Hi, everybody. I'm Warren Ackerman, Head of Consumer Staples at Barclays. I'm delighted to be here at Unilever House with incoming CEO Fernando Fernandez. Welcome, Fernando.
Thank you.
We've got a fireside chat. It's an auspicious time. It's your first week in the role. Maybe I'm showing my age, but I think you're the fifth or sixth Unilever CEO I've known. I'm delighted to have the opportunity to spend some time with you and get your thoughts. We're going to kick off. First question, Fernando. I'm going to start with the elephant in the room and get your thoughts on the circumstances around the sudden change of leadership. Many investors thought Hein was doing a good job. 2024 was Unilever's best year in a decade. There's been a lot of surprise on the timing of the change.
Can you maybe provide some perspective of what happened? Is there any backstory? Why it's happened now in terms of timing? There's lots of theories out there on disagreements on strategy, on portfolio, speed of change.
So it'd be great to get your perspective on what happened, why it happened, and maybe something on the timing.
Yeah, no, clearly. Thank you for having me, Warren. Hey, you know, I feel the board agrees with the investor. Hein has done a really good job. He put together the basis of the Growth Action Plan that is our strategic path. It's a path that the board fully endorses. He took some significant decisions. The separation of Ice Cream is a very important portfolio decision. We have implemented the productivity program ahead of schedule. So there is, and the financial metrics in 2024, I believe, have been really solid, you know. But this is a forward-looking decision. It's not a backward-looking decision.
You know, the board believes that for the next phase of transformation of the company that is fundamentally making Unilever a world-class company in terms of brand creation and in market execution, my skill set, my track record is a better fit.
So that's the reason behind this decision. There is nothing more than that. Regarding the timing, you know, I feel the question that the board made to themselves is, why wait? You know, what time will give in terms of additional information to substantiate a different decision? And they got to the conclusion that it was the right timing. The faster, the better. And I believe it's a good message also for me and for the organization about, you know, not procrastinating decisions when you have enough information to take it.
Okay. How would you describe your relationship with Nelson Peltz and with the chairman, Ian Meakins? Anything to say on that?
Let me expand that. My relationship with every board member is very, very good. You know, it's excellent. You know, they have really provided very significant insight, very valuable insight for the definition of our strategy. They are absolutely behind me and the management in making this company a world-class leading company. Ian and Nelson, in particular, you know, they have a ton of experience in the consumer sector. You know, their insights tend to be spot on. I listen to them a lot. If the underlying question behind your question is, am I an Ian person or a Nelson person, probably the right answer is,
I am a board person. You know me, Warren. I'm my own person. That's what I would say.
And can I just maybe push you a little bit on trading? Because with your full-year results, you confirmed your guidance for the full year, but said there will be a softer start in the Q1 . Can you maybe reassure the listeners that there are no skeletons in the closet and there's no linkage between the CEO change and any further deterioration in trading? I'm just trying to understand again the reasons for the softer start in Q1 and what the building blocks that give you confidence that we will see an acceleration in Q2 and in the back half to deliver the guidance that you have reiterated.
Yeah. Well, many questions within that questions. You know, first of all, no skeletons in the closet. You know, I want to be very clear. We have reaffirmed our guidance for the year, 3% to 5%. And we reaffirm our guidance for the midterm after the separation of ice cream, 4% to 6%. Of course, you know, we put that guidance in the context of a 3% global real GDP growth and 3% inflation as an economic context. That is what we have seen in the world in the last 10 years, you know, things can change. But that's the hypothesis that substantiates the guidance that we have put. I feel, first of all, let me, I believe it's important to remind what we have done in 2024.
You know, we delivered 3.5% growth of revenue in hard currency, 2.9% volume growth, 280 basis points of gross margin expansion, 13% of profit growth in hard currency. And we were number one in total shareholder return. So we believe that the Growth Action Plan is working. It gives us a very good foundation to continue building from now onwards. Regarding the quarter one, we call out. It was our responsibility to call out a softer start. Markets are softer. You know, pricing is subdued. Consumer confidence has gone downwards in many important markets. And of course, there is a lot of instability after the American election with the start, stop, start of tariffs, you know.
And I believe we have not been the only company. Many, many other companies have called out an acceleration of performance along the year.
What is behind what we believe will be the acceleration of performance? We are landing what we believe is one of our best innovation plans in a long period of time now, between March and April. We have had China and Indonesia as a significant drag of our performance, and they will contribute to growth in the second half. I have been in India recently. You know, I spent five days in India. You know, the Indian economy has been a bit softer recently. You know, the September quarter showed something like 5% GDP. The Indian government and the central bank in India have taken some significant measures.
There was a significant reduction of interest rates. You know, there is close to INR 500 billion of loans to households in India, you know, that will get benefit from that. There are cuts in personal income tax.
Fundamentally, that is a very important factor in India in terms of disposable income. There is food deflation now after many years of food inflation. We believe that the prospects of the economic environment in India get better in the second half of the year. India is our second largest business. And, you know, we need India growing faster than what we have done recently to really, you know, be another driver of growth to the ones we are having in developed markets and in other regions of the world.
I mean, it seems obvious, Fernando, that the chairman and the activists want you to go quicker and to unlock value creation more quickly. That was in the statement very clearly. Can you maybe specifically give some examples of where you want to go more quickly and how you're going to unlock value more quickly?
Yeah. You know, it's just every business I have run in my career, you know. I have basically divided my approach between what I call perform and transform, you know. In the short term, I believe it's very important to land flawlessly what I mentioned is a very strong innovation plan. We are divisionalizing our sales force in the top 24 markets. It's a very significant organizational change. We believe it will make the company much, much stronger, increase accountability of delivery to the BG President. So I want to ensure that that happens, you know, in a very, very solid way. We need to complete the separation of ice cream, and we need to really, by the end of the year.
That's a commitment we have made, and we need to ensure also that the productivity plan is completed.
My intention is to really complete that by June this year. So these are the short-term priorities. I feel in the long term, it is all about creating a machine of demand creation in Unilever. You know, I believe I have always said that, you know, in a one to 10 scale, I probably score as a six.
10 doesn't exist.
10 doesn't exist. My mom used to say. But yeah, I believe that, you know, we want to really build a marketing and sales machine in Unilever, and that requires a decisive shift to premium. That requires to create what I call desire at scale. Desire has been a very important word or mantra in my timing in beauty, but I believe that applies to any single business groups. The consumer now is much more discerning, is much more demanding. The phone has changed the parameters of aesthetics, the parameters of what the desirability that they are expecting. I'm really committed to really, you know, being a serious revolution in our superior functionality, aesthetics, sensorials of our brands.
On top of that, you know, when I look at the long run, any company that is a best performer tends to have a couple of very strong geographical anchors.
I believe that US and India should be our geographical anchors in the long run. This is what I did in beauty and what I believe has to be replicated in our business as a whole.
In terms of pace of change, there's been a lot of investor questions about that. Is there any risk that you see that the pace of change could be too quick for the organization? How do you get the balance right? I mean, some investors see you as very dynamic, very operational, good track record, but also you're quite a hard charger, a lot of energy, you're pretty direct, which could also unsettle some people in the organization. Can you say anything about reassurance about getting the pace of the change? Because it feels to many people, the pace has already been quite quick.
You know, Warren, I have been 37 years with Unilever, and I have never crossed my path with an employee that told me, "Fernando, we are going too fast." You know, the contrary. You know, some people say, you know, why we are going so slow? Or, "Fernando, tell me why I'm working on this that is completely useless." Or, "Fernando, why do we have a process of sequential decision-making when things can be decided much faster?" So I will not reassure you in terms of slowing the pace because I believe that's not what we should do. I believe we have great talent. You know, I want to ensure that
we shift this company outwards and forward and that everyone that is working in Unilever is absolutely focused in creating demand. You know, I believe this will be very well received by the company overall. They know me.
They know what are my priorities. That's the way I have run business for 20 years. And, you know, I continue thinking that that will be the approach.
Can we get a little bit more detail on your experience in Brazil, in the Philippines, and running the Beauty and Wellbeing division? You talk a lot about volume mix and gross margin as the three KPIs that really drive value creation in Staples. How can you take those experiences that you've had in those three different areas and then apply them to the Unilever organization as a whole?
There are a few principles that I believe is a pattern in every business I have managed. You know, if I can mention some of them, you know, I like to concentrate resources in segments and categories where I see a significant profit pool and where we have right to win. You know, my time in Latin America, for example, was defined by the mantra, "Deos first, then the rest." As you know, we have a very interesting category there where we have the right to win, very profitable, you know, very good returns. I feel the second thing that you is productivity as a habit, not as a program, productivity as a habit to ensure that we release resources to invest significantly competitively behind our
brands. You know, I'm a great believer that there are always inefficiencies in the company.
If you tackle them, you release money that you can put behind your brands and you build a virtuous circle, you know, of volume growth, investment, more profit, more volume growth. The third point is a decisive shift of our portfolio into more premium, more desirability, investing heavily in product, investing heavily in activity systems of marketing that really drive our brands forward. I believe, you know, these are some of the key patterns of what I have done. I'm obsessed with volume growth. I believe that investment for volume growth is a key feature that I have always followed. Innovation is a key driver of volume growth.
Renovation is a key driver of pricing. So innovation for volume, renovation for pricing is another pattern.
And I believe the last point I would mention, and you know, it's a bit related to my experience in developing and emerging markets, you know, you have to build portfolio resilience to deal with economic volatility and you have to have clever pricing management to deal with that. So I feel resilience, portfolio resilience against economic volatility has been also another feature. All this is possible if you are surrounded by great people. I'm uncompromising on talent and I'm uncompromising on winning mindset. You know, this is what the company in Argentina injected me in my early years of my career.
And it has been something that, you know, I try to inject and infect the whole organization with.
Fernando, if I had to pin you down on your near-term priorities, if there's three kind of near-term things that you want to see done, what would they be? And then what would be your three kind of medium and longer term? I'd love to just kind of get your idea on prioritization because that's obviously key.
Yeah, I mentioned some of that. In the short term, you know, help the business groups to really shift decisively resources into the most profitable strongholds. There is an element of risk on that, and I feel I'm prepared to share the risk with them. I feel that's my role. I feel, as I mentioned, you know, landing our innovation plan flawlessly in a moment in which we are divisionalizing sales force is a very important point. I feel fixing some of the geographical issues we have, you know, China, Indonesia, accelerating India is very important for me at this point of time. And of course, completing the separation of ice cream and finishing with the productivity program because, you know, we
need to leave that behind and give our people a clear reason to believe in the future growth of the company.
In the long run, as I mentioned, make US and India two key anchors of our portfolio. Make our brands, make our best brand travel fast. We have not been good enough in rolling out our brands globally. I always say that Unilever is a bit of a federation of local and regional brands. You know, I believe in the long run, we need more widespread presence of our strongest brands. I feel we have made a significant step with the top 30 brands and the focus we are putting on them, but I believe we can go faster in rollout, continue driving optimization of our portfolio into premium with a good program of bolt-on acquisition and disposal. So that's basically what I would do.
Yeah, you mentioned portfolio. There's been a bit of speculation that the change means that the board wants to go faster on portfolio change and perhaps consider more transformational change with question marks on the Foods portfolio. I want to try and clarify that because at the CMD, you raised your ROIC target from mid-teens to high teens, which I read to mean no big deals. And you also said that there was only EUR 1.5 billion that you would invest in portfolio change. Is that still the case or has there been any change of view from either you or the board, particularly on the point around bigger deals?
No change of view. You know, yes, I mentioned at the Capital Markets Day today that our ROIC now is close to 19%. So I believe it's in the top third of the sector. We like that, and you know, my view in transformational acquisitions, I call it the paradox of transformational acquisitions. You can only do it from a position of strength, and if you are in a position of strength, why would you do it? We are happy with the approach we have had in terms of bolt-on M&A focus in the US and India. US is a very important market because it's probably the only market that gives you two things. It gives you enough local critical mass,
and it gives you a platform for global brands because American brands tend to travel.
We are very happy with the progress we have done in our portfolio in the US I believe it has been a bit, it has gone a bit unnoticed by the market, you know. After the separation of ice cream, we will have a business there of around $11 billion, close to $3.5 billion in Prestige Beauty and Health and Wellbeing with 15 consecutive quarters of double-digit growth, an extraordinary position in deodorants, an extraordinary Dove brand in skin cleansing, Hellmann's in dressings, you know, 45% share, two times the share of the second player. You know, our US business, we will not be the largest company in the US,
but I don't see many companies with the kind of growth footprint that we have in the US In India, we have just completed the acquisition of a Prestige Beauty brand called Minimalist.
You know, we have an exceptional position in India. But we know that the portfolio that brought us here is not the one that will keep our position in the future. So there are significant consumer preference changes. There are significant changes in the channels, and we need to ensure that the portfolio moves in line with that changes. And we will not, you know, blink on that. You know, we will do whatever necessary to really ensure that the kind of positions we have in India, 55% in hair care, 45% in laundry, 80% in premium tea, will continue being like that. So no transformational acquisitions on the table.
We are happy with the kind of approach. Probably some faster, some acceleration in the process of disposals. You know, we always talk of pruning the portfolio.
I'm in the camp that when you have taken a strategic decision, it's better to act fast, so probably you will see a bit more pace on that.
I mean, you mentioned at the CMD, EUR 1 billion of revenues are non-core in the foods portfolio, mainly Europe. We've seen a few small disposals, but it's not really been happening that quickly. So where are we on that? And then sort of the bigger question, I suppose, is the bigger food portfolio. You mentioned Hellmann's, and it seemed to me that Hein was quite wedded to the foods portfolio. Hellmann's and Knorr are scale brands, big market shares. They're good on cash. They help in the EM. He always said there would be big synergies. Can you just clarify your view longer term on the foods portfolio?
Does it have a place in the portfolio? And do you agree on the synergy point? So two questions. The one is on the Europe non-core and then the bigger one on the strategic brand.
Let me start by the bigger one. I feel like Knorr is our second largest brand. Hellmann's is our fifth largest brand. They are accretive in margin. They are accretive in terms of cash generation. They have a huge return on invested capital. So they are 60% of our foods business, and the two categories in which they play are 70% of our foods business. So our food business is not a classic food business. You know, I internally call it edible Personal Care because, you know, the margin structure of that business is very similar to the Personal Care one. So it is a very attractive business. You know, it gives us a lot of flexibility.
And we are committed to grow that business. You know, so that is what I can say about foods now.
Of course, there is, yeah, around EUR 1 billion of local brands fundamentally in Foods Europe that we believe they don't fit well with our portfolio going forward. They are not strategic priorities. We have some another, probably EUR 500 million of other, you know, foods and other categories brand, particularly in the smaller markets of Unilever that we don't see the possibility to scale, and probably we will also act on that. And my intention is to act in all these probably at a faster pace, but of course, you know, the market condition has to be there to ensure that happens. So that's where we are in portfolio.
But hey, many people say that I'm a hair brand, you know, a hair guy. You know, I have worked in hair; it doesn't show, but you know, I have worked in hair care for many, many years.
I was the person that disposed Suave in the US. And Suave was the highest penetrated brand in the hair care market in the US. But it was a perennial decliner. It was in the value segment. We didn't see good strategic fit in the long run. And I didn't have any problem to disposal brand. So what I want to say with this, every brand in our portfolio, every category in our portfolio has to earn the right to remain in our portfolio. And I don't have any emotional engagement with any brand when it comes to portfolio management. So this is what I can say. Time will say what we do with our portfolio in the long run, but that's the position at this stage.
Maybe switching gears to ice cream. There's been a lot of discussion around that. My question is, are there any other options for ice cream? I mean, how much of a distraction has it been? Would it still not be better just to do a JV or a sale and then return cash to shareholders, even if it meant a higher tax liability? Are you definitely happy now as a new CEO that you're going down the right path with the primary listing in Amsterdam and secondary listings in London and New York? Why wouldn't you still consider a twin track or, I don't know, incorporating it into the US or, you know?
You know, just I'm not coming into the CEO role from whatever. I'm coming from the CFO role, and I have been part of all these decisions. So definitely I'm aligned with the decisions that we have taken. Let me give you a bit of background first. We separate ice cream because we always saw it as a clear outlier in our portfolio, you know. So complete different capital intensity, seasonal business, you know, our infrastructure in rural areas don't help a lot the ice cream business. So I'm absolutely convinced that a separated, an independent ice cream company with a different ownership structure will make that business thrive.
At the same time, for the remaining Unilever focus in our portfolio, we believe we'll have an impact in the quality of the work that we will do. So I'm absolutely 100% behind that decision.
In terms of the mode of separation, we analyze a few factors. First one, maximizing value for the shareholders, you know, IPO and demerger don't have the same tax impact. Second, minimize the political blowback or the forced selling is an important factor. Very importantly, ensure no operational disruption, neither in the ice cream business nor in the remaining Unilever. The fourth point, important also, do it in a timeframe that we believe would be one that would be manageable and that wouldn't imply distraction for the management. And we want to do this by the end of the year. So we continue thinking that the demerger and listing is the most logical outcome of this.
But of course, you know, hey, we always have to, we have a fiduciary responsibility to analyze any other option.
It has to be a very credible option to really ensure that we don't follow this path. At this stage, we are running ahead with the merger and the listing. We have 11 work streams absolutely on track. I reviewed that last week. You know, the progress is very significant. We are setting up a standalone operation in ice cream that by July should be operating in that way, and you know, I stick to the decisions that we have taken.
In terms of numbers, you talk a lot about hard currency EPS. When you do spin off ice cream, would it be EPS accretive, neutral, dilutive? Can you share some numbers in terms of the hard currency EPS impact? Because there were some concerns around scope and they could be a bit dilutive.
Hey, ice cream is 13% of our revenue, is 9% of our profits, and in terms of cash contribution, it's less than that, so you know, when we separate ice cream, you know, the shareholders, we receive shares of the ice cream company and the Unilever company. You know, what we say is that on a like-for-like basis, you know, we are committed to earnings per share growth in the business. You know, so that's what I can say at this stage. Of course, there are many decisions that we have to take now, but hey, that's what we have promised and that's what we have delivered.
What is the investment case in ice cream? You know, how much margin upside is there? Can it grow in line with the refreshment average? You know, you've got the great brands, but the margins still seem to be quite low.
Yeah, honestly, I'm a bit critical of how we have managed the ice cream business in the past, and I believe we have done a lot of progress last year, and I believe that some of that progress will also be shown this year in a better performance. If you look with some other ice cream companies, you know, I will not mention the name, but you know, companies that have a significant exposure even to private label that depend a lot in licensing brands, you know, they have a much better margin structure than the one we have, so I believe the possibility of unlocking significant, significant profit growth in hard currency in the ice cream business is incredible.
We have three out of the four major global brands. You know, we have a significant global presence in the business.
I believe there is a lot of scope in improving our supply chain, but it will require some capital. But even before allocating significant capital to improve that business, I believe that there is profit expansion opportunities just through better managing what is a complicated business. You know, I always say that ice cream requires the marketing of beauty and the operational grip of beer or soft drinks. You know, I believe that our marketing has been good. Our operational management has been very far from a beer company or a soft drink company.
I want to move to premiumization because as long as I've covered Unilever, it's been seen as a kind of a mass market FMCG company. It's morphing into something different, more premium, more focused, 30 brands, 24 countries. But when I look at Europe and North America, the percentage of the portfolio in premium still looks quite low. There's been progress, but the starting point's low. So my question to you is, how big does premium need to be in Europe and the US? How do you turbocharge premiumization and what's the best way to get there?
Clear. Let me give you some numbers. You know, if I look at our, let's say in three aggregated segments, you know, premium, mainstream, and value, we have around 20% of our business in value, 35% in premium, the other 45% in mainstream. Okay. So I would like to have around 50% in premium. That would be our ideal position, you know. I feel different situations in Europe and US. I feel in the US, we have allocated a lot of capital into M&A that has transformed our business in a dramatic way. And I would say, you know, that's a business now that the profile is fundamentally a beauty, wellness, personal care, and food business.
And I believe the profile of that business, when you consider that close to 35% of that business is in Health and wellbeing and Prestige Beauty, is already a very significant contribution of the premium segment. So it's just the US business now is a positive outlier when it comes to premium segment for Unilever. In Europe, it's different. You know, both Hein and I have been very, very clear that, you know, we are both fans of a better balance between emerging markets and developed markets growth. We have neglected Europe for many years. That has changed in the last couple of years.
We have innovated at scale in Europe, and you have seen our volume growth in Europe close to 4% last year.
I cannot say that Europe will be for us a 4% volume growth in the long run, but this has given us a lot of confidence that if we put our best technology behind our best premium brands in Europe, there is significant volume growth and positive mix that can be unlocked. So, you know, just I feel the direction of travel is clear. I like premium. I believe if you look at my career, I have been always driving premium. But hey, that cannot be wishful thinking. You know, getting a portfolio that is more premium requires injecting desirability at a scale. I'm a great believer on that. That will be probably my mantra in the next few years, desire at a scale.
I want to ensure that this is injected in our marketing philosophy. It has not been in the past.
So that's probably one of the changes that you will see.
I want to switch gears and talk about a few geographies and especially Asia because as long as I've been covering Unilever, emerging markets are the real powerhouse. They still are the real powerhouse. But what we're seeing is very nice growth in Europe and North America. And some of these Asian markets are lagging. You know, China and Indonesia. We saw China down 5%, a bit of a reset going on. Indonesia has been a long story, and you've been trying to get that improving, but it's been a struggle. The question I'm getting from investors is, is there something bigger going on? Are you actually behind the curve with how consumers and channels are changing?
Do you need to rethink your approach and go much faster in terms of digitalization, channel shift to actually appeal to those aspiring Asian consumers?
And then when do we actually get Indonesia and China back into solid growth?
Cool. Yeah, it's a very important question. First of all, you know, we are very proud and we like a lot our position in emerging markets. You know, and I'm sure that if you would be running Unilever, you would not swap our Indian business with any other company, you know. And probably you would not swap our Indonesian business, you know. So we like the kind of positions we have in Asia. It's not only Asia. You know, we have an incredible business in Latin America. Our African business is already the size of Indonesia, you know. So we are making single-digit growth there.
So, you know, the demographic benefit that emerging markets provide is a significant element for fast-moving consumer goods business.
And if I look at the history of Unilever in many of these markets, you know, Indonesia, that is where we have had a serious long-standing crisis. It has been a clear outlier, you know. I went to run the Philippines in 2008, and our Philippines business at that time was EUR 450 million. Now it's EUR 1.3 billion. So we have added EUR 8- 9 per capita in 15 years in the Philippines. In the same period in Indonesia, we have done nothing. And I believe, you know, it's just there are many, many reasons for that. And, you know, we have reflected on that. But hey, there's a very strong local competitor there. You know, it has anchored our pricing for a long period of time.
And I believe that our marketing has not been of the quality that we deserve, that the consumers in Indonesia deserve.
But Indonesia has been an outlier.
Is there any green shoots in Indonesia?
There are green shoots. I feel it. You know, I was in August there. You know, you know that the last year in Indonesia has been a bit strange because of the Middle East conflict. There was a clear consumer backlash against international companies. You know, it has affected many of the big American names also. In our case, the response was significant promotional activity, and that generated a lot of price instability. Our distributor systems were put in disarray, and I went to negotiate and say, hey, we need to reset here, and when you reset your distributor systems, it takes some time, but hey, the last few months we have been beating our forecast in Indonesia is far from being
where I would like to be when you look at the run rates that we believe that we can have in Indonesia.
But I see Indonesia contributing to growth in the second half of the year. China is a different thing. I feel in China, you know, for many years we went for an all-in strategy. But the truth is we arrived to China probably late. We didn't have the portfolio particularly to attack premium beauty in China that we have now. Our strategy in China now is a much more selective growth. We have excellent businesses. You know, our hair care business is very strong. Our laundry business is very strong in one region of China. We have an excellent food service business in China. And we are making serious inroads with some brands like Hourglass or OLLY in vitamins, you know.
But it's a much more selective strategy.
You know that there has been a dramatic change in the e-commerce side of China, you know, from the likes of Alibaba to the likes of Douyin and Pinduoduo. Our route to market to channels like Pinduoduo or Douyin was seriously intermediated. We are now adopting a much more direct approach in the route to market that also has some kind of short-term impact. I see China also contributing in the second half of the year. India, I don't know if you asked me about India, but.
I was going to ask you about India because at the CMD, the comments on India were pretty bullish. You know, per capita consumption will double by 2033. You talked about it as the biggest near-term, medium, and long-term opportunity. But the performance has still been pedestrian, has been missing numbers every quarter, the last three or four quarters, 2% organic growth last quarter. So my question is, when does growth pick up? Are you saying it's just mainly a macro issue? And what can you do to turbocharge premiumization? I know you bought the Minimalist and you're talking about 900 basis points increase in premium. Is that enough?
Why should we be confident that Unilever will get the fair share of the growth in beauty, which is going to be the next battleground in staples over the next decade when you've got the likes of L'Oreal also trying to chase that same growth? So when do we actually see it come through?
I feel with the slowdown of China, everybody has rediscovered US and India, of course, you know. But hey, our position in India, I mentioned before, is exceptional. You know, we have great brands. We have a great portfolio. I feel in the, you know, in the last three years, we have gained 200 basis points of share in India. You know, it's not that we are losing share or anything like that. The market has been softer. I have given some explanations. You know, food inflation was very significant in India, and food inflation affects 80% of the household seriously, you know. Particularly, vegetables inflation has been crazy.
And that's very strange because, you know, vegetables usually supply and demand align very, very quickly. I believe the economic environment in India will get better in the second half of the year. There are significant changes in channels in India.
There is, you know, the rise of the affluent India is very important. You know, there are 60 million households of the 320 million households in India that, you know, they have serious money now. The economic active population in India is 430 million. You know, it's up 30%. It's probably the lowest in the world. There are 80 million female workers in India. So in a 750 million female population. Every time the women get into the labor force at a scale, companies like Unilever really have a lot of tailwind. I'm very bullish about the long-term prospects of India. Regarding the changes in consumer preferences, the channel changes, are we moving fast enough?
The answer is we have to move faster. You know, I was in India. I spent five days a couple of weeks ago.
You know, you see, for example, the phenomenon of quick commerce. You know, quick commerce is now 2% of our sales. We expect quick commerce to be 10 to 15% in the next three, four years. You know, India is a very special place because, you know, richer Indians and poorer Indians live in close proximity. That basically provides demand and supply of labor that basically made that quick commerce a logical channel to grow. You know, if you ask me, hey, do you prefer quick commerce to marketplace in terms of channel development? Yes, of course. Quick commerce is a limited assortment channel.
You know, for companies like us that have such a presence in India, you know, that's a good development of channel.
When you say margins in that channel?
It's just our margin, the mix in that channel is much better. So I cannot say that like for like, the margin is better. But what I can tell you is that the mix in that channel is favorable. That in the whole picture, you know, will drive our margin faster. So I'm very optimistic about India in the long run. We are competitive. We have a great organization. We have great people. There are things that have to be adjusted. Yes. But let me tell you something. Some people believe that we have headwinds in all the portfolio. The only category in which we have some headwinds due to channel and segment development is in beauty.
We have tailwinds in Home Care. We have tailwinds in personal care. We have tailwinds in foods.
So, you know, it's not that we have a portfolio that has to be completely rebuilt in India. It's not the case. Probably where we have more things to do is in beauty because, you know, the change will be faster there. And hey, the acquisition of Minimalist is fundamentally an indication of what we will do there to really move our portfolio fast.
I want to turn to Latin America, your old stomping ground. You talked about, I mean, Latin America has been very strong, but we have seen volume slowing. I think it was flat the last quarter, and there's talk of retailer destocking. So the question is, how long do you think that continues? And then how do you feel about Brazil and Mexico? 25, more medium term as well.
You know, I'm not very objective about Latin America, you know. I ran Brazil for nine years. I ran Latin America for another four years. You know, it has been a spectacular region for us in terms of growth. We have incredible market positions across Latin America, you know, Brazil, Argentina, Mexico. Let me give a bit of a structure of our business in Latin America. Brazil is 50%. Mexico is 25%. Argentina is 15%. Different situations, you know. Let me start by Mexico. This is most obvious, you know. The tariff stuff, tariffs, you know, is really having a significant impact in the Mexican economy.
If you look at the Mexican peso, it was very, very strong for a long period of time. In the last year, there has been a significant devaluation that brings inflation in place.
I believe that Mexico, there is a macro component there that, you know, we need to see how it evolves. Of course, if there are 25% tariffs into Mexico, there will be an impact in the economy. There will be an impact in the currency, you know. So we will have to wait until see how all these things develop. Our position is very strong. Our shares are very strong. We have a great food business, a great personal care, and a great beauty business there. In Brazil, there is a short-term, well, there is a short-term issue in Brazil that is Brazil tends to operate with positive interest rates, you know, real interest rates.
But if you look at nominal interest rates now, they are 14% and inflation is at 4%. So the real interest rate went from 3% to 4% into 10%, you know.
If you look at the normal retailer in Brazil do 3%, 4%, 5% of operational profit, now they can do 10% in financial profit, you know. So that fundamentally put pressure in stock holding in Brazil. And we are seeing some pressure in the short-term, particularly in big volume categories like laundry, like Home Care. Our personal care and beauty business continues thriving there. So I believe that that situation in Brazil, you know, is related with some fiscal position of the government that has to be adjusted. But hey, I believe.
That's what happened. Our stock levels coming down now.
Stock levels are coming down. Stock levels are coming down, but you know, there is probably a bit more, a bit more happening, particularly in categories like Home Care. Argentina, the government is doing the right things, you know. It's just, but that generates some contraction of the economy in the short-term. Last year, our market share in Argentina went from 49% to 53%. So it's a huge, huge increase. Many of our international competitors have abandoned Argentina. Now we compete in Argentina fundamentally with local players. But hey, our competitiveness continues evolving in the right way.
There is some pressure in the market now because I believe for the long run, what is happening in Argentina is good. But in the short-term, you know, fiscal adjustment tends to have some impact in contraction of the economy, and the purchasing power of the consumers is feeling that.
I mean, you mentioned tariffs in passing. I mean, you mentioned it in relation to Mexico, but obviously China, Canada. Can you maybe talk a bit more broadly about tariffs and kind of risk mitigation that Unilever is looking at with tariffs? I know it's volatile every day. It seems to be something different. But how do you think about it from a planning point of view?
Yeah. First of all, let me tell you about the US, you know, because it has been the driver of this. In the last three years, we put close to $4 billion of capital in the US. So between acquisitions, investment in factories. So we are well positioned in the US. And as I mentioned before, it's a key market for us. We are investing heavily there. And we will keep investing heavily there. When it comes to the supply chain, you know, after COVID, we made a serious effort to make our supply chain more flexible, you know, in terms of more local for local, more reliable, you know. And I believe now, you know, if you take a country like the US.,
you know, close to 87% of our revenue is produced on a local basis. Tariffs have impacts in different dimensions.
You know, let me give you two fundamental dimensions. One is the direct impact of the tariffs in the flow of goods between these four countries, you know, China, Mexico, Canada, and US. And the second is, of course, it gives some space for producers of material locally to charge more. We believe that that effect for us is limited. You know, we can put mitigating actions in place. We can reroute our supply chain to serve the US. in case of need. So, you know, the mitigated effect of the tariff increase is something that is not material for us, you know. There is a second effect that is what tariffs can imply in terms of currency instability.
And, you know, logically, in a context of tariffs going up, you know, emerging market currencies tend to depreciate. And that implies more pricing in the year that has to materialize.
But we have seen that in the first round of announcement of tariffs. We have not seen that in the last few weeks. But that's something that we are following in detail. On top of that, of course, you know, usually when there are tariffs, you know, there is some impact in economic growth. I feel Mexico and Canada will be much more affected on this than the US. So these are two markets in which our revenue is in the 2 billion territory between the two of them. So there can be some effect, but it's not a dramatic effect. So we don't see a dramatic effect in Unilever. And hey, you look at this always in relative terms.
You know, we believe that given our global supply chain footprint, our flexibility in our supply chain, we will suffer much less than most other players' tariff effect.
I want to move to gross margins, one of your focus areas, Fernando. Your gross margins recover from 40% to 45%. My question is quite simple. What is the real long-term gross margin runway in this company? Why can't this be a 50% plus gross margin business? I mean, I'm thinking out to 2030, to your end of your GAP program. I was struck by your comment at the CMD that every percentage point of incremental volume is coming in as a gross margin closer to 60% plus. So here we are at 45%. You know, you know, what is your vision of where you want this to go long-term?
Yeah, it's absolutely right. You know, what we call the marginal contribution. So the gross margin in the next unit of volume, you know, comes average of the company at close to 60. If you take beauty, 65, 70, or if you do, you know, so personal care, 62 or whatever. So that's the reason why volume growth is so important, you know, because, you know, just the absorption of fixed costs is dramatic. And I'm a great fan of that, you know. We are happy with what we have done in gross margin last year, you know, 280 basis points of margin increase. But I feel important also if you look at the quarter four results, you know, that were published by the sector.
I believe we have the highest expansion in gross margin of the whole sector in the Q4 .
It's not only in the full year, but also in the quarter four. There are, I would say, four drivers of gross margin improvement, you know. And one is volume leverage. Marginal contribution is very important. The second is mix. So the more you grow Beauty, Personal Care, that has a significant impact. The third one is procurement interventions that we are doing in some fundamental, in the value chain of some fundamental materials for us, you know. I always give the example of surfactants, you know. I can mention fragrances, etc. We were one of the few companies that we are completely dependent on third parties on that, you know.
Now we are making some vertical integration in some key materials that we believe that will improve our procurement power.
And the fourth one that is very important, and I have mentioned many times, you know, we allocate. We are spending capital expenditure around EUR 2 billion a year. In the past, we used to allocate around 30% of that to margin expansion initiatives. Now we are allocating 55%. So if you think that number, you know, that's basically EUR 1.2 billion. You take 3-4 years of payback, you know, you have EUR 300 million to 400 million that you can spend profit through this kind of allocation of CapEx. So we have a very disciplined approach now. I'm a great fan of fixed spending in our factories, you know.
I always tell our factory directors, hey, your role is to run this factory without a penny more. I don't care how much more volume you put. So leverage has to happen.
Hey, I cannot tell you what is our long-term ambition, but hey, you know, I expect that we will continue driving gross margin to ensure that we can keep investing behind our brands.
On the procurement side, I think your Raw & Pack is like EUR 25 billion. It's a big EUR 27 million. It's a big number. All these interventions that you're making, you know, what's in scope? You know, how many, you know, how should we think about that? Because you've been mentioning it more and more. Fragrance, EUR 100 million investments, surfactants. I think palm oil. Can you maybe just frame it for us?
Yeah, let me give you an example of fragrance. For example, we invest in fragrances around EUR 1.2 billion. If you compare that number with some of the size of the key fragrance houses in the consumer division, it's not a small number. You know, now we continue working in partnership with all the fragrance houses, you know, but we want to develop internal capabilities also to ensure that the value in the value chain is better split. So we have done surfactants in the US., for example. You know, we used to be the only, you know, surfactants are very important in liquids.
We were the only player basically with no participation in the whole value chain. That's a monopolistic position of some supplier there. You know, we have invested on that. We're improving.
So overall, our intention is to basically our procurement inflation to be 1% below the market procurement inflation, the market material inflation, you know. That's significant, you know, in a EUR 27 billion, you know, it's a significant number. That's the challenge I have put to our supply chain guys, and, you know, we continue doing. There are 12 families of materials in which we are making interventions. I cannot give you more.
Don't worry, I won't ask.
But there are 12 families of materials in which we are working with a very clear, structured, articulated way. I have brought game theory at scale in our negotiations. I'm a great believer of that. And, you know, I feel all that is resulting in a better procurement strategy.
I want to move to brand and marketing, Fernando. It's really stepped up from 13% of sales to 15.5% of sales. The question is, does it begin to plateau from here or does it keep increasing as the portfolio shifts more to beauty? And then if you get ahead on productivity, can the BMI be stepped up sort of in a dynamic way? And I'm just trying to understand, because it's such a big number, what the incremental returns on that spend are, because you're going from a, you know, you're moving to a social-first advertising strategy, 30% of total spend to 50%. I mean, that's huge. I mean, content going up, not 20%, 20X. That's huge. So it sounds like a massive change to me, more influencers.
How, you know, can you maybe just walk us through that, you know, on the return side and how confident are you this is the right move at the right time?
Yeah. It's probably the biggest change in our company going forward. You know, let me first go into a market, into numbers. You know, we spent 13.1% in 2022. We moved to 14.3% in 2023, 15.1% in the first half of 2024, and 15.9% in the second half of 2024. If I remember all these numbers, it's because I consider them very, very important. You know, it's something in which I believe there is an implicit recognition that our level of investment in 2022 was non-competitive, you know. So we are happy that our improvement of gross margin has allowed us to really fuel investment.
I believe that this number between 15% and 16% we feel comfortable with. We believe it's in competitive levels. You know, our shares are starting to show that the level of investment is competitive.
I have a principle, you know, that I took from an old boss that you being consciously uncompetitive is a criminal act. So basically, we will always be competitive in investment, you know. Regarding the quality of, so we are, that's a quantity. Regarding the quality aspect of our investment, hey, today brands are by definition, by default, they are suspicious. Brands coming from corporation, messages of the brands coming from corporations are suspicious messages. So creating marketing activity systems in which others can speak for your brand at scale is very, very important. Influencers, celebrities, TikTokers, etc.
There are 19,000 zip codes in India. There are 5,764 municipalities in Brazil. I want one influencer in each of them. You know, in some of them, I want 100, but at least I want one in each of them. That's a significant change.
It requires a machine of content creation, very different to the one we have had in the past. AI played a very important role on that. But I'm absolutely committed, and this is one of the things I will drive like hell in the company in the next few years, you know. Desirability at scale and marketing activity systems of others at scale will be the fundamental principles of our marketing strategy. I'm 100% behind that. I need to really ensure that that happens in the company. The returns, hey, we have now the UBS methodology to measure performance of our brands, the impact in brand equities.
And, you know, we have a very clear understanding of what is the return of all these kinds of things, you know. The point is not if the returns are higher versus the past.
The point is the returns are higher versus any alternative allocation of funds today and versus any other option. They are higher returns.
Okay. I want to move to Prestige Beauty, and Wellbeing because from small beginnings, it's now growing rapidly. I think it's broken through EUR 4 billion of revenue. I think 14 consecutive quarters of double-digit growth. You've got brands like Liquid I.V. approaching EUR 1 billion of revenue from a small base when you acquired it. So, you know, how much more runway is there for that brand? And then you've got the new jewels, K18 and Nutrafol. Can these be the next billionaire brands in the future? I'm just trying to understand, you know, your CEO now, what is the vision long-term for prestige, beauty?
I know you've got a new head in prestige and well-being. If you look out to 2030, how big can it be? And what brands, you know, are you most excited about within the portfolio?
And, you know, can investors get confident that when you acquire brands, that you acquire the right ones that are not just faddish and they've actually got real appeal for the long term? So the whole kind of prestige, beauty, and health, well-being strategy.
No, that's good. First of all, you know, the number you quote is directionally right. So let's say that we are around EUR 4 billion after pro forma. When we acquired those businesses, you know, they were around EUR 1.7 billion. And the tenure, the average tenure is around five years now. So basically, in five years, we have doubled that business, you know. And you have seen that in the results, particularly in our US portfolio, you know, our US business in the last couple of quarters grew 7%, you know, volume at more than 5%. And Prestige Beauty and Health & Wellbeing have been significant contributors to that, you know. It's true also that in Prestige Beauty, we have seen a softening
in the market in the last couple of quarters. Wellness continues flying. There are some spectacular successes, you know. Liquid I.V., we acquired the brand in 2020.
It has multiplied by seven. And it's now a EUR 850 million brand. Nutrafol, we acquired the brand in 2022. It has multiplied by three. It's now a EUR 650 million brand or something like that. So they are definitely in their path to a billionaire brand. There are other brands who are doing very well. OLLY in wellness, Hourglass in beauty, Tatcha, Dermalogica. We have some dogs also, you know. Sometimes not all the acquisitions work as they should work. But we have now a very clear blueprint for acquisitions, you know. They have to be digitally native brands. They have to be in super growth stage.
They have to be brands in which our R&D capabilities can add value to that innovation process. They have to be lifestyle brands.
And they have to be brands that are very strong in some narrow verticals to ensure that we can deliver exceptional profits. And fundamentally, there should be brands that not only appeal for the American consumer, but have potential to travel abroad because, as I mentioned before, I see the fact of being a federation of local and regional brands one issue for Unilever. And I want to ensure that we have a portfolio of more global brands in the future. So it's a great business. The intention is to grow it faster and to roll it out faster. So you probably will see an acceleration of rollout. I believe it's very important for our India business.
So Indian consumers tend to have the American brands in high regard.
So differently to the China situation in which, at the time in which the beauty business exploded in China, we didn't have a portfolio ready. Now we have a portfolio ready. And we will deploy that portfolio at the right time on top of the acquisitions that we will do locally. So these are very important businesses. We have seen some change of leadership. Vasiliki Petrou that did an amazing job for us has decided to retire. We replaced her with an excellent resource, somebody that we knew from Unilever before, but was running a jewelry company. MC Gasco-Buisson is an extraordinary talent. And I'm sure that she will take the Prestige Beauty business to new heights.
I'm sure she will. I want to talk about innovation. Your 6P strategy has been a real kind of driver. You call it UBS. You know, you're focusing on 12 big launches. You're trying to create EUR 100 million platforms that are unmissably superior. You want to make markets, not steal market share. It's a big change in mentality. How confident are you that this 6P strategy is embedded deep in the organization? And, you know, what innovations, technologies are you most excited about? Because that was a big kind of thing for Hein. And, you know, are you going to take that and extend it further? Are you happy with where it's at?
Our science has been historically better than our marketing. You know, I feel, and, you know, I look at our science in two different buckets. The new flow of science, that is the R&D investment that we will do in the future, but also the stock of science that has not been leveraged in our portfolio. And there is a lot of that. You know, when I took over beauty, if I look at the five key scientific streams of skincare and hair care, they were deploying 22% of the revenue. A few years later, they were in 45%. I would be surprised if something similar doesn't happen in the rest of the portfolio.
So I will be really looking at that seriously. Science and marketing, better marketing in the premium segment is fundamental in developed markets where concentration of retail and changes of channels is very, very significant.
I'm absolutely committed to this idea of focusing behind big bets. I believe that the numbers don't reflect the opportunities we have. The numbers of our innovation plans don't reflect the ambition we should have with some of the science that we have available. And the intention is to really move faster and move at higher scale and ensuring that, you know, the geographical coverage of our key innovations, at least in the top 24 markets, happen in a much shorter time frame than it has happened in the past. That's something I'm very keen in making happen.
I want to talk about the mid-single digit organic growth ambition in 2026. What is your conviction level that can be delivered? Because the consensus currently is not there. You know, the consensus is kind of like four, you know, or below or around four. And then sort of related to that, when ice cream is out of the portfolio, EM becomes a bigger weight. So how come, you know, so is hard currency EPS still the priority? And how do you deliver that and the top line, mid-single digit stepping up? At the same time, with this volatility and deliver, you know, both top line and bottom line and deliver that top third consistently, what needs to happen?
You know, I'm a hard currency guy, you know. So, just, I know investors put pounds or euros or dollars and they don't want Argentinian pesos. So that's very clear. You know, revenue growth in hard currency driven by volume growth and mixed profit growth in hard currency driven by top line leverage and gross margin expansion is what guides my strategy. Financial metrics have to say it all, and these are the financial metrics I will be looking at. I feel it's very important for you guys to know also that if you look at my remuneration and the leadership executive remuneration now in the long-term incentives, more than 80% of our remuneration is hard currency linked remuneration.
So it's a very important change. It was not like that a few years ago, and that drives different behaviors in the company.
And we look at metrics in a very different way to the way we used to do it. Regarding the 4% to 6% USG underlying sales growth guidance I mentioned before, it is, of course, based on a hypothesis of 3% GDP growth, 3% inflation. If the inflation is higher, we need to revise. If the GDP growth is lower, we need to revise. But overall, assuming the hypothesis, we are confident that the kind of changes we are doing in the company, the focus in the new innovation platform, multi-year scalable innovation platforms, what I call excellence in demand drivers, you know, multi-year scalable innovation, delivery at scale, social first expansion, etc., etc., should really aim better in market execution.
That is something I'm very passionate about, you know. It's something that, you know, it should really drive the company into that kind of level of growth.
The CEO is a very different job to the CFO, Fernando. I remember Alan Jope telling me that when you get to the top of a company, you think you're at the top, but then you realize it's actually an inverted pyramid. And you actually then have, you know, governments and regulators and other stakeholders that maybe you don't sort of think about at the time. So are you ready for that? You know, you're an operator, but there's other stuff that's going to be out there. How will you manage those additional responsibilities? And do you need to bring in new talent or are there gaps in terms of people or skills that you need to change upfront?
I believe the size of the inverted pyramid is as large as you want that inverted pyramid to be. So let me be very clear. I will be a frontline CEO. So my focus will be being all over our brand plans and be all over our market execution. So that's where I will allocate 95% of our time. So I know also that Unilever has a great reputation and preserving that reputation with all our stakeholders is very important. And I will surround myself with the top-notch team to ensure that I can deliver on that space also. But my personal focus will be in demand creation and in market execution. I really believe, you know, I'm an economist.
I look at everything in terms of return. The return of my time, I believe, will be higher if I put it in that kind of areas, you know.
So that's the initial point. So frontline CEO, you know, absolutely focusing demand creation in market execution.
The other thing I want to talk about as a CFO, obviously you and Hein. I thought we were good foil for each other. You've got an interim CFO, Srinivas Phatak, but you're starting an internal and external search, my understanding. What attributes do you look for in a CFO for you? What would suit you, your style? And when can we expect to hear confirmation of a permanent CFO appointment?
First of all, let me tell you a bit about our Acting CFO, that is Srinivas. You know, Srini, we call him Srini. He was the CEO, CFO of Hindustan Unilever between 2017 and 2021. The business grew at 7% in that period. Cash conversion was about 100%. Margin expansion was more than 300 basis points. I believe the market cap doubled in that time for Hindustan Unilever. So he has an incredible track record. He has been my key person in the finance team during my period as CFO. As you know, I was an unorthodox pick for CFO. I had 27 years of erosion of my financial knowledge when I came into that.
So Srini was very, very important. Of course, we have a very talented team surrounding him. So he's a great pick to be the Acting CFO.
My responsibility is to ensure that we have the best possible CFO, and we will have a very thorough process with internal and external candidates to define who is the best guy to really partner with me in the next few years. It will be a relatively six months to 12 months process. We believe that this is the timing that the classic process can take. In terms of the profile, I would like to have somebody that is complementary to me, you know, that gives me, you know, I'm fundamentally in the business partnering side of finance. I believe that somebody that has a very solid knowledge about accounting, controllership, you know, that keeps the finance ship very, very tight.
And also somebody with a good reputation with the markets, of course. You know, I believe I have built a decent reputation with the markets.
but, you know, somebody that supports me on that is very, very important. A good communicator with the markets, somebody that is keen on doing that. And, you know, somebody that also has a real focus on performance management. You know, I believe that Hein and myself were very well on that. You know, the performance management intensity in the company has changed a lot. You can ask any person in the company, and that's very different today. And I want to ensure that that only goes higher. So that's the kind of profile we are looking. Ideally, PLC or US experience would be welcome. But, you know, it's just fundamental that these kind of three or four features are important. But we are very happy in the meantime with Srini. He's a great talent. We partner very well. And I'm sure that he will do a brilliant job.
Fernando, I've talked to you for hours. Unfortunately, our time is up. I do, before I let you go, want to ask two sort of non-Unilever questions just to get to understand a bit more about you. First of all, favorite sports team? And secondly, I'd love to know what your favorite book is.
Oh, good. Well, my favorite team is called San Lorenzo de Almagro. It's an Argentine team. It's one of the top five, but it's not one of the top two. We have been in bad shape last year, but this year we are leading the league. So it's just, I'm motivated. I follow them. I have never missed a match in my life, practically. So it's just, I'm a great football fan. Book, wow, that's a difficult question. But I would probably choose one from Mario Vargas Llosa. He's a Peruvian writer. It's called The War of the End of the World. I like competitive wars, and I'm coming from the end of the war. So it fits well.
Okay, well, listen, Fernando, thank you again for your time. Good luck on the journey and buena suerte.
Thank you very much, and it has been a pleasure, and always, always a pleasure to talk to you. Thank you.
Thank you.