Unilever - H2 2023

Transcript

Hein Schumacher (CEO)

Good morning, and welcome to Unilever's full year results. I'm delighted to be here today with our new Chief Financial Officer, Fernando Fernandez, who, as you know, took over the role on the first of January. Fernando may be new to the role, but not, of course, to Unilever, having previously served as president of our Beauty and Wellbeing Business Group, and before that, as head of Unilever's business in Latin America. We expect prepared remarks to be around 45 minutes, followed by Q&A of around 30 minutes. All of today's webcast is available live, transcribed on the screen. This is how we will run today. In a moment, Fernando will take you through the details of the results and our outlook. I will then give an update of our progress against our Growth Action Plan before we take your questions.

First, though, let me try to frame today's announcement with a few overall reflections of my own. The results and our performance for last year give some cause for assurance. The strengths and the resilience of the business are clear, but not enough cause for comfort. There are some real gaps that we need to close. Most of all, however, they reaffirm the importance and the relevance of the measures we are taking now at pace to accelerate Unilever's growth and to step up the quality and the consistency of our performance. Those measures were set out in the Growth Action Plan I shared with you at the end of October. But given its importance, I want to devote most of my remarks today to the plan and how we are implementing it.

First, though, let me highlight five important shifts that we have already made, some of which are reflected in the results we are sharing with you today. First, we return to positive volume growth of 1.8% in Q4, and gross margin expansion of 330 basis points in the second half. Second, we tightened grip on operations and working capital, leading to strong free cash flow. Third, we stepped up brand and marketing investment, focused on the 30 Power Brands. Fourth, we made significant changes in our ice cream business to address underperformance. And fifth, we accelerated portfolio change with the acquisition of the premium haircare brand, K18, and the disposal in the value segment of Elida Beauty.

I will come back to the Growth Action Plan in more detail later, but I wanted to flag these five shifts up front, partly because they are significant in their own right, but also because they are indicative of the changes that we are making, changes that we need to make, and we know that. Our competitiveness bottomed out but remains unacceptably low. We are not waiting to take the action that is needed. On that note, let me hand over to Fernando to take you through the results. Fernando, over to you.

Fernando Fernandez (CFO)

Thank you, Hein. I am very happy to be here with you today for the first time as Unilever Chief Financial Officer. Let me introduce myself. I joined Unilever in Argentina as an economist in the finance function. For the last 16 years, I have led some of our key operations, like the Philippines, Brazil, and Latin America. More recently, I was the president of the Beauty and Wellbeing Business Group. My long experience in high-growth businesses, particularly in volatile markets, has always been anchored in one fundamental belief: drive brand and product differentiation to grow volume, positive mix, and to expand gross margin consistently. That recipe never fails in delivering long-term competitive success, and it is the one we will ruthlessly follow. I am excited to partner Hein in embedding the Growth Action Plan to improve our financial performance, our competitiveness, and drive significant value creation.

That said, let's get into the 2023 results. Full year 2023 underlying sales growth was 7%, with all our business groups delivering growth. Price contributed strongly at 6.8%, and volume returned to positive territory at 0.2%. The 30 Power Brands were growth accretive, with 8.6% underlying sales growth and 1.6% volume growth. Along the year, we have seen a steady decline of price growth rates as cost inflation is. Fourth quarter growth was 4.7%, with a significant step up in volume growth to 1.8% and with price at 2.8%. Three of our five business groups posted volume growth: Beauty and Personal Care, and Home Care. The 30 Power Brands grew 6.5%, with 3.9% coming from volume.

Going forward, we will be laser focused on driving volume growth and mix as price growth returns to more normalized levels. Beauty and Wellbeing delivered a strong full year performance with good balance between volume and price growth. Underlying sales growth was 8.3%, 4.4% in volume, 3.8% in price. In the fourth quarter, we saw a strong acceleration in volume growth to 6.3%, underpinning sales growth of 7.9%. Our Health and Wellbeing and Prestige Beauty businesses, both with significant exposure to the U.S. market, continued to deliver double-digit volume-led growth. Liquid I.V., Nutrafol, Dermalogica, and Hourglass all performed exceptionally well. Combined, Health and Wellbeing and Prestige Beauty now represent 27% of the business group turnover. Hair Care

ended the year with good momentum and positive volume growth, reflecting strong performances from Sunsilk, TRESemmé, and Nexxus, our masstige proposition in the US premium segment. The skincare businesses saw a strong performance from Vaseline, now a EUR 1 billion brand, on the back of the Gluta-Hya innovation. Skincare performance was weak, given a necessary reset of our Chinese route to market. While we are disappointed with skincare's performance, we remain confident in the potential of the skincare brand across Asian Personal Care also had a strong year, driven by mid-teens growth from deodorants. Underlying sales growth was 8.9% for the year, with 3.2% in volume and 5.5% in price. Fourth quarter growth was 6.4%, with 2.5% volume and 3.8% price.

The global rollout of our 72-hour nonstop protection technology across Dove, Rexona, and Axe has given us significant product superiority and a strong growth in all three brands. It will remain one of our major multi-year growth initiatives. Skin cleansing grew well with positive volumes, despite the slowdowns in India and Indonesia, to which I will come back shortly. Dove benefited from the Dove body wash improved Deep Moisture innovation, and Dove Men+Care enjoyed a strong double-digit growth. Oral care also grew well in the fourth quarter, with solid performances in both Pepsodent and Close-Up, particularly in our Asian strongholds. Despite the strong financial performance of Personal Care business, we are disappointed with the erosion of competitiveness in the U.S., where we have been too slow in responding to the consumer shift to an emerging super premium segment.

We are taking decisive action to address this issue, but it will not be a quick fix. Home Care saw volumes turning positive in the second half, alongside a sharp deceleration in price growth. Underlying sales growth was 5.9% for the year, with 6.8% price and 0.9% reduction in volumes. Fourth quarter growth was 1.7%, comprising positive 0.8 volume and 0.9 price. Home Care has a significant exposure to emerging markets, where volatile commodities play a disproportionate role. In many Asian markets, including our largest, India, we benefited during the upward trend of commodities, with several local players in the value segment struggling. Now, with falling commodity prices, they are returning to the market, putting pressure on prices.

We are, and we will, defend our position, and this explains the sharp deceleration of pricing we have seen as the year progressed. Fabric Enhancers and Home and Hygiene also grew with good performances in Latin America, Turkey, and the successful introduction of Domestos Power Foam in Europe. This is another example of premium innovation based on differentiated technology, which will drive both category growth and improvement in competitiveness. Hein will come back to this theme shortly. Nutrition delivered price-led growth in 2023 as the business responded to higher input costs. Nutrition grew 7.7% in the year, with price up 10.1% and volumes down 2.2%. Fourth quarter growth was 4.7%, with price up 5.9% and volume down 1.1%.

The main drag on volume was in Europe, where we have aggressively rationalized our assortment through the delisting of unprofitable items and where we continue to see the impact of consumer downtrading to private label. The two largest brands, Knorr and Hellmann's, which together represent 60% of the business group, grew well in the fourth quarter with positive volume. Knorr surpassed the EUR 5 billion milestone for the full year, and Hellmann's benefited from the continued success of the vegan and flavor ranges across key markets. Our professional Food Solutions business delivered a strong double-digit growth throughout the year. The business has now returned to pre-pandemic volumes, with value well ahead. Ice cream grew 2.3% in the year, with 8.8% price growth and a 6% decline in volume.

The fourth quarter saw underlying sales growth of -0.4%, with price growth slowing to 0.4% and a volume decline of 0.8%. It has been a very disappointing year for ice cream, with price elasticity in the in-home channel much more negative than that seen in other categories, and with a strong consumer downtrading to private label. We are taking actions to restore competitiveness in the category, and we start to see benefits of a sharpened pricing and promotional strategy in the United States that brought in-home volumes back to positive territory in the fourth quarter. A difficult year calls for reflection and then action. We have put in place a new leadership team led by Peter ter Kulve, who has great experience in the category.

This team is reviewing the end-to-end economics of the business, with the goal of improving operational grip and productivity. This completes the review of the business group performance. Let me now reflect briefly on the fourth quarter performance through a regional lens. Our largest region, Asia Pacific Africa, grew 1.9% in the quarter, with 0.7% volume and 1.1% price. It is a testament to our strength in depth in emerging markets, that we have been able to deliver positive growth in the Asia Pacific Africa region, despite some headwinds in important markets like India and Indonesia. In India, Hindustan Unilever remains a powerhouse, with strong brands and rural distribution and exceptional talent. As has happened many times in the past, the business is navigating a commodity cycle, aiming to strengthen our long-term competitive position.

We have decisively adjusted prices in categories more sensitive to commodity cost deflation, such as fabric cleaning and skin cleansing bars. The outcome was a flat top line in quarter four, but with volumes coming back to the long-term growth trajectory and improving gross margin. We will continue investing behind our brands and capabilities, even if price is expected to remain negative in the near future. In Indonesia, we saw a double-digit sales decline in the fourth quarter, as sales of several multinational companies were impacted by geopolitically focused consumer-facing campaigns. The impact was significant in December, but we are managing the situation well and began to see an improvement in our January sales. Europe grew 2.5% in the quarter, with price up 9.4% and volume down 6.3%.

With a large exposure to nutrition and ice cream, we suffer from the consumer downtrend into value. We have also consciously removed a significant number of unprofitable SKUs, making us leaner and sharper. This impacted volumes and market share, but with a positive mix contribution to gross margin. North America grew 7% in the quarter, with volume up strongly at 6.3%. This was a great performance, driven by positive volumes in all business groups, and in particular, the strong performance of the brands acquired over recent years in our health and well-being and prestige beauty businesses. I don't want to sound biased, however, let me say that Latin America remains a real Unilever stronghold. The region grew 13.4% in the quarter, successfully navigating the commodity cycle with a pivot from price-led growth to a strong volume growth of 9.1%.

This reflects a well-positioned portfolio and the strength of both our brands and our in-market execution across the region. A key feature of the financial statements in 2023 is the negative impact of currency, both at top and bottom line. This was driven by the weakness of most currencies against the euro. Not only were the emerging markets currencies down, led by Argentina, India, and Turkey, but the US dollar also saw a negative impact. Turnover for the year was EUR 59.6 billion, down 0.8% versus 2022. Underlying sales growth contributed 7%, and we saw a negative impact from acquisitions and disposals of 1.7%, with the disposals of Tea and Suave partially offset by the inclusion of Nutrafol and Yasso.

Currency had a negative impact of 5.7% on turnover, and if currencies remain where they were at the end of January, the currency impact on full year 2024 turnover would be around -2% and around -5% on underlying earnings per share. This will no doubt change, and we will update you as the year unfolds. Underlying operating margin for the year was 16.7%, up 60 basis points versus 2022. The gross margin expansion of 200 basis points allowed us to significantly increase our brand and marketing investment by 130 basis points to 14.3% of turnover. That investment in our brands, focused behind strong, superior innovations, is a fundamental reason behind the acceleration of volume growth in the second half.

The 10 basis points increase in overheads reflect continued investment in R&D and key capabilities. Three business groups increased underlying operating margin. Beauty & Wellbeing was flat, as we keep investing behind our fast-growing prestige and health and well-being businesses. Ice cream was down 90 basis points, reflecting the gross margin impact from continued cost inflation and volume deleverage. In absolute EUR, underlying operating profit was up 12% in constant exchange rates and 2.6% in current, reflecting the higher than normal drag from currency on the 2023 result. Absolute profit is a metric I follow closely, and something that you will hear us talk more about in the future. Both Hein and I believe deeply that continued gross margin improvement must be the backbone of our plans going forward. The return of gross margin to pre-pandemic levels is an absolute priority.

We are already making good progress, with gross margin up 200 basis points in the full year to 42.2%, and a strong acceleration of 330 basis points in the second half of 2023. Net material inflation moderated in the second half, but we did not see deflation. Our price coverage improved as the year progressed, but we have not yet fully recovered the impact of cost inflation seen since 2020. We continue seeing the benefits of mix coming from portfolio optimization in several areas, such as acquisitions and disposals, premiumization, and removal of unprofitable SKUs.... Improvement in conversion costs will be a key priority going forward, and one of the key areas where our new net productivity program will be focused.

Underlying earnings per share were EUR 2.60, up 11% in constant currency and 1.4% in current exchange rates. We saw a strong positive contribution of 10.3 from operational performance as a result of combined top-line growth and margin expansion. Finance costs made a positive contribution to underlying EPS of 2% at constant currency. While we did see the impact of high interest rates on our debt, this was more than offset by higher interest income and a higher interest credit from pensions. Tax was a drag of 1.6% on underlying EPS, as we saw our underlying effective tax rate increase to 25.6%. This was primarily due to an increase in non-deductible interest payments and lower benefits from tax settlements and other one-off items. Our guidance for the underlying effective tax rate remains around 25%.

The impact of our share buyback program made a positive contribution, which was mainly offset by higher minority interest. The combination of the above resulted in underlying earnings per share increasing by 11% in constant currency. This strong operational performance was mostly offset by a negative currency impact of 9.6% to leave underlying EPS up 1.4%. Free cash flow for 2023 was strong at EUR 7.1 billion, up EUR 1.9 billion versus 2022, resulting in a cash conversion ratio of 111%. The main drivers behind this strong delivery were the operational profit and improved working capital, although we also benefited from a one-off EUR 400 million tax refund in India.

We increased capital expenditure to 2.9% of turnover, and going forward, we expect it around 3% as we continue to upgrade our technology and accelerate savings. Return on invested capital improved to 16.2%, slightly up against 2022 at 16%. This reflects the favorable working capital improvement, which reduced total invested capital. Finally, closing net debt was EUR 23.7 billion, in line with December 2022. Closing net debt to underlying EBITDA was 2.1 times, in line with our guidance of around 2 times. Proper capital allocation for maximization of value creation is an absolute priority for me. As laid out by Hein in October, we will allocate capital behind four key streams. First, to drive organic growth. Investment in superior R&D technologies to support multi-year innovation programs for our top 30 brands will be a key priority.

R&D increased from 1.5% to 1.6% of turnover last year, and we are committed to increase spend again in 2024. Secondly, we will prioritize investment to drive net productivity. While part of our capital expenditure is dedicated to align production and distribution capacity with our growth plans, we will significantly increase the proportion of our CapEx allocated to optimize our supply chain and unlock efficiencies. Thirdly, we focus on shareholder returns through an ongoing attractive dividend with payout ratios in the mid-sixties. We will supplement dividends with share buybacks when we have surplus cash available. In 2023, we returned EUR 4.4 billion through dividends and EUR 1.5 billion through share buybacks. Finally, we will continue allocating capital to bolt-on acquisitions to further strengthen our portfolio in premium segments and faster-growing channels, particularly in the United States.

During 2023, we have been active with five important transactions: the disposals of Suave, Dollar Shave Club, and the recently announced agreement to dispose Elida Beauty, which we expect to be completed sometime mid-2024. We also acquired two exciting premium brands, Yasso in ice cream and K18 in prestige hair care. Before moving to 2024 outlook, let me tell you how we will measure competitiveness going forward. Our current level of competitiveness is unacceptable, and we are investing and improving execution to turn it around. The current metric, percentage of business winning, has fundamental flaws. It is a binary metric that does not take into account the size of share gains and losses, and it does not provide any color about our performance versus market growth.

From now onwards, we will measure and inform competitiveness through turnover-weighted market share with a coverage of around 70% of our revenue. It is important to note that fast-growing parts of our portfolio, such as Food Solutions, prestige beauty, all accretive to growth, will not be covered. As you can see, during the last two years, we have been growing above global market growth, which reflects our favorable geographical footprint. However, we will not lie to ourselves. Turnover-weighted market share is the true measure of our competitive performance within the footprint in which we operate, and we are disappointed with the 75 basis point share decline. Of this, 60% is explained by Europe and 20% by the shift to super premium segments in the United Personal Care market.... Fixing competitiveness will take time.

We don't expect to see an improvement in the first half of 2024, but we are committed to turn around our competitiveness. Let me close with the 2024 full year outlook. Our priority remains to drive organic top line growth. We expect underlying sales growth to be within our multi-year range of 3%-5%. Underpinning this, we expect an improved contribution from underlying volume growth. The impact of the Growth Action Plan will start to be seen in the second half. We expect to deliver a modest improvement in underlying operating margin for the full year. This will be driven by gross margin expansion through a step up in productivity, while net material inflation returns to historic normalized level.

In terms of capital returns, we remain committed to an attractive, sustainable dividend that will be supplemented by a EUR 1.5 billion share buyback program, starting in quarter two, timed to coincide with the expected receipt of the proceeds of Elida Beauty disposal. With that, let me hand back to Hein.

Hein Schumacher (CEO)

Thank you, Fernando. Let me turn now, as I said I would, to the Growth Action Plan. To recap, this was the plan I set out at the end of October, following an intensive piece of work by a handpicked group of senior leaders across the business, and it produced a Growth Action Plan, which, with the benefit of more than seven months now in the business, I'm even clearer is the right plan at the right time for Unilever. Since October, we've been implementing the plan at speed. Priorities have been set, targets have been cascaded, metrics have been revamped, resources have been allocated, new leadership has been put in place. So in short, we've been reorienting the organization behind the plan.

What I want to do today is to share with you in a little bit more detail what we are doing, but more especially, where we are seeing signs of progress. Recognizing, of course, that we are at very early stage and that the benefits will build steadily as we will go through the year and beyond. The plan has 10 action areas under three broad headings, underpinned by one simple premise: the need to do fewer things better with greater impact, leading to a single overarching objective, the consistent delivery of high quality top line growth ahead of our markets. And I would love to say that we are within touching distance of that objective, but we are not. We know that. We have work to do. But I'm confident we can get there. Everything is being directed to that effort.

The plan starts with the need to deliver faster growth, and we believe that we have the brands to do exactly that, specifically 30 of them on which we'll focus first, our Power Brands. These are already proven drivers of growth. Last year, they were up 8.6%, representing 90% of our total growth and 75% of group turnover. Growing strongly and gross margin accretive. When we talk about the core, this is it, and by any standards, it's a pretty strong core. So we will focus on these brands first. Now, what does that mean in practice? Well, the vast majority of brand and marketing investment is going behind these 30 Power Brands, and that will continue. Very importantly, this includes investment in digital to continue the strong momentum behind our D-commerce business, which grew 16% last year.

Primarily, however, it is about stepping up execution and leveraging scale better. Hence, our brands, and especially the Power Brands, will benefit from two very important shifts we are making in the way that we develop, position, and grow our brands in the future. First, we are using a highly rigorous and quantifiable process to completely change the way we think about and measure brand superiority. Going forward, we will make our brands unmissably superior, that is, able to win, not just on product superiority, but across multiple dimensions, all of them proven drivers of consumer preference. The evidence for this is compelling.

It is something that we have validated in 29 strategic sales, where in each case, the correlation between improvements against our 6P methodology and stronger brand performance was clear, and this has given us the confidence to move rapidly to the next stage, setting baselines for ambitious goals and developing gap closing plans. For the 30 Power Brands, these will be in place by the end of the first half in 2024. The new unmissably superior framework will then be embedded in the second half, and progress tracked against these goals. Second, our Power Brands will also benefit from an equally new and distinctive approach that we are taking to the way that we think about and systematize innovation. The priority now is a multi-year scalable programs that will drive category growth and premiumization and expansion into new segments and geographies.

Again, the process being put in place to drive, track, and measure this is rigorous. Scale and multi-year benefits will come from a focus on big platforms, not small projects. So platforms that leverage differentiating R&D strengths, whether, for example, in biotechnology or microbiome, and which generates significant increases in incremental turnover. This will be supported by a step up in R&D investment, which, as you heard from Fernando, now sits at 1.6% of turnover. And let me illustrate the approach we are taking by reference to one example of how I see it working in practice. Vaseline Gluta-Hya, a great product from one of our Power Brands. It's flying. And why? Because it combines strong brand equity, breakthrough technology called GlutaGlow, which is a patented technology, and it's clinically proven, proven to be ten times more powerful than vitamin C for boosting skin's brightness.

It is delivered in a consumer-preferred light sensory format with competitive levels of investment, and it is built on a multi-year global platform that is carrying it to new markets and to new, more premium segments, such as serums, sun protection, and a Pro Age range. It is already in 12 markets, and this month, it launches in China. This is just the kind of scalable, multi-year, multi-platform examples we want to replicate more extensively. There are, of course, other examples, like our patented and superior technology in deodorants, which is driving premiumization through the 72-hour nonstop protection platform. This has now been rolled out across 3 Power Brands, Rexona, Dove, and Axe, and 40 markets, driving double-digit growth we now see in deodorants.

Similarly, Hellmann's, it's also benefiting from multi-year innovation platforms like Hellmann's Vegan, supported by deep R&D expertise to deliver great taste in a plant-based product. Over 6 years, it has reached 34 markets and is on track to hit EUR 100 million in turnover next year. Hellmann's, by the way, has been growing double digits for 4 consecutive years now, adding EUR 1 billion turnover since 2019. So we have some great examples of scaling innovations through multi-year, technology-backed platforms. We just need more of them, and that is what this plan is designed to achieve. In fact, we are confident that, taken together, the increased rigor and prioritization we applying, both to brand superiority and innovation, will help to drive the performance of our Power Brands and with it, the overall growth prospects for the business.

I want to turn now to the second element of the Growth Action Plan, productivity and simplicity. Let me go straight to gross margin. I make no apology for that. Anyone who has heard me speak over recent months will know how much store I place on gross margin recovery and on getting it back to at least pre-pandemic levels. I can assure you that that message has landed loud and clear inside the business. The fact is, we have been too slow in recovering the gross margin that we lost during the pandemic, which has constrained volume growth and depressed our bottom line. The good news is, the position has started to reverse in 2023 and accelerated in the second half of the year by 330 basis points, as you heard from Fernando.

And we are now building on this forward momentum, first, by continuing to work price and mix, but also by shifting focus to the important cost side. And we've seen some progress here already. The organization is fully focused on net productivity programs, replacing the previous focus on growth savings. Business group implementation plans are in place. We are striving for lower complexity, with over 20% reductions in SKUs, raw and pack materials, and number of suppliers. We have arrested the increases in cost per ton of recent years, and our integrated operations delivered significant working capital improvements. So we will build on this momentum throughout 2024 and beyond with a relentless focus on a few big ideas.

These include network optimization of the kind that we've undertaken recently in beauty and wellbeing in the U.S., vertical integration of some of our key materials, further cost per ton improvements through operating discipline, such as tight waste management, and investing a higher proportion of CapEx behind net productivity savings, and importantly, pursuing further improvements in working capital. When I spoke to you in October, I also signaled a significant shift in the way we intended to approach our sustainability commitments, and we deliberately included this under the productivity and simplicity section of the Growth Action Plan. The fact is, by limiting our corporate focus to four key platforms, climate, plastics, regenerative nature, and livelihoods, we believe we can have a greater impact over a shorter time frame.

However, we'll only achieve that greater impact if we apply, as we are, exactly the same rigor, discipline, and stretch to our sustainability targets as we are to other areas of the plan, and importantly, that we hold ourselves accountable to very transparent and measurable goals. You will get a sense very soon on how we intend to do that when we publish our second Climate Transition Action Plan for shareholder consideration. And for the moment, I hope the direction of travel is clear. Namely, and again, fewer priorities done better with greater impact. So now let me turn to the third element of the plan, dialing up performance culture. And specifically, we said that we would refresh the team and find ways to drive and reward outperformance. And we've made good progress on both. You will have seen this morning's announcement of a further change to the Unilever executive.

Nitin Paranjpe, our Chief People and Transformation Officer, indicated to me some months back that he wanted to retire from Unilever in June, and I'm grateful to Nitin for all he has done over a long and distinguished career. I'm very pleased to bring in a worthy successor in Mairéad Nayager, currently Chief Human Resources Officer at Haleon, and prior to that, at Diageo. I'm confident that Mairéad will play a key role in delivering this plan and helping to drive Unilever forward. With just one position left to fill in nutrition, which we anticipate to announce shortly. It means that since last summer, over half of our executive leadership team will have changed, either people or roles. The new team is already working to put in place the means necessary to sharpen the company's performance edge.

On driving driving stronger performance, we have, for example, put in place a new, more stringent goal-setting process. We've introduced greater transparency in the way that performance is measured and assessed, and we've streamlined leadership behavior standards. These are now focused on those areas most likely to lead to a step-up in performance. And then on reward for performance, our approach is being guided by three principles. One, a better line of sight. Two, greater differentiation. And three, more focus on in-year performance. And these principles have already been brought together in a remodeled reward structure for approximately 15,000 of our managers.

Of course, the full impact of these changes will take time, but I'm confident that we are moving with the right level of urgency in making the changes that are necessary and in putting in place the framework needed to hasten a step-up in performance culture at Unilever. Let me bring this to life a little further. We identified a performance issue in ice cream, and we've moved quickly to change the leader, but that was only the beginning. Because since then, we have refreshed the entire leadership team, replacing 80% of country and regional leaders in ice cream. We've reduced the overall size of the leadership team. We've externally benchmarked our overheads with a target to bring them to industry-leading standards, and we significantly rationalized our SKUs, taking out more than a third in 2023.

And finally, we're doubling down on meaningful, scalable, big bet innovations. Now, I mention this just to demonstrate that we won't hesitate to move decisively and surgically whenever we feel it is necessary to address underperformance or root out inefficiencies. We will not wait. So that is our Growth Action Plan, and as you can see, it's all about stepping up execution in order to improve the quality, the speed, and the competitiveness of our growth. Let me try to sum up briefly before we go to questions. The results for last year confirm that we have pockets of real strength, which yield some great returns, but they also highlight that there are important gaps to close and opportunities to be better scaled and exploited. And our Growth Action Plan addresses those very gaps and opportunities, but with a scalpel, not a bludgeon. This is a very operational plan.

It is based on a simple premise, the need to do fewer things better and with greater impact, underpinned by real rigor and discipline in the way we go about everything. Inevitably, the full benefits will take time to work through, but I am confident that they will. The plan has given rise to a huge amount of activity in the company, but the principles and the objectives underpinning it, on which I am totally focused, are very clear. A switch to net productivity to drive gross margin and thereby boost our volume performance, a greater operational grip to drive our competitiveness, and this all leading ultimately to a more consistent delivery. Thank you for listening. We look forward to updating you further throughout the year on progress against the plan.

In the meantime, I hope this has provided a little bit more color on how we are implementing the plan and where we are seeing the early signs of progress. Your questions.

Moderator (participant)

Good morning. Many thanks for joining the call. If you would like to ask a question, please press star one on your keypad. If you no longer wish to ask a question, please press star two to exit the queue. When it's your turn to ask a question, I will call out your name and then please go ahead. And finally, please keep your questions to a maximum of two. So I see our first question is from Tom Sykes at Deutsche Bank. Tom, over to you.

Tom Sykes (Managing Director and Head of European Consumer Equity Research)

Yeah, thank you very much. Morning, everybody. Just on the guidance of the 3%-5%, I suppose the mix of price and volume growth and the cadence of that in the year, you've obviously got some quite strong volume growth in categories that might be a little bit more seasonal, things like beauty, possibly well-being. Would you be able to replicate that volume growth in those slightly more seasonal areas again in H1? Or should we think of some of the volume mix improvement may be difficult to replicate the Q4 number in H1, but a little bit more H2 weighted? And then, sorry, just on the sort of culturally changing the business, and you've obviously mentioned the different aspects to that.

Do you think you have a more difficult cultural problem in changing the competitiveness in DMs versus EMs at all across your business? And what has been the response internally to some of the remuneration changes you've put through, please?

Hein Schumacher (CEO)

Thanks, Tom, and good morning. Thanks for your question. You know, let me first come back on the... It's Hein speaking, by the way, Tom. So let me first come back on your question on growth, and then I'll talk a little bit about the cultural change. Look, I mean, if you think about it, in Q4, we realized a 1.8% volume growth. Three out of five business groups are now in positive volume territory, so that's a good thing. And we saw some sequential improvement throughout the year. You know, in Q3, somewhat minor, Q4 more convincingly.

And I think if we, if we step into the year, you know, I, I wouldn't say there is a, a massive, you know, first half or second half, development. We're looking for a healthy composition of our, of our guidance between mix, price, and, and volume. And obviously, with easing inflation, clearly volumes have to play a part in our overall, overall growth story. If you look at the, the guidance in itself, the 3%-5%, I think we've been, quite consistent about that. Our internal ambition is obviously, is obviously higher. We're always seeking at the upper end of the range, but it's still a bit, still a bit early in the year. Clearly, we're balancing it all out with our gross margin improvement.

So, you know, you've probably picked up on the 330 basis point improvement in the second half of the year, and that's an important metric for us going forward. So, you know, let me leave it there on the growth side. If you think of the, you know, the cultural piece or the performance culture and the improvements and what it means to our people, I mean, we've implemented the remuneration changes that we talked about at the end of Q3. We did it at pace, and I would say, yeah, I'm seeing a really improved momentum in the company. You know, people are getting increasingly familiar with the Growth Action Plan.

You know, we've obviously talked about it a lot. I see a renewed momentum, a renewed level of energy in the company. I wouldn't say that, you know, our employees in emerging markets would be less inclined to drive the priorities that we've set out than in developed markets. Obviously, it's a sizable company, and we have many people, so therefore, it may change. It may take a little bit before everything takes effect, but I'm very positive on the momentum that we have. But of course, much more to do, and that's what we're working on every day.

Moderator (participant)

Our next question comes from Guillaume at UBS. Guillaume, please go ahead.

Guillaume Delmas (Executive Director and Equity Research Analyst)

Thank you very much, and good morning, Hein and Fernando.

Hein Schumacher (CEO)

Morning.

Morning.

Guillaume Delmas (Executive Director and Equity Research Analyst)

Two questions from me, please. Firstly, on your pricing outlook, if you could shed some light on your expectations for 2024, because we've seen already some negative development in India, Indonesia. There seems to be some quite tense negotiations in Europe, particularly with French retailers. You mentioned some trading down in the US. So how should we think about it at this stage? I mean, more pressure on price growth this year, meaning that we could actually see some pockets of negative pricing development here and there. And which categories do you think would be the most vulnerable to some price cuts or heightened level of promotional activities? And then my second question is on your underlying operating margin for 2024.

I mean, could you maybe touch on the key moving parts and assumptions, which lead to your modest underlying operating margin development guidance? Because given the strong gross margin recovery you should get this year, I mean, it seems you are signaling another year of triple-digit basis points increase in BMI. And very lastly on this also, what do you mean when you talk about net material inflation back to more normal levels for 2024? Do you mean you're still gonna get some inflation, or could we actually have some deflation on NMI? Thank you very much.

Hein Schumacher (CEO)

Thank you, Guillaume, and good mix of questions here. So let me start, and then I'll hand over to Fernando on some of the details, particularly on pricing. You know, as I mentioned to you before, you know, we're looking within that guidance of 3%-5%. We're looking at a healthy composition. And clearly, when inflation eases, and that's what we're currently seeing across the globe, we tend to increase promotional activity. I mean, that's what usually consumer companies do. So that will have a bit of pressure on our pricing, you know, on growth from pricing.

But, look, I don't think at this point that I want to signal a real, real reduction. We're seeing some deflationary tendencies in South Asia and Southeast Asia in our non-food business, and obviously, we are responding to that because we wanna make sure that we remain competitive. Competitiveness is a very important objective for us as well. And we've seen an increased level of promotional activity in ice cream in North America, also here to you know to drive competitiveness. But you know, these are more targeted pricing actions that we take. But if you look overall for 2024, we still expect some level of inflation.

When we talk about inflation more to normal levels, you know, think of, you know, in the range of somewhere between 2.5%-3% or so. That's at least what the expectation is, but that means that there is ongoing inflation, but it differs by category, and it differs a little bit by geography. And where there will be ongoing inflation is somewhat in food and less so probably in the non-food side of the business. When it comes to the operating margin, yes, we are guiding towards a modest improvement, and we're laser-focused on improving on gross margin, as you said. I mean, we've had some good improvements on gross margin in the second half. This is a super important agenda item for us going forward.

I think I've talked about it since October. We're seeing opportunities for productivity enhancement, and then, of course, there's the whole mix on the top, on the top line. We still believe that there is room for increased investment behind our, our core brands, but at the same time, you know, we don't want to waste it. So, you know, plans need to come together for our brands around market development, around category development, around landing multi-year and scalable innovations. That's, that's an important part of the Growth Action Plan, and I'm seeing increasingly an opportunity to do so. But we will only start really spending it when we feel that the plans are, are coming together.

So at this point, I feel good about the guidance on our overall margin development, but clearly, if there's opportunity to do more, hey, then we will go for that. Fernando, anything on pricing you wanted to add?

Fernando Fernandez (CFO)

Yeah. Well, first of all, you know, just say that, it's a pleasure to be with you all now. You know, I'm sure that we will have a lot of opportunities to interact frequently. A bit of color on pricing, particularly in the D&E markets, you know, like India or like Brazil. It's true that we have seen a significant deceleration of pricing, along 2023. But we have seen this before. You know, take the example of India, for example, we have seen this in 2008 and 2009. We have seen this in 2012, 2013.

The reason behind that is, you know, a significant, substantial part of the market trade at fixed price points, and during a commodity inflationary cycle, in categories where commodities play a key role in their cost structures, like laundry or like skin cleansing bars, we see many, many competitors abandoning or reducing their presence in the market. When the commodity cycle reverses, we see these players returning, given the expansion in gross margin. This puts some pressure on pricing. We are navigating this commodity cycle in places like India or like Brazil, like we have done many times in the past, always preserving long-term competitiveness. It will take a bit of time for our pricing to stabilize, so probably one quarter or two more.

But, you know, at this stage, our priority is to really defend competitiveness in these markets, and we will price in line with this objective of preserving our market share. In terms of outlook, I would like to highlight a couple of things. I feel Hein has touched base on that. At this stage of the years, you know, we need to... we prefer to remain cautious for a few reasons. You know, the first one is the price goal, growth, volume growth dynamic will take some time to normalize. The second is that we want to confirm the positive trajectory of our gross margin.

The third one is that we need to assess what is the cost of restoring competitiveness, particularly in Europe, particularly Personal Care u.s., and we are really assessing what kind of resources that we need to make that happen.

Moderator (participant)

Our next question comes from Warren at Barclays. Go ahead, Warren.

Warren Ackerman (Managing Director and Head of European Consumer Staples Research)

Yeah, good morning, everybody. Good morning, hi, I'm Fernando. It's Warren at Barclays. I've got two questions and one observation. The questions are, firstly, can you dive a little bit more into Prestige Beauty and Wellness? So you say 6% volume growth in the quarter, but that's for the whole division. What was the volume growth for the new Prestige Beauty Wellness units? You know, specifically, I'm interested in some of the bigger brands, Dermalogica, Paula's Choice, Nutrafol, Liquid I.V., and maybe if you could talk a bit about the K18 acquisition and your ambition for that. If you can just dive into that whole topic, would be, would be super. And secondly, Indonesia and India, can you maybe tell us what's going on, on the ground?

Hein, you mentioned the consumer boycott in Indonesia, already, and you talked about an improvement in January. Can you put some numbers around that, in Indonesia? And also in India, I mean, it seems to me, Indonesia and India in 2023, pretty disappointing for, for both geographies. What is your outlook for Indonesia and India, in terms of top line and margin for 2024, and maybe in terms of competitiveness as well? And then the observation quickly, this new market share metric, I, I get turnover weighting makes sense, but why does it still only include 70% of the portfolio? I, I get it's different channels, but seems to me all the parts of the portfolio, like Prestige Beauty, are not included in this new metric.

My question is, why are you not able to measure market share in the other 30% of your portfolio?

Hein Schumacher (CEO)

Thanks, Warren. Very clear questions. Look, I'll start off, and then again, what we just did, Fernando will add. I mean, first of all, on the Prestige, and obviously, Fernando, you know, having led the division until the end of last year, will probably add a bit more color. But I would say if I look at the brands, you know, and the brands that you called out in Prestige Beauty, all of them have been growing double digit, and particularly the ones that we acquired at later stage, not just in Prestige Beauty, but also in the health and wellbeing space. You know, all good off to a very good start.

Well, not start, because we acquired them a while ago, but, you know, ongoing strong performance, I would say. And I think we're in the, in the small verticals in which we're operating, I feel we'll outgrow- I feel we are outgrowing competition, so that's really a good thing. And we're very, very, you know, we're very, very pleased with that, but also very optimistic on the, on the future. Obviously, fueled with significant investments.... If you, so it's, it's pretty broad, I would say. I would not call out one brand specifically, but it's, it's truly, across the board, with particularly strong performance on, on Hourglass and on Dermalogica. I mean, probably I would call out those, but hey, all in the double digit, double-digit space.

On Indonesia, we've seen a 15% decline there, and you've probably seen the Indonesia numbers that were reported separately. There is indeed improvement. I mean, in the month of January, I'm pleased to see actually quite strong improvement, but here we are cautious. So we're guiding for the first and the second, for the first quarter, somewhere mid-single-digit declines, potentially. Obviously, the team is working on it very hard, and we're, you know, we're seeing some upside. But once again, we're taking a fairly cautious approach, and that is included in our overall guidance.

If you look at India, as you say, the good, the good thing about quarter four is, yeah, with the price pressure that is there in India, and, Fernando just alluded to that, what, you know, what one of the impacts, of, of, of deflationary pressure in some categories could be with increased competition and so forth. We have seen a volume growth, so the -2% on pricing was balanced by a 2% volume growth. I think that's a positive for India. We do see that situation continuing for Q1 and Q2, and we do see improvement opportunities in Q3 and Q4.

So we believe that in the balance of the year, India should see a slowly changing trajectory, but in the short term, it will probably be around the levels that we mentioned. I think that answers most of the questions. Fernando, maybe a few words on the Prestige Beauty side that you want to talk about?

Fernando Fernandez (CFO)

Yeah, of course, please, sir. First of all, I would like to say, you know, Prestige Beauty and Health and Wellbeing, now, they will represent—they represent already 27% of our turnover in the, in the Beauty and Wellbeing business groups. Both pillars, both Health and Wellbeing and Prestige Beauty, have been growing at mid-teens. And if you look at our top five brands, Liquid I.V., Nutrafol, in Health and Wellbeing, Dermalogica, Paula's Choice, and Hourglass, all of them grew double-digit, both in the year and in the, in the fourth quarter. So really, really strong performance.

I would say that, you know, behind the success of these brands, I would say some of the pillars behind the success of our these brands are exactly the same that Hein has laid out for the Growth Action Plan. You know, we are shifting resources to the most profitable brands, we are increasing exposure to premium segment, to fast-growing channels, to the United States, and we are optimizing the portfolio through bolt-on acquisitions, you know, like this one, that really give us a very good exposure. K18, we have just completed the acquisition on the first of February. Very, very exciting brand.

Just anchoring the intersection between biomimetic science and a very strong social engagement program, a very, very strong presence in TikTok, and we are very, very excited about the growth prospects that this brand bring into the, into the company, with an excellent founder that has put together a very, very solid company and a very solid management team. We are sure that we will can add, as we have done in all the Prestige Beauty and Health and Wellbeing, a lot of science into these brands to really boost our innovation program. In terms of competitiveness, I would like just to, to highlight a couple of things. You know, our intention today was, fundamentally to tell you three, three things. You know, we measure share in about 70% of our turnover.

What is not included there, it is not included because there is no reliable measurement, because, you know, the metrics... are not reliable in terms of coverage. Businesses that are not included there include some of our fastest-growing businesses, like Prestige Beauty, Health and Wellbeing, and Food Solutions. You can see that basically in the difference of underlying sales growth between the business we measure and the business we don't measure. The second thing to say is that our organic sales growth compare favorably with the global market growth, what highlights the attractiveness of our category and our geographical footprint. The third thing, and probably the most important, is that we are disappointed with our competitive performance in the footprint in which we operate.

We will use turnover weighted share to measure our performance going forward, fundamentally for two reasons: It gives a clear indication of the gap between organic sales growth and turnover weighted market growth, and it takes into account, differently to what happened with business winning metric, the depth of the share gains and the share losses. So just to reaffirm that we are not happy with our performance in terms of competitiveness, it's a burning platform for both Hein and myself, and we will really attack decisively on that.

Moderator (participant)

Our next question comes from Celine at JPM. Go ahead, Celine.

Celine Pannuti (Managing Director and Head of European Consumer Staples Research)

Yes, thank you. Good morning, Hein and Fernando. So my first question would be to understand what happened in the volume growth in Latam, which was quite strong, 9%, and as well in the US. So if you could shed some light, because those are for those two market is well above, I think, the market growth. So could you explain that? And trying to understand whether there were some one-off factor or, you know, what kind of sustainability of volume we should be looking for these regions. And then my second question is a bit to come back to some of the, the questions, frankly. First, on cost, you said that cost is still positive, 2%-3%. Could you kind of help me understand that?

Because if I look at your many of your raw material I see them being down quite a lot. Yes, your food are up, but a lot of the oil derivatives, edible oil, and so on and so forth, are down a lot, and that's why you were mentioning that price slowing down in some emerging markets. So, yeah, I'm finding it a bit difficult to understand how it's not flat or even negative for the year. And then maybe as well, a follow-up on that, price versus volume equation, are you signaling, you know, that pricing will continue to accelerate fast? And I think we are facing peak pricing in H1 of 2023.

And I was wondering whether that means that, you know, what it means in terms of elasticity of volume. If I see some regions like Asia, where price comes down, volume is up 2% in India, but it's hardly up a lot. So just want to understand a bit that equilibrium of price versus volume. I know you had been asked, but it's a bit unclear to me. Thank you.

Hein Schumacher (CEO)

Thank you, Celine. I mean, very clear, three questions. So first of all, on the volume growth in the US and in, and in Latin America. So a couple of words, on those. You know, of course, we are implementing the action plan, with enormous speed and decisiveness. And I first want to point out that a number of the trends that we're seeing in the US and LATAM are, in that sense, good inspiration for what should happen across the globe. I mean, first of all, we're seeing strong expansion of the prestige beauty, and the health and wellbeing space. And Fernando just talked about that. Warren asked a question about it.

That is about a quarter of the U.S. business, and that's all been double digit. And of course, that helps on the total U.S. side. Secondly, we have been implementing strong innovation in both North America as well as in Latin America, and particularly around deodorants, which has been growing double digit for us, actually globally, but very much spurred by the development in the Americas. And that is all behind the protection, 72-hour protection behind some of our core brands. And, you know, we, we're using that, we're using that technology, but we're applying it to Dove, we're applying it to Rexona, to Sure, et cetera, et cetera. So strong performance in deos. But also premiumization.

We're landing, at this point, premiumized portfolios in Dove, but also in our nutrition portfolio. I was very pleased when visiting Latin America recently on Brazil, very good performance on Hellmann's, where we introduced a premium mayonnaise product, but also line extensions in other mayo-based sauces. So, you know, I think all of these things come together: premiumization, good innovation, and then, of course, the growth in our prestige and health and wellbeing businesses. Those are the most important reasons behind it. Is it structural? Look, these type of growth rates, volume growth rates, are hard to maintain forever, of course, but we're seeing a good momentum in the Americas, and we're pleased with that, and we're keen to benefit from that globally.

If you look at it, from a cost perspective, the 2.5 and 3 are sort of that I, that I pointed at, you are right. You know, in the short term, there are some. It's, it's probably for the company a bit more flattish. So, you know, the prediction for the year that I gave is, it, you know, might be a bit more, towards the balance of the year, where we see inflation picking up. I already talked about India, where we believe there will be some happening going forward. But at the same time, there are, of course, also Forex impacts here from transactional Forex, for example, that is also not always playing, you know, to, to...

Well, you simply buy in the emerging markets at a bit more expensive, and that has some headwind that needs to be offset, and that will lead to some cost in. Look, I mean, if you look at pricing, is there a fast deceleration? I mean, I don't think we're saying that. I mean, as I said, in some areas in the world, we are adapting our pricing. We're seeing additional promotional activity. I already talked about the examples. India, we talked about -2 and then +2 on volume. Southeast Asia, to some extent, we've significantly increased, you know, our efforts to get back, to become more competitive on, for example, ice cream in North America.

Those are the tactical things we're doing, but I wouldn't point yet to a fast deceleration on pricing.

Celine Pannuti (Managing Director and Head of European Consumer Staples Research)

Yeah, I would add only, you know, that of course, the price acceleration has been higher in categories of high elasticity, like in home ice cream or laundry or skin cleansing bars. So that's one important point. The other point that I feel is important is we don't see, we don't expect negative pricing for the whole group. It can happen in some of our categories.

Moderator (participant)

Our next question comes from Fulvio at Berenberg. Go ahead, Fulvio.

Fulvio Cazzol (Equity Research Analyst)

Yes, good morning. Thank you for taking my questions. My first one is on the Power Brands growth of 6.5%, as you stated in Q4, which implies that the rest declined slightly. I was wondering if you are seeing any cannibalization effects benefiting the Power Brands as you redirect investments there, or is there limited market overlap between the top 30 brands and the rest? My second question is on CapEx. I'm just trying to understand how you can spend only 3% of sales, which you've previously guided to anyway, of which half will go towards productivity, and you also expect to generate higher volume growth. Is capacity utilization even low, or do you expect it to reduce as you cut SKUs and simplify operations?

I mean, could that explain the low CapEx spend relative to your peers? Thank you.

Hein Schumacher (CEO)

... Thanks, Fulvio, for your two questions. I mean, first of all, on Power Brands, and, you know, we laid it out in the, in the speech. So, I mean, it's very important to re-emphasize, we are not neglecting brands outside of the, of the top 30. And it's not that the, with the 6.5%, that the other ones are, are in decline. What we've said with the top 30 proposition was, we are directing our funds first and foremost behind those Power Brands to place bigger bets behind multi-year and scalable innovations.

We also wanna make sure that the superiority framework that we talked about, and the brilliant execution around that is, you know, that we measure that consistently and very well for the top 30, Power Brands, because that will ensure brilliant execution in the company. It will just make it better than when, when we declare that, you know, all of that for, for all of our brands. We just wanna make sure that we face and pace that well, and we feel that we're well on the way with our Power Brands, now 75% of the total company, and with accelerated growth. And I'm sure some of the other strong brands beyond the top 30, they will cling on, pretty fast to, to the themes that we talked about. Actually, if you...

I mean, if you think about the capital expenditure and the productivity agenda, we have guided towards an increase in capital expenditure from 2.7% that we had last year to somewhere between 3%-3.5% for 2024. So we are stepping up capital expenditure. That's number one. Secondly, within the capital expenditure bucket, we're looking for a greater spend on productivity. You know, productivity was a very important part of the Growth Action Plan, and you know the historically we've you know just spent less on that. So we're going to spend more and a greater percentage of the total CapEx total CapEx amount on productivity, and we're seeing good opportunities there to reduce controllable cost.

Fernando Fernandez (CFO)

Yeah, I would add only, you know, that, you know, of course, we will invest for aligning production and distribution capacity with our demand, but we will put constraints to ensure that we focus ourselves in increasing assets, utilization, and operational effectiveness where we see opportunities.

Moderator (participant)

Our next question comes from Bruno at Bernstein. Go ahead, Bruno.

Bruno Monteyne (Senior Analyst)

Hi, good morning. Now, Hein, when I'm listening to the presentation and your numbers, there seems to be a material disconnect between the language of the results to date and what consumers are saying or doing, right? I mean, just quoting from your words, it's about unmissable superiority, science-backed innovations, holistically superior products, and unmissable marketing campaigns. But obviously, that's a big clash with your competitiveness. It's not just bad, it's sort of worse than before, you know, down to 37. Even on your new measures of sales-weighted market share, it's still awful or worse. And I sort of see, like, a big language disconnect there. On the one hand, this amazing business, on the other one, consumers not buying it, so one of those things sort of can't be totally right.

And I do know on the list that you say you're disappointed in that, but you're not really providing anywhere an analysis of why it is so poor and underperforming your competitors. Just saying you're disappointed, but keep saying the business is amazing. And then when I look at what Peter is doing in ice cream, he's clearly taking the ax to pricing and trying to change the direction of volumes. That obviously suggests that profitability was still too high, and pricing needs to be adjusted. And it makes me wonder, given that disconnect that's so obvious in the results, is your margin simply just too high? And you keep talking about gross margin targets. Gross margin targets is not gonna stop you from doing the right thing on pricing if you're suddenly so focused on gross margin. So that's the first question.

The second one is sustainability. You talk about it as priorities, and it's been an ongoing theme, but also see a lot of kind of new European Union laws coming in, moving the bar higher and higher. There's more and more news about palm oil supposedly sustainable, but not being that sustainable. Should we start expecting material inflations in terms of really paying for truly sustainable, commodities, in the next coming years? Should that be part of our margin modeling going forward? Thank you.

Hein Schumacher (CEO)

Well, thanks, Bruno, for your provoking questions. Look, I mean, let me be quite clear, I don't think there's a disconnect at all. You know, we are obviously with the business winning percentage that we talked about in Q3, which is about the same level now. You know, even though that is not a perfect metric, I mean, we've talked about that, but we wanted to be very consistent in laying it out. That competitiveness number is bottoming out. We are not happy with that. We have been very, very clear on that. However, we are not sitting on our laurels.

We have given, we've presented a clear action plan by the end of October, and exactly around the themes that you talked about, which is about unmissable brand superiority, making sure we develop the market and the categories, making sure that we drive up our margin, and so forth. That is what we're doing, that is what we're executing against, and that is not something that you turn in, in one quarter. But we have also signaled that we're going to, you know, that you should see improvement on, on this in the balance of 2024. So I think we've given very clear, you know, guidance towards that. And hey, it's never one size fits all.

So while we're not, you know, super excited about the competitiveness number, if you look at our overall reported growth numbers of the company, which are helped by roughly, you know, 30% of our business, that is doing actually very well, that's the higher growth part of the business, we should also highlight that. You know, this is not a story that we're all disappointed. No, there are some real pockets of strength in the company that serve as wonderful and strong examples, and that will help us going forward. But we are focused on improving those things that don't, that we feel that can be improved, and that is truly what all our actions are about....

And again, when we do that well, we do see some early signs of success, and we will continue to report to you about that in the next quarters. I mean, your question on ice cream, what was important, and we talked about that at the end of Q3. Peter, you know, approaches the ice cream business groups very much as a system, and that's super needed. You know, you have to connect your supply chain, your buying, your distribution, obviously investments in cabinets and freezers, and then the whole price mix and top-line strategy. You need to tie that even more than in any other business group; you need to tie that very strongly together. That's what we're doing, and that means you want to get leverage from volume.

So there was a clear and a conscious decision to drive extra promotional activity in North America, but that was a surgical way of going about it. And already, volumes are, you know, on a comparable basis, were picked up in the fourth quarter, were better. North America actually posted positive volumes for ice cream, and our out-of-home ice cream business in the fourth quarter posted positive volume growth numbers. Now, we need to see that improving going forward in 2024. And we believe that there will be a better 2024 for ice cream than what 2023 looked like, both on the top line as well as on margin. On sustainability, you are absolutely right. You know, the guideline, the bar gets higher, but, hey, I've got, on that sense, good news.

I mean, all the efforts that the company has made over the last few years, that really helps us now. When we laid out our sustainability framework, and we talk more about that in our new Climate Transition Action Plan in the AGM in May, it's all about transparency. It's all about realizing impact in the short term, and it's all about, you know, making sure that we, you know, again, we report behind a more transparent framework on a regular basis about our progress, and we are very well prepared for that. You know, on deforestation-free and palm oil, I think we're leading in the world, and this is something that we continue to do, so I wouldn't expect a major downside from that.

Moderator (participant)

Our next question comes from Olivier at Goldman Sachs. Go ahead, Olivier.

Olivier Nicolai (Managing Director and Head of European Consumer Staples Research)

Hi, good morning, Hein and Fernando. Two questions, please. Going back to slide 16 on gross margin, should we expect gross margin in 2024 to actually recover even above the 2019 level, considering that you have a much better product mix and you have implemented some portfolio changes as well over the last four, five years? And then perhaps could you break up the 200 basis points gross margin improvement between price, mix, and portfolio changes? And then just a follow-up on ice cream, if I may. You flagged downtrading in Europe. Could you give us a bit more detail as well, if you see the same downtrading in the US, and do you expect any impact in the midterm from GLP-1 drugs? Thank you.

Hein Schumacher (CEO)

Thanks, Olivier, for your, for the question. I mean, on gross margin, I'll make some general comments first, and, we'll hand over to Fernando, and then I'll come back on, on ice cream. Look, you're right. I mean, our, our gross margin is improving, behind not just mix and, and premiumization, but also, from increased productivity. This was a major priority for us in the Growth Action Plan, and we're, we're moving forward with that with an enormous, dedication in 2024. When we talked earlier in about the Growth Action Plan, that we would like to see gross margin return to pre-pandemic levels in the plan period, and that was sort of in the range 2025-2026.

With the plans currently on the table, we are seeing indeed an acceleration of gross margin growth, and we aim to get back to pre-pandemic levels earlier. Clearly, you know, some things need to play out in the year, but I'm positive about the progress that we're making there. Fernando, anything you want to add?

Fernando Fernandez (CFO)

No, just, the only point is we see our price coverage going up, our mix improving, and the impact of portfolio change all contributing to the gross margin improvement. So there are different levels all working in the right direction, and as I have said, you know, this is the backbone of our financial plan going forward, and we will put a lot of focus on that, particularly in investing to increase our net productivity.

Hein Schumacher (CEO)

I wanted to make some comments on ice cream, and I'm afraid some of them may sound repetitive, because we made them before. Is there downtrading in the U.S., like we've seen in Europe, for example, the migration to private label and, you know, this is something that I talked about at the end of Q3? No, I wouldn't say so. I wouldn't... I mean, I think it's a different dynamic in the U.S. We stepped up promotional intensity to address competitiveness, and I feel, you know, with the numbers we're getting in, that that's working. And volumes, as I said, were turned to positive in North America in Q4. Clearly, we will price competitively in ice cream. We're very determined on that.

But some key ingredients in ice cream remain inflationary. So think of sugars, think of cocoa, and I already talked about the Forex effect, transactional currency effect that we see in some of our important ice cream markets, for example, in Turkey. So the actions in ice cream really should come from a much stronger execution, a new look at the total supply chain and transforming our distribution and our network into a very competitive set. We believe that there is opportunity to do so. Peter has taken some very drastic action when it comes to leadership change. Around 80% in the business group has of his key leading positions, has changed.

So we're not sitting still, we're addressing the issues with enormous speed and decisiveness, and I expect a better Ice Cream in 2024 along this, the key metrics.

Moderator (participant)

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

Jeff Stent (Equity Research Analyst)

Good morning. Firstly, just a word of thanks really to Nitin, who I think has been an incredible servant to Unilever over, frankly, longer than I think any of us can really remember. So, I hope he enjoys his downtime, if I can say that. So two questions. The first one is, somewhat curiously, you put on one of the slides that vertical integration on key materials is going to be a priority. Could you just explain what that actually means? And the second thing is, you also commented that focusing more on absolute profits would be a priority. Now, if I take consensus, and I apply your minus 5% currency guide on earnings, it would sort of imply that EPS won't really grow this year. So I just want to get your comments on that.

You know, is that what you're guiding to, that there shouldn't be sort of meaningful constant currency EPS growth this year? Thank you.

Hein Schumacher (CEO)

Thanks, Jeff. Three points. Let me just respond to, and just echo your words about Nitin. Thank you, by the way, for making those illustrious career, really great to work with. I'm very grateful to Nitin for everything he's done in the company. By the way, he will continue as the chair of Hindustan Unilever for the foreseeable future, and I'm very grateful that he will, and will use all his expertise and experience in that key role. Now, handing it over to Fernando on the two questions. One is on key materials, and the other one was on absolute profit and the relationship to EPS guidance. Fernando?

Fernando Fernandez (CFO)

Yeah, vertical integration, you know, is, I... Let me give you a couple of examples. For example, if you look at our surfactants cost in North America, we have a significant disadvantage. We are one of the few players that are not vertically integrated in the sulfonation and production of SLS. That has a significant cost to our business, and we believe that this is an opportunity that we can really materialize in the future. There are other materials in which I will not go deeper at this stage due to confidentiality reasons, but we believe that there is a role to really improve our leverage in our procurement strategy and have a significant impact in our gross margin going forward. Let me go now into the absolute profit growth.

Every time I get into a new role, I try to look at the long-term trends, you know? There are two things, looking at the last 10 years' performance of Unilever, that I'm sure that it's no surprise for you, but really, I would like to highlight. The first one is that our volume growth has been below what our footprint in terms of geographies and categories allow. And the second is that in the last 5 years, our profit in hard currency, in current currency, have stagnated, and we know that we need to fix these two things.

I will not get into details now about the outlook and the guidance, you know, but I want you to be very, very clear that we are very conscious about really compensating some of the negative effect that currency headwinds have, and we are working hard on that.

Moderator (participant)

Our next question comes from David Hayes at Jefferies.

David Hayes (Managing Director)

Thank you. Good morning, all. Two for me, one on the divisional heads planning process, and the second one on SKU rationalizationionalization. So could you just walk us through the timing and the process of these new divisional heads in terms of their presentations to ExCo in terms of their 2024 and midterm plans? And during that process, what were the biggest surprises and the identified challenges that came out of that? And is there plans for them to come back again, given they are new in those roles, to elaborate and be more detailed in what they see as the ambition and what they need for the next few years to deliver? And then just on SKU rationalizationionalization, is that done now?

I know you've done a lot of that over the last couple of years, but the 30% or 25% of sales not in the Power Brands, is there a lot more to do in terms of both SKU and brand rationalization to kind of streamline that tail so it doesn't become a drag on the overall group performance? Thank you.

Hein Schumacher (CEO)

Thanks, David. On your first question on the divisional, what you call divisional heads, I'm not sure that I fully got the question, but let me just elaborate a bit, but please come back if you feel that that I'm not answering it. Last year, in October, we refreshed the leadership team of the company, and we made a number of internal appointments. So Priya Nair heading up Beauty and Wellbeing, Eduardo heading up the Home Care division, Peter ter Kulve changing from Home Care into Ice Cream. And I believe we appointed these people with a proven track record and, you know, very hungry, of course, to take on the challenges that we have.

The targets and the goals for them for 2024 are completely aligned with the Growth Action Plan. We've cascaded that, you know, rigorously, I would say, and in a much more, you know, a much more rigorous fashion than probably was the case prior. We have just made the appointment of Mairéad. There is one outstanding position on the ULE, and that is the president for nutrition. We are in finalizing stages of that, and I expect to be able to announce in the next couple of weeks. There were some technicalities why we couldn't do it today. It is what it is, but you know, we are moving forward on that quite fast.

Ultimately, I aim for a good mix, obviously, between internal and external views. That's why we made the appointment of Mairéad today. And hey, I would say everyone is really, is onto it, started on the first of January, formally in the new roles. But, yeah, I'm happy with the progress made so far. On SKU rationalization, we, we've done some significant SKU rationalizationionalization to simplify operations, help our procurement, teams in particular, and of course, the global category teams that are now the primary access to which we manage the company.

They have taken a very, hard look at, "Hey, how can we simplify our business, going forward and make our propositions more scalable?" Mid-20s% or so in terms of SKU rationalization, significantly, of course, that has harmed some competitiveness and some volume, but we're happy with the actions taken. Going forward, I would not expect, similar reductions, of course. I think we have sort of bottomed out, and we need to grow from here.

Fernando Fernandez (CFO)

Yeah, let me add only that. I would see and I would look at this, you know, as, say, one of the key benefits of the business group-led organization. It was very difficult in the past when we were organized on a geographical basis, to take decisions in simplifying our assortment. We have done it. It has a cost in terms of volume, it has a cost in terms of competitiveness, but make us leaner, faster, sharper, and we have been decisive on doing that.

Moderator (participant)

Our next question comes from Karel at Kepler. Go ahead, Karel.

Karel Zoete (Head of Netherlands Equity Research)

Yes, good morning. Thanks for taking the question. I have two questions. One on the beauty and wellbeing business, and one on hair care. Starting with the beauty and wellbeing, that's been elevating growth in the North American market for you for a while. At the same time, I don't necessarily see all these brands traveling very quickly across the globe. Is that part of the plan of these brands, or are they so far going to be predominantly leveraging on the growth opportunity in their North American home markets? And the other question is in relation to hair care. That's been a difficult category for you for a bit longer. At the same time, we've seen quite some action on the portfolio last year.

How should we think about your hair care performance in 2024? Thank you.

Hein Schumacher (CEO)

Thank you, Karel. I'll take a part of the first question, and again, given Fernando's role in that business, both responsible for hair care as well as on health and wellbeing and the prestige beauty side, he will add. Clearly, these prestige brands, roughly a quarter of the business group Beauty and Wellbeing, of course, we want to scale. You know, this is an important theme of our Growth Action Plan, scalable propositions, multi-year bets, and so forth, and these brands fit that extraordinarily well. However, we want to make sure that we put them on a very solid footing, and the United States, or North America, is a very significant market.

So we were really keen to drive growth there initially, and we're looking for expansion. But let me tell you, in fact, you know, we've expanded on Liquid I.V. We've introduced it in a number of countries, amongst others, Canada, but we're also looking for more internationalization, more on that to come, so stay tuned. Dermalogica, in fact, available in multiple countries, actually, now available in the UK as well. Paula's Choice, I hear from your accent, you're from the Netherlands. In fact, our European operations for Paula's Choice are based out of the Netherlands. I was there recently. All digital, very strong growth, similar growth rates that we're seeing in North America, so we're actually very excited about that.

But we will do it very targeted and where we feel that the moment is right, and that we have sufficient presence in the base in the United States, and then we will look for internationalization. Fernando, maybe a few words to that, and as well as hair care.

Fernando Fernandez (CFO)

Yeah. I feel one of the powerful features of the portfolio that we have been building in health and wellbeing and in prestige is the fact that North American brands travel. These kind of strong brands in the US give us the possibility of building a more harmonized portfolio across the globe in the future. So definitely, global rollout of this brand is something that we will pursue with decisiveness in the next future. There are some differences when you look at prestige a bit easier. In the case of health and wellbeing, there are regulatory constraints that have to be overcome, but overall, you know, just the decision is to really go global with most of these brands.

I feel one point that, Hein touched on that, and I feel it's important, we wanted to solidify our position in the, in the U.S. first. You can see that our growth here is really very, very, very competitive, particularly at the moment in which many companies, particularly in the beauty space, are shifting back focus from China into the U.S. We thought that was important to focus in solidifying the position there. Regarding hair care, good performance, you know, positive volume, Latin America and South Asia with double-digit growth. We have a bit of a difficult time in, in North Asia, despite the fact that Clear, in particular, is doing very, very well there and is, reducing the gap with the anti-dandruff leader in the market.

Overall, the performance of hair care has improved significantly in the last couple of years, and we believe that these strengths will continue going forward.

Moderator (participant)

Our final question comes from Sarah at Morgan Stanley. Go ahead, Sarah.

Sarah Simon (Equity Research Analyst)

Um, yeah-

Moderator (participant)

Sarah, are you there? I think we may have lost you there, Sarah. I'm afraid. So, with that, we will-

Sarah Simon (Equity Research Analyst)

Can you hear me now?

Hein Schumacher (CEO)

Oh, yes, you're back.

Yeah, you're back.

Sarah Simon (Equity Research Analyst)

Okay. Sorry, don't know what happened there. It was two questions. One was on restructuring. You've obviously had fairly significant restructuring costs for quite some time. Can you just take us through how much of those are gonna be cash in 2024, and how long you would anticipate continuing to charge restructuring? And then the second one was just on the gross margin question. In terms of price coverage of, of NMI since things started to—well, since we started to see significant inflation, where do you think you've got to in terms of price coverage? Maybe as a, as a percentage or something like that. Thank you.

Hein Schumacher (CEO)

Thanks, Sarah. I mean, on restructuring, we're guiding towards roughly 1% of turnover on the restructuring for 2024. Fernando and I were seeing some real opportunity for productivity improvement, so I already talked a bit about ice cream. We're looking at some other pockets that we will come back to you on. We're doing it, as mentioned in the video, surgically, and I think that's right. But at this point, we would guide towards that sort of 1%. On gross margin, if you look back in the last couple of years since inflation started, you know, I would say we're at roughly 80% coverage, give or take.

And you know, with obviously some momentum behind gross margin and the productivity plan there, and I already mentioned earlier in the call that we're leaning in a bit more on gross margin in terms of faster recovery to pre-pandemic levels than earlier communicated.

Yeah, and price coverage now, for the first time in four years, is above 100%.

Thank you, Fernando.

Sarah Simon (Equity Research Analyst)

You're at over 100%?

Now, for the first time in 4 years, our price coverage has gone beyond 100%.

Great. Thanks.

Hein Schumacher (CEO)

Thanks, everyone, for joining the call. And that was indeed the last question. So as you have all heard, we have reorientated the company now behind the Growth Action Plan, and this is resulting in some important shifts. First of all, a laser focus on growing volumes and gross margin expansion. I mean, two themes that we have discussed during this call. A tight grip on operations, and resulting in 2023, particularly strong working capital performance and thereby, you know, strong cash generation, and we're pleased with that. An increased investment behind our growth, and of course, behind our Power Brands. You know, we stepped up investment in 2023, and we aim to do more in 2024, but obviously based on the strong plans.

The right level of urgency that we have now in the organization to address that competitiveness, and underperformance in the pockets where that, where that's valid. We'll also continue to look at the portfolio. We've done some important changes in 2023, and we will continue to look at the right portfolio going forward. So, you know, all in all, clearly, we are all focused on value creation and increasing shareholder returns. It's super important that we do that. We're very clear, and as Fernando said, we know what to do. We look forward to update you on the progress, through the course of the year, and, for now, have a very, very good day. Thank you.