talked about wanting to get to the upper end of that target. The increased focus that they on standing up the levels that you spoke about today, is that still the right way to think about where you’d like to end up within that 3% to 5% range in the medium term? And then my second question specifically on Q3 on nutrition and acquire volumes. A bit of a level of deterioration there particularly in Europe, of course, which you guys touched on. Is it a question of taking too much pricing in Europe and that’s impacting volumes? What can you do in the near term to rectify the dynamic and start to win back share again? And then on the market share metrics, basically, is that kind of what drove the sequential deterioration quarter-on-quarter?

Hein Schumacher: I noted roughly three, but you were breaking up here and there. So let me try to get to all three, but if I miss something, please correct us. So first of all, on the financial framework and our growth ambition of 3% to 5%, yes, that is indeed our medium-term growth ambition and we’re confirming that here to-date. Your question on Europe and one pricing, look, I don’t think that we have priced too much, certainly not. In fact, if you look at total input costs and to the extent that we have price, we have not fully recovered inflation and margins — gross margins, particularly in Europe, remain somewhat under pressure. I think if you — and that’s sort of a bridge to your third question on market shares, if you look at what’s happening.

In Europe, I believe that and I’m pointing that out in the action plan as well. It’s also a matter of making sure that we come with the right innovations that we develop the market accordingly and that we simply do a very good job there. So pricing may have played a role in consumers gravitating towards value segments, such as private label, for sure. That is playing a role. But at the same time, I don’t see the current levels of pricing to be a hindrance for us to grow in the future. Does that sort of — did I capture all three elements, Rashad, I just want to make sure.

Jemma Spalton: Our next question comes from Warren at Barclays.

Warren Ackerman: It’s Warren here at Barclays. Two from me. First one on market share. Last quarter, it was 41%. This quarter is 38%. Obviously, that’s not good enough. I guess you needed to be in the 50% and ideally close to 60% to be top quartile in staples. What I’m trying to understand is how much of that is real share loss? You mentioned not enough of the portfolio in premium spaces like peers. And how much is kind of technical in terms of SKU reductions and the fact that the share metric you use doesn’t cover some of the fast-growing parts of your portfolio like Prestige Beauty? I’m just trying to understand a little bit what’s real here and how realistic and how quickly can we get back into that at least 50%? And how do you want to measure competitiveness within Unilever.

I just want to understand what’s the key API going forward? That’s the first one on market share. The second one is — and sorry to be cynical on this. But we have heard about bigger bolder innovation for years at Unilever. It’s been a big mantra and something about getting better returns on marketing spend. I know rich slate, your head of R&D has been talking about bigger bolder innovation already for a long time, and that’s been happening. So I’m not 100% clear, what’s different? Can you perhaps be more specific about what you consider to be bigger, better, bolder and better returns that would be helpful because I guess the issue here is that your volume mix, five-year track record is kind of 1%. And as pricing rolls over to get to the kind of top end of the 3% to 5%, you do need that roll mix to start to move into the kind of 2%, 3% range.

And it sounds like bigger, bolder innovations and better returns are keys to that. I was wondering whether you can just give us a little bit more granularity and what’s behind that and how do you define that?

Hein Schumacher: Thank you, Warren, for your questions. Let me first talk a bit about competitiveness. And first of all, as you say, and the way we look at the way I look at competitiveness is. I don’t think there’s one metric that is perfect. The way I sort of look at it is a combination of three. So, business winning is the one that we have used in the past. Then there is a market share or a market-based competitiveness and then there’s turnover weighted competitiveness and market share development. So, the reality is I look at it across all three. And you’re absolutely right. When you look at business winning and we express business winning here in value is under pressure. And for sure, all our efforts are aimed at improving from here.

But then if you look at okay, what is really covered in business winning. It’s roughly 80% of our business, 20%, which is Prestige Beauty, UFS, Food Solutions and our Health & Wellbeing segment for example are not covered. And yes, they are growing quite well. If we would convert business winning value into volume, it would also look a little different. And if you look at it on a market-weighted metric, actually, you would see a much more positive picture. But for consistency reasons for now, we have used business winning as the key metric. And once again, we simply need to win from here. What we need — what we intend to do in the new year is to give you a more comprehensive picture on competitiveness, not potentially focus on this one metric per se.

But of course, we will always report out on business winning. And internally, it will remain — actually, we will prioritize business — the competitiveness as an important element of the total remuneration framework. Then if you talk about what are some of the decisions that we’ve made. Yes, we have rationalized our SKUs by roughly 20%, 21% year-to-date. So that’s quite significantly. And certainly, this has contributed to that business winning percentage. We also took some conscious decisions particularly in Europe to delist some of our parts of our portfolio given pricing and of course, given the whole inflation game. So yes, that has played a role, but I don’t want to dwell on that for too long. When it comes to innovation, look, I understand.

Look, if you look back over the last couple of years and looking back at our volume track record and potentially what you’ve heard before. But I am very confident actually about the science and technology part of our business. This is one area where I — and I said that I think in the video, we have spent a disproportionate amount of time and what we’ve been particularly focused on is understanding what are the key differentiating technology platforms that we have, where we have deep knowledge and that will allow us to expedite a multiyear innovation program behind our top brands. And I know we have that. We have talked about that with the leadership and we’re going to unlock that. And I feel that with the bigger and the bolder choices that we’re making, the clear focus behind our top 30 brands initially, which will ensure a greater degree of delivery.

I do believe that this is going to be a sustained source of growth for us. I talked a bit about in the video about biome technology. I talked a bit about renewable packaging and about biotechnology type of platforms. And those are the ones that I believe were very strong at and are fueling most of our business.

Jemma Spalton: Our next question comes from Guillaume from UBS.

Guillaume Delmas: Two questions for me, please. Firstly, it’s on today’s strategy update and a point of clarification on your financial ambitions. And apologies if I missed it, but the line was breaking on the first question. So on underlying sales growth, you kept the 3% to 5% range. But since December of last year, Unilever was more guiding for the upper end of 3% to 5%. So just wondering, if there was any change there? And still on your financial ambitions in terms of operating margin expansion. So no change there still expected to be moderate. But I guess, does it mean that the vast majority of your gross margin recovery will be reinvested as opposed to flowing through to the EBIT line over the next few years. And I guess, to put it bluntly, I see consensus for 100 basis points operating margin improvement for the next two years.

Would you see that kind of magnitude as consistent with your financial ambitions? And then my second question is on your renewed focus on EPS growth. I was wondering, what’s your mindset here and whether you look at EPS growth in constant currency or on a reported basis? Because the flip side of deriving 60% of revenues from emerging markets is that foreign exchange tends to be, on average, a significant adverse impact. So curious to hear if this is something you’re taking into account and if you would actively pull some levers, I’m thinking pricing, I’m thinking savings to ensure consistent EPS growth year after year in euro terms.

Hein Schumacher: Let me take the first part, and then I’ll hand over to Graeme to comment a bit more on your EPS question. But first of all, on the financial ambition. So you’re right. I mean that in the first question, it was breaking up a bit, but let me reiterate the financial framework that we laid out, including the growth ambition of 3% to 5% is a medium-term goal. The guidance that we’ve provided for this year, which is to be above 5% still hold. So, there’s a this year guidance and then there’s a medium-term framework. Now if you talk about the medium term and the moderate margin expansion. I think you said is right. The focus will definitely be on expanding gross margin and bringing that back to pre-pandemic levels.

And we do see a path towards that. But as indicated in the action plan, I feel that there is opportunity for us to invest more behind our brands, and we will progressively do so. But obviously, only if we know for sure that some of these innovation platforms that I just talked about, as well as the superiority thinking and so forth are really taking hold, and we are sure that the increased spend will actually deliver returns. So we will see some progressive increases but it will differ a bit by business group and by brand. And the same goes for our increased investments in R&D. The plan projects us for R&D to accelerate investments there to just above the turnover growth levels. So yes, there will be part of that will be reinvested. But all in all, the algorithm is leading us to a moderate margin expansion.

Graeme, on the EPS side.

Graeme Pitkethly: Very interesting question actually. Thanks for asking it and pointing it out. What we do is we look at and measure both within the business, but we’re very aware of the fact that the real returns that we deliver to shareholders are denominated in current rates of growth, not constant rates of growth. So in the short term, what we can do as managers of the business is deliver constant rate earnings growth. But what is actual real value creation, of course, reflects what we can deliver in euros and dollars in hard currency. And as you point out, with 60% of our business in emerging markets, there’s usually quite a difference between those. Now when you go back and look at it over time, when we measure the difference between the two, it’s pretty much a sign curve.

That’s the way that currencies tend to operate on the translation of our results into euros when we report them every quarter. But if you go back and look at it over time, even though there are large differences like this year, as I think we guided to in the video, we expect the difference to be about 9% negative between constant EPS and current EPS for this year. That’s quite a big number actually relative to history. But there’s very much a sign curve effect. If you go back over time and take a longer-term view, usually, the difference between both in Unilever is about 1.5% to 2% on the average. And when we set our strategies and our financial plans when we talk to the Board, about EPS growth, we talk about constant. We also talk about current, and we size our plans with that 1.5% to 2% in mind.

And we obviously have to make sure that we are, for example, pricing for that in some of the economies where we have devaluing currencies.

Jemma Spalton: Our next question comes from Bruno at Bernstein. Bruno, please go ahead.

Bruno Monteyne: When I sort of listen to the planned new update, it’s clear that some of the actions in almost all the actions about focusing on proud brands, product superiority, it could have been part of the Capital Markets Day before Christmas. But I guess that’s only natural and to be expected. It’s unlikely to come up with some silver bullet, an action that people haven’t talked about. So I tried to prefer to like focus on the weaknesses, what do you identify as not having gone well in the past? And you have some slides on there, but it tend to talk about the outcomes, let’s say, low volume growth, low earnings growth. But that doesn’t really explain why sort of Unilever. What did it do wrong? What’s wrong with Unilever that is in this position and this discussion has been gone for a few decades.

So, I’m going to try to probe a little bit deeper in your view since the time you’ve been there why this is happening in that. I’ll give a few on suggestions to see what you think about it. So how much of that performance is really attributable to the Board and the governance because for albeit you talk about weak performance target we stressed, surely, those are part of the Board, are they failing and is just replacing the Chairman, therefore good enough. The second one is company leadership, but that’s why the performance is weak. I’m thinking, for example, that your own reference execution levels, CapEx, was great for years that it was high enough to support the growth. Was that with a mistake less or even more importantly, what is the culture of the Company that’s wrong and therefore, probably still wrong?

I’m just reminiscing about one of my colleagues here asking about excuses of why competitive needs might be so low by referring to other parts and not captured. That seems to be a culture of complacency sort of referring to what isn’t captured on focusing on the per measure. So if you could just try to comment and discuss why the performance has been so weak? Is it the Board, company leadership? What is its culture, all of the above or something different? Now my second question is building on the previous question, you’re targeting 3% to 5% organic. I think Graeme sort of agreed that the kind of negative impact of FX, structurally about minus 1.5% so you’re really saying that the Company is targeting a net revenue euro growth of about 1% to 3% which is probably barely in line with euro inflation.

So is there for the medium-term target to still be shrinking in real terms in euros using those previous numbers from the goal?

Hein Schumacher: Thanks, Bruno, for your questions. I’ll take — I’ll certainly take the first part and refer the second one to, Graeme, but I think that can be a fairly short answer. But let me talk about the first part. And it’s a pretty wide-ranging question. And yes, I talked a bit about it in the video, but let me just reiterate a few points. I think the question on what is wrong with Unilever, look, I don’t think you would hear me go there, I would say, look, Unilever has very, very strong fundamentals and many strengths. But at the same time, sometimes there is a sunny side and sunny side meets to a shadow side and that’s what I tried to point out in the video, but let me just give you a few examples. Unilever has strong science and technology capabilities without a single doubt, and I think this comes back to the question of Warren, why haven’t we delivered these innovations that at scale?

Well, you need to be disciplined on making choices behind which brands to do what, but also what technologies are really differentiating and where can we make them scalable and multi-year that’s super important, not stop and start. And I think that may have happened somewhat. If you think about a team like sustainability, I think we have spent a huge amount of time and investment and thinking in this area, and it has led to a — yes, I think to us being certainly perceived as the leader in our field. And that’s in general, that’s a positive. But it may have diluted our efforts somewhat in that area. When you think about our talent base and about performance culture, look, I think Unilever is outstanding people. There is no doubt about it. We are the preferred employer in many of the markets that I visited and where we operate.

But at the same time, there is an opportunity to dial up the performance edge. And that is, as you say, that is not a silver bullet. That comes back to a number of very specific actions, but mostly it’s related to making clear choices setting clear priorities and simplifying everything that we do. So look, I can go on, but then I would repeat my video, but I think those are for me some of the key points. Is that the Board, I wouldn’t comment on that or the leadership. Every incoming CEO inherits a situation and looks at that situation through his or her lens and then tries to improve from there. And that’s exactly what I’m doing. And yes, we’re making some changes today to the course of action to the leadership and so forth, and that underscores, I think, the direction that I’m very keen to take.

But overall, it’s about discipline, clear priorities, walking the talk and making sure that the Company is truly steered with a much higher emphasis toward performance. That’s where I would summarize it. Graeme, on the medium-term growth algorithm?

Graeme Pitkethly: So the difference between bottom line earnings constant and current growth that I gave in response to Guillaume question, that’s bottom line. I don’t think it would be right to assume that taking our 3% to 5% range and taking 2% off the bottom end of that means that we will grow in euro terms below real rates of inflation, et cetera. I don’t think that’s the right extension from it. I mean some people might ask, well, with all of the elements of our action plan that are in place for the period ahead. Why still 3% to 5%? I want to be clear that we know what it takes to get this company back up to top 30 SR performance. When we back solve for that, driving a rate of consistent growth delivery to the upper end of that 3% to 5% range is absolutely sufficient with the other levers that we have down through the P&L to deliver a rate of earnings growth that will deliver top third TSR performance.

That’s how we set our strategies and our strategic plans, et cetera. So that’s why the long-term guidance hasn’t changed. What we need to do is perform better within that long-term guidance range, in particular, more consistently. And also, and this links a bit to Warren’s point the quality of the growth has to be higher and we get a higher element of volume growth, which in called out within his action plan. So hopefully, that sort of squares the circle for you there.

Jemma Spalton: Our next question comes from James Edward Jones at RBC. James, please go ahead.

James Edwardes Jones: Yes. Thank you very much. So similar to Bruno’s question really, I was struck by the way you talked about competitive buying as a driver of gross margin improvement. And what were you doing before? This feels like a really basic thing, and I wonder if it’s symptomatic of some of what we’ve heard this morning. I suppose I want to understand if Unilever was actually a rather more dysfunctional state than might have been obvious from the outside. So if there’s greater upside than we realized by stopping doing things badly. And the second question, I guess, is you said there will be no transformational acquisitions. What about transformational disposals? Will you consider splitting the group up if the food business doesn’t improve its performance?

Hein Schumacher: First of all, on buying, and I would like to put it in a bigger context of improving our gross margin and we tend to talk about gross margin pretty much from a top line perspective, driving better mix and so forth. But I’m renewing a significant emphasis on the cost and on the productivity side in the next two years over the plan period. And that means that we’re basically going to work all three levers. And that, for me, includes buying, logistics and distribution and the manufacturing side through network improvements. Now if you think about buying where the main upside sits, and this is something that I’m seeing happening today, it’s the new organization structure that we have implemented allows for a significant amount of complexity reduction.

If you think about it, think of a business group like Home Care, who is really looking at it through a lens of the big power brands, the Dirt is Good brands, for example, and saying, okay, how many variants do we need? Can we eliminate complexity? can we scale down the number of ingredients? And I think all of the business groups are essentially finding out that there is opportunity to leverage our scale significantly better. So, that’s, I think, where we see a critical upside, but the same goes for network. When you look at it through a very specialist lens of in a business group to say, hey, liquid shipping is, of course, much more expensive then powder shipping, just to give you one example. So in some cases, you want to bring the factories a bit closer to where the market is, in some cases, you want to have a bit more distance.

Optimizing around that, I feel, is gaining a lot of momentum, and that’s where I see significant upside. But it is all about expediting it and executing these plans well. I see them coming through, and that’s what we’re going to work on. The ask that we have, as we said, was an expected restructuring that we will execute on a year-on-year basis of roughly 1% of turnover. Your second question on large-scale M&A. Look, at this moment, and I think I’ve laid it out, we see the biggest value creation opportunity in operating our current businesses very well. And that’s why we’ve laid out the action plan of today. Is that portfolio forever? Look, the situation is dynamic. Things can always change at some point in time. But I believe that the current — the value creation opportunity that is on the table is really to improve our business that we have while we continue to optimize the portfolio in — like we’ve done in the last two to three years or so.

Jemma Spalton: Next question comes from Tom Skykes at Deutsche. Go ahead, Tom.

Tom Sykes: Thank you. Good morning, everybody. Just going back to the points on rebooting the culture within the business, how opaque was the performance management before of the top 400 managers. And how differentiated will be bonus and pay remuneration be now compared to how it was before and when you look at the senior management team, I appreciate that there’s an external Chairman. And obviously, congratulations to everybody who has moved into new positions, but you’re coming back into the business and there’s obviously largely internal appointee. So why not try and reboot the culture more by bringing in more external influence? And is there anything in the HR, IT systems that you think just provides a kind of natural level of inertia to changing the performance culture?

And then briefly, just on you mentioned the product superiority was 70% that you have a broader level of criteria to measure that now. When you say there’s obviously the disconnect between the 70% product superiority and the competitiveness at 38. So looking at it another way, what percentage of your portfolio do you think is fit for purpose to improve the competitiveness and where do you need to get to, please?

Hein Schumacher: Thanks, Tom. There were quite a number of questions. So let me go through them, but please remind me if I miss something. So I think your first question is a topic that’s very close to my heart, and I’m very passionate about, which is as you call it, we boot culture, but essentially to dial up the performance culture. And as I said, actually before and one of the questions is, I mean, shaping our performance culture is not just saying, okay, now we need to perform. And that is — as you said, that is a very disciplined and concerted number of actions to take, and I’m very excited about the opportunities there. It starts with setting very clear priorities. It starts with setting very clear and stretching goals.

It starts with bringing ultimate transparency on the progress of all of these and it starts with linking remuneration to these objectives and making sure that there are direct consequences. And I think that links to your question on remuneration and what are we doing? Well, a few things that I want to say about that. On remuneration, there is a proposal on remuneration for executive directors that we’ve gone through with quite a number of you and that will be for voting next year in the AGM. So that links our executive director compensation more directly to shareholder interest. So I think that’s number one. But then, as you say, probably even more important is what do we do internally? And just let me give you just two examples where I feel that we’re making a change.

First of all, for approximately 15,000 employees, and that is not a factory personnel. So it’s office and manager level. But for 15,000 we have changed the remuneration structure as per immediate and that we take out the long-term incentive plan to which they have very little line of sight to, but we’re going to dial up remuneration and the performance component on in-year performance. Still, the payout to them will be partially in long-term plans, such as shares and so forth but we’re taking — we’re dialing up or in-year performance there. Secondly, we’re significantly increasing the line of sight in terms of remuneration structure. So there where people, for example, were rewarded on a total Unilever level, we’re actually increasing the component in total remuneration for the business unit or the business group that they are directly responsible for to the vast majority of their variable pay.

Now these are just two examples and of measures that we have taken as part of this action plan and that I’m going to communicate right after this call to the whole Unilever internal community. So, I think that’s something just to emphasize. Then on the external part — or sorry, on the appointments. Look, I believe that I was really on the CFO appointment, for example, this is about an action plan, and this is about making business progress. And I believe that after a long and thorough search, it was super clear that Fernando is by far the best partner for me in doing that. He has an outstanding operational track record. He’s an economist and a finance leader by background. And I’m confident that together, we’re going to accelerate on this plan, a plan that he is square behind.

And there’s still a vacancy on the Nutrition side. Obviously, now in the future, there could be more change. So I’m definitely not excluding external appointments. But when we have the right and people available internally that are buying into what we want to do that gives us a flying — definitely a flying start. When you talked about superiority, just a very quick one, yes, we measure product superiority. As I said, approximately 70% of our current portfolio has product superiority, we believe. But moving towards unmissable superiority, yes, we are quantifying that. That is a score, that’s an internal mechanism. We’re clearly measuring all of these aspects, and we’re holding these top 30 — we’re rolling that through to these top 30 brands with great speed.

And it is actually a very disciplined and a very quantifiable approach. So I’d like to leave that here for now because going into specific scores on these different metrics is probably not the right time, but it is indeed a very quantifiable method.

Jemma Spalton: Our next question comes from Jeff at BNP. Go ahead, Jeff.

Jeff Stent: The first one is, I appreciate that you said that you think you’ll create most value just by running the existing business groups better. But if you could just explain in the new business group structure, what really is the value add of Unilever itself and in particular, keeping food and HPC together, given you’ve now got these separate business groups. That’s the first question. And the second one is, I think Graeme explained that to hit top four TSR, which is your objective, you need to deliver the upper end of 3% to 5% so with that in mind, why are you guiding just to 3% to 5%, not to the upper end of it because 3% to 5% would seem to be inconsistent with the other target for top five TSR.

Hein Schumacher: Thanks, Jeff, for your questions. I’ll take the first one and hand over to Graeme for the second one on the financial — on the framework. Look, I mean, on the total, I think since the inception of Unilever of bringing together Lever Brothers and the Margarine Unie from the Netherlands. There have been always questions about are we better together? Or should there be more focused? So I’m super well aware of that. But the first couple of months have convinced me that at this point in time, the biggest value creation opportunity that we have is to simply run these businesses better. And yes, there is a significant amount of synergy between the different portfolios, whether that’s in buying, whether that’s in developing digital and technology, whether that is — but also go to market if you think about it, and I spent quite some time in Indonesia and Africa, for example, if you deliver food products to distributive trade that is all going in the same van.

It’s the same ordering pattern than for HPC type of product. So the synergies are undoubtedly there. But apart from the synergy discussion, I believe, at this point in time, there is a value creation opportunity for all businesses to further improve. Graham.

Graeme Pitkethly: Morning, Jeff. I mean, I guess the answer is that if 3% to 5% still covers it, albeit as the upper end, then it’s still relevant guidance for us to give at this stage whilst we get the momentum moving, et cetera. I do want to reiterate a point that I think I made earlier. Really, there’s a big factor here about consistency of delivery, where I think the new organization and what Hein said around culture and performance focus, remuneration, et cetera. All of that helps in delivering that consistency. It’s a much better way of running Unilever through the lens of the five business groups with end-to-end accountability, consistency of investment behind strategy, that’s what’s going to deliver the consistency. That’s a key factor in that value creation algorithm and also quality of growth, you’ve heard our call out on the volume component, which we do need to step up.

I agree with Warren’s sentiments earlier. It’s been hard over the last three or four years perhaps to look at the underlying performance relatively of companies in the sector, our footprint during COVID and then the inflation, et cetera, has kind of made things relatively opaque. But you hear our confidence around stepping up the consistency of our growth, stepping up the level of growth and stepping up the quality of growth. And I think they are the things that at least in the midterm, we’ll secure that step-up of returns.

Jemma Spalton: Our next question comes from Karel at Kepler. Please go ahead, Karel.

Karel Zoetea: Yes. Two questions. The first one is on your European footprint and supply chain. We had quite some volume losses for a while now. Does this leave room for some optimization? And also, how do you look at the European brand footprint as I still see many local just dealers and probably brands with a modest gross margin, particularly in the food and ice cream franchise. The second question is on the innovation agenda. R&D already sits within the categories for a while. So how can the disconnect and a focus on smaller things and related to that, if you want to deliver innovations more on scale, how does the fragmentation of your revenue base across countries and categories come into play?

Hein Schumacher: Yes, obviously, good questions on Europe and with the volume pressure that we’ve had I think your question is mainly around do we see optimization opportunity on smaller brands. Look, I think at this point in time, as we talked about, our focus has to be on executing our top 30 brands very well. And that sort of bridges a bit to your second question as well. Those top 30 brands constitute more than 70% of our total turnover. And at this point in time, they probably wouldn’t get that disproportionate investment in BMI as well as in R&D. That’s something that we’re actually changing fast, and that’s where I see opportunity. Now that doesn’t mean that were on a path to quickly divest or sell or whatsoever, all the remaining brands, but we need to make sure that these engines are working, and as we actually show today, the top 30 brands are growing ahead of the Company average, roughly 7.5% versus 5.8% for the Company of 5.2% for the Company overall.

So I’m very confident that, that is the right thing to do, and it will lead to a better execution of everything that we do. Do we see optimization opportunities in the portfolio in Europe, particularly on the food brands in the future? Yes. I mean the situation is dynamic. So, we will continue to look for opportunities to optimize the portfolio around the edges, but I don’t want to comment on that further today. At this moment, I feel that we once again, that we need to grow what we have and that we simply need to run our operations a little better in that respect.

Jemma Spalton: Our next question comes from Celine at JPM. Celine, please go ahead.

Celine Pannuti: The first one is on your growth rate of 3% to 5%. You said we wanted to improve the quantum or through the credit it, but there was no specific volume targets of volume ambitions. So I’m a bit surprised by this because we have had in the past, Unilever strategy where volume was really the center of the strategy, both in terms of top line market share gain. And so can you elaborate on that? And specifically, I thought that was interesting, the point you made on premiumization driving mix and driving gross margin at the same time, do you think that the portfolio of Unilever and its brand, and I’m thinking as well given 60% of the footprint in emerging markets, is the right portfolio right now to drive that premiumization at scale.

My second question is on next year. And if I look at the balance of potential of easing cost inflation and how that fits to the P&L. We are looking at cost deflation. Some of that has already been evident in some of your emerging markets where yourself and competitors have all other prices. If I look at next year, model, I could have a huge gross margin expansion next year. But obviously, it will depend on how much reinvestment will be made in terms of pricing or promotion. Can you take talk about that, how we should look at this equilibrium for ’24 period?

Hein Schumacher: I noted that three questions. One is around the composition of our medium-term 3% to 5% between sales and volume, question around innovation and premiumization, and the third one on the 2024 financial framework. I’ll take the one on innovation. And Graeme will take the one on the growth target and the 2024 financial framework. So, on innovation and premiumization, and I think this builds a bit on the question of Karel. Yes, we have around 450 brands or so, but don’t forget that once again, 30 top brands constitute 70% of the total turnover and are growing faster. So that’s number one. Secondly, I talked about big innovation and technology platforms. And I called out three or so they do fuel essentially almost all of the portfolio.

So we’re not I would say, diluting our R&D efforts too much, at least that’s not in the plan. In fact, we’re trying to bring that somewhat more together. And if you think about brands, so for example, Dirt is Good. We call it Dirt is Good, but it could be Persil in one country. It could be OMO in another country. It could be Surf in another country. But these different brands originate technology-wise and innovation-wise, obviously, from a very coherent innovation strategy that is enabled by the new organization. So I think that about fragmentation. And I think we have a pretty strong handle on that one. Then on premiumization, just a quick one, actually, we see premiumization across the emerging market world. That is an important theme, and we clearly want to participate in that.

There’s one exception, and that’s in Africa where mainstream consumers at this point are very focused on affordability, obviously, for all the known reasons. Inflation hit them much harder than mainstream consumers in other countries. So, when looking at the world at large, I don’t think that there is a premiumization game going on there. And there, we are focused actually on making sure we drive entry packs so that consumers can participate in our brands and will grow up with brands and get that brand familiarity. But in the other areas of the world, we’re actually very focused on premiumization, including in emerging markets. Graeme, on the 3% to 5%, and the constitution of volume versus value and then 2024?

Graeme Pitkethly: Let me actually start with the theme of cost inflation, the cost inflation outlook. So we’re guiding again for this year to the $2 billion of net material inflation that we saw last time we spoke. And obviously, that is weighted towards H1 versus H2 when we see a much lower level of inflation. I think it’s fair to say we can see us coming out the back of this incredible inflation period that we’ve had now and we expect our current outlook for inflation next year has it sort of normalizing back to the levels that we had before we entered the inflation spike. The reason I mentioned that is because your diagnosis is quite right. That does provide a tailwind to gross margin that comes through. I don’t expect that we will have deflation in pricing other than in a couple of specific areas, it’s possible in India because a couple of our categories in India fabric cleaning and skin cleansing are very heavily correlated to the underlying commodity prices and local competition reenters the market.

And we have to simply adjust pricing there in order to maintain competitiveness and our volume position, et cetera. So that’s one example. The second one is Indonesia where we have been resetting our pricing, and we’re starting, as we said in the presentation to see the benefits of that in terms of moving back into share positions in a few share-gain positions in a few of our categories. So they are the two ones that I would call out. But you’re right. It does provide a tailwind of gross margin. As we’ve said, that provides the bank for reinvestment. And we will reinvest, and this is getting to your question about quality of growth now in sustaining consistent higher level of growth with better quality in the form of a higher volume component.

Now you’re right, we’ve never guided to a specific number on volume, and we won’t do that. But I think at the Capital Markets Day, this year, we said that we wanted to see that, and we broadly spoke about it being balanced between price and volume, roughly 50-50, but we want more volume as a component of our growth, and we want to deliver that more consistently. In terms of ’24 guidance, we expect ’24 will be within the framework that we’ve set out, of course, but we’re going to come back to you with the full year results in February and give you more detail on 2024.

Jemma Spalton: Our final question comes from Victoria at [indiscernible]. Please go ahead, Victoria.

Unidentified Analyst: I have just one question left on strategy. When I look at all the initiatives related to SKU optimization, focus key brands, change in culture. It’s very similar to basically every other company in staples is doing. So my question within this framework is with gross acceleration, do you expect market share gains? And if so, why are you expecting to gain market share from? Is it private label on local producers in emerging markets and private label and developed or do you see some specific sort of competitor characteristics where you think you can regain lost market share in recent years?

Hein Schumacher: And look, very clear, and yes, many of the themes that we are talking about, you would recognize in CPG companies, and I agree with that, but it comes down to — obviously, it comes down to execution. It comes down to our abilities and our capabilities to do so. And since it’s the last question, if you allow me, Victoria, I just want to reiterate something I think that’s really important. I talked about opportunities to improve in Unilever, but I talk about that from a position of, hey, we have inherent significant strengths, but we need to dial them up where we can, and we need to be much sharper in our choices that we make and make things a lot simpler and do it with great level of impact. That’s what the plan is about, and that’s what we talked about.

Now when you talk about share improvement, I think most importantly, we’re not in the game here of just simply stealing share. For us, priority number one is to make the market and therefore, to develop the market and enlarge the categories. So when I talk about innovation and technology platforms, they are very much aimed at making sure that we offer the consumer something extra, something that’s not there, so that we, together with our retail partners, create more value for the category as a whole. And if we do that well, since we are the number one or two in 80% of our business, in the category, that will mean that we will grow our share accordingly. So and within that market development framework, we see, as we talked in the previous question, we see premiumization as an important trend, but there are others to address.

And that’s something that I would really look forward to come back to you in the next couple of quarters and talk more on examples that I mentioned today in the speech, I talked about the masters, I talked about DAF, but there’s actually much more to say and really looking forward to bring those to life. Jemma?

Jemma Spalton: Okay. Thank you. Thank you all very much for your questions, and we’ll bring the call to a close there. If there are further questions, please do e-mail into the IR team, and we will make sure we set up a time to speak to you. Thank you very much, and enjoy the rest of your day.

Graeme Pitkethly: Thanks, everyone. Bye-bye.

Operator: This concludes today’s call. Thank you all for joining, and have a nice day.