Unilever PLC (NYSE:UL) Q3 2022 Earnings Conference Call October 31, 2022 4:00 AM ET
Company Participants
Richard Williams – Head, IR
Alan Jope – CEO & Executive Director
Graeme Pitkethly – CFO & Executive Director
Conference Call Participants
Guillaume Delmas – UBS
Pinar Ergun – Morgan Stanley
Bruno Monteyne – Sanford C. Bernstein & Co.
Celine Pannuti – JPMorgan
Jeremy Fialko – HSBC
Warren Ackerman – Barclays Bank
Martin Deboo – Jefferies
Richard Williams
Good morning, and welcome to Unilever’s Quarter 3, 2022 Trading Statement. We expect prepared remarks to be around 30 minutes, followed by Q&A of around 30 minutes. All of today’s webcast is available live, transcribed on the screen.
First, I’ll draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures.
And with that said, I hand straight over to Alan.
Alan Jope
Thanks, Richard, and good morning, everybody. Well, this is the first time that we’re going to present our performance through the lens of the five business groups. And so we are going to take some time to ensure that the new segmentation is clear as we go through the numbers. I’ll give an overview of the quarter and the performance of each of the business groups, and then Graeme will give the details, including a geographic perspective.
Before we start, let me acknowledge my own decision to retire from Unilever at the end of next year. There’s going to be time enough to discuss this in more detail on other occasions. For now, it’s business as usual, and my team and I are fully focused on the task at hand running this great company.
We’ve delivered double-digit underlying sales growth in the third quarter, and we’re raising our growth outlook for the year despite the obvious challenges of the macroeconomic environment. Growth is, and will remain our overriding priority. And the results demonstrate the resilience of consumer goods as a sector, the strength of our brands and our single-minded focus on operational execution during this period of high inflation, even as we transitioned our operating model in what is a fundamental change for Unilever.
Of course, the growth was price-driven and broad-based with all five Business Groups contributing and volumes continuing to hold up well. The billion Euro-plus brands led the way with standout performances from Hellmann’s, OMO, Lux and Rexona. We’ve continued to invest behind our brands and bring exciting product innovation across the price spectrum.
We’re adding premium offerings and, at the same time, providing great-quality, value-priced products that serve consumers with limited budgets. The new Unilever organization is in place and is already increasing the clock speed of the company and sharpening key decisions and choices across the business. It is still early days and we have much still to do, but we’re seeing strong signs of the benefits with many examples to share.
Coming to the numbers, we saw underlying sales growth accelerate to 10.6% in the third quarter, driven by price at 12.5%. And that’s the seventh successive quarterly increase. Taking price increases is not easy, and we’re very mindful of the pressure that this puts on consumers. The inflation that we’re seeing from global materials markets, higher energy costs, the impact of climate change on agriculture and rising wages means that we must take prices up simply to protect our ability to invest in our brands. This has been an explicit strategy implemented by Unilever early and with precision.
We’re taking price carefully, and we’re driving productivity efficiencies hard and in parallel to generate savings that offset some of the cost increases. And at the same time, we’re investing more in product quality and brand support to ensure that they offer superior performance and great value. Volumes have held up well, in fact, better than we were expecting. Underlying volume growth was minus 1.6%, which was a little better than we saw in the second quarter, helped by a somewhat weaker comparator and a good summer in Europe. That leaves the year-to-date underlying sales growth at 8.9% with price at 10.7% and a 1.6% decline in volume.
Our growth remains competitive with 50% business winning share, and that’s down from the high watermark earlier in the year, as we expected. The investment behind our brands remains competitive, and around 80% of our brands are either holding or increasing their brand power. We have previously flagged that by taking the lead on price, we would expect to see a short term drop in share and we may see business winning dip below 50% in the coming months, but that will be temporary.
By pricing early, we continue to be able to invest in our brands and ensure that they are well placed to come out stronger from this remarkable period of inflation. We’ve made good progress against our strategic priorities, starting with brands and innovation. The billion Euro brands continue to represent around 50% of Unilever’s turnover and are growing at 14% ahead of the Unilever average.
We have a strong and healthy pipeline of product innovation, and I’ll give some examples shortly. We saw further progress in our strategy to move the portfolio into higher growth spaces, both organically and through M&A. Prestige Beauty and Health & Wellbeing have maintained their double-digit growth ahead of the markets and ahead of the Unilever average. At the same time, the acquisitions of Nutrafol and the disposal of the ekaterra tea business, both completed in July, reflect our strategy-led and financially disciplined approach to capital allocation.
Coming to our geographic priorities, the United States maintained growth momentum with underlying sales growth at 8.6%. Volumes held up well despite double-digit price increases and the ongoing customer service issues that we highlighted in our midyear reporting. Whilst the supply situation is now improving, we continue to face some systemic issues with labor availability, and that’s going to continue into the fourth quarter. India reported another strong quarter of growth at 16.1%, led by price with positive volume, and this reflects the strength of our portfolio with brands that cover different price points as well as Hindustan Unilever’s laser focus on operational execution and consistent marketing investment.
China reported positive underlying sales growth despite the ongoing impact of the localized COVID lockdowns, which not only had a direct impact on sales, but is also contributing to weakening consumer confidence more broadly. Emerging markets growth was 13.3%. Graeme will give more details on performance through the country lens.
Moving to the channels of the future, the contribution of our turnover coming from e-commerce was stable at 14%, and we saw underlying sales growth of 20% in the channel. We remain confident in the growth potential from digital commerce, and we’ll continue to invest strategically.
Our fifth strategic priority is to land our new organization and to continue to strengthen Unilever’s culture. We passed a major milestone when the new organization went live at the start of July. The full transformation is ongoing. There’s still more to be done to become even more agile in responding to opportunities in these fast-changing markets and to fully exploit the clarity of accountability that the new organization brings. Our business groups are taking decisions more quickly and driving sharper strategic action and related resource allocation to drive growth.
I’d like to share three examples with you. First, speed of execution. The Personal Care supply chain team identified the need for product rationalization. Now previous initiatives had frankly gained limited traction since so much energy was required to align multiple country organizations to remove products from their portfolio. The new Personal Care leadership team prioritized the initiative, and the combination of strategic clarity and clear accountability meant that progress was made in weeks. We’re tracking well versus the reduction target, and we’ll complete the work early next year, respecting customer planning windows and shelf space considerations.
In fact, the drive to simplify is taking grip in all five business groups. The second example comes from North America Nutrition. Capital expenditure proposal to provide new cross-border sourcing capacity and cost savings have been under some time — have been under discussion for some time without resolution. The new team reviewed the case, concluded that the investment was important to support the growth of the business group, and the decision was made on the spot and is now being implemented.
And the third example, frankly, is a much more substantial one, and it comes from Unilever business operations where we see the strength of One Unilever in action. Our team successfully accelerated our migration to the cloud, moving our data, applications and network technologies to a cloud computing environment.
As a result, by the end of this year, we will have 95% of our business operations in the cloud, and that unlocks new opportunities for digital technology deployment and innovation. Some examples of this are the availability of real-time Internet of Things performance data from our factory digital twins, deployment of AI to support geospatial deforestation tracking. This program included moving one of the largest ERP ecosystems in the industry to the cloud with near zero disruption.
The changes have been largely invisible to the rest of the business, and very few companies of our size and legacy can claim this level of cloud implementation. These and many other examples that I could share, give us confidence that we’re set on the right course, and the new organization will deliver the step change in speed and accountability that we have committed.
Let’s now take a look at our third quarter results through the lens of the new business groups. Beauty & Wellbeing comprises our core Hair and Skin Care businesses and our Prestige Beauty and Health & Wellbeing portfolios. Key brands include Dove, Sunsilk, Clear, Liquid IV and Dermalogica. Beauty & Wellbeing reported 6.7% growth, 7.3% price and minus 0.6% volume. Prestige Beauty and Health & Wellbeing delivered double-digit growth with Liquid IV growing particularly strongly. Sunsilk and Clear performed well and contributed to a strong performance in Hair.
In Skin Care, we saw good growth from Pond’s and Vaseline. China reported a small decline and impacted by the continuing COVID lockdowns that I mentioned. Let me just give three examples of the brand and innovation activities that underpinned our growth in Beauty & Wellbeing. Sunsilk has introduced Sunsilk Activ Infusion, which delivers gorgeous hair through a unique blend of vitamins, oils and proteins, deploying new nanoplex technology. And this helped drive strong performances in India, Turkey, North Africa and throughout the Middle East.
Liquid IV’s rapid growth has been supported by a new multichannel marketing campaign, which drives home the product benefit three times the electrolytes of traditional sports drinks. The continuing growth trajectory now means that we have more than quadrupled the turnover of Liquid IV relative to the period immediately prior to acquisition. And finally, Living Proof has maintained very good momentum, has recently launched Living Proof Triple Bond Complex into the bond building hair care category. This product has proven to make hair eight times stronger by building the three types of molecular bonds, by reducing visible signs of damage, including split ends, and preventing breakage and future damage.
Right, to Personal Care. Personal Care includes our deodorants, skin cleansing and oral care businesses. And the key brands in this business group include Dove, Rexona, Lux, Axe, Signal and Lifebuoy. Personal Care grew 8.9% in the quarter with strong pricing at 13.5% and a volume decline of 4%. I must say, Deodorants is a standout with Rexona, Dove and Axe all growing double digit. These brands were able to support higher pricing and enabled deodorants to deliver positive volume growth despite some North American customer service challenges.
Skin cleansing also grew. But here, the double-digit price increases, lockdown restrictions in China and service issues in the U.S. resulted in a negative impact on volumes. The Lux brand performed particularly well. Oral care also grew well, underpinned by good performance from Pepsodent.
So some brand highlights from the Personal Care portfolio include Dove body wash with microbiome nutrient serum. This is a blend of ingredients which helps the good bacteria on your skin microbiome to grow and support natural skin functions, and it transforms even dry skin in just one shower. Rexona continues to benefit from its top-performing, 72-hour nonstop protection using new science that offers significantly improved protection against sweat and odor. This is a multiyear investment priority behind our superior antiperspirant technology.
And Lux bars have been relaunched successfully in South Asia, North Africa and the Middle East with ingredients which offer clinically proven skin care benefits, leaving a spotless glow.
Home Care, Home Care comprises our fabric cleaning, fabric enhancing and household care businesses with brands like OMO from the Dirt is Good family of brands, Sunlight, Comfort, Surf, Domestos and Cif. Home Care growth was the highest of the business groups at 13.6% with price up 17.8% and volumes down only 3.6%, less than we were expecting given these levels of pricing, especially in Latin America.
Fabric cleaning was the main growth driver with strong performances from Dirt is Good, Surf and Radiant. Fabric enhancers maintained good momentum through Comfort, though Household Care was more muted as we lapped the prior year with elevated growth during the pandemic. Our Clean Future strategy in Home Care continues to inspire technical innovation that we then translate into consumer-relevant product propositions.
For example, the new Sunlight dishwash liquid launched in Thailand uses naturally derived bio-enzymes to provide a product that is tougher than ever on grease and cooked-on food. Surf Excel delivered very strong growth in India, reflecting the ongoing strength and importance of premium propositions even in difficult markets. Comfort delivered positive price and volume growth on the back of good progress made with our global relaunch, and that’s using a product which protects clothes from damage through superior pro-fibre clothes care technology as well as improved fragrance delivery.
Nutrition comprises our scratch cooking, dressings, healthy snacking and beverage businesses. And the two main brands in this business group are Knorr and Hellmann’s. Those are complemented by supporting brands, for example, Bango, Maille, Brooke Bond and the nutrition beverage, Horlicks, of course. Growth was up 11.8% with price up 11.7% and volumes just positive. Dressings grew more than 20% with positive volumes despite double-digit price increases.
The Knorr brand grew well in both retail and in Unilever Food Solutions channels. Horlicks was flat in the quarter, putting in a very strong share performance in a market with somewhat subdued category growth due to the impact of inflation or discretionary consumption in India. We remain very confident in the prospects for the Horlicks business.
Within Nutrition, the highlights included dressings where the Hellmann’s, Make Taste, Not Waste campaign continues to drive outstanding growth. Knorr’s zero-salt bouillon is helping people to eat healthier diets inspired by Nutrition’s boldly healthier strategy. And Unilever Food Solutions, our professional foodservice business, delivered strong growth against a baseline that included COVID restrictions, although the business is now back to pre-COVID volumes despite the ongoing restrictions in China, and we saw particularly good growth in North America and Europe in the quarter.
Our Ice Cream business comprises both our in-home and out-of-home channels with brands like Magnum, Cornetto, Ben & Jerry’s and Wall’s. It is 60% in-home and 40% out-of-home. Ice cream growth was 13.2% with 12% from price, 1% from volume. Magnum, Wall’s and Cornetto all contributed to the good performance. Both in-home and out-of-home grew strongly behind double-digit price increases in both channels. Volume was very much driven by out-of-home with a great marketing and innovation agenda, but helped by a good summer in Europe and the recovery of some of the volume lost during COVID.
In-home volumes were slightly down due to the impact of higher pricing and supply issues in the United States. However, in general supply chain has responded very well to the demands of a good summer season. Cornetto introduced successful concept-led innovation in China, tapping into the pet culture trend, which is particularly popular with younger Gen Z consumers. Magnum is a role model in Unilever for how to continue to drive growth on the core. And Magnum continued to benefit from the success of the classic Remix, our rearranged versions of our classic Magnums.
And Ice Cream Now, which is our main play in ice cream digital commerce, is tapping into but also creating demand for ice cream home delivery. Another strong quarter of growth from Ice Cream Now.
So having completed that quick tour of the Business Groups, let me now hand over to Graeme to provide some more details on the quarter’s performance. Graeme?
Graeme Pitkethly
Thanks, Alan. Good morning, everybody. We delivered 10.6% underlying sales growth, further building on the faster growth performance that we’ve seen over the last year. Pricing continued to step up, reaching 12.5% in the quarter. And volumes, whilst down 1.6%, as Alan just said, were better than we had anticipated. There was some benefit from a weaker volume comparator as markets reopened following COVID restrictions. And of course, targeted lockdowns remained a feature of the market in China.
Let me now add a little bit of geographic detail. In our largest region, Asia Pacific Africa, we saw underlying sales growth at 12.5%, comprising 12.1% price and 0.3% volume. India delivered strong double-digit growth despite weaker market volumes, especially in rural areas. Inflation there is running above 7%, and this continues to put some pressure on discretionary spending. We are taking share in India by navigating the conditions better than most of our competitors.
In Southeast Asia, we saw rapid growth in Vietnam and the Philippines against what was a low prior year baseline which was impacted by COVID restrictions. Indonesian GDP remains positive, but inflation is increasing and consumer confidence weakened somewhat in September. Our performance remained muted in Indonesia as we continued to progress a business reset, which is a significant strategic market for all five of our business groups. Now as part of this, we took the decision to reset pricing and to improve the health of our end-to-end supply chain by constraining sell-in levels below sell-out levels, particularly in the mini-mart channel.
Nonetheless, Indonesia continued to grow, and the additional category focus and sharper strategies from the new organization will serve us well as we reset the competitiveness of that business back to where it should be. Now as Alan already mentioned, the market in China has been impacted by lockdown restrictions and weak consumer confidence. This is causing a slowdown in the e-commerce channels, although Pinduoduo and Douyin continue to grow. And we are seeing some evidence of down-trading and some customers reducing stock levels.
And in Africa, the economies are relatively weak post-COVID, and are not helped by the strong U.S. dollar. Consumer confidence is quite low and purchasing power is constrained, leading to smaller shopping basket sizes, a trend to multipurpose products and a reduction in the purchase of discretionary items. We are navigating these difficult conditions well, and we delivered double-digit growth in the quarter, led by price.
Coming now to Latin America, here, we saw underlying sales growth of 17.6% with price at 23.2% and volume down around 4.6%, which we think is a pleasingly resilient volume performance. Now our deep experience of navigating Latin American markets with high inflation continues to serve us well. In Brazil, we saw cost-conscious consumers shopping around between physical and digital channels. For example, the cash-and-carry channel in Brazil is growing fast, and at the same time, we see influencers having a growing impact on consumer choices.
North America reported underlying sales growth at 8.3%, driven by price at 11% and with a 2.4% decline in volume. The U.S. consumer is still relatively robust, but inflation is now his or her number one thought, and concerns about recession are growing. The market grew in the third quarter in both bricks-and-mortar and e-commerce channels, but we saw smaller shopping basket sizes. There are also early signs of consumers eating out less often and preparing more meals at home. The service issues impacting our supply chain, which are caused mainly by labor shortages, continued in the third quarter but are on an improving trend.
And finally to Europe, where we see consumers feeling the pinch of higher prices, especially in Eastern Europe. Across Europe, consumers are now having to make trade-offs to respond to higher cost of groceries and utilities, and they’re deploying a range of coping strategies for that. For example, we saw private label penetration grow in some categories, such as in-home ice cream and household care. At the same time, we saw e-commerce growth slowed down as consumers returned to physical stores.
Europe also benefited from a good summer season, which helped our out-of-home ice cream business, albeit we are not yet back to pre-COVID levels due to some outlets not having reopened yet. Against this very backdrop in Europe, we reported underlying sales growth of 5.4% with price at 8.9% and volumes down 3.2%.
Looking at the group results overall then, turnover for the third quarter was EUR15.8 billion. That’s up 17.8% versus 2021. Underlying sales growth contributed 10.6%, and we saw a reduction from acquisitions and disposals of 2.1% with the exit from tea and the addition of Nutrafol being the main drivers of that. Currency translation had a positive impact of 8.8% as nearly all of our basket of currencies strengthened against the euro. Based on spot rates today, we would now expect a positive currency translation effect of around 6% of turnover and around 5% on underlying EPS. That’s for the full year 2022.
Changing gears then, let me make a few comments on commodity costs. Now whilst this is only a trading statement, we do think it’s important to continue to share our perspectives with you on the extraordinary levels of cost inflation that we are working through. For 2022, we continue to expect net material inflation of around EUR4.5 billion, of which EUR2.5 billion will fall in the second half.
As we speak, more than 95% of our net material inflation for the second half has been fixed, and therefore, we don’t expect any major changes from here on with that. For 2023, we do expect some further cost inflation in the first half. This is consistent, we think, with what others have been saying around input costs staying high. And we thought it would be useful to give some indication of scale and, in particular, the main drivers. Now the 2023 cost inflation results from three main factors.
Firstly, commodity costs. We will be comparing against the first half of 2022, which benefited from contracts and covers which were struck before the outbreak of the war, so the H1 2022 baseline for us is quite low. Some commodities have come off their peaks. But as we now start to lock in costs for the first half of 2023, we anticipate that prices will be higher than the first half of 2022.
The second point relates to higher labor and energy prices in the raw and packing materials that we purchase. Now typically, we do not directly buy commodities such as crude oil, palm oil and so on. What we buy are derivative products of these commodities that have been processed by our suppliers into the raw materials and packaging materials that we use at our manufacturing sites. Some examples of that are things like fatty acid blends, chocolate, processed sugar, plastic films, bottles and so on.
Now these processes are multistep and they all involve energy and labor costs, and we are now seeing meaningful inflation in these particular components of our cost base.
And the third element is the transactional impact of currencies. There are significant devaluations in hyperinflationary markets such as Turkey and Argentina, where we are very experienced in pricing to offset such devaluation driven on costs. The general strength of the U.S. dollar against nearly all currencies means that the local landed cost of materials has increased in all of our main markets apart from the United States. Now these three factors all contribute to first half 2023 cost inflation in roughly equal amounts. We would characterize it as about a third, a third, a third.
Now the range of potential outcomes is still quite wide given obvious volatility in the commodity, energy and currency markets. But our current best estimate of the first half net material inflation, and I would stress that this is only an early estimate, is in the region of EUR2 billion as things currently stand. For the second half of 2023, we have little visibility, and it’s too early at this stage to call.
So coming to the outlook for 2022, we now expect full year underlying sales growth in ’22 to be above 8%, driven by price and with a greater level of volume decline in the fourth quarter compared with the first nine months. We will continue to navigate the inflationary pressure while investing for growth to support the long-term health of our brands by investing more in advertising, R&D and capital expenditure.
We expect underlying operating margin for full year ’22 to be 16%, within our guided range of between 16% and 17%. Looking beyond 2022, we expect to improve margin in 2023 and 2024 through pricing, mix and accelerated savings delivery. And as market conditions normalize, that will also begin to have a factor on ’23 and ’24. As we’ve said before, we will not be setting a margin target.
And with that, let me hand to Richard for Q&A.
Question-and-Answer Session
A – Richard Williams
Thank you, Graeme. [Operator Instructions]. So our first question will be coming from Guillaume Delmas at UBS. Go ahead, Guillaume.
Guillaume Delmas
Thanks, Richard. Good morning, Alan. Good morning Graeme. Two questions, if I may. The first one is on your billionaire brands, because it seems the delta between your billionaire brands and the rest of your business has further increased in Q3 when looking at underlying sales growth. I mean I’m getting to a 300 basis points outperformance in Q3. I think it was more 100 basis points in the first half of this year.
So could you shed some light on this? Like what do you think it is the case? Is it because the billionaire brands are the one leading on pricing actions? Is it down to a different resource allocation? Or is it down to consumers’ preferences?
And then my second question is then to go back on the inflation outlook you provided for the first half of 2023. As you’re expecting an incremental EUR2 billion, I mean appreciate it’s an early estimate, but does it mean you will have to implement additional pricing actions over the coming months? And maybe also if you could say how much of your raw mat impact is covered for the first half of 2023. Thank you.
Alan Jope
Great. Guillaume, I’ll take your first question and hand over to Graeme to talk about inflation and the impact on pricing.
You kind of answered the question yourself. Yes, our billionaire brands are outperforming, and frankly, it’s because that’s where we have the strongest brand equities. Many of our billionaire brands have found that magic spot of the intersection of superior functional product performance, great value and long-standing purposeful brand campaigns that create tremendous consumer resonance. So the brand health measures for our billionaire brands are particularly strong.
Secondly, as we focus our innovation program and have fewer, bigger innovation activities, those tend to be on the billionaire brands.
And thirdly, they are our priority for increased BMI investment. I have to say it’s complemented by a clear point of view on what are the next generation of billionaire brands. There are three or four brands knocking on the door of joining that club, and those are also performing well. And the third kind of element of our growth strategy is some of the brands that are smaller today but growing exponentially, and there, I’m thinking about things like Liquid IV, Nutrafol, Paula’s Choice, Hourglass, some of the brands in Prestige Beauty and Functional Nutrition.
So yes, I think you’ve diagnosed quite well why the billionaire brands are doing so well, and we see the potential for new members of that club. Graeme, inflation?
Graeme Pitkethly
Hi, Guillaume. First of all, thanks for acknowledging that the sort of best estimate we gave for first half ’23 inflation was an early estimate. I do just want to emphasize that for everybody. The first thing I’d say regarding your pricing question, more generally, we believe that we have both the tools and the preparation to absorb the cost pressures that we face over time.
We’ve got a proven pricing track record behind what are very strong brands, sort of linked to your first question and Alan’s response. We have led on pricing, and it sequentially increased over the past seven quarters. For example, our price coverage, which is really a sort of broad measure of our success in covering material inflation was sitting about 90% of the net material inflation on a year-to-date basis for 2022. And to the specific of your point, pricing will carry forward into 2023, but our local businesses will continue to price where they need to, obviously, doing that in a very responsible way.
So some pricing activity from ’22 will, of course, carry into 2023. Further out, it’s going to depend on the movements that we see in net material inflation and, very importantly, the competitive dynamics in the markets. We have to be responsible. We won’t price to a level that jeopardizes the long-term health of the business, and we’re always mindful of that.
Other than that, we’re not going to give any sort of forecast on pricing because there are too many moving parts.
Now in terms of your second part of your question on how much is covered for 2023, right now, around about 20% of the first half of ’23 is contracted through physical covers or covered by paper covers. We expect that will increase between now and the end of the year, but it’s around about 20% at the moment, Guillaume.
Richard Williams
Okay. Thanks, Graeme. Straight to the next question, which is from Pinar Ergun at Morgan Stanley. Go ahead, Pinar.
Pinar Ergun
Hi, good morning. One on volumes, please. Unilever’s three year volume CAGR has held up quite well despite accelerating pricing. Why is that the case? Is it resilient consumer demand? Is it something you’re doing differently? And how do you see volume patterns evolving in the foreseeable future, especially given your own expectation of weaker market share trends?
And then the second one’s on next year’s margin commentary. So you’re expecting ’23 EBIT margin up despite a very significant NMI in H1. I appreciate it’s an early figure, but it’s a pretty big one. Can you please talk about the building blocks of your expectation here? How comfortable are you in a second half-weighted margin delivery, given you also said you had very little visibility on the H2 NMI? And how will you go about balancing pricing volumes and increasing investment in the business all at the same time? Thank you.
Alan Jope
Thanks, Pinar. We’ll stick with the trend. I’ll tackle your question on volumes and let Graeme take the second half of your question. Look, we have a well-rehearsed strategy for landing pricing, which is surgical and has been practiced in our markets like Latin America, Southeast Asia, where we’re used to inflationary contexts. And so there is an element of list price increases.
But also, we play with pack price architecture. We use mix carefully. We adjust consumer promotion, and we’re very careful with trade spending. And I think that playbook has served us well to apply what we call net revenue management, which is the surgical application of pricing. Secondly, we’ve come into this period with our brands in good health. We’ve been making the point for several quarters now that we have been gaining market share, and that’s a consequence of our brand health, the investments we’ve made not just in advertising, but in product quality.
Remember, versus three years ago, below 50%, somewhere around 45% of our brands tested superior in head-to-head testing versus the competition. And at the moment, that’s running more like 70% of our brands testing superior to the competition. And that’s the point about, it’s not just price, it’s value. And so the combination of surgical application of pricing, the health of our brand equities and the product quality that underpins them means I think we’ve seen this lower elasticity.
Now it has surprised us a little bit just how low it’s been. And so we do expect that there will be more volume elasticity because there’s more price to come. And frankly, the macroeconomic environment is deteriorating. So don’t be surprised if the UVG pattern into Q4 and early next year deteriorates from where it is right now. Graeme?
Graeme Pitkethly
Pinar, on the outlook for margins, there is, of course, a lot of volatility, and we’ll continue to monitor it closely. But we do expect to grow margins in ’23. And as I said earlier, we believe we have the tools and the preparation to do that. I do want to say, first of all, that delivering growth remains our absolute first priority, and we will invest in the health of the brands. As Alan just said, it’s the brand strength that allows the pricing to land, and delivering growth is that first priority.
I won’t repeat the comments previously made on the cost inflation and pricing carry forward. But I will just say that our savings programs are looking very strong for ’23 and will probably accelerate. And just a reminder that, that includes the delivery of a large proportion of the EUR600 million savings that are related to the implementation of the new operating model. So yes, I think we — that’s the landscape that we face. They are the levers that we have to pull, the tools in our toolbox. And whilst we’re not going to provide a half yearly margin outlook, we do believe that we can increase margins in ’23 and ’24.
Richard Williams
Okay. Thank you. Thanks, Pinar. Next question is from Bruno Monteyne at Bernstein. Go ahead, Bruno.
Bruno Monteyne
Hi, good morning. My first question is on competitiveness. It came down to 50%. It was higher previously. So if we were to use the sort of infamous shorter 12-week competitiveness measure that would suggest that it’s now below 50%. So while the one year measure still looks 50%, the shorter one is below.
Can you sort of confirm that? And assuming that we’re starting to lose market share, can you just pinpoint whether that’s largely to private label, whether it’s to cheaper brands, if there’s any patterns in that? And the second one is I sort of noticed that food and ice cream, those two new divisions, they’re the only ones with a positive volume growth right now. Obviously, that’s quite interesting because that was, again, the one division, Foods & Refreshment, that was potentially going to be disposed of you by GSK Consumer Health. So the one you want to get rid of is actually doing the best in volumes. Is there any reason why the kind of food-oriented have better volume resilience? What should we read behind that? Thank you.
Alan Jope
Great. We’ll stick with the pattern, Bruno. First of all, I know you often follow up with our IR team after these calls, and I’d encourage you to do that on the famous percent business winning metric and how it’s calculated. It is absolutely not the case that summing up the rolling 12 weeks gets you to the moving annual total. And I can tell you that our most recent measures of competitiveness are perfectly healthy. So please do not project that we are running with week — 12 weekly competitiveness measures. And we will resist the temptation to give out numbers on that and stick with our moving annual total metric.
But if you’ve got questions on the way that’s calculated, there’s a video on the website, and I’d encourage you to have a chat with the IR team. More substantially, what I would say is the brands are in good shape. But we’re being realistic that if we follow our strategy of leading on price, which is our strategy to protect our ability to stay in that virtuous cycle of investing in our brands, increasing brand health and giving us a platform for taking price increases, then it’s inevitable that in places where competitors are slow to make similar moves, we will tolerate short term dips in market share.
However, it’s not widespread. And if it persists, then we will adjust prices back as we’ve done in a couple of categories in Indonesia. I think we’ve previously shared that example where we moved too far ahead of the market on skin cleansing and home care, and we’ve adjusted back. But we are prepared — as we make trade-offs, we’re prepared to tolerate short term market share depressions in order to continue to follow our strategy of pricing to protect our ability to invest in our brands. Graeme, food and ice cream?
Graeme Pitkethly
Yes, good morning.
Alan Jope
I’ve [indiscernible] Bruno’s question because we don’t want to get rid of those brands. We love those categories.
Graeme Pitkethly
Good morning, Bruno. So I mean sort of linked to what Alan just said, very much looking forward actually to our Capital Markets Day, if I can share that a wee bit, because actually looking through the lens of the five business groups, Nutrition and Ice Cream, looking forward to sharing with everybody what the strategies are. And just looking at those businesses in a more focused way under the business group structure, I’m really looking forward to that.
But to answer your question on the volumes, just — yes, I mean they had positive — both had positive volume in the third quarter, in nutrition, 0.1%; and ice cream, 1%. I’ll take nutrition first. We’ve had very strong growth from our Dressings business and we took double-digit pricing. But we had positive volumes. That was driven by Hellmann’s. Hellmann’s has put in a very, very strong brand performance.
We also had good performance in Knorr, and Food Solutions was a big driver of that. So the volumes in Nutrition in particular are quite supported by Food Solutions, which has grown by — and this is a year-to-date number, I mean, Food Solutions is up sort of in the sort of 20%. But as double-digit volume increases, as that business continues to recover, so you see the benefit of that principally in the Knorr brand, but it’s sitting in nutrition.
And then turning to ice cream, of course, what you’re seeing there is the benefit of a good summer season in Europe for our out-of-home ice cream business, which is 40% of our ice cream business. Just to give you another couple of data points, at a brand level, both the Heartbrand, which is Wall’s, Langnese, et cetera, Iglo, that brand around the world, Magnum, Cornetto, all of them delivered double-digit price increases with positive volume growth in the quarter.
So hopefully, that helps you understand the performances in nutrition and ice cream.
Richard Williams
Thank you. Let’s go to the next questioner which is Celine Pannuti at JPMorgan. Go ahead, Celine.
Celine Pannuti
Yes, good morning. My first question is on the volume. You are guiding for the volume for the full year to be less than the nine months average. I imagine in Q3, and you mentioned it yourself, you had the benefit from a strong summer and easy comparative. So am I right to think that probably excluding that the underlying volume is more in the region of down 3% to 4%? And is this what carryover kind of volume we are looking at for Q4 and H1 next year?
My second question is on elasticities and the overall consumer demand. I was quite surprised to see, despite some of the benefit of the summer, that Europe and U.S. volume were negative. And in terms of your reaction to that, as you look into next year and competitivity, are you expecting to increase promotion? Or how would you look at market share performance if effectively, as you mentioned, private label are getting a bit more shares? Yes, thank you.
Alan Jope
Right. Celine, let me try and tackle both of those quickly. I think the first one, the easiest way is just to give you the facts, which is that the favorable weather in Europe this summer gave us, we think, about 30 basis points of incremental volume growth. So if you want to normalize for an average summer, knock 30 basis points off of Unilever’s UVG. That will hopefully give you a straightforward answer to that question.
As far as elasticities are concerned, we saw very strong volume performances across — let me give you, we’ve given a lot by category and business group, let me talk a little bit about geography. We saw strong volume performances across South Asia, not just India, but across India and some of the surrounding countries like Pakistan, Bangladesh. We saw Southeast Asia, notably Vietnam. Turkey, believe it or not, grew volumes in a hyperinflationary environment. We definitely saw more negative volumes in Latin America, where the magnitude of pricing that we had to land was so high that I think we weren’t surprised to see 4%, 5% volume declines.
And it is definitely true that in Europe, the consumer sentiment is deteriorating. We see that in country after country where the consumer sentiment is on a declining trend. And as the Northern Hemisphere energy costs and winter heating bills land, frankly, we’re not expecting an improvement on that. And it’s in that context that we think Unilever is quite well buffered by the fact that only 20% of our business is in Europe, only 20% in North America, 60% in what are turning out to be more resilient markets in the rest of the world.
And I want to make one slightly tangential point, but it’s of strategic importance. We now have five business groups in the company, each of which are capable of growing ahead of Unilever’s historical growth rate. And that’s thanks to the portfolio reshaping that we’ve done, jettisoning structurally low-growth businesses and adding in high-growth brands and categories. Thanks, Celine.
Richard Williams
Thank you. Next question is from Jeremy Fialko at HSBC. Go ahead, Jeremy.
Jeremy Fialko
Hi, good morning. A couple of questions from me. First one, can you talk about mix at all? Any indication of how positive or negative that was for the group as a whole? And then perhaps you can give a bit of commentary by kind of business units and geography, just some high-level stuff there. And then secondly, can you talk a bit more in detail about performance of your VMS brands, some of the recent acquisitions? Certainly, commentary from some of your peers has pointed to a category that is seeing perhaps a bit of a weakening. So would be interested to hear how you’ve performed. Thanks.
Alan Jope
Great. Well, I’m going to take the question on VMS because it’s a very attractive area for us to talk about. Graeme, why don’t you talk about mix?
Graeme Pitkethly
Good morning, Jeremy. Yes, we’ve been driving mix hard. It’s one of the critical components that we have when we’re facing the inflation that we have. And we talk a lot. We obviously look to drive up our productivity and our savings, and we look to have self-help as much as possible. But driving the mix of the products that we sell has been quite important. That has helped us to some extent within the gross margin line. We’ve started to see it’s less than 100 basis points of benefit in there. But it’s sort of 40, 50, 60 is the general range of sort of mix benefit that we see within gross margin.
In terms of the top line, sometimes, because we report volume and mix together and leave pricing, as you move your — the affordability of your products into the right place, you can — you see it showing up in the volume line. And the price line is a pure line for us. I just wanted to use the opportunity to highlight that just a little bit. It’s the same with some companies, and it’s a bit different for other companies, as you know. But we are driving mix hard. It’s a key component of what our businesses do in order to meet both the challenge of consumer affordability and also to mitigate some of the inflation pressures that we have. So yes, it’s a big feature for us.
Alan Jope
Jeremy, the — what we call Health & Wellbeing, because it goes much beyond vitamins, minerals and supplements, is strategically a very attractive space for us. We have carefully built a very differentiated portfolio. It is benefit-led and it’s extremely premium-priced. That’s the segment that continues to do well, and that’s why we’re seeing double-digit growth in the latest quarter from that Health & Wellbeing business. The less differentiated sort of generalist multivitamin propositions are the areas where the market has definitely softened, but that’s the bit that we are not in.
And brands like, in particular, Liquid IV, OLLY and now Nutrafol are frankly, booming. And we’re having a tug of war between the Investor Relations team on just how much we should talk up the extraordinary growth that we’re seeing in Liquid IV, which has grown multiples since we launched it. So it’s all about the type of portfolio that we’ve built in Health & Wellbeing, which is premium, differentiated and benefit-led and not in some of the segments that are softening in recent months.
Richard Williams
All right. Thanks, Alan. Let’s go to Warren Ackerman at Barclays for our next question. Go ahead, Warren.
Warren Ackerman
Yes, good morning everybody. So Warren here. So yes, two for me as well. The first one, Graeme, just back on this raw material point, I’m still a bit surprised by the EUR2 billion number. I know it’s a big range and it could move around, but can I just check the cutoff point? Was that at the end of the quarter? Or is that now? Because obviously, the last month, there’s a big difference in energy natural gas prices in terms of the movement. And maybe, Graeme, could you remind us the size of the buckets within the commodities? And obviously, they’re moving around. It sounds like what you’re saying is there’s quite a big element in there on wage inflation sort of baked in.
I was wondering whether you can maybe elaborate on what you’re expecting on wage inflation. And I guess most of it is in dollars you’re buying. I’m just trying to sort of get my head around that and some of the kind of details around how we kind of think about EUR2 billion in the first half.
And then the second question is actually back on the Beauty & Wellbeing division overall. I think it was the only division where the pricing went down sequentially. It was 9.5% in Q3, only 6.7% in Q4. So that — and volume has also worsened. So it looks like it’s the division with most elasticity. I was wondering whether you actually dialed back pricing because it sounds like Prestige is still growing quite well.
So I’m just trying to work out what’s going less well. And why did the pricing actually sequentially slow in Beauty & Wellbeing when it went up a lot in all the other divisions? Is it a China issue? Just trying to get my head around that. Thank you.
Alan Jope
Graeme, why don’t you talk — give a little bit more color around the EUR2 billion, and I’ll give a bit of insight around Beauty & Wellbeing.
Graeme Pitkethly
Yes, Warren. So let me just quickly reiterate what I went through quite quickly in the presentation. There are three factors driving the EUR2 billion as we see it right now for the first half of ’23. Each of them in roughly equal proportion. The first one is that transactional currency impact driven by U.S. dollar strength against most currencies in the world. That’s the local currency devaluation that we see against the U.S. dollar that adds to on cost. I should say that within that currency piece, there is a big proportion of it is in hyperinflationary countries or high-inflation countries.
Actually, Pakistan, Turkey and Argentina account for a fair bit of it. And that’s not a challenge for us because we are very successful at covering very high levels of currency devaluation-led price increases in those markets. And in fact, we do that and continue to deliver quite strongly positive volumes in both Turkey and in Argentina in the year-to-date, if you wanted an example of exactly that.
The second feature, as I said, is a back year impact. It’s a base year impact, because we had a higher level of beneficial covers in the half one ’22 base. And therefore, as you roll forward, it’s more of a comparison point that drives it.
And the third point is exactly to where your question takes us, which is around the shape of it, because it’s now processing costs driven by higher labor and energy inflation at our suppliers that shows up in our conversion cost. So that’s the dimensionalization.
In terms of the buckets themselves, if you go back to 2021, I’ll just give you the makeup of our total cost base. This is ’21 as a reference point. We had EUR22 billion on — sorry, EUR20 billion on materials that are covered by our procurement team. And there’s a further EUR2 billion which is not dealt with directly by our procurement team, but it takes place in local markets. So EUR22 billion of materials.
We then have logistics and freight. It’s about EUR3 billion. Production costs in our factories and other costs, about another EUR5 billion. So EUR22 billion plus EUR8 billion is a base of about EUR30 billion. That’s in 2021.We then added to that in ’22 in the material space to the tune of about EUR4.5 billion. And we are seeing, to your latter part of your question, inflation, particularly on the production cost, logistics and freight part. That’s where you see the energy cost of conversion and labor rates coming through.
So hopefully, that’s helpful in terms of the size of the buckets that we’re talking about. And in terms of wage inflation, we’re just going through the process at the moment of around the world looking at what’s happening within marketplaces, where our positioning is strategically relative to the market. So I should say that Unilever remains a really attractive employer, and there are many factors why people join us and stay with us, et cetera. But it’s really too early to say on that when we’re just doing the work at the moment.
Alan Jope
And warren, Beauty & Wellbeing price growth in the quarter was 7.3% and actually increased sequentially over the first half. So the year-to-date is 7.2%. But you’re quite right that it hasn’t increased by as much as, for example, Home Care or parts of the Nutrition and Ice Cream business. And there is a shift happening in where in our commodities basket we’re seeing the higher levels of inflation.
Looking backwards, it’s much more in petrochemical-derived and the likes of palm and soy. Looking forward, it is more in certain other agricultural commodities. So the pressure in Beauty & Wellbeing is lower than it is in other parts of the business.
In terms of where the growth is coming from, while we’ve commented that Prestige Beauty and Health & Wellbeing both grew double digits, just to be a little bit more explicit, hair care grew high single digits. Skin care grew low single digits, and that was — you’ve put your finger on it, actually, good growth in Southeast Asia, and South Asia was offset by weaknesses in North Asia. In skin care, we have a particularly good skin care business in North Asia.
So maybe that helps with a little bit of decomposition of Beauty & Wellbeing, still one of the strategically most important and attractive parts of our portfolio.
Richard Williams
Okay. Thanks, Alan. I’m conscious we’re out of time. So we’ll just take one last question and then we’ll stop, because we know it’s a busy reporting day for everybody. So that last question from Martin Deboo at Jefferies. Go ahead, Martin.
Martin Deboo
Yes, good morning, everybody. I just want to finish by re-asking the question Pinar asked on margin guides. I think it’s important. You’re guiding to a percentage margin increase. 2024 is miles away, let’s talk about 2023. You’re talking to a percentage increase in 2023. You and I know that getting percentage margins up in an inflationary environment is just arithmetically challenging. So despite your reluctance toward H2, the only way I can square that guidance is if you feel there is going to be deflation in H2 ’23. That’s the — and I’m sort of curious why, given the low visibility, you haven’t chosen to guide to a constant currency EBIT increase, where you’ve actually sort of raised the stakes by guiding to a percentage margin increase. Can you just sort of comment a bit more on that?
Alan Jope
Yes. Thanks, Martin. Well, first thing I want to say is that our priority remains growth, healthy growth. But we remain highly convinced of our ability to improve margins in ’23 and ’24, and it’s by using all the tools in the bag. So we believe we’re not at the end of the road on landing price increases.
Secondly, we’ll continue to drive mix hard. But we are anticipating in 2023 an unusually productive year in our savings agenda, our ongoing savings. The introduction of Unilever Business Operations has unlocked, we believe, several hundred million of incremental savings. And as Graeme mentioned, the bulk of the EUR600 million of organization savings that we’re making will fall in 2023. So we do not believe that we will need a deflationary environment.
We think that the tools we have in our bag around price, mix and particularly cost in ’23 will allow us to make sequential improvement in ’23 and ’24 in the context of an overall focus that’s on growth.
Richard Williams
Okay. Thank you, Martin. Thank you, Alan. Let’s bring the call to a close there. If you’ve got any further questions, please email the IR team, and we’ll set up a time to speak to you today. Enjoy the rest of the day, everybody, and thank you.
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