Unilever PLC
Q4 2020 Earnings Call Transcript

Published: 5 Feb 2021

[Richard Williams:]

Thank you. Good morning, and welcome to Unilever's full year results and strategic refresh. As in previous quarters, we're presenting to you from our prospective homes. So hopefully, technology will run smoothly again. We expect prepared remarks to be longer today at around 60 minutes, followed by around 30 minutes or so of Q&A. All of today's webcast is available live, transcribed on the screen as part of our accessibility program. First, can I draw your attention to the disclaimer to forward-looking statements and non-GAAP measures.

[Alan Jope:]

Well, good morning, everybody, and welcome to our full year results update. As usual, Graeme and I will take you through the results. And as Richard said, this is going to be a slightly longer presentation than we customarily do because we'll also take the opportunity to share with you our strategy refresh. It's a good time to do so now that we've closed out 2020 and completed the unification of our legal structure. But first, back to 2020. Well, I think it's stating the obvious to say it was far from business as usual. Typically, we would start this presentation by sharing our underlying sales growth, underlying operating margin earnings and cash. But in this year of incredible volatility and uncertainty, we prioritized three things

[Graeme Pitkethly:]

Thanks, Alan. Good morning, everybody. Volume-led competitive growth with over 60% of our business winning value share translated into underlying sales growth of 3.5% in the fourth quarter and that brings the full year USG to 1.9%. Across our markets, the pandemic continued to cause volatility with restrictions, lockdowns and channel closures returning in many countries in the fourth quarter. While restrictions in other countries have been eased, we expect this volatility to continue into 2021 as governments balance opening economies to support livelihoods with public health protection. I'll touch on some specifics when we get to the regional updates. Now as in previous quarters, we've broken down our portfolio into groupings that reflect changing consumer behaviors and channels during the pandemic. Across the year, we've seen huge swings in demand, and many of those big trends have continued into the fourth quarter. While demand for hygiene products, that's skin cleansing and home and hygiene, remained well above pre-COVID levels, demand for hand sanitizer started to normalize in Q4 and versus the exponential growth that we saw in the second quarter. With many consumers experiencing restricted living and lockdowns, our in-home Foods & Refreshment business saw strong growth across the year and again grew double-digit in the fourth quarter. In contrast, our Food Solutions and out-of-home ice cream businesses declined significantly. And after a slight recovery following the easing of restrictions in Q3, many countries saw a resumption of channel closures during the fourth quarter.

[Alan Jope:]

Thank you, Graeme. Let me just summarize. In a year that saw unprecedented uncertainty and volatility, we're pleased with our performance, thanks to our resilient portfolio, and frankly, newfound levels of agility and responsiveness in Unilever. We've delivered a clear step-up in competitiveness, together with strong profit and cash delivery despite making the choice to continue to invest strongly in our brands. We also continued our strategic progress and entered 2021 in good shape, while volatility and unpredictability will definitely continue through this year. We are confident in our ability to adapt to this rapidly changing environment. Now let's move on to the second part of this morning's presentation. Our strategy refresh and financial framework. Over recent months, we've spent a good deal of time sharpening our strategy to ensure that the choices we make and the actions we take best position us for success. We're going to take you through that thinking now, starting with our vision and our differentiating strengths, moving to a scorecard of our delivery against the strategy that we set out in 2017 and sharing the strategic choices that we're making for future growth. Graeme will then talk you through a bit more detail on our multiyear financial framework before we open to questions. Let me start with Unilever's vision, which is simply to be the global leader in sustainable business and to demonstrate how our sustainable business model drives superior financial performance, consistently delivering results in the top 1/3 of our industry. It's a vision that's bold and ambitious. It differentiates us in a way that is increasingly being linked to superior performance and returns. And it energizes and engages our people who are excited to work at a company which puts winning at the heart of our sustainability agenda. And what I want to do this morning is give you a sense of how we intend to pursue that vision, creating long-term value for all of our stakeholders. For many decades, Unilever has been recognized as a company with great brands, a far-reaching global footprint and a determined belief in doing business the right way. And that's just true now as it was 50 or 100 years ago, but it's even more important today. We think Unilever has three differentiating strengths, which the data clearly tells us, create competitive advantage

[Graeme Pitkethly:]

Yes. Thanks, Alan. Take a break after that long shift. Before I go into our multiyear financial framework, let me start by breaking down the three big levers that we'll use to step up our top line growth. Firstly, there is tremendous opportunity to grow our markets through market development. Now we do this by introducing consumers to a product that they didn't previously use, fabric conditioners, hand dishwash, or surface cleaners are good examples. We'd also do it by increasing usage frequency or by encouraging them to trade up into newer, more premium formats, such as moving from a dishwash bar soap into dishwash liquid or packaged tea rather than loose tea. This type of market development can result in significant incremental growth in our categories. Secondly, competitive growth. As Alan showed, we've delivered a step change in driving operational excellence through our continuing focus on the five fundamentals of growth. And as a result, we're winning market share in over 60% of our business in the last quarter. And finally, we'll step up our top line growth by continuing to evolve our portfolio towards higher-growth segments in hygiene, in skincare, Prestige beauty, functional nutrition and plant-based foods. So looking forward on a multiyear basis, we expect our underlying sales growth to be ahead of our markets, delivering in the range of 3% to 5%. We will deliver profit growth ahead of that underlying sales growth on a comparable basis and a sustained strong cash flow over the long term. We are very disciplined on cash, and that won't change. 2020 was an exceptional cash year with delivery of €7.7 billion, but the progress made on working capital too, for example, from an already strong position, can be sustained through focus. We will continue to deliver long-term value creation by driving earnings growth, together with a growing dividend. Moving to other long-term financial metrics. We have a healthy pipeline of savings programs that provide fuel for growth, and we expect to continue to deliver savings of €2 billion per annum from our well-established initiatives, such as 5S, ZBB and our technology-enabled restructuring programs. We will invest €1 billion per annum in our assets, capabilities and organization over the next two years to strengthen our foundations for the future and ensure that we remain future-fit. I'll come back to this. ROIC is one of the targeted metrics in our long-term incentive plans. And as you saw from our 2017 scorecard, we have a good track record. We expect to deliver ROIC in the mid- to high-teens over the medium term as we will balance the capital cost of shifting our portfolio towards higher-growth segments with the discipline to maintain a high ROIC. For leverage, we expect to keep our leverage at around 2x EBITDA over the long term. Over the last three years, we have reshaped our organization by investing behind modernizing and optimizing our supply chain, that includes 24 site closures; major overhead transformation programs, for example, addressing the stranded costs from the sale of our spreads business; and organization redesign to bring our marketers closer to our markets and our consumers and accelerating the transition to digital ways of working across Unilever. Together, this investment delivered incremental savings of €1.5 billion with an average cash payback of three years. Over the next two years, we will invest to ensure that our organization remains future-fit and becomes increasingly digitized, driving process harmonization, new data structures and building analytics capability to enable faster, better decision-making, and importantly, free up the burden of frontline teams working on back-office processes. This will increase the focus on consumers, customers and growing the business while continuing to drive efficiency savings. We expect to deliver incremental savings of €1.3 billion from this investment with an average cash payback of three years. Moving to our capital allocation framework. Because of our high ROIC, our first priority will continue to be operational investment, investing backin our business, creating the platform and the momentum for future growth. The second set of choices for capital allocation are about reshaping our portfolio through acquisitions, disposals or partnerships as we continue to evolve towards the higher-growth spaces that Alan described in Home Care, Beauty, Personal Care and Foods. And the third allocation is about returning value to our shareholders, whether through dividends or share buybacks, which continue to be one of a suite of tools within our capital allocation framework, which aims to keep our leverage at about 2x EBITDA. I'll now hand you back to Alan to wrap up.

[Alan Jope:]

Coming off mute there. Thanks, Graeme. Well, 2020 was certainly a volatile and unpredictable year in which Unilever demonstrated its resilience and found a new type of agility through the COVID-19 pandemic. We've delivered a step change in operational excellence through the focus on the fundamentals of growth. We've progressed our strategic agenda through building our existing sustainability commitments and completing the unification of our legal structure. Our purpose is to make sustainable living commonplace, and our vision is to be the global leader in sustainable business. And that differentiates us from our peers. We will demonstrate how sustainable business drives superior performance. We'll do it by leveraging our three differentiating strengths that position us well for the consumer and demographic trends of the future. And we've set out plans to drive long-term growth through the five strategic choices that we've made. By doing so, we will deliver long-term value for all our stakeholders. Thanks for your attention during this longer than usual presentation. That's the end of our prepared remarks, finally. And we'll now take questions. Richard, back to you.

[A - Richard Williams:]

Thank you, Alan. Thank you, Graeme. So we're now running over to Q&A. So our first person we have in the queue is Warren Ackerman from Barclays. Do you want to go ahead with your question, Warren?

[Warren Ackerman:]

Yes, Richard. Hopefully, you can hear me okay. The audio is a bit crackly. So firstly, on competitiveness, I was struck by the value share picking up from 51% to 65% in December. Can you outline where those gains are coming from by geography and category? And does it include e-commerce? The reason for the question is, when I look at Colgate and P&G growing 8% over the last quarter, and you doing sort of 3.5%, obviously, you have different portfolios, but there is quite a gap. And then when I look at Beauty & Personal Care growing 1.2% for the year, 1.5% in the quarter, is that competitive growth in that division in your view? And then secondly, just around margin. Lots of moving parts. Just wondering whether, Graeme, you can touch on some of those for 2021. Specifically, I think in input costs, R&D step-up you talked about, gross margin advertising. You're saying margins will be up medium, so can you confirm that you expect margins to be up in 2021 against 18.5% base?

[Alan Jope:]

Graeme, you take margin question, so on competitiveness, Warren, let me just say that it's very broad-based. Most of our markets or an increasing number of our markets are starting to fold e-commerce into market share reporting, it's not universal. And I think it's fair to remind what Graeme pointed out, which is the one place where competitiveness is not yet above 50% is in the United States. And some of the comparisons with the competitors that you mentioned are largely due to differences in geographic footprint. So we're 18% in the U.S., which has enjoyed very good growth over the last 12 months. Some of our peers, it's up to close to 50% of their businesses in the U.S. So I think, at the moment, we can explain all of the difference in headline growth through different category country portfolio differences. Our step-up in business winning share is very broad-based across divisions and across geographies with work still to do in the U.S. itself. Although in the U.S., the very rapid growth that we are seeing in things like vitamins, minerals and supplements, that's not captured in the market share that we're reporting. And similarly, our Prestige business is more or less flat for the year, down 2%. And to be honest, that compares with a peer set that is typically down somewhere between 10% and 30%. So our Prestige business has done rather better. But the majority of the difference in headline number is due to footprint. And as I've said now, competitiveness is broad-based with work still to do in the U.S.

[Graeme Pitkethly:]

Warren, picking up your question on the margin average going forward. Let me just spend a little bit of time on the drivers in 2020 for a second. As we said, within gross margin, which was down by 50 basis points, there was a 90 basis point impact from COVID it. That was the two buckets, 50 basis points is direct on costs, so things like PPE, distancing and safety protocols on our sites, alternative sourcing, temporary labor to cover absenteeism, et cetera. That was almost €0.25 billion all in. And we also had 40 basis points of adverse mix from the categories, and those which are constrained through channel closure. A couple of examples of that, our skin cleansing business has a gross margin which is about 10% lower than the rest of Beauty & Personal Care. So as skin cleansing surges relative to the rest of BPC, that gives us negative mix. And similarly, our in-home ice cream business has a gross margin is about 10 percentage points lower than out-of-home ice cream. And therefore, as we saw a switch from out-of-home to in-home that gives us negative mix. And all in, that's been negative 40 basis points of mix. And we also -- I should remind everybody, we made €100 million of donations of product in 2020 and had about a 10 basis point impact on margin. But looking forward, what would we expect to see? Well, we would expect the COVID-related impact on cost and the adverse mix to continue into 2021, and particularly, the mix will be impacted by the category demand patterns. So as the pandemic progresses, in particular, as lockdown and restricted living changes, we may see some shifts in that, but we're expecting we'll see that continue into 2021. We'll also be lapping a softer base, of course, in the first half. At the BMI level, I should say, we conserved a lot of BMI during lockdowns because there weren't places to advertise. And then when we innovated and created the mixes, which were specific to COVID, we really strongly stepped up investment behind our brands in the second half. So although absolute BMI spend was up €160 million versus 2019, it was down 100 basis points in the first half but up 100 basis points in the second half. We're really investing very strongly behind the brands now in the second half and Q4 in particular. Now in terms of what all that adds up to for -- well, sorry, let me just comment a little bit on commodity outlook as well because I think that's relevant for you. We are seeing quite a bit of commodity inflation and a larger foreign exchange impact as we go into 2021, particularly in Latin America, in Turkey, in India and in South Africa. And we've got some commodity inflation coming through, in particular, tea in India, in palm oil, in liquid oils and in food ingredients. So we've got some inflationary pressures coming forward. And we do expect mid- to high single-digit commodity inflation in the first half. So we have to be at the top of our game in pricing going forward. So now what all that adds up to, I'm not going to give an outlook on margin specifically for 2021 other than to say that in accordance with the multiyear framework, we would expect that our profit grows faster than our top line growth.

[Alan Jope:]

Thanks, Graeme. I just want to follow-up on two data points that I should have given Warren. The first is our coverage on market share is 70%. So there are parts of the business like Food Solutions, out-of-home ice cream, some part of the luxury portfolio where it's hard to get data in some of the tail countries, but we got about 70% coverage. And the second is just to confirm, in the latest 12 weeks, we're over 60% winning value share in all three divisions, in BPC, in Home Care and in F&R. Just a couple of data points there. Richard, back to you.

[Richard Williams:]

Okay. Thank you. Thanks, Warren. So next question is from Alan Erskine at Crédit Suisse.

[Alan Erskine:]

Hope you can hear me. Can I just sort of follow-up on Warren's question? I mean, you talk about improving competitiveness. But at the end of the day, you reported 1.9% USG for the year. And if I've done my math correct, Argentina pricing was 30, 40 basis points of that, which is clearly below the 3% to 5% run rate you think the group is capable of and below most of your peers. I think the obvious conclusion to draw here is that the net impact of COVID and the lockdowns has been a negative for you. So given that we do expect some sort of return to normalization in FY '21, I just want to confirm that your multiyear 3% to 5% goal applies to '21. My second question is with regards to functional nutrition. I mean, I would make a distinction between Horlicks, which is essentially a malted beverage, and some of the more functional VMS acquisitions that you've made. And my question is given -- you have a bit of a mixed record where you've gone outside your core areas. I think things like Blueair and Dollar Shave Club. What gives you the right to win in the VMS space?

[Alan Jope:]

Graeme, do you want to talk about the top line outlook in the closer end period? And I'll come back on VMS.

[Graeme Pitkethly:]

Yes. Alan, well, obviously, the -- I mean, the principal driver of headline growth at the moment, obviously, is a particular geographic and category makeup of each of the companies in our peer group. And Alan, that's absolutely why back in the first quarter, we withdrew our guidance and reset. And we're very clear on how we measure the performance of the Company. We measure that performance through competitive growth, and that's delivered for us. We've stepped up our competitiveness significantly during the course of the year, as Alan's presentation described, and we exit 2020 in a much improved position competitively than we did before. And I don't really know what else to say about that other than we've done what we said we would do. Clearly, the best way to determine the performance of a company in this volatile situation is through the competitiveness of your business. We measure it scrupulously. That's what we told our business to focus on, and that's what our business has delivered. And the particular top line outcome that happens as a consequence of that in any single year is -- has everything to do with the particular categories and geographic footprint that you have and nothing to do with the underlying performance of the business, provided you're comfortable that your growth has been competitive and ours has.

[Alan Jope:]

Thanks, Graeme. Alan, on the functional nutrition, we absolutely do not see Horlicks as a malted beverage. I think that was one of the problems the business had. Since we've taken it over, it's growing double digits. And one of the reasons is that we're doing exactly what I said we would do in the criteria for the businesses that we're going into, which is we are applying marketing and technology know-how. So we were able to fortify Horlicks with zinc and offer it on an immunity platform, which, of course, is highly relevant in the current circumstances with excellent science behind it and even better marketing, if I may say. And we see huge runway for Horlicks as a carrier for the micro nutrition needs of emerging markets in India and beyond. And then if you just think about the VMS business, so Equilibra, OLLY Liquid I.V., SmartyPants, those businesses, since we've taken them over. I mean, we're several years into Equilibra now, it beat the odds in Europe. It grew mid-single digits in Europe last year. All the others are growing -- I'm embarrassed to say, very high double digits, in fact, it's -- we're seeing super growth. And the founders are still with us, and they see Unilever's nutrition knowledge and Unilever's ability to bring operating efficiencies as an absolute gold mine to continue the growth and step up the profitability of these VMS businesses. So the criteria that we laid out on the areas that we would prioritize, where we bring knowhow certainly apply on both Horlicks and VMS. And they share very common characteristics, just different delivery mechanisms for different markets. And if you had to pick one part of the business, I'm optimistic about delivery of super growth, it would be that one.

[Graeme Pitkethly:]

Alan, could I just add on the points that Alan gave around where we've stepped out beyond our categories? Alan, you could say exactly the same about our Prestige beauty business, and we think we've created what is currently a very successful Prestige beauty business. It's performing better as far as we can tell than any other Prestige beauty business in the world right now. And so yes, I'd just point that out.

[Richard Williams:]

Okay. Thank you. Thanks, Alan. The next question is from Bruno Monteyne at Bernstein.

[Bruno Monteyne:]

My first question is on India. Clearly, there's new alliances between technology companies and the retailers, and they're all giving access to the final mile of the informal trade in India through e-commerce, similar to add up in China. Do you see that as a potential risk that sort of giving those new platforms that will allow other international brands to catch up with your deep penetration in India? Or do you not see that as a problem? And the second one is you talk about the purposeful brand, and I recognize a lot of what you say there. But then -- so other counter data also suggest that if you ask any consumer in this 3-brand average panel, can you list us any brand that are more responsible to the environment others? Only about 20% of consumers were able to name a brand. And so to the top brand only have 5%, 6%. So while they care and they say they care, they seem to have very little unaided collection of the brands that deliver for them. Do you recognize that data? Do you see that changing? And does it give you any concern?

[Alan Jope:]

Graeme, do you have any preference? Do you want to take the first one and I'll take the second one?

[Graeme Pitkethly:]

I'll take the first one. Yes. Bruno, the -- I mean, you know the strength of our route-to-market distributive trade not just in India, but in many parts of our sort of growth market footprint. We've talked about it many, many times. As Alan said in the presentation, we -- there are about 14 million outlets within that universe globally. We reach 5 million of them directly. We have salesmen calling, having a conversation, having a relationship with those stores. But we see both risk, yes, but also tremendous opportunity in the application of digital and digitizing that part of our business. And we've been very, very active with that. So when we talk about our e-commerce growth at 61%, 1/3 of that business is what we call eB2B. And that, Bruno, is exactly the digitization of that distributive relationship that you're talking about. Now it grew at over 65% in 2020, that aspect of our business. A lot of that was in Latin America with our Compra Agora platform that we've rolled out now to 10 or so countries. But in aggregate, of the 5 million stores that we directly call on today, we have digitized 1.5 million of those stores already. And as Alan said in his presentation, we're adding to that very, very quickly. So we see it, I think, more through the lens of opportunity than we do as risk. And of course, you wouldn't expect us to be sitting back passively, not seizing all of the opportunity that digital and the power of data represents as we apply that to what is a tremendous asset of Unilever.

[Alan Jope:]

Bruno, on purposeful brands and consumer awareness, I'm just going to take a second to share why we're so confident on our assertion that purpose drives growth. So two, three, four years ago, we used qualitative criteria in the Company to identify what we called our sustainable living brands. So we checked across what the brand was doing, what it was seeing, how it was perceived by consumers. And we would conclude for example, Dove and Ben & Jerry's, yes, they qualify as sustainable living brands. Then we took that those brands, and we quite simply added up how they were growing versus the rest of the portfolio. But we felt slightly uncomfortable that, that was insufficiently consumer-led. And we wanted to hold ourselves to a higher standard. So for the last couple of years, we've had in place tracking in 571 category countries sells around the world, where one of the questions that we ask for all brands that the consumer is aware of, us and the competitors, we ask a question about whether that brand makes a meaningful contribution to planetary or societal well-being. And that methodology gives us a consumer-led view at a market level, so not general aggregates, on amongst brands that they're aware of how purposeful or sustainable are they seem. And the data is so compelling, in truth, we've underplayed it slightly in this presentation. The difference between -- and growth between the brands that the consumers see as being sustainable versus not is dramatic. And then you layer on top of that, the 12-year longitudinal study of tens of thousands of brands that Kantar have looked at across multiple sectors. And they've concluded that those brands are growing at double rate of the brands that are not purposeful. And as far as our consumers aware of it, there was a chart I flicked over quite quickly that shows lower intrinsic interest amongst older age groups, Baby Boomers and Gen X, but huge levels of interest amongst the majority adult population in the world, which is Millennials and Genzennials. So we think not only is this driving performance. Not only is it already highly relevant, but it's going to increase in relevance over time. So, we see no evidence whatsoever of consumers unable to distinguish brands based on purpose.

[Graeme Pitkethly:]

Alan, can I just come back to the first question quickly for Bruno, because I realized I didn't answer his final point about risk of increased competition as the distributive trade digitizes. I think, Bruno, the key thing to remember is that it's the consumer who decides and our brands are incredibly strong in these markets. We have incredibly strong businesses and incredibly strong brands. Across Unilever, the brand power of Unilever's brands is holding or growing in more than 80% of the Company. It's also important to note that the way we do this is by focusing on the ultimate customer who's the small holder. And we have strong existing relationships there. And we can help that small holder to grow their business through assortment, through promotions, through recommendations and what the consumer wants in terms of basket and correlation between brands. So I think that's a very significant advantage.

[Richard Williams:]

Thanks, Graeme. The next question is from Celine Pannuti at JP Morgan. Go ahead, Celine.

[Celine Pannuti:]

Yes. I -- so my first question is on midterm. And maybe if I reflect on some of the comments before in terms of you not being able to go to the 3% -- deliver on the 3% to 5% despite being more competitive, as you believe. Is it in the end an issue about your category growth exposure? So could you talk about the growth that you see in those, I think, five subcategories you are mentioning versus the remainder of -- and the core of the Unilever business. And given that you've done some portfolio changes over the past couple of years, and that has not helped, does it mean that we should expect an accelerated portfolio shift maybe through M&A. So that's my first question. And my second question, more on the short end side. I was surprised about pricing, that came below my expectation, in fact, across many geographies. So can you talk about the pricing environment, especially in the light of what you said, higher raw material cost, how confident are you that you will be able to reverse that weakening pricing momentum?

[Alan Jope:]

Great. Let me take the first one, Graeme, and you can comment on pricing. Celine, let me try to answer your question in the following way, which is over the three years leading up to 2020, our best estimate is that the market was growing somewhere 2.5% to 3%. We also know algorithmically that every 10 basis points -- sorry, 10 percentage points step-up in competitiveness. is worth about 100 basis points of growth. So our history has been that, growing 3% in markets -- growing at 2.5% to 3%. All else being equal, the step-up in competitiveness, we would have added at least 100 basis points of growth. Now the environment in 2020, of course, was completely turned on its head. We saw collapses in certain categories and super growth in others. Similarly, geography, so if you've landed from Mars, and look at our growth last year, you would say, "Oh, it's great that U.S., U.K. and Australia, your high-growth markets." Actually, for the long term, the U.S. will be an important contributor, but places like India and China, of course, become more important. So what you see -- I would be very careful of drawing conclusions from aggregated chaos which is what 2020 is, but rather look at our performance -- competitive performance when markets resume a more normal growth pattern, where we are very confident that we would, all else being equal, with the current levels of competitiveness, be well into the range that we're guiding. That's why we're confident to bring back that range guidance. As far as the five subcategories that we called out, we're not going to go into a decomposition of their growth levels. But they are at least twice the average of the rest of Unilever. So let me just pause there. Graeme?

[Graeme Pitkethly:]

Celine, let me first of all pick up what happened in pricing in 2020 and give you some of the dynamics there. So the first thing to note is that pricing was relatively low in Home Care, principally because the commodity environment in 2020 for fabric solutions, for the laundry business, was relatively benign. And of course, it's a very dynamic and quite a high commodity-driven category. And therefore, we didn't price because we didn't see the cost inflation. And then if I go a little bit by geography, in Europe, the -- pricing in Europe has been difficult for everybody for a long time, given the retail environment, et cetera. But in H2, promotional intensity did step back up after promotions were pulled at the height of the pandemic. We also had a little bit of a channel impact as we shifted from -- it's the same product, but we shift from out-of-home ice cream to in home ice cream. That price dynamic doesn't sit actually in -- it sits in pricing rather than in volume because, of course, we put volume and mix together as one metric. Then in the AAR region, Turkey and India actually had positive pricing. Southeast Asia, though, had negative pricing. Quite a few dynamics there, but again, there's quite a big fabric solutions business, there pricing turned negative in the second half because we passed on the reduced commodity costs to invest in competitiveness. That was one dynamic. And then there's one I'd say in particular, which is promotional intensity in Thailand. Thailand is a very challenged market from a market growth perspective. There is no real value portfolio in Thailand. And therefore, as you're making products affordable, it does show up in terms of promotional intensity. And then in North America, there weren't many promotions through much of the year, but they have been coming back into the -- at the end of the year. And we did invest a little bit in competitiveness through promotions in the fourth quarter. And yes, I mean, pricing in Argentina, of course. But I'd highlight that our volumes were positive in Argentina. And if I add all that up and look forward, and I'll not repeat the comments I made earlier about the outlook for currency depreciation and rising commodity prices in a few areas, it does mean that we're going to have to be at the top of our game on pricing. And our markets are absolutely on top of that as we look into 2020. And I think we've got a great track record. I mean, we grew pricing by 1.6%, I think, in '19, 1.2% in '18 and by 2% in '17. The key, as you know, to landing pricing is brand power, is strong brands. And as I said, in response to Bruno's question, 80% of our brands have got stable or increasing brand power. So that's a great platform if you need to price.

[Richard Williams:]

Okay. Thank you, Celine. The next question is from David Hayes at SocGen.

[David Hayes:]

So my two questions, firstly on portfolio management and then another question on ESG. So on portfolio management just to kind of follow-up some of the discussion we've heard post-unification and so forth, obviously more ambition for change. But three questions. One, can you kind of quantify that a little bit as you look at the vision for the group? Some of your peers historically have talked about up to 10% of sales being bought and sold. Is there any kind of indication you can give on kind of the ambition of change over the next two or three years? And I guess related to that, the metrics you've outlined for the medium term. You talked about return on invested capital being mid- to high single-digit -- sorry, mid- to high teens, but it's already high teens. So is that mostly including M&A? Or do you see other reasons why that ROIC might come down into mid-teens? And the second question on ESG. I think you're doing this presentation in the first quarter on more detail on your plans around ESG. You talked about R&D spend going up. But can you give us a little preview in terms of what incremental spend you might incur as you push forward on ESG and whether that impacts the margin in the next couple of years or so?

[Alan Jope:]

Graeme, do you want to have a crack at the portfolio point and ROIC, in particular? And I'll come back on the bundle of questions that were folded together under the headline of ESG there?

[Graeme Pitkethly:]

Sure. David, so I think we've been really clear -- much clearer than we've ever been before now on the areas we will deploy capital for portfolio change. And the critical role that portfolio change has in accelerating the growth momentum of the Company, and for the long term, making our value creation algorithm, which requires a step-up in growth from 3% into that 3% to 5% range. But once that's achieved, there's a virtuous circle that takes place and the business becomes very value creating. And Alan touched on it in his remarks, but growing the business now off a higher margin base is much more strongly value-creating going forward. So we feel good about that. And obviously, we've got strong cash flow. And as we said, our priority is to invest in the business because of the high ROIC, and thereafter, change the portfolio with discipline and with focus, using the areas that we've called out, not just focusing on acquisitions but potentially disposals as well using both levers. And all of that, historically, just to pick up on a point that Celine made earlier, it's not true to say that our M&A capital hasn't given a growth result. There's about 70 basis points. Of growth from the acquisition and disposal activity that's taking place over the course of the last five years. So you see that working. On your point on ROIC in particular, we're not signaling anything really with mid- to high teens. It's simply the current 18% that we're at doesn't have the full year of the impact on the invested capital base of the Horlicks acquisition. The full impact of that comes in, in 2021 and will be about a 1% negative. And technically, we were told that high-teens cutoff is about 17%, and therefore, mid- to high teens is still an excellent ROIC and pretty much, at least top half, maybe even top quartile of the table in terms of ROIC across the peer group. So yes, we're not -- we just think on a multiyear framework, mid- to high teens is the appropriate expression.

[Alan Jope:]

Let me take the points that you bundled under the banner of ESG. The first, I think there's a dangerous supposition around in some places that somehow or other -- our sustainable business model is a cost to the business. We don't see that at all. We see doing business sustainably as a very strong business case. I won't labor the point on growth, already went into that in a bit of depth with Bruno. But we are unequivocally clear that purposeful brands are growing faster. Secondly, on cost, we think we've taken out €1.2 billion of cost by sustainable sourcing, for example -- and there's an interesting pattern here, which is very often, there is a short-term premium which results in a long-term discount. Let me give you a couple of examples. We made a commitment to move to renewable electricity in our operations. We achieved it a year early. There was initially an on cost. But as the market has swung, we found tremendous savings from the procurement contracts that we have around green electricity. Same on sustainable agriculture. Initially, there's often an on cost. But because yields go up with sustainable practices, typically, over time, it's a cost advantage. So there is sometimes an early hump that we need to get over. We're in that mode right now with renewable plastics. So post consumer-use plastic carries at that 1% to 5% to 10% premium. It varies around the world. Over time, as the collection and recycling systems get put in place that will drop below virgin plastic costs. So there's a growth benefit. There's a cost benefit. There's definitely a risk-benefit diversifying and making sure that we've got sustainable supplies, has been very important for us over the last year. And then the final point I won't labor, which is our sustainability agenda is a magnet for the best talent in the world. So I find it hard to answer the question, what's the cost of sustainability because we see it as a benefit where sometimes there are initial cost premia that we need to work our way through. As far as your question about investing in R&D, we have called out a number of areas, I'm obviously not going to be too explicit here, where we're doing best advantage of corporate level technology. They do all relate to the biotech and innovative revolutions. And each of the next three years, we will step up our investment in R&D to take advantage of that. And when we go through later this year, we'll decide whether or not we're going to put numbers against that R&D step up. At the moment, we're just indicating the direction, not the magnitude.

[Richard Williams:]

Thanks, Alan. Thanks, David. So we've got a lot of people wanting to ask questions. We'll try and squeeze in one or two more. So next question, Martin Deboo at Jefferies. Go ahead, Martin.

[Martin Deboo:]

Two quick ones from me. I just want to go into what you're seeing in FY '21 again. It's come up a few times. Let me offer you -- are you saying that FY '21 is year one of the new multiyear guidance framework? Or are you effectively extending your FY '20 guidance position because it's just simply too difficult to say and too difficult to call? That's the first question. Secondly, just to come back on David Hayes' question on portfolio and what strategic choices made. And you said at Englewood Cliffs that you expected the rate of disposals to accelerate and the rate of acquisitions to slow, which could be interpreted as a shift from a net acquirer to a net disposer posture. I feel I'm hearing something different today. Am I -- can you just clarify what you're saying about the portfolio? Those are the two questions.

[Alan Jope:]

Let me answer the second question, and then I'll carry on and answer the second one -- the first one, unless Graeme wants to jump in on 2021. SoI think the first thing I would say is we are very clear, Martin, on the criteria that we're using for acquisitions and disposals. I think we've laid those out more transparently today than we ever have. Secondly, we're not guided by targets for how much we're going to acquire, how much we're going to dispose. We will be extremely economically rational on those decisions. In Englewood Cliffs, we called out that disposals could play an important part of -- a more important part shifting the portfolio. And you saw shortly after that quite a decisive move on most of our tea business, where that work is going on. We continue to look in the portfolio at opportunities for disposal. Last year was definitely a slowdown on the number of acquisitions. But don't forget, the scale was impacted by Horlicks, and then we were very focused on functional nutrition for the others. I'm not afraid to say that we were pipped at the post on some Prestige beauty targets that we were going after. But frankly, the valuations just run beyond what we thought was financially responsible. So the focus remains crystal clear. What the message we were trying to land was we're open to disposals where we see it as value creating, and we will be -- continue to be very choiceful on acquisitions. I think if you take a long period of time, we'll probably be a net acquirer, not a net disposer. But we're not -- we don't have in-year targets for how much we will acquire or dispose. On '21 guidance, I think we've issued now multiyear. We've issued multiyear guidance. I see 2021 as the first year of that. And that was notwithstanding, of course, it remains highly volatile. But yes, 2021 is the first year of that multiyear framework that we laid out.

[Richard Williams:]

Okay. Thanks, Martin. So the next question to Jeremy Fialko, HSBC. Go ahead, Jeremy.

[Jeremy Fialko:]

Just a couple of questions. First of all, on e-commerce. I think historically, you've talked about slightly under-indexing relative to your kind of offline market shares. Could you just give us an update on that, where you're over and under-indexing and if there are any big differences between sort of geographies and category? And then secondly, one of the things you haven't mentioned in your framework is the return of surplus capital, but obviously, you do have a net debt-to-EBITDA target, which you are slightly below. So maybe you could just talk a little bit about the kind of return on capital and when that would start to come on the agenda.

[Alan Jope:]

I think those fall quite naturally, Graeme, maybe you can take the second one on capital allocation. Let me address e-commerce. Jeremy, we had a really very strong year on e-commerce last year with 61% growth overall. Half our Prestige beauty business is now in e-commerce. Omni-channel doubled in size. We grew 100%. We grew 100% in North America in e-commerce. We're gaining shares in e-commerce. And we're inventing a new type of B2B e-commerce that Graeme touched on. The headline answer, though, is that in omni-channel, our market shares online and off-line are very similar, so bricks and mortar/.com, very similar. In pure play, so Ali, Amazon, JD, our overall market shares, and I'm really aggregating here in a way that I maybe shouldn't, are slightly behind our off-line market shares. And so we've got the whole organization deployed against designing for channel. And that really boils down to value density. And parts of the reason why functional nutrition, why are concentrated eco products and why Prestige beauty do so well in e-commerce is precisely because they bring that value density that works for pure-play as well as the omni-channel mechanisms. So yes, we're quite -- we're making very good progress on e-commerce with a sheer gap to fill in pure play. Graeme, capital?

[Graeme Pitkethly:]

Yes. Jeremy, so obviously, we had a very strong cash performance this year. We've got very high cash conversion in the business. We're converting profit into cash in a healthy way. We ended, as we said, at 1.8x EBITDA of leverage. We're pretty comfortable with that, to be honest. And we do aim for around 2x, that's over the long term, but we're happy to swing above and below that to a reasonable degree. As we said on the section of capital allocation earlier, given the high ROIC of the business, really, our first priority is to invest back into the business. And in 2021, for example, we'll have -- we've got some re-phased CapEx from 2020 that will go back into 2021. And I've already flagged the restructuring investment for 2021 and 2022. That's examples of that. Now things like buybacks, they remain a really critical part of our capital allocation toolkit, and it sits alongside that first call, which is after investing in the business, which is to pay an attractive and growing dividend. That's all part of an approach of returning the dough to shareholders. We don't have anything to say around -- currently in relation to share buybacks, and we'll just wait and continue to see how the cash position develops as we go forward.

[Alan Jope:]

Richard, I know that we're a bit over time. But I really want to send a signal of being available for a discussion of our business to our investor and analyst community. So let's squeeze in one or maybe two more questions.

[Richard Williams:]

Yes. Sure. Okay. So next question then is from Jeff Stent at Exane.

[Jeff Stent:]

Two questions, if I may. The first one is you're targeting profit growth ahead of sales growth on a comparable basis. If you could just confirm that does mean underlying EBIT. So that's the first question. And the second question is, will, going forward, you'd be reporting like-for-like EBIT growth given that I'm assuming it's now one of your kind of key focus, is -- are you going to start reporting it to the market?

[Alan Jope:]

Graeme, I'll let you take on Jeff's questions there. Pretty straight forward answers, I think.

[Graeme Pitkethly:]

Jeff, on the profit growth ahead of sales growth comparable, what we mean there is our underlying operating profit, pretty much underlying EBIT, on a comparable basis, means on the same basis, as the sales growth still constantized and excluding the impact of acquisitions and disposals. And yes, we will report that and we'll report the growth on that measure.

[Alan Jope:]

Let me just double-check that. I mean, so the short answer is yes, Jeff. Does that answer your question properly? I'll take that as a yes, it does. Okay.

[Richard Williams:]

Okay. Next question from James Targett at Berenberg, Go ahead, James?

[James Targett:]

Just one quick one for me left, actually. Just on pet care, obviously noticed you'll move into the market. Where does it fit into -- this category fit into your kind of first initiative on portfolio evolution. Just it's going to be a niche play here? Or is there something you could scale up organically or through M&A?

[Alan Jope:]

James, let me take that one. I don't think we could be clearer than we've been this morning on where our strategic priority areas are. Alongside that, we're constantly experimenting in the business and trying of things here and there. I would put the pet care extension down to a fun experiment to see how it goes. It is definitely not a particularly strategic move. We've called out the strategic moves.

[Richard Williams:]

Thanks, Alan. Thanks, James. Trying to quickly get through some Tom Sykes at DB. You can go ahead with the question.

[Tom Sykes:]

So just to a bit more detail if possible on the COVID-related costs and how quickly these may come down, whether it's possible to sort of say what EM and DM within that? And is this going to be vaccine-related or was there a relationship between some of the surge categories that you had and some of the on costs there, which perhaps as some of those slowed down, some of the COVID-related costs may actually -- may come down as well. And sorry, just on your comments on BMI. Obviously, there was the catch-up in the second half, but I'm not 100% sure of clarity on whether that is a higher run rate of BMI going forward now, which you're then expecting the benefits from more? Or are we not -- should we not consider the second half as the run rate, please?

[Alan Jope:]

Graeme, why didn't you take Tom's question on COVID costs? And I'd encourage to be quite transparent on the sort of the nature and the timing of those COVID costs? And I'll come back on BMI.

[Graeme Pitkethly:]

Sure. Tom, yes, I'll bounce a bit of detail later, if I may. So overall, it had a minus 50 basis points impact on our gross margin in 2020. I couldn't give you a DM and EM split, but pretty much all of our markets because we manufacture mostly locally across our huge factory footprint, I think you can assume that it's been equivalent across all markets and not necessarily EM or DM-focused. The particular timing of it was particularly determined by the particular strength of lockdown and the progress of the virus in various places. But I'll give you the components. The big-ticket items are things like hygiene and safety on-site, cost somewhere between €60 million and €70 million last year. Premium rate transportation was about €60 million. Over-time and contract label for employees was also a $50 million, $60 million item. We spent around about €20 million on masks and PPE. So it all adds up, and that's how you get to the 50 basis points. That will continue for us long as we are having to operate our manufacturing in a safe way and so long as the virus is there. The critical data, I think of the mix of our business in 2021 will simply be the progress of the virus and the need to operate safely. But there is an on cost of operating safely. And as I said in the prepared remarks, I think we also had a 10 basis point impact as the cost to Unilever of the donation, the €100 million of product value donations that we made during the course of 2020. On your question about vaccine, we are -- in all of our sites, we provide testing, very, very active testing. But we wouldn't propose to have any form of mandatory vaccine as a business, we wouldn't do that. But we would encourage all of our employees to get vaccinated just as soon as they can within the particular geographies and countries in which they're operating.

[Alan Jope:]

It's a perfect bridge from COVID costs into BMI actually because with 50 bps of COVID cost and 100 bps when you factor a negative mix as well, obviously, it would have been both tempting and very easy for us to peer back on second half brand investment. But we decided not to. We decided to take all the money that we'd stored up in the first half through the lockdown -- the severe lockdowns and really reinvest it back to secure the health of our brands. And I want to just be sure to clarify that, that benefit accrues over time. It's not as simple as you spend a lot of money in the second half, you get growth in the second half. So that's sustained long-term investment in our brands. And we will continue to do that. So we are absolutely committed to investing competitively in our brands in the coming years. What competitively means does change, though. So it changes as a consequence of market rates. It changes as a consequence of competitive activity. And it changes as we shift our media mix into more and sometimes less efficient but more effective channels. So you can take it to the bank that we will spend competitively. Frankly, I see it unlikely that, that will be in a downward direction. And our intent is to relentlessly continue to step up the investment in our brands, whilst delivering the top line, bottom line and cash guidance that we've given.

[Richard Williams:]

Okay. Maybe we can just squeeze in one more, Alan, which is from John Ennis at Goldman. Go ahead, John.

[John Ennis:]

I've just got one follow-up on pricing. Do you guys think that you priced in line with the market in the second half? Or has there been any element of deliberately delaying some pricing to help support volume share? That's the one for me, please.

[Alan Jope:]

Yes. Short answer on that. Absolutely not. We have not sought to be more competitive through the delaying pricing at all. If anything, as Graeme hinted, there has been growing impetus for the business to make sure that we and the steadily rising agricultural commodity prices that we get on the front foot on recovering that. So if anything, the Clarion Cole and the Company has been more in line with, let's recover FX and cost than let's go slow in pricing to try and gain volume share. We gain volume share through all the other actions on physical availability and prioritizing some of the Tier 3 brands in our portfolio when the economies are slow in big markets like in Latin America. Right. Richard, I think we've reached the end of our remarks and Q&A. Let me just say one sentence of wrap up, and then I'll hand back to you, Richard, just to formally close, which is we've laid out today a set of results for 2020 that we are proud of. In particular, our step-up on competitiveness and the strong profit and cash delivery is exactly what we asked our organization to do. It is underpinned by a strong operational grip on the business that's coming through from our growth fundamentals. And we've taken time today to lay out our strategic priorities for the future around categories, around geographies, around channels and a little bit of a lifting of the lid on what we're doing on a fully digital and agile culture. It is all underpinned by a belief that sustainable business is a path to superior financial performance. Thank you for your attention, and we look forward to the individual engagement in the coming days and weeks. Richard?

[Richard Williams:]

Okay. Thanks, Alan, and thank you, everybody. We're bringing the call to a close. We've got through a lot of questions, not quite everybody. So if you've got further questions, please e-mail the IR team, and we'll arrange a time for a call today and get back to you. So thank you, everybody. Enjoy the rest of the day. Stay safe and say well. Thank you.