聯合利華 (UL) 2021 Q2 法說會逐字稿

Good morning, ladies and gentlemen. I will shortly be handing over to the Unilever team to begin the conference call. (Operator Instructions)

I am now delighted to hand over to Richard Williams at Unilever. Please begin your presentation.

Good morning, and welcome to Unilever's Half Year Results Update. We expect prepared remarks to be around 30 minutes, followed by Q&A of around 30 minutes or a little longer. All of today's webcast is available live, transcribed on the screen as part of our accessibility program.

First, I draw your attention to the disclaimer to forward-looking statements and non-GAAP measures. And with that, let me hand over to Alan.

Well, thanks, Richard, and good morning, everyone. While we've delivered a strong first half of the year, it's a result of our continued focus on operational excellence, which is behind our step-up in competitiveness and the associated good financial performance. We've continued to progress our growth agenda by developing our portfolio into high-growth spaces and by focusing on differentiated innovation and our purposeful brands. We're pleased that this has translated into underlying sales growth of 5.4% in the first half, with volume growth of 4% and price growth of 1.3%.

In the second quarter, our underlying sales growth was 5%, 3.3% volume and 1.6% price. Our pricing is accelerating as we take action to offset the impact of rising cost inflation and it crossed the 2% level in June. At our quarter 1 trading statement, we said we expected a decline in underlying operating margin in the first half of the year. And we indeed saw that with a drop in underlying operating margin of 100 basis points to 18.8% as we lapped the period last year when we were conserving brand and marketing investment during the onset of COVID-19.

We also confirmed with our quarter 1 trading statement that we expected to deliver a slight improvement in underlying operating margin. Since then, over the last quarter, we've seen further significant cost inflation emerge. Cost volatility and the timing of landing price actions do create a higher-than-normal range of likely year-end margin outcomes. We're managing this dynamically and expect to maintain underlying operating margin for 2021 around flat. And Graeme is going to give more background to that in a moment.

Earnings per share in constant currency were up 4%, but the impact of translation to euros at current exchange rates means that the headline EPS was down 2%. We delivered a strong EUR 2.4 billion of free cash flow, and we're pleased that on an MAT basis, our key competitive measure of business winning share remains at a healthy 52%. We continue to be guided by our 5 strategic choices, which clearly sets out our priorities for our portfolio development, how we win with our brands, our key markets and key channels of the future, and an organization leading with purpose and a growth culture and all of that underpinned, of course, by operational excellence.

We continue to make progress on our strategic change agenda. The acquisition of Paula's Choice is an important step in evolving our portfolio into our growth segments. Paula's Choice is a perfect addition to our Prestige portfolio. It's digitally led. It's a cruelty-free skin care brand with a strong presence in key growth markets like the U.S. and has excellent potential for further international expansion.

Brand has pioneered science-backed products and has a very strong direct-to-consumer e-commerce business. The operational separation of our tea business is now substantially complete. We've created an attractive stand-alone business with dedicated leadership. And actually, we're already starting to see signs of the benefit of focus. Very pleased with the progress we've made on the complex separation. We filled 3,500 vacancies around the world, and we're in the middle of moving 90 factories across into the new business. We've established the sales organizations in our largest markets with systems implementation on track to complete over the next 2 months.

We will start to engage externally very shortly to execute an outcome, and this could be through an IPO, through a sale or through a partnership. The exact time line to conclusion will depend on which of these paths maximizes value creation for Unilever's shareholders.

Strategic portfolio changes delivering results. Prestige grew 27% with strong growth offline and online. And Functional Nutrition, which combines our VMS and Health Food Drinks business grew by 18%. Together, Prestige and Functional Nutrition contributed 50 basis points to group USG in the first half. At Q1, we announced a share buyback of up to EUR 3 billion, which reflected our strong free cash flow delivery and balance sheet position. The first tranche of EUR 1.5 billion will be completed on or before August 27.

Right, turning to our categories. This slide, which we introduced at the start of last year, continues to be a very useful way of illustrating how consumer demand and sales have been changing through the pandemic. The operating environment overall has seen improvement, but remains extremely volatile. COVID-related restrictions are still in place across many emerging and developed markets, and we expect that they will continue in line with the case numbers. So we can expect these channel dynamics and consumer behavior to continue to be impacted accordingly. We are still managing in COVID times.

As already mentioned, Prestige grew strongly. It was worth noting that the comparator will start to get tougher in the third quarter. Hygiene and in-home eating, the categories that saw the biggest spike in demand a year ago, both declined in the quarter as we lapped very strong comparatives in the prior year. While both saw a decline in Q2, demand remains above pre-pandemic levels as consumers follow enhanced hygiene routines and continue to enjoy increased cooking at home. I'll say more about that in a second.

In the U.S., for example, 55% of Americans are saying that they're cooking more at home now and over 50% say they will continue to do so even in a post-COVID world. And the picture globally is that 47% of consumers are saying that they have changed their eating habits. Functional Nutrition grew by 9% and has 1/4 of Horlicks sales for quarter 2 within the reported USG numbers now that we've lapped completion of this transaction.

Importantly, other personal care categories, comprising deos, hair, oral care and skin care, grew double digit in the quarter. Now while consumer usage occasions dropped sharply in the prior year, we have seen these occasions slowly return in some regions as social restrictions and workplaces reopen. But occasions, and therefore, aggregate demand globally still remains below normal levels.

Our out-of-home business grew strongly against a weak comparator as restaurants and out-of-home ice cream locations reopened with lockdown restrictions easing. Consumption levels are still below pre-pandemic levels with many cities and locations around the world still missing the key tourist trade.

Now looking through the lens of our divisions. Beauty & Personal Care grew 3.3% in the half with volume growth of 1.8%, price at 1.4%. And as restrictions eased in some of our markets, this growth accelerated to 4.2% in the second quarter. Skin cleansing declined as we lapped the spike in demand from last year's household stocking. I think it's fair to say we're well past peak sanitizer, but sales remained overall above 2019 pre-pandemic levels.

We continue to deploy our innovation capabilities on big initiatives on our big brands. And a great example is how we further extended the Dove Care and Protect Antibacterial range, which combines efficacy against germs with the unique care of Dove and is now available in over 50 countries. That's a good example of big bet innovation, we're rolling out fast and at scale.

Skincare, hair and oral as well as the deodorants grew as some living restrictions were eased and usage occasions for consumers increased. Deos, we saw an 8% decline in the first quarter as social occasions were limited, grew double digit in the second quarter as we started lapping the weaker comparator and levels of usage began to pick up again. But again, not all the way back to pre-pandemic levels.

The highlight of the half was our launch of an inclusive deodorant under the Degree Rexona brand name in the U S. It's designed for people living with visual and motor and disabilities. And this innovation picked up several of a total of 24 Cannes advertising Lions awards for Unilever. This is the highest number of Lions in the FMCG industry. I do think it's credit to some of the great marketing talent in our organization and powerful, purpose-led brands in our portfolio. But let's be clear. The reason I care about creative awards is that creativity is proven to tightly correlate with increased ROI on our advertising investment.

Foods & Refreshment continued its strong growth trajectory, with underlying sales growth of 8.1% in the half, 5.8% from volume, 2.1% from price. We're now lapping the higher demand base for the prior year. Our second-largest brand in the company, Knorr, continues to develop propositions to offer high-quality and healthy products for in-home cooking. After a successful launch in Brazil, we've rolled out our Zero Salt Bouillon across Europe, tapping into this own cooking trend with healthier alternatives for consumers.

And this directly links to our commitment that 85% of our global foods portfolio will help consumers reduce their salt intake to no more than 5 grams a day. This is part of our future food strategy where we're helping people transition towards healthier diets as well as reducing the environmental impact of the global food chain.

Hellmann's grew double digit as it communicated its purpose to Make Taste, Not Waste, by using dressings for creative cooking that reduces food waste by using leftovers. Our vegan variants performed particularly well. And in addition to encouraging consumers to reduce food waste at home, we have committed to halving our food waste in our direct global operations from factory to shelf as quickly as by 2025.

Ice cream grew across both out-of-home and in-home, driven by China, Turkey and India. Out-of-home grew against a weak comparator, with sales seeing double-digit growth despite the depressing impact. I mean that in both senses of the word, of poor weather in much of Europe in April and May. Our collaboration with singer-songwriter Miley Cyrus delivered our highest-ever brand engagement for Magnum with content around Miley in Layers. It's been trending on YouTube and Twitter, and it does reflect the multilayered nature of our delicious new Magnum Double Gold Caramel Billionaire.

Our Food Solutions business continued to recover, led by China, where the number of restaurants we're serving is now 5% higher than it was pre-pandemic. The U.S. is also showing an improving picture with restaurants back open, although the hospitality sector in Europe remains severely impacted with restrictions in place for most of the half. At a global level, restaurant demand overall remains below pre-COVID levels.

And finally, Home Care. Home Care grew 4.5%, volume led. After negative price in the first quarter, pricing has accelerated through the half, driven by Latin America and Turkey. Home and hygiene declined as we lapped the surge in demand from the start of the pandemic, but growth remained strong over a 2-year period. And our new surface cleaning range under the Domestos brand is performing very well. Laundry grew 6% with growth driven by China, where our Comfort fragrance boosters innovation with dual-color beads and luxury-inspired fragrances has performed well.

We're also expanding our super premium brand called The Laundress into China and sales dynamic up over 1/3 of total brand sales with the U.S. also growing double digit. We really do have a strong innovation pipeline in Home Care. It's rooted in our clean future agenda and tough on stains, but kinder to the planet relaunch of our Dirt is Good brand known as Omo in many markets, or Persil in the U.K., is performing well.

Now our new businesses, Prestige and Functional Nutrition. Prestige continued its really strong growth trajectory with 27% USG in the half, and our Living Proof launch in the curly hair space with products which offer 3x stronger curls backed by proprietary technology is performing especially well. And as I mentioned, the Paula's Choice acquisition is a sign of our commitment to continue to build scale and capability in this attractive segment.

Functional Nutrition grew 18% in the half with strong growth, particularly from VMS. Some of our more recent acquisitions like Liquid I.V. and SmartyPants haven't yet dropped into our reported USG numbers because we haven't had them for more than a year, but they're growing well. If these brands were included, Functional Nutrition like-for-like growth would be over 30% in the half.

As already mentioned, Prestige and Functional Nutrition contributed 50 basis points to group USG.

E-commerce. E-com grew 50% in the half and now makes up 11% of total group turnover, despite lapping last year's sharp increases in online shopping at the start of the pandemic. We do continue to see strong growth for Unilever ahead of the market, and we don't see this trend reversing as we exit the pandemic.

And with that, let me give my husky voice a break and hand over to Graeme to cover the regions. Graeme?

Thanks, Alan. Our focus on operational excellence and our 5 sharp strategic choices continue to drive competitive growth.

After posting growth of 5.7% in the first quarter, we grew by 5% in the second quarter, leaving the half at 5.4% USG. Of this, volume growth was 4% for the half and price growth was 1.3%. We are stepping up pricing in response to rising commodity inflation, which is driving a sequential increase in UPG, as Alan said, from 1% in the first quarter to 1.6% in the second, and price growth in the month of June was 2.2%. We expect this acceleration to continue into the second half as our pricing actions land in many markets.

Now growth was led by emerging markets with China in full recovery and strong growth across South Asia and Latin America. However, the environment remains volatile as infection rates and restrictions continue around the world. Our local market teams are very well placed to handle this volatility and are taking all necessary actions, pricing up and driving our mix and savings programs hard. The Asia/AMET/RUB region is a really good illustration of the volatile environment. China is largely back to normal with continued strong consumer demand. In fact, demand in most categories is back to or above pre-COVID levels, although Home Care has been a bit slower to come back. And while growth in China continues to be driven by online channels, it has slowed a little versus a year ago, with online market growth there slowing from 40% to 30% on an MAT basis.

Underlying sales growth in the quarter was again double digit, led by Food & Refreshment. On the other hand, the second quarter in India saw a severe second wave. While regional lockdowns were not as disruptive as last year, these still increased the human cost of this pandemic, and yet we saw strong double-digit growth across South Asia, illustrating the resilience of our business there. We implemented learnings from the first wave by holding inventory closer to the consumer, while in our production sites, we had more flexibility in capacity and distributed manufacturing across our various sites. Over the half, India grew double digit across all of our divisions, and we've led on pricing in our categories with high cost inflation such as skin cleansing and fabric cleaning.

Turkey grew double digit with a good balance of volume and price growth across all categories. Southeast Asian markets remain very challenging with COVID cases having returned to all-time highs in countries such as Indonesia and Thailand and markets there continue to be negatively impacted by the resulting economic downturn and the lack of tourism. In Indonesia, we saw many consumers seeking cheaper value offerings, which contributed to a decline in the half.

Thailand is also being hit particularly strongly by the lack of tourism, but our USG returned to positive in the second quarter as we lapped a weak comparator. We saw strong growth in Beauty & Personal Care, especially hand and body, where we launched Vaseline Gluta-Hya, that's a serum burst UV lotion offering flawless glow and instant moisture boost. Overall, the Asia/AMET/RUB region grew 7.7% in the first half with 6.4% volume growth and 1.2% of price growth.

Let me turn to Latin America now. Our Latin American business has remained very resilient with double-digit growth in the second quarter, bringing first half USG to 9.5% with 3.1% from volume and 6.3% price growth. The region has been particularly impacted by high commodity inflation and currency devaluation. And as a result, we continue to take strong pricing with price stepping up to 7.4% in the second quarter.

Brazil grew in double digits in the half, a very competitive performance in what is a difficult health and economic environment. Our Omo dilutable laundry liquid innovation, which launched back in 2020, continues to drive share gains, and we're leveraging our strong market position to lead on price. We also introduced Knorr Rinde Más. That's a value-orientated product innovation in Argentina, which enables consumers to increase the yield of meat dishes by adding meat replacement proteins from soybean, garlic and onions. Around 35% of the population there have been living in poverty in the past decade and protein consumption has been consistently decreasing amongst poorer people. So this type of product innovation offers healthy food choices at great value to our consumers.

Mexico saw strong growth across all divisions with a good balance of volume and price with Magnum and Cornetto driving market share gains and good performance from our 100% natural bouillon.

Colombia declined double digit in the second quarter as our operations were heavily disrupted by the widely reported civil unrest in the country.

In North America, we grew 2.6% in the first half with volume growing 1% and price 1.6%, driven by double-digit growth in our Food Solutions and Prestige Beauty businesses as the channels reopened.

Despite lapping the peak surge of demand in the prior year, we saw growth across all divisions. Competitiveness, which is a key focus for our U.S. business, continues to strengthen. In-home foods declined as we lapped household starts, but demand remains high, especially for ice cream. We launched top Ben & Jerry's, including our chocolate caramel cookie dough variant with a layer of fudge on top of the ice cream, and we extended the Klondike brand into cones and shakes.

Our hand hygiene launch under the Dove brand performed well, but the hygiene portfolio overall was broadly flat as we lapped the big surge in demand from the prior year. Demand for the hand sanitizer product format, in particular, has dropped off quite sharply with high stocks in store and in consumers' homes.

Food Solutions contributed strongly to growth as restaurants reopened across North America. While growth was strong, demand still remains below 2019 levels and we see further headroom for recovery.

Turning to Europe. Europe grew 1.1% in the first half with positive volume of 2.2% and negative price of 1.1%. This negative pricing reflects a period of lower frequency and depth of promotions during the first wave of the pandemic in the prior year. Out-of-home ice cream sales drove volume growth as we cycled the steep decline from last year when Europe went into lockdown. In Italy, which is our biggest out-of-home ice cream market, we launched 3 special edition Magnums to commemorate the 700th anniversary of the death of the medieval poet and philosopher Dante. The first of the 3 flavors, which is called Inferno, combines chocolate ice cream with raspberry and salted dark chocolate, and that's been followed by Purgatorio and Paradiso.

Across Europe, sales in April and May were impacted by poor weather, though they have recovered in June. The U.K. and Germany declined slightly in the second quarter as we lapped the spike in household stocking from the prior year. We grew in France, where we continue to see a deflationary retail environment, and we saw strong growth in Italy and in the Netherlands.

We turn to the turnover bridge. Turnover for the half was EUR 25.8 billion, which is basically flat versus the prior year, driven by a negative currency translation impact of 6%, as currencies weakened versus the euro. As already mentioned, underlying sales growth was 5.4%, and we saw a net positive impact of 1.4% from acquisitions and disposals. Based on spot FX rates, we would expect a negative currency translation impact of 2% to 3% on turnover for the full year and around 1% more than that on EPS.

As we had indicated last quarter, underlying operating margin of 18.8% in the half was down by 100 basis points. Brand and marketing costs were up 80 basis points as we invested EUR 400 million more in the business and lapped the conservation of BMI in the first half of last year in response to the pandemic. We will see an unwind of this effect in the second half of the year as we lap the period of strong brand and marketing investment in H2 of last year.

Overheads were 40 basis points lower, and we continue to see good on-target delivery from our productivity programs and ongoing COVID-related savings in areas like travel and facilities. Gross margin was down 60 basis points. We stepped up pricing in the second quarter in response to accelerating cost inflation, although inevitably, there is a lag, which is large in some countries, between the cost impacting and prices landing with our customers and consumers. We remain very focused on stepping up price and delivering the full potential of our savings programs, which are well on track to deliver EUR 2 billion in the full year.

For the half, the impact of COVID on costs and mix on gross margin was slightly negative versus the level we saw last year. COVID on costs for the half were at similar levels to last year, and we saw a 10 basis point headwind in the half from negative mix. The full extent of the negative COVID impact versus our pre-pandemic 2019 margin is largely unchanged compared to last year at negative 90 basis points. As you're well aware, the COVID situation remains unabated in many countries, and it's still too early to give an indication of where we expect these costs to reverse -- sorry, when we expect these costs to reverse, but we will continue to update you on these.

Cost inflation is now in the news on a daily basis. And we've already mentioned it a number of times already in this presentation. So let me take a few minutes to review how it's impacting Unilever. Last quarter, we said that we expected to see percentage commodity inflation in the second half in the low to mid-teens. Since then, we've seen further incremental price increases across many commodities. Inflation is impacting us across the full spectrum of input costs in materials, in packaging and quite notably in freight and distribution costs.

Crude oil, which impacts ingredients that we use in our home care products, as well as the resins for packaging material, have seen prices pick up rapidly from the all-time lows we saw in 2020. Currently, crude oil price is up 60% versus prior year and has risen 12% since we last reported in Q1. This is driven by many factors, but broadly by demand recovery as countries exit lockdowns and OPEC keeping production supply tight.

Similar to crude, soybean oil has been accelerating inflation. It's an important ingredient for us in categories such as dressings. Soybean oil prices have increased by a further 20% just in the last quarter and are now up 80% versus last year. The increase is driven by increased demand, coupled with a poor U.S. soy crop in 2020. The price of palm oil, a key ingredient for our skin cleansing products, is now 70% higher than its long-term average with increased demand and lower harvest yields driving up the price.

We've seen large increases in freight and logistics costs, the results of demand outstripping supply on sea freight and labor shortages across the distribution industry, especially in the United States. Packaging has also seen further price increases in the last few weeks on top of already high levels, the results of high demand for packaging from online shopping and weather-driven supply shortages. Our best percentage estimate of our input cost inflation for H2 has now increased to the high teens. We have been and will continue to pull all of the levers of pricing and saving.

We've already taken significant pricing action in key markets through a combination of list price increases, pack changes on key price point packs, mix actions and focused promotional management. We are carefully balancing the eternal triangle of pricing, cost and competitiveness, while being mindful of consumer affordability through a period of difficult economic circumstances in many parts of the world. As Alan has already said, cost volatility and the timing of landing price actions create a higher-than-normal range of likely year-end margin outcomes. We expect to maintain around flat margin for the year, which is a balanced view. We will continue to aim, of course, for an improvement. For all the reasons that I've outlined, the range of possible outcomes is a bit wider than usual.

Onto EPS. While we delivered EPS growth in constant currency of 4.3%, after translation at current rates, this is negative 2% at EUR 1.33. Turnover and operational performance contributed 2.9% to earnings, while lower finance costs had a positive impact of 1.5%, reflecting lower levels of debt and lower interest rates. For the full year, we expect finance costs to be in the range of 2% to 2.5%. The underlying effective tax rate for the half decreased to 21.9% from 22.6% in 2020, and that contributed 0.8% to underlying EPS and was largely the result of favorable one-offs. We still expect our full year tax rate to be around 25%. Minorities had a negative impact of 1.4% on EPS due to higher minority interest in India following the Horlicks acquisition, which was part settled using equity in Hindustan Unilever.

Free cash flow in the half was EUR 2.4 billion, down EUR 0.4 billion versus prior year, which was an exceptional cash delivery as we protected profit and cash at the start of the COVID crisis. Our net debt-to-EBITDA ratio increased from 1.8% at year-end to 2x now, in line with our broad leverage target, with the increase largely due to the share buyback program that is underway.

Our net debt levels stand at EUR 22.4 billion, up from EUR 20.9 billion at the year-end. The increase was driven by dividends paid and our share buyback program, partially offset by free cash flow delivery. Our pension surplus increased from EUR 0.3 billion to EUR 1.9 billion. The increase was driven by positive investment returns on pension assets and lower liabilities as interest rates increased.

And with that, let me hand you back to Alan.

Well, thanks, Graeme. Let me summarize. We delivered a strong first half, underpinned by our focus on operational excellence which flowed through to good competitiveness and improved growth of 5.4%. We've taken decisive action on pricing and we'll continue to do so as we face accelerating cost inflation in the second half.

Our portfolio evolution continues to progress well through the recent acquisition of Paula's Choice, through the separation of the tea business and also the separation of a number of smaller beauty brands and personal care brands with a dedicated management team under the name Elida Beauty. And we're seeing very strong performance of our higher growth segments, Prestige Beauty and Functional Nutrition.

For the full year, we expect underlying sales growth well within our multiyear framework of 3.5%. And while we will also continue to aim for a slight improvement in underlying operating margin, at this stage, we expect margins to be around flat. And we will give an update on our latest fuel margin along with our Q3 trading update. Our vision remains unchanged, to be the global leader in sustainable business, and we hold this ambition with certainty, the certainty that it is driving us towards the sustained delivery of superior financial performance.

Nearly 18 months on, the COVID situation remains very volatile and many countries are facing severe new waves from the Delta variant. As I've said before, the view from Delhi or Jakarta is not the same as from London or New York, and this continues to be the case. But our improved level of performance is rooted in matching this volatility with Unilever's growing agility, speed and resilience.

And with that, let me hand back to Richard to kick off the Q&A. Richard?

Thank you, Alan. (Operator Instructions) So I see our first question is from Martin Deboo at Jefferies.

Richard and Alan and Graeme, can you hear me okay, first of all?

Yes, we can hear you.

Okay. Two brief questions. Clearly, the conversation this morning is going to be around the margin guidance. You've been as clear as you can be on commodities, I think, and pricing. The question I would like to ask is, what is the flow of gross cost savings into the business coming both into the COGS line and the SG&A line? How big was that in H1? And how big do you expect it to be in H2?

Second question is on the cash flow. CapEx, 1.4% of sales in H1, down on an easy comp in the prior year. Is that just a reaction that you can't get projects away under COVID? It's just a low number, guys, is what lies behind the question. So those are the 2.

Okay. Thanks very much, Martin. Graeme, I think I'll have -- I'll ask you to answer both those questions.

Okay. Thank you, Alan. Just to talk about the flow of the margin, costs going into the margin. And let me emphasize, first of all, that this is really all about timing. We have the ability to manage through our brands and the strong local teams, the pricing to cost balance, and we will continue to manage that. It's really the eternal triangle of competitiveness, of inflation and pricing and the timing of landing price to offset inflation means that the point of time at the year-end is harder to predict. We are pulling all of the levers and managing them all well within our control.

So everything that is in our control and all of the savings programs and mix management and pricing, we're pleased with how that's going in, but there are some things, as we described in the presentation, there are a little bit that have moved since Q1 into Q2. If we look in aggregate, what looked like low to mid-teens aggregate market inflation at Q1 now looks like high teens. That's the market. We offset that and, of course, we see lower than market inflation due to our buying scale and procurement, due to our covers, which waned off, of course, due to inventories that we carry and due to our savings. And as I said earlier, our savings programs are very much on track. That's our supply chain savings and things like product logic, which is part of 5S. So everything in our control is going as planned and are actually delivering high levels of impact.

When we add all that together, though, what looked to be a slight increase in UOM for the year, our best balanced view now is that the UOM will be around flat, and that's, therefore, what we're guiding to, although, of course, our ambition remains to have a slight increase in our margin.

As to your question on CapEx, levels of CapEx, where you're right, about the same as they were in the first half of last year, and that was at a depressed level. Going forward, we think that the right level of CapEx for the business is the sort of long-term run rate of about 2.7% on the -- that's a healthy level of CapEx for the business. We're recognizing that quite a bit of our production now is done through third parties, not within our own network.

And the reason why it's slightly depressed in the first half is because a number of projects that would have been underway, there has been some delay in project teams being able to get on with CapEx and there's been some challenges of supply, of equipment, et cetera. So short-term impact, very much related to the conditions that we're managing under and we think that our CapEx levels will normalize back to the sort of longer-run 2.7% margin.

Okay. Thank you. Thanks for the question, Martin. Let's go straight to Tom Sykes at DB. You're on, Tom.

Yes. So firstly, just on the competitiveness, the figure that you've given, the 52% is obviously a bit lower than it's been for the last couple of quarters. So maybe you could give a view there. I know you don't like giving the in-quarter number, but maybe just if there's some confirmation that you're still above or where are you versus the 50% on that level and how you expect that to progress? And then maybe related to that, again, is maybe dissecting the BMI expense. What's perhaps happening to rates and your volume of expenditure? And do we still expect an increase in rates to come through in the second half of the year? And how do you balance that versus your promotions and the volume of advertising, please?

Okay. Thanks very much, Tom. I'll take the first one. Graeme, perhaps you can address the second one. So Tom, what we're trying to do is make sure that we do keep looking at competitiveness on an MAT basis. It is quite volatile, 12 weeks to 12 weeks. We do see sales moving between gaining and slight losses. And I think the simplest way to answer your question is that it's been a long time since we've had an L12 -- at least a 12-week period that's below 50%, and that continues to this day. So the L12 is healthy, above 50%.

And we also -- just to give you a sense, we have to bring the shutter down at a certain date that gives us an aligned date for reporting the MAT. But of course, not all markets report on the same date. And as a result of that, since we closed the MAT, we have seen 1 or 2 important markets sharing an insight into what their next period will look like, particularly U.S. and India, and both look very healthy. So we're confident on staying above 50% on competitiveness and the immediate forward look looks really good. Graeme?

If I could just use the opportunity to zoom out a little bit on brand and marketing investment. As we said in the speech, our spend was up, on a like-for-like basis, EUR 400 million this half compared to the last half when we were conserving. If you go back on a multiyear basis, our BMI spend as a percent of turnover has been pretty consistently around 14% for the last few years. But there's a lot happening within that and quite a lot of change in mix. For example, 40% of our media spend is on digital. That's not a very relevant figure in the aggregate. Obviously, it's very different in the market. China much higher, India much lower, for example. But that's just a broad sizing.

Within that step-up in BMI, the lion's share has gone in media, not advertising production. So we're showing more of our wonderful creative to consumers, which is what really matters at the end of the day. In terms of your question on rates versus volume, the outlook in media rates across markets, it depends very much in each local country. We are seeing very stark differences, some deflation in some parts of the world. No deflation, normal levels of inflation in other parts of the world. It's very much linked to the status of the pandemic. And of course, media are very much determined by market forces. But we don't expect to see a large deflationary market in media rates for this year, and we're not, in fact, seeing that. So it's mostly a volume question that we are seeing. So I hope that gives you a little bit of color on that.

Just a footnote, Graeme, a couple of important points. Our share spend to share of market as a measure of -- one measure of competitiveness is at a multiyear high. And it's in the public domain that we are doing a full media review of our buying. We think we buy very competitively, but these reviews of our media buying, which we do every 3 years or so, test that assertion by putting a competitive element into our media-buying operation. Richard, back to you.

Thanks for that, Tom. Next question is from Alicia Forry at Investec.

Can you hear me okay?

Yes, we can hear you.

Okay. Great. My question is on price. It seems like perhaps putting it all together that price has been a bit harder to take in some markets than...

I lost Alicia.

We've lost you, Alicia. Okay. Let's jump to the straight question. If Alicia gets back in later on, then we can try again. So let's go to Guillaume Delmas at UBS.

A couple of questions for me. First one is on Functional Nutrition. Still a strong performance in Q2, but it's still a marked slowdown relative to what we've seen in the past 12 months where growth was more around 40%. So appreciate Liquid I.V., other recent acquisitions will help your underlying sales growth there going forward. But could you shed more light on why we've seen such a slowdown in that second quarter? And maybe if you can also provide a quick update on where you are from a revenue synergy standpoint for Horlicks.

And then my second question is on Ben & Jerry's. I mean it was making the headlines a couple of days ago, your decision to stop selling the brand in Israeli settlements. And so here, I'm wondering, are these the type of decisions that you're going to be taking going forward because it's kind of the natural next step for brand with purpose? Or is it very much specific to Ben & Jerry's DNA? And I guess the bigger picture here would be, where do you draw the line between purpose and an active political agenda?

Why don't I take both of those and give you a break, Graeme. The Functional Nutrition, Guillaume, is very simple to answer, which is that up until now, we've only been reporting a smaller -- a couple of the smaller VMS brands based in North America. And the reason for that is that those are the only ones that have been in our base for more than a year. In Q2, we started to add in Horlicks, which grew mid- to high single digits in the half, but obviously, not at the rate of some of the indie brands, which are growing, as you have correctly pointed out, in the high double-digit range.

So it's all about the first quarter of reporting Horlicks in our Functional Nutrition base. We're delighted with the progress on Horlicks, top and bottom line, ahead of our business case. Revenue synergies coming through clearly, both from stronger innovation and better reach. Hindustan Unilever have done their usual masterful job of integrating that brand, that business and making sure that we really deliver on the top and bottom line synergies that were in the business case. So let me pause there. Hopefully, that gives you a clear answer on Functional Nutrition.

On Ben & Jerry's. Look, this was a decision that was taken by Ben & Jerry's and its independent Board in line with an acquisition agreement that we signed 20 years ago. We've always recognized the importance of that agreement. Obviously, it's a complex and sensitive matter that elicits very strong feelings. I think if there's one message I want to underscore in this call, it's that Unilever remains fully committed to our business in Israel. We have 4 factories, including a recent EUR 35 million investment in a new razor factory for Dollar Shave Club. We've got 2,000 employees in our head office and distribution centers and in the factories. We've put ILS 1 billion of investment into the country in the last 10 years. That's just the capital investment. And we're very active on the start-up community and social programs in Israel.

I can assure you, it is not our intent to regularly visit matters of this level of sensitivity. It's been a long-standing issue for Ben & Jerry's. And we were aware of this decision by its -- by the brand and its independent Board. But certainly not our intention that every quarter will have one quite as fiery as this one.

Okay. Thank you. And thank you, Guillaume, for the questions. Okay. Let's try again with Alicia Forry at Investec. Alicia, do you want to try again and see if we can hear you properly?

Yes. Can you hear me?

We can now, yes.

Okay. Great. Sorry about that. I lost service. So it sounds like maybe price has been a little bit harder to take in some developed markets. Is that a fair characterization? And what are the competitive dynamics in your developed markets across the Unilever Group?

Graeme, you want to crack at that? I'll augment.

Yes, sure. Alicia, so as we said, we're definitely -- we're seeing our pricing step up 1% Q1, 1.6% Q2, 2.2% in June. And we expect that trend to continue for sure. H2 pricing will be ahead of H1. And the whole business has been very, very focused on this. Where we're taking price, for example, in the U.S., we're taking less price increases across the portfolio. That's going to increase. You'll see that in the second half. LatAm's done very strong pricing, particularly in Brazil. And India has been lending pricing in areas like skin cleansing. As a broad generalization, in the developing markets, we tend to take pricing in a more stepped basis. That's the best way to land it.

And to your question about developed markets, yes, it is a little bit more difficult. Let me characterize that. The nature of the organized trade in Europe and in the U.S. is that you've got more structured things now. What that means, of course, and when I say price, we're not talking list price. List price is really at the end of the stack and the levers that we seek to pull. First of all, we deliver our savings programs. Then we use net revenue management, driving mix, driving pack architecture, looking at promotional efficiencies, looking at our trade spend, et cetera, as ways of covering the cost inflation. So pricing is just one lever of that margin.

But in Europe, for example, I mean all countries in Europe are different, of course. But in markets like France and in Germany, we're on much more structured annual or biannual pricing agreements. So the windows are a little bit more difficult. It's a little bit less structured in markets like the Netherlands and in the U.K. And the U.S., this is sort of a hybrid of that. But as I said, in the U.S., we've taken pricing actions and we'll start to see those coming through in the second half. So yes, to sum up, really, there is a difference between the developed markets and the developing markets, quite different pricing.

But I have to say, our teams on the ground, very experienced. And as I said, in response to Martin's question, it is that eternal triangle of the competitiveness of our growth, which is our priority, of course, landing the pricing and managing the cost inflation, delivering our savings program. So we're managing all those things in a very fine balance.

Let me complement your answer, Graeme, with just a couple of extra points. So Alicia, I definitely would not characterize that we're somewhat struggling to take price. The nature of taking price is different between D and D&E markets. Unilever's enjoyed positive pricing movement in 39 out of the last 40 quarters. And I think the most important characterization is that when inflation is accelerating as it is right now, there is an inevitable lag between the cost signal and landing price increases. And it's different between D and D&E markets. But the real issue is the continued acceleration of cost input signals through the second quarter versus where we were at the end of the first quarter. Okay?

Okay. Thank you, Alicia. Let's go to Warren Ackerman next at Barclays.

It's Warren here at Barclays. I've also got one on pricing. I was struck by the difference in pricing between LatAm plus 7 and Asia plus 1. I imagine in Asia, you've got commodity inflation and FX devaluation. Because it does look like in Asia, pricing is quite benign. Is it partly a function that you're up against locally or vertically integrated players that have palm oil plantations who have a benefit on commodities that you don't, so it's harder to take pricing in Asia, and you're seeing trading down? Just struck by the difference in pricing between those 2 big EMs. If you could maybe comment on that, that would be helpful. And then maybe specifically, what kind of pricing do you need in the second half to hit flat margins? I mean, I imagine you're looking to maybe double it in H2 versus Q2. Is that the right kind of quantum that you're thinking about on pricing?

And then secondly, just going back to Tom's question on market share. I'm a little bit confused. If you're saying that the 12-month MAT was 57% in Q1 and now it's 53% for the half year, it must have been in the 40s in the second quarter. But then I also heard you say it's above 50% in the last 12 weeks and that you're confident it will remain above 50%. But I guess if pricing needs to move up meaningfully in the second half, wouldn't that impact MAT share even more? Maybe you can discuss your sort of philosophy around kind of market share momentum versus the need to get pricing.

Okay. Great. Thanks, Warren. Graeme, why don't you carry on with the pricing point, and I will come back on market shares.

Warren, so I talked a fair bit about Latin America. But for sure, our Latin American business is very skilled and very practiced at leading on price, and you are seeing, yes, we were above 7% price growth in Latin America in the quarter. It's probably worth splitting Asia down into a couple of halves. That's maybe South Asia and Southeast Asia, because quite a difference there between the 2. As I said earlier, our business in South Asia is taking pricing. Pricing there was sort of mid-single digits. But it's been stepped in, in a very measured way. Southeast Asian pricing is much more muted. It's pretty much flat in the quarter. And you are seeing there quite an impact from our business, for example, in Indonesia.

Now Indonesia is quite a challenging market for us at the moment. We've got a lot of competition from -- which is very fact focused on value propositions for the consumers, particularly the case in our fabric cleaning business and in our dishwash business. One or two of those players, yes, they are vertically integrated, and that means that there's perhaps a benefit from that vertical integration in palm oil pricing. And it does mean that, from a competitive perspective, pricing in the market doesn't move up. Actually, from a consumer perspective, that's probably a good thing because the economic situation in Indonesia and the pandemic situation in Indonesia would mean that we really do want to keep our business -- our products affordable for value-conscious consumers.

So I think a combination of competitive dynamics, certainly, that's some. But from a consumer perspective, we would want to be in the same place. So I think we will see more muted pricing in 1 or 2 of the geographies of Southeast Asia. That's largely the driver that you see between the Asian pricing performance in aggregate and the Latin American pricing performance.

Thanks, Graeme. Warren, on pricing, you should be aware that the MAT is done on a monthly -- a month-by-month calculation. And that does give different mathematical outcomes from simply averaging quarters. Let me focus on the -- and I can assure you that latest 12, and as we try and get a glimpse around the corner, remains firmly above 50%. Let me try and give you a philosophy on how we see that eternal triangle that Graeme is talking about of cost, price and competitiveness.

We had talked previously about, in some periods, business winning share of going above 60%. We don't think that's sustainable. We'd like to be in the 55% to 60% zone. That really would be a meaningful stimulus to our overall top line. The pricing actions that are being taken, remember, are not unilateral. We're in the context of very significant inflation that all of our competitors, category by category, are seeing one way or another. But we would be happy to see competitiveness dip into the low 50s, if that's what it took to maintain the integrity of the P&L by leading with price where we need to.

So we take responsibility when we are market leaders, that we are -- we tend to move first on price and we'll tolerate competition following for a while, even if that means competitiveness dipping a little bit. So we're comfortable to 50% to 55%. 55% to 60% is a sweet spot, over 60% is great, but probably not sustainable. Hopefully, that gives you a feel.

Thanks for the question, Warren. So we've hit the hour, but we'll run on for a little bit longer. I've got a few people still wanting to ask questions. If I could ask everybody to make sure they stick to just 2 questions. So the next question is from Celine Pannuti at JPMorgan. Go ahead, Celine.

My first question is really about the guide. If I look at the share price performance today on what is admittedly slight -- H1 that's, what, slightly ahead of consensus. Your top line guide is related. Your margin guide is only slightly changed and yet the shares are down 5. I think there seem to be a crisis of confidence. And effectively as late as June, you were quite confident about your margin. So what -- and clearly, when the cost base was already accelerating. So given that you said there's a wide range of outcome, I think it would be interesting to understand what kind of visibility you have on your pricing and your margin. As you said, that triangle, in order effectively to see you landing around flat for the year.

And my second question is on raw mat. And I'm sorry, I think it's something that -- if you could clarify. When you talk about your high-teens raw mat inflation in H2, am I right to say that this -- as you said, it's the spot. So is there a delay of about 6 months? So will that be for next year H1? And could you give us, for H1 this year, what was the gross margin impact of raw mat before pricing and before any savings?

Okay. Well, first of all, Celine, we don't run the business on day-to-day movements of the share price. But we are -- we feel these are strong first half delivery numbers. As you say, slightly up on market consensus, top and bottom line, confirming revenue for the year, revenue growth for the year. And I think being realistic on margin based on sequential input cost inflation, which we continue to see over the last 2, 3 months even since May and June. So we are being as transparent as we can be on the likely place that we think we'll land in the year. And I can certainly tell you that the management of Unilever doesn't have any crisis of confidence. We will be continuing to work on our operational and strategic agenda.

I'll hand over to Graeme to talk about the raw and packaging material inflation that we're seeing and maybe to help explore the difference between market moves and what we're able to do for our business. Graeme?

Thanks, Alan. We came into the year, Celine, expecting inflation potentially at levels last seen a decade or so ago in 2011 or indeed, back in 2008. So we have been focused on our pricing actions, and these are landing well. As Alan said, we're very comfortable with all the levers that we should be pulling, we are pulling. Now inflation has ended up being even higher than we anticipated over the course of the last few weeks and months. We've had further incremental input costs. And that's really what drives the change in our guided margin. We're trying to be balanced. We're trying to give you the transparency and our best signal in this.

Just to reiterate some of the examples. Crude oil is up 10% just in the quarter, wasn't foreseen. Soybean oil was up 20% just in the quarter, wasn't foreseen. And U.S. freight costs are up 4% just in the quarter. So that takes us from what was a sort of low to mid-teens aggregate market outlook to a high teens market outlook. Now we obviously see lower than market inflation in our own business. And I'm not going to give you the detail on what that net number is. Now that comes from buying scale and procurement from our covers, which wind off, of course, from our inventories and from our savings.

In terms of the timing of a delay, I don't think -- we're taking pricing in relation to what we see in front of us, our competitiveness and consumer demand. That's the most important thing. It's a timing equation, not an absolute equation, and that's the reason for a little bit more width around what we see as the margin landing point at the end of the year, which is only a point in time, of course. And that's why we've guided now to around flat versus the slight increase that we saw back in the first quarter.

As we said in the presentation, our ambition, which isn't our guidance, but our ambition, is still to deliver a slight increase in UOM for the year. But on balance, with all of those moving parts, we see it as being around flat for the year. Much of the pricing that we take into the second half will benefit us into the first half of next year, but there will, we think, be some residual pricing increases -- sorry, commodity cost increases that will flow into the first half of next year. So I think this is going to be something that we'll be talking about for the next 3 or 4 quarters.

Thanks, Celine. Let's go straight to John Ennis next at Goldman Sachs. Go ahead, John.

I'll stick to one, and it's on competitive movements around pricing, which, I guess, relates to Warren's question earlier. But are you suggesting that multinational players are moving pricing faster than local players in Southeast Asia? And therefore, your price premiums will widen for a period? I guess, if so, for how long do you think that will last before others follow? And elsewhere outside of Southeast Asia, how should we think about your price premiums to the market? Is it going to be largely unchanged? Are people elsewhere generally moving pricing in the same sort of magnitude and around the same time?

Let me give a careful answer to that, John. It is very important that we don't overstep the mark on some of our other ascending price signals in these types of meetings. So I will be a little bit circumspect. But suffice to say that where we have market-leading positions, we expect that we will lead on price. And we do think that at the end of the day, when the dust settles, our relative pricing will not have changed. It is not our expectation nor our intent that we will shift our relative pricing. And I think it will be very interesting to watch all the published pricing that we see in the upcoming reporting period. But hopefully, that's a straight answer to your straight question.

Thanks, John. Let's go straight next to Jeff Stent at Exane.

Apologies for kind of coming back to this topic, but I just can't understand some of the mathematics here. So on an MAT basis to Q1, competitiveness was 57%, yes? And on an MAT basis to Q2, it was down to 52%. Then you drop out a period where Q2 last year, competitiveness was 49%. You gave that number last year. I just can't see how (inaudible) it can be above 50% in Q2. It has to be materially below. And can you just clarify what are we missing here on simple maths?

Yes. Jeff, it is based on the fact that the MAT is done month by month, not quarter-by-quarter. And if you look at Q3 2020, you'll see that the math there, when you simply average quarters, also is a bit confounding. So all I can do is once again assure you that the MAT is where we've reported it at 52% and L12 is above 50% and we anticipate the next L12 to be healthy as well.

Can I just add, Alan, on that point that we use percent business winning because we think it's the best measure of our relative competitiveness on a long-term basis. I mean, it's very difficult right now to get a good read of aggregate market growth, for example, and compare our growth rate against aggregate market growth. And we do believe it's an impeccable measure of performance, but it works better on the MAT basis versus an L12 basis. But rest assured, the mathematics are sound behind it. I just wanted to make a point, though, in the short term that, as Alan said, 50% to 55% is good, 55% to 60% is excellent and above 60% is probably not sustainable. But in a couple of key markets for us, in particular, the U.S., we are seeing continued improvement in our competitiveness. That's important because Unilever is currently sitting at its most competitive position for over 3 years, and we've been sustaining that now for 4 quarters. Our focus in the U.S. is really important, and we are seeing a step-up in the short-term competitiveness in the U.S. So we're pointing in the right direction here.

Thanks, Graeme. Next question is from Bruno Monteyne at Bernstein.

I'll keep it to one as well. So you sort of reconfirmed that the COVID impact of the business is about 90. I think you added an extra 10 basis points this time, from 90 to 100. You've also explained that the margin impact on pricing and cost price inflation is largely a timing problem. So you have some margin pressure because of that. So am I right, therefore, to conclude that once COVID is out of the system, once you've had time to pass on prices, you should see at least 100 basis points plus margin recovery in the business once the timing issue is resolved and COVID is out of the system? Would that be correct?

Graeme, I mean, some pretty straight answers, very simple answers. Do you want to go ahead with that?

Yes, yes, yes. I think that is correct, Bruno. We've been consistently saying that. Just to break it down, we've got about 50 basis points of -- on cost within our gross margin still from the cost of operating our factories and manufacturing in a safe way. In fact, the majority of our manufacturing sites, over 70% are still operating at our highest level of safety protocols, which we call Tier 4. And we're dealing with a number of employees who are isolating, et cetera, and we have to replace that capacity with temporary labor, which is more expensive. So that's -- these are all components of the 50 basis points impact.

The 40 basis points impact is due to mix, because our hygiene products and our in-home foods products are at lower gross margin than the rest of our Personal Care portfolio and our away-from-home foods portfolio. So that's the 40 basis points. We're still seeing that carry on as is. We don't anticipate that that's going to change much for the balance of the year. But we'll keep reporting that to you. And that will come back into margin as we start to unwind and operate back to normalcy.

And as our mix normalizes, I should say that our mix normalization, if we end up with increased levels of in-home consumption and people eating in home versus away from home, we may have a different mix to our business going forward. But fundamentally, the impact of that, we will keep you apprised of and keep updating you with what the costs are.

Yes. Thanks, Graeme. I mean, it's pretty straightforward. We have committed that, that cost of 90 basis points will unwind, Bruno. But we're not committing when. And as -- I think Graeme made the key point, which is that 70% of our manufacturing is still under -- operating under our most severe COVID protocols. So perceptive question. Thank you.

Okay. We have a hard stop at quarter past. So I think we can just fit in one more, and that question will be from Jeremy Fialko at HSBC. Go ahead, Jeremy.

So 2 ones, hopefully, fairly quick. One other element of the whole pricing debate is the question around volumes. So could you talk a little bit about the sort of elasticities that you're seeing and whether based on your outlook of kind of tougher comps and more price, you could see volumes of around flattish or very slightly positive by the end of the year?

And the second question is, do you think that commodity prices are now peaking based on your outlook and some of those graphs that you presented?

Graeme, why don't I take volumes and you're becoming rapidly a commodity cost expert. You can comment on that. Good luck predicting the market. Jeremy, nice to speak to you. Look, the elasticities that we've modeled on a (inaudible) business as usual basis go out the window when you enter this type of inflationary environment. What I can tell you is we've looked back at 2008 and 2011 when our price growth was very material, 5% for the year, 7% for the year, and those were years where we still grew volume. So we do see the opportunity for stepped-up price on top of more moderate but continued volume growth. Graeme?

Jeremy, thanks for the question because I have been steeping in details of commodity markets, as you might imagine, with our procurement and buying teams around the world over the last few weeks and months. So let me just only give you as good a read as we have. And as Alan said, we don't have a crystal ball here, but we believe that the inflation that we're seeing is a combination of structural and cyclical. Crude is perhaps the most cyclical, I would say, along with the bulk transportation rates, because they are more down to supply factors. And for example, global freight container capacity is quite irrationally distributed around the world at the moment. So crude and bulk transportation probably more cyclical.

Now others such as LAB, linear alcohol benzene, which is a surfactant used in our laundry portfolio, is a little bit more structural. There's been a lack of capacity investment on the supply side. So it takes a little bit longer to adjust. Another example, perhaps of more structural adjustment would be packaging, wood-based packaging, because of the spike in e-commerce, and we expect that the e-commerce trend is locked in and won't wind back, but that is an impact on packaging costs. Similarly, on palm oil, there really hasn't been an increase in the global crop acreage in palm oil. And therefore, it's perhaps a little bit more structural.

Similarly in soybean oil, we're seeing new demand from renewable diesel. So that's a little bit of a runaround the key commodities that we put on the chart in the presentation. One thing that's different is it doesn't often happen that all -- that 3 of our big commodities such as palm oil, crude and soybean oil, all inflate in unison. You go up and one goes down or one stays flat, et cetera. So it's a bit of a rare event. That's why I think we're seeing, as I'm sure everybody else is, decade highs. But as I said, what's important is we've got the tools and the agility and the ability on the ground to manage it. And it's a function of timing as much as anything else as we've said a few times.

Okay. Thank you, Jeremy. Thanks, Graeme. And we'll have to bring the call to a close there. We've got too many questions. We haven't quite got through everybody. So if there are further questions, please just e-mail the IR team, and we'll set a time up to speak to you today. So with that, enjoy the rest of the day, stay well, and thank you for dialing in.

This now concludes today's call. A recording will be available for replay on unilever.com. Thank you very much for joining. You may now disconnect your lines.