Unilever PLC

Good morning and welcome to Unilever's full year results and strategic update. We expect prepared remarks today to be around 45 minutes, followed by Q&A of around 45 minutes. All of today's webcast is available live transcribed on the screen as part of our accessibility programme. First, I draw your attention to the disclaimer to forward-looking statements and non-GAAP measures. And with that, let me hand straight away over to Alan.

Thanks, Richard. We're here to talk about our full year results and our 2021 results have been good. We've delivered our fastest growth in nine years. It's been driven in line with our strategic priorities and we've managed margins to around flat with underlying earnings per share up 5%. But before we get into the detail, I do want to touch on a few topics that are top of mind for many of our investors and have been top of mind for the board and me over the last weeks. And we'll come back to some of these in more detail later. Let me start by sharing unambiguously that I am dissatisfied with the recent value creation that Unilever has delivered for our investors. We have the potential to do a lot more with the portfolio that we have. And my leadership team and I are 100% focused on doing just that, delivering value for our shareholders. Our first priority, of course, and the thing that the vast majority of people in Unilever are focused exclusively on is organic growth. That is our day job. At the same time, though, it's important to chart the long-term direction of the company. And after months of careful review, our board concluded that accelerating the shift of Unilever's portfolio into consumer health and wellbeing would position the company for faster growth in the coming decades. And it's this conclusion that lay behind the confidential discussions that we were having with GSK and Pfizer. That being said, we've listened carefully to our shareholders and we've heard the message that there's currently no support for a move the size of the GSK consumer health business. We remain resolved in the direction of our portfolio evolution, but we will not be proposing transformational acquisitions for the foreseeable future. They are off our agenda. Instead, we intend to improve Unilever's value creation in the following ways. First, we'll continue to accelerate organic growth, investing in our biggest and best brands, which are in great health, stepping up the benchmark quality of our products, and continuing to strengthen our innovation. We will build our position in the growth markets of the future, starting with the U.S., India, and China. And e-commerce remains both an overarching priority and a part of the business that continues to grow very well. Secondly, a powerful new organization model will be a further accelerant. An operating model that moves away from a heavy matrix is simpler, more focused, and provides greater accountability. It is designed for growth, but does so at materially lower cost. And thirdly, we will continue to reshape our portfolio, but through bolt-on acquisitions and selective disposals. We've built substantial, fast-growing new businesses in prestige beauty and in functional nutrition, and this will continue to be the direction of travel for our portfolio. Our capital allocation will be disciplined, and we will maintain Unilever's historically high levels of return on invested capital. We exited 2021 with growth momentum and we expect that to continue. Our goal is to keep growth at least in the top half of our 3% to 5% multi-year range. 2022 has started well, but the biggest challenge we'll face this year is navigating a further step up in input cost inflation. We have been leading on pricing, and it's working. We will invest competitively in advertising, in R&D, and in operational CapEx. As a result, our margin will be down in 2022, though, as Graham will show later, the empirical experience we have is that we can expect a restoration of margin quickly, with the majority coming back in 2023. Right, so this is how we'll run today. First, I'll give a quick overview of 2021 before Graham takes you through the details of the results. I'll then give a strategic progress update, which will include portfolio evolution and some more details on the new operational model that we announced last month. It's a major change for Unilever. Graham will then close with the outlook for 2022 and beyond. So let's take a quick look at 2021. We delivered Q4 underlying sales growth of 4.9%, driven by price with volumes flat. And that resulted in a full year of 4.5% underlying sales growth, well into the upper end of our multi-year framework of 3% to 5%. Volume growth for the full year was 1.6%. Pricing stepped up to its highest level in a decade as we responded to the significant inflation that we're seeing across commodities and other input costs. We believe that landing price at speed is the right thing to do. It's critical to preserving our ability to continue to invest in our brands. At the same time, we maintain good levels of competitiveness, ending the year at 53% business-winning value share, posting a second full year of growth that is competitive. Underlying operating margin for the year was 18.4%, which is down 10 bps versus last year, and in line with our guidance of around flat. Underlying earnings per share were up 5.5% in current currency and 7.8% in constant currency. Free cash flow remained strong at $6.4 billion, albeit down year-on-year versus a record delivery in 2020, where, remember, we focused the business on cash in a period of great uncertainty. And Graham will give more details on this later. I do want briefly to put our 2021 delivery in the context of recent years. At 4.5% underlying sales growth, 2021 was the highest we've delivered in nearly a decade. Of course, this was helped by the relatively low comparator in 2020 as we managed the business through the pandemic. But on a two-year basis, growth is back above 3% and has been accelerating during the year led by pricing. And that's despite some parts of the business, for example, food solutions, still not having fully recovered versus 2019. As you know, restoring Unilever's competitiveness has been a key focus for us over the last three years. Competitiveness had fallen to a level that was unacceptable. And through our sharp five-point strategy and more focus on business fundamentals, we have made a good progress with 53% of our business winning share in both 2020 and 2021. Growth remains our priority, but margin progression is, of course, also an important component of value creation. Underlying operating margin was around flat in 2021, despite the inflationary conditions. So overall, good progress in 2021. Our growth momentum is building. We stepped up pricing significantly in a heavily inflationary environment while delivering strong earnings, and we maintained our restored competitiveness. But we know there is more to do, and further accelerating growth remains our number one priority. I'll come back to this when I talk about our strategy later in the presentation. Now over to Graeme for a few more details on 2021. Graeme.

Thanks, Alan. Good morning, everyone. First of all, let me cover underlying sales growth. While the 2021 quarterly growth numbers were clearly impacted by the comparator, growth progressively stepped up on an average two-year stack basis and is accelerating. We continue to land pricing as inflationary pressures increase through 2021, and we expect further increases in 2022. I'll give you more on that later in the outlook section. We have started seeing some volume elasticity, especially in our markets where pricing has been significant. But these are well within our expectations. While volume growth for the year was positive, there are a few puts and takes within that number. For example, the recovery of food solutions, where volumes grew at over 20%. And in contrast, Southeast Asia, where lockdown restrictions, as we talked about in our last results call, had a 1% negative impact on reported volume growth just in Q3 alone. Turnover of the year was 52.4 billion euros, and that's up 3.4% versus 2020. As already mentioned, underlying sales growth contributed 4.5%, and we saw a positive impact from acquisitions and disposals of 1.3%, with Liquid IV, Horlicks, Smarty Pants, and more recently, Paula's Choice being the main contributors to that. Currency had a negative impact of 2.4% as the US dollar and some emerging markets currencies weakened against the Euro. Based on spot rates, we would now expect a positive currency translation impact of around about 2% on turnover and on EPS for 2022. Turning to our divisions, beauty and personal care grew 3.8% in 2021, with 0.8% from volume and 3% from price, with pricing stepping up across all categories. In 2021, we saw a growth step up in categories most impacted by social restrictions during 2020. That's categories like deodorants, hair and skincare. These grew 4% in the year and are now flat on a two-year CAGR basis. Social occasions in many of our markets remain below pre-COVID levels, with people continuing to work from home and restrictions being reintroduced in some places. We continue to innovate at a greater pace and with greater scale in BPC, with innovations landing on our global brands. For example, Dove, where we launched a range of both liquid and foaming hand washes, which are enriched with Dove moisturizers to mitigate against dryness after regular washing, while still providing germ protection in seconds. Or Rexona, where we rolled out patented technology to the core ranges of the Rexona brand, offering the first ever 72-hour protection in the core of the brand. Skin cleansing declined versus strong double-digit growth in the prior year, but remained significantly ahead of 2019 levels with a two-year CAGR of 6%. And Prestige Beauty continues to be a big growth contributor for beauty and personal care, growing strongly in 2021 and in fact by double digits on a two-year CAGR basis. Growth in food and refreshment was 5.6% in 2021, well balanced between volume and pricing. Our in-home portfolio was flat against a high growth comparator, leaving the two-year CAGR at 6%. This was driven by strong core brand growth and by innovation, such as Magnum Double Gold Caramel Billionaire, our Knorr Zero-Salt wheels, and the Knorr Rindamass product, which we launched in Latin America. Out of Home, which includes our food solutions and out of home ice cream business, grew by over 20%, but is still down 4% on a two-year CAGR basis. The recovery of our food solutions business accelerated throughout the year as restaurants, offices and schools reopened, and we saw our two largest food solutions markets, which are China and the US, return to pre-pandemic turnover levels in the second half. Home care grew 3.9% in 2021, with price growth of 3.1% and volume growth of 0.7%. Pricing stepped up significantly in the second half to over 6%, with limited price growth in the first half. Laundry grew by 6% in the year, bringing the two-year CAGR to 4%, and while home and hygiene declined versus a very strong comparator, it does remain up 6% on that two-year CAGR basis. We're rolling out our clean future technology now across our home care markets with formulations and products that deliver superior performance whilst also being kinder and friendlier to the planet. For example, our SIF antibacterial range, which is scientifically proven to kill 99.9% of bacteria and viruses with a cleaning agent that is 100% naturally derived. Now let me turn to our regions. Our biggest region, Asia Amit Rub, which is nearly 50% of our business, grew 5.8% in the full year with a mix of both price and volume. India performed strongly, growing by over 13%. We stepped up pricing in India during the year while maintaining positive volume. China saw good volume-led growth of over 14%, with strong growth across all divisions, although we're currently seeing a slowdown in market growth driven by online channels. In Southeast Asia, Indonesia remains a challenged business for us with disappointing performance. Competitors there are backwards integrated into the supply chain, and they're therefore less exposed to inflation than Unilever is. Although that's a tough competitive dynamic, we're also clear that we have not been on top of our game in Indonesia when it comes to innovation and driving market development through marketing fundamentals. We have put strong plans in place to address this, but it will take time. Other Southeast Asian markets like Vietnam recovered in Q4 following the severe lockdowns in the third quarter, although the local economies still remain overall quite impacted by the pandemic restrictions. In Turkey, we saw another year of strong growth with both price and volume up for a second year running. Latin America grew by 9% in the year, all from price. Pricing in LATAM stepped up significantly through the year and we're exiting Q4 at 14% price growth with some elasticity impact on volumes now showing. We have a really strong track record of landing pricing in the region, and we will continue to take price, but we will not compromise on the long-term health of the business. Our largest market, Brazil, grew double digit from price with volumes slightly down. North America grew 3.4% versus a very strong comparator, and we saw our growth return to competitive levels in our biggest market, which is the US. We are landing pricing with our customers and consumers and managing volumes well. Higher demand for in-home foods and ice cream has continued throughout the year, and our health and well-being and prestige beauty businesses are now strong vectors to North America's growth, contributing over 2% USG in the full year for North America. Europe was flat in the year with only slightly positive volume in price. The pricing environment in Europe remains difficult. In 2021, our list price increases were still relatively limited despite high levels of inflation, and France in particular remains a key area of pricing challenge. The UK, which is our biggest market in Europe, declined versus a strong comparator. European out-of-home ice cream improved, but still remains well below pre-COVID levels as travel restrictions hit the critical summer ice cream season in 2021. Underlying operating margin for the year was 18.4%. That's down 10 basis points from last year. Our gross margin was down 120 basis points. Despite stepping up pricing significantly, this wasn't enough to fully offset the high-cost inflation we're seeing across our raw materials, packaging, and distribution costs globally. We have been leading on pricing in most markets, and those increases are landing on the shopper shelf. Pricing is a relative exercise and competition is following with a degree of lag. Volume elasticities are so far settling at around the levels we would expect for this level of relative pricing. And we're pleased to have maintained competitiveness while taking these pricing actions. Within gross margin, there was a 30 basis point benefit from the unwind of some of the additional COVID costs and negative mix that we had in 2020. Branded marketing investment in constant currencies was 7 billion euros, so in line with the investment levels of prior years. BMI as a percentage of turnover was down 90 basis points, but if we look one level further down on BMI, we see a considered and responsible approach by our markets, focusing on local market dynamics and taking opportunities to invest competitively at greater efficiency. For example, we stepped up BMI spend in North America, including in our fast-growing health and well-being portfolio. Overheads were down 20 basis points through productivity programs and turnover leverage. Underlying earnings per share, as Alan said, were up by 5.5% in current currency and by 7.8% in constant currency. Operational performance was the main driver of earnings growth, while a reduction in the number of shares from buybacks contributed 90 basis points. An increase in minority interests in India were part offset by lower finance costs and higher income from non-current investments. Looking at 2021 through the lens of our multi-year financial framework, we delivered growth well within our multi-year framework of between 3% and 5%. Underlying operating margin was down 10 basis points, and cash was once again strong at 6.4 billion euros, but down versus the record delivery from last year, which saw lower capex spend and a big focus on working capital. For 2021, we have declared a 3% increase to the dividend, taking it to 4.4 billion euros for the year. Looking at other long-term financial metrics, we delivered another year of €2 billion savings through the various programs that run across all lines of the Unilever P&L. This includes cost of goods savings such as ingredient agility and product logic, savings from our buying scale, and the payback from our restructuring investments. Restructuring was €0.6 billion, which was below the run rate of the last few years because of delays in projects due to COVID disruption and to create the space needed to implement the new operational model in 2022. We still expect to spend 2 billion euros across 2021 and 2022, including the restructuring investment to create and land the new operational model. And thereafter, from 2023 onwards, we expect to return to the pre-2017 restructuring levels of around 1% of turnover. Return on invested capital for the year was 17.2%, in line with our guidance of mid to high teens. The decrease was due to goodwill and intangibles from the Horlicks and Polish Choice acquisitions, partly offset by an increase in profit. Leverage at 2.2x remains broadly in line with our target of around 2x. So summarising 2021, we improved our growth momentum during the year, but we are clear that there's still more to do. Pricing stepped up significantly in a high inflationary environment, and we're pleased to have delivered strong earnings and maintained competitiveness at the same time. And with that, I'm going to pass you back to Alan.

Thanks. As Graham said, we believe that 2021 has seen a step up in Unilever's performance and that we have built momentum in the business and that's driven by disciplined action on the strategic priorities that we set out a year ago. It is these five choices which will sit at the heart of our strategy for value creation. So let's start with winning with our brands. We have 13 1 billion euro brands that together make up 50% of our turnover. They grew an aggregate 6.4% in 2021. And some key performances to call it here are Dove, which grew 8%, which is the fastest growth in eight years. Hellmann's, which grew 11%. And our ice cream brands, Magnum and Ben & Jerry's, both growing 9%. And all against strong comparators. So these are not COVID bounce-backs. Behind the success of these brands is product superiority and great innovation, and we continue to improve our performance in both these areas. Superiority in blind testing versus competition is now over 70% of tested turnover, and that's up from less than 50% in 2019. And our focus on driving bigger, better and more impactful innovation delivered over 1 billion euros of incremental turnover in 2021. That's double the delivery in 2020. Yes, double. Our brand power remains strong with over 80% of our turnover increasing or holding brand power. We've chosen to prioritize the key markets for the future, the US, India, and China, and other key emerging markets. All three of the highest priority countries delivered strong and competitive growth in 2021, and on a CAGR basis over the last two years. The US, for example, grew almost 4% on top of a record growth year in 2020, while India and China grew well into double digits, albeit versus weaker comparators. It is particularly pleasing to be winning competitively across all three markets, and they do remain a key focus for innovation, for investment in capabilities, for talent development, and for capital allocation. Next, leading in channels of the future. E-commerce grew 44% on the back of an exceptionally strong year of growth in 2020, and this growth came from all of the main sub-channels of e-commerce. It was driven by growth ahead of the market in the US, India, and China. In just five years, the channel's gone from 2% of Unilever's turnover to 13% in 2021. We've invested significant resources in both expertise and tech capabilities, and we will continue to do so. Our next strategic priority is to build a purpose-led, future-fit organisation and growth culture, and key to that is putting in place the right operating model for Unilever. We've known for some time that the matrix structure we have operated under with three divisions and 15 regional performance management units was relatively heavy and not as simple, fast, or clear as it could be. We started working on the future organization model all the way back in late 2019, but concluded that making such a significant change in the depths of the COVID crisis would not have been the right thing to do. So we restarted the work again in the second half of last year and announced the conclusion of that work last month. The objectives of the change are straightforward to make Unilever simpler, faster, and more agile, more focused and expert in our categories with greater empowerment and accountability. We will be organized around five business groups, beauty and wellbeing, personal care, home care, nutrition, and ice cream. Each business group will be fully responsible and accountable for their strategy, their growth, and their P&L globally. Each business group will be able to allocate resources to choices which support their growth strategy. For example, the beauty and wellness business group under Fernando Fernandez will have a very strong focus on growing in channels like beauty stores, drug stores, direct to consumer e-commerce. These channels are less relevant to, for example, our nutrition business, where out-of-home, classic grocery, and omni-channel e-commerce are going to be the key channels to grow the business. And here you can see clearly how our categories fit within the relevant business groups. Beauty and well-being will combine hair and skin care, prestige beauty and our health and well-being businesses. Within that structure, we'll continue to run prestige and health and well-being as separate global GBUs. A model that has served us well in building each of these businesses to 1 billion euros of revenues. Personal Care, under Fabian Garcia, brings together the categories of skin cleansing and deodorants, as well as Alida Beauty and Dollar Shave Club. Our home care business group will be run by Peter Tukalva, and our nutrition business group by Hanneke Faber. Ice Cream becomes its own business group, led by Matt Close, who has many years of success leading our ice cream business. We will have a lean corporate center where our company-wide global strategy and priorities are set and led from, where capital is allocated, and where our top talent is managed. And as a foundation to our business, we will have a technology-driven Unilever business operations team who will run our backbone commercial processes designed once and leveraged everywhere with the highest reliability and the lowest cost. Each business group will consist of seven or eight geographic business units led by an empowered general manager. These are groups of countries which have similar consumers, customers, and channels, and they will be the engine of our business in our markets. It's worth noting that customer development will remain one integrated function at country level. We'll continue to show up as one Unilever for our customers. This new operating model is a major change in the way we run Unilever, and I firmly believe it's one that will enable us to step up our growth by making us simpler, faster, and more accountable. Quarter two is a transition period with accountability for delivery and performance incentives vested with our current leadership teams. We'll go live with the new organization in July, and I'm personally looking forward to performance managing the five business group presidents. They've been selected almost exclusively for their record of consistent delivery and performance. In terms of reporting, you'll continue to see our performance under our current structure for the first half of the year, and we'll report under the new business groups from Q3 onwards. This is a transformation that has been designed to deliver higher growth. Cost savings were not the primary goal, but the 15% reduction in senior management roles and 5% reduction in junior management roles, together with some non-people cost savings, will translate to a saving of €600 million that will be delivered across this year and 2023. This leads me to our fifth strategic priority, which is to continue the move of our portfolio into higher growth spaces. In parallel with achieving unification of our legal structure, our board went through an extensive process to review strategic pathways to reposition Unilever's portfolio into higher growth categories for the longer term. This work concluded that our future strategic direction lies in expanding our presence in health, beauty, and hygiene. These categories offer higher rates of sustainable market growth with significant opportunities to drive growth through investment, technology, marketing capability, and innovation, and by leveraging Unilever's strong global footprint. We're building a health business within beauty and well-being, in particular through our vitamins, minerals and supplements brands, as consumers take a more holistic approach to their beauty and well-being. At the same time, we've disposed of slower growth food segments such as spreads and tea. Now, obviously, we've been asked whether the new business groupings are the next step for a disposal of the nutrition or ice cream businesses. Let me be clear, both nutrition and ice cream are great businesses with strong brands that can thrive within Unilever. Both have benefited from our focus on operational excellence and have performed particularly strongly during the pandemic. And we've already stepped up their growth profile through the divestment of spreads and the Ecotera tea business. The new operating model will give them even more power to drive performance by responding to the consumer and channel dynamics that are unique to each of those business groups. So we see a bright future ahead for both nutrition and ice cream inside Unilever. When we responded to disclosure of our interest in GSK Consumer Health, we explained that were we to acquire that business, we would also have divested parts of our portfolio, most likely foods and refreshment via an IPO, to both provide funding and to enable the value impact of large separation dis-synergies to be more than offset by synergies available from acquisition. I want to emphasise the conditionality of that approach. We've drawn a line under the GSK consumer health proposal and we do not intend to pursue any other major acquisitions in the foreseeable future. We are 100% committed to continue the step up in growth of our existing businesses through the five new business groups which I've just described. We will continue to accelerate growth through a rigorous focus on organic growth, accelerated by our new operating model, and while making incremental portfolio change through bolt-on acquisitions, predominantly in the higher growth spaces of beauty and well-being. Now, we've been on this path of portfolio evolution for a while now, and we're seeing results. We intend to provide more transparency on the success or otherwise of our M&A activity starting today. 93% of all capital deployed in M&A since 2017 has been in either prestige beauty, functional nutrition, or core beauty and personal care. In contrast, 98% of disposals during that time have been in slower growing foods and refreshment categories. The big two, obviously, are spreads and tea. Overall, our portfolio rotation as a percent of turnover has been about 17% in that time period, which is well ahead of our peer average and in line with the best regarded companies in our sector. I know this is not the perception, but they are the facts. And the portfolio rotation is making a difference to USG. We disposed of businesses, mainly spreads, which we estimate would be around a 40 basis point drag on our USG. And the newly acquired businesses contributed 70 basis points to 2021 USG. And that excludes the impact of more recently acquired brands such as Liquid IVY. I want to stress that throughout this rotation, we've been disciplined in our capital allocation, which is reflected in good ROIC, which remains in the mid-to-high teens at 17.2% in 2021. And we will continue to be disciplined on capital allocation in the future. Generally, we have a good track record of delivery across our major recent acquisitions, which account for 88% of our deployed capital since 2017. In particular, the investment to build substantial prestige, beauty, and functional nutrition businesses has been highly successful. But let's also be clear that some of our earlier acquisitions have underperformed. We didn't always get it right. Dollar Shave Club did not deliver as expected, and the economics of the DTC model changed. We also found it harder to unlock non-razor sales than planned. Blue air took us too far outside our core strengths, and like Carver Korea, was impacted by significant channel and policy changes post-acquisition that we hadn't anticipated, such as material improvement in China air quality or the clampdown on the cross-border Daigo trade in North Asia. Nevertheless, Carver, Koala and Sundial will remain highly important and strategic parts of the portfolio. Let me give a little bit more update on Prestige Beauty and Functional Nutrition. This is where nearly all of our M&A capital has been focused since 2019. Prestige Beauty, now a 1 billion euro business, grew over 20% in 2021. And whilst this was against a weak base, growth was still double digit on a two-year basis. Dermalogica, the biggest prestige beauty brand in the portfolio, has seen a remarkable step up in growth since we acquired it in 2015. From around 1% in the three years pre-acquisition to a CAGR of 10% over the last five years, with the brand now present in over 60 countries around the world. We're just getting started building prestige in China now that the animal testing regulations permit it. Functional Nutrition includes the health food drinks business in South Asia, as well as our largely US-based health and well-being VMS business. This business grew 22% in the full year and has some very strong global leadership positions across that portfolio. As you can see here, together, Functional Nutrition and Prestige are now making a meaningful contribution to group underlying sales growth. For the full year, these two businesses contributed over 50 basis points. But you can see the trend has been rising. And in Q4, they contributed 70 basis points. And that is with some of the more recent and fastest growing acquisitions still not reflected in underlying sales growth. So this wraps up the update on how we're doing in total and versus the strategic priorities for Unilever. And the key messages that I'd like to leave with you are as follows. We've drawn a line under the GSK consumer health discussions and we will not be doing any major acquisitions in the foreseeable future. We have a great portfolio of brands and categories, and we're 100% focused on driving stronger performance from our existing portfolio. The measures we put in place through our strategic choices and focus on operational excellence are starting to show up in our performance. We exited 2021 with momentum and are impatient to accelerate further. We are facing the highest levels of inflation for over a decade, and the business is responding by leading on price. Organization change will be an accelerant of performance and will continue the disciplined evolution of our portfolio through organic growth, bolt-ons, and selected disposals from all business groups. And on that, back to Graham.

So building on Alan's key messages there, I would first like to reconfirm what our approach to capital allocation has been and will be going forward. We will remain disciplined on capital allocation to drive shareholder value, and we will retain a leverage ratio of around two times. Operational investment into our business remains our priority. Reshaping our portfolio through bolt-on acquisitions remains part of our strategy, but as Alan said, we will not pursue any transformational deals in the foreseeable future. Our dividend yield is high and we will continue to pay an attractive dividend. Share buybacks remain part of our capital allocation and value creation thinking, and today we announced a further share buyback of up to €3 billion over the next two years, reflecting the continued strong cash flow and the proceeds from the tea sale expected in the second half of the year. This follows the share buyback of 3 billion euros, which we announced and completed in 2021, and takes us to a total of 6 billion of share buybacks between 21 and 2023, and 17 billion between 2017 and 2023. Now, before I get into the outlook, I'd like to touch briefly on a measure that is critical to understanding the inflationary pressures that we're facing next year. To date, our practice has been to quote market inflation numbers, which are external numbers before any efficiencies and savings that we make. However, in a time of such dramatic cost inflation, we think it is useful and helpful to give you greater transparency and objectivity on the actual absolute levels of cost inflation that the business is facing. So today we're sharing some more detail on what is the core internal inflation metric that we use. And that is called net material inflation, or NMI, as I'm going to refer to it now. Now, NMI is the net inflation number expressed in absolute euros of cost that the business will see. It is market inflation, less the benefit from hedging covers and global procurement actions, such as bundling purchases of similar ingredients. It also includes product logic savings through reformulation, for example, where we substitute one ingredient for another, depending on which is more expensive at the time, but with no compromise on efficacy of the product. And it also includes the work that we do to simplify the total number of product specifications that we have in the company. FX for an exchange is also a factor, and it can be a headwind or a tailwind, though it generally has been a headwind in the last few years as our emerging market currencies have weakened versus hard currencies like the dollar, in which most global commodities are priced. Now this chart has a lot of detail on it, but it really is very, very important. We want to give you some history on the levels of NMI, that net material inflation absolute number, that we have seen in the past, how we have priced for that, and how quickly we recover the gross margin impact as a result. And as you can see on the chart, NMI inflation has been at quite low levels for the decade up until 2020. In 2021, we saw a significant step up. That's 1.3 billion euros on the chart. And that was a step up to levels that we've last seen, as you can see, over 10 years ago. And now looking ahead to 2022, our projections and the work that we do in our global procurement team indicate that we're faced with even more net material inflation at very high levels. We expect market inflation to move from mid-teens in 2021 to over 20% in 2022. And with fewer hedges in place and a more inflated cost base, more of this will flow through to the net material inflation absolute number. Now, while there are wide ranges to this and a lot can change, we are currently looking at projections of around 3.6 billion euros of net material inflation for 2022. That's the far right-hand column on this chart. We expect, just to break this down, that first half NMI will be over €2 billion. Now, this may moderate in the second half to around €1.5 billion, but there is a wide range of projections, and that reflects market uncertainty about the outlook for commodity, freight and packaging costs. And just to put this into context, the unmitigated gross margin impact of 3.6 billion of NMI, if we were to take no pricing or implement other savings initiatives, would be around 700 basis points of gross margin. This chart also shows you the historic data for price growth, or UPG, as well as our gross margin progress. And as you can see in the chart, we have always stepped up pricing where inflation required us to do so, but often not to the extent so as to fully recover gross margin in any discrete year. Importantly, however, gross margin has then recovered quickly in the subsequent years once cost inflation normalizes and the full effect of pricing lands in the gross margin. The high inflation and brief declines in gross margin called out in this chart in 2008 and 2011 illustrate this very clearly. We will, of course, continue to take further price increases. These need to be phased in, however, and they lag the full effect of NMI inflation, as well as continuing with our savings programs. We need to do that as well because it's a very important component of managing the inflation. This time lag between inflation and pricing, combined with the need to keep the business healthy, means there will be a short-term hit to profitability. And we do not expect to be able to fully offset this extreme net material inflation in 2022 alone. But we are confident, based on the data that I've just presented and set out in this chart, that margin will be restored after 2022, with the majority coming back in 2023. And this takes me to our outlook for the year. We see continued growth momentum as we start the year, building on a strong 2021. We are managing the inflationary shock that 2022 brings, but we'll do the right thing for the health of the business in the long term. And at the same time, we will be implementing a major new operational model for Unilever to become an even simpler and faster business. For 2022, we expect underlying sales growth to be in the range of 4.5% to 6.5% with strong pricing. As mentioned, we expect very high input cost inflation in the first half of over €2 billion and we currently expect that to moderate to around €1.5 billion for the second half. we will not dial back any investment to deliver a short-term margin. And we plan to maintain competitive levels of investment in our brands, in our marketing, in R&D, and our capital expenditure. The full year underlying operating margin for 22 is expected to be down, therefore, by between 140 basis points and 240 basis points. So that would take our margin to somewhere between 16% and 17%. with the first half underlying operating margin impacted more than the second half. We expect the margin to climb from 22 to come back in 2023 and 2024 with the bulk in 2023. Our pricing has been and it will continue to be strong. We have established cost savings programs in place which will be further enhanced by our operating model change. and we expect inflation to ease from the peak levels that we're seeing. We also expect the remaining impact from COVID costs and mix to unwind over this period, although this depends on the world returning to normal. Therefore, we're confident that margin will be restored quickly, but our top priority is accelerating our growth, and we will continue to invest competitively and take actions to deliver stronger growth. And with that, let me hand you back to Richard for the Q&A.

Thank you, Graham. As a reminder, if you want to ask a question, please press star one. Once you've pressed star one, you'll be placed in the queue. If you no longer wish to ask a question, you can press star two to exit the queue. If you're listening to the conference call on a speakerphone, please use the handset while asking your question. And finally, please keep your questions to a maximum of two. So our first question will come from Warren Ackerman at Barclays. Go ahead, Warren.

Good morning, Alan, Graham. It's Warren here at Barclays. A couple from me. First one is just around the top line guidance. You're talking a little bit more about more elasticity in certain pockets. Could you maybe share with us where you are seeing more elasticity and what should we expect as pricing continues to step up? I'm just trying to understand... know within the new top line guidance which is a step up do you expect any volume growth in 2022 or are you expecting you know price to be very high and sort of volume to be negative just trying to understand that whole elasticity point and where you're seeing it by geography and category And then the second one for Alan, I guess, I mean, can we just maybe step back and ask about the Glaxo consumer transaction, which obviously is now not happening, but maybe you can walk us through why you thought it was the right deal in the first place. I mean, clearly not happening now, but can you confirm that the target is still to treble sales in prestige nutrition and functional nutrition? I'm just trying to sort of understand on the capital allocation, you're still saying bolt-ons, but no big transactional deals. Thank you.

Sure. Graham, why don't you deal with the elasticity question, and I'll get into GSK.

Yeah, hi, morning, Warren. Morning. So the key message, I think, is we're going to continue to responsibly take price wherever that makes sense. We spoke months ago about the need to carefully manage the triangle of inflation, pricing, elasticity, and competitiveness. So we won't push pricing to a level where it compromises the long-term health of the business, but taking price is critical to our ability to carry on investing in our brands, and we're able to do that because our brand equities, our brand power as we measure it, is very strong. As Alan said, over 80% in very strong brand power positions. Just to click into a little bit more detail on where we're seeing it, the biggest elasticity we're seeing to date is in Latin America, where we've taken rounds of multiple high levels of price increase. And as you know, that is very much the norm in Latin America, although with these levels of inflation, it has been higher levels of price. And you see that reflected. Volumes have gone negative, for example, in home care. That's the right thing to do, we believe. I do want to emphasize we carefully manage it, but as the price leader, we need to balance that out. So it is simply that, you know, there is elasticity. You know, elasticity is a relative thing. Elasticity is lower where there's high levels of price inflation across the market. So we measure a relative price position. We are the price leader. Competition is following in pricing, and we're measuring that. Pricing is following up on the – it's landing on the consumer shelf, which is important, so retailers are protected. And elasticity so far, which we model very carefully, we've done a lot of work on this around the business. We began that, we do it all the time, but we began it to step it up back in the middle of last year when we first saw the inflation headwinds coming. So far, elasticity is tracking very much within the model, the expectations that we have. But it's very dynamic. It's different market by market. That's where we've got the experience. But there is bound to be some impact on volume for 2022.

Thanks, Graham. Warren, for your second question, let me start by underscoring that Unilever's management team, the entire company, are focused on one thing, and that's maximizing the performance from today's portfolio. That is the number one focus of the vast majority of our employees who never touch M&A or capital allocation. It's also the number one priority for Graham, myself, the rest of the Unilever executive. At the same time, it is important to chart the long-term direction of the company. And after months of careful review, the board concluded that accelerating our shift into consumer health and well-being and beauty as two very attractive adjacencies would position Unilever for faster growth in the decades to come. And that's really the conclusion that lay behind what were intended to be confidential discussions that we're having with GSK and Pfizer. Now, we've been very clear in our statement today where we stand on GSK Consumer Health or other transformational acquisitions. We've listened intently to our shareholders. We understand the feedback. We've drawn a line under the GSK Consumer Health bid, and we don't have any intention of pursuing other major acquisitions. However, and this is really the second part of your question, Warren, we are absolutely resolved on moving the portfolio towards these attractive spaces of beauty and health and well-being. But I would say we're more patient on how we get there. Bolt-ons remain part of the strategy. We expect to continue some disposals, pruning some brands and smaller assets across the whole portfolio, by the way. And that bolt-on activity will be very focused in delivering our intentions of a scale prestige beauty and health and well-being business. So yes, our commitments to grow those two businesses to meaningful scale are intact.

Okay, thanks, Alan. Let's go straight to our next question, which is from Pinar Ergen from Morgan Stanley. Go on, Pinar.

Thank you. Two questions. The first one is on margins. Could you please walk us through the building blocks from the 21 to 22 expected margin? Just wanted to confirm that the decline is all driven by commodity prices. And what would prevent the 23 margins from fully recovering? I appreciate the cost pressure is high, but you mentioned that you expect the majority to be restored by 23, despite some cost benefits you will get from the reorganization. So that's the first one around margins. The second one is on capital allocation. I think Unilever's net CapEx is down to below 3% of sales this year. Graham, I recall that back at one of Unilever's investor seminars a few years ago, you were indicating that such levels could be perhaps a little too low for a business like Unilever. What has led to this evolution of capital allocation strategy over the last five, six years, where we have seen a shift from CapEx into pursuing external growth? Would you expect the next few years to follow a similar algorithm? Thank you.

Thanks, Pinar. The short answer to your question on margin pressure in 2022 is 100%. Yes, it is all about commodity cost inflation. Those are very widespread. We're seeing doubling of costs on a variety of agricultural raw materials, petrochemical-derived raw materials, energy. You know the data on freight and distribution. It's up by multiples. packaging components. So as Graham has shown, we're looking at 3.6 billion euros of cost increases on those input costs. If we didn't mitigate that with savings and pricing, that would translate directly to 700 basis points. of margin impact. So the commodity cost increases are way more than the margin impact that we've described. Of course, we then mitigate with our savings and productivity programs and leading on pricing. And so far, our determination to lead on price is going well. Our brands are in very good shape. Our brand health is allowing us to lead on price. Now, to believe the reversal in 2023, I don't think we should just look at history and say, fingers crossed that will happen again. Three things need to happen for our margins to restore in 2023. First, we need a slight reversal on commodity cost inflation and literally a few hundred million euros as against 3.6 billion this year. And that is our best outlook right now. Secondly, we will moderate price increases dramatically. In fact, rely mainly on the rollover pricing effect from 2022. And thirdly, deliver the organizational savings, which we categorically will deliver. If those three conditions come true, then we see a reversal of almost the entire margin lost from 2022 in 2023. So it's a combination of decomposed assumptions about next year, but also the historical track record. I hope that answers the question.

Yeah, hi, morning, Pinar. Let me just anchor in a couple of numbers first. So net capex for 2021 was 1.2 billion. That was about 2%, 2.4% of turnover. It was a step up from 2020, which was 0.9 billion. And both of those years were impacted by the disruption of COVID. I want to be really clear, we've not been able... to progress some of our major capital projects at the pace that we were planning because of the disruptions thrown up by the pandemic. You know where our footprint is. You know how disruptive the pandemic has been. You know the restrictions on movement in large parts of Unilever's footprint. So that's the reason for that. Now back to normalised levels. Actually, just a reminder, if you go back to pre-2015, our levels of capex were north of 4%, and there was a very clear element of catch-up on that. We felt that in the decades prior, we'd underinvested in the productive base of the company, and we accelerated that investment over a four- or five-year period in order to correct for that. Thereafter, and actually, I think you're right, I think we did have a conversation of around 3% being about the right levels. We think that around 2.7, 2.8 is maybe around about the right level. And there's a reason for that now, and that is that so much of our manufacturing has now moved to third-party manufacturing. So that was 10% or 15% three or four years ago. It's now 20%. And you have to adjust for that in looking at it as a percentage of turnover. If you just do the math on it with 20% of your supply coming from third parties where the capex is on their balance sheet, not on ours, and you adjust for that, then a 2.7% level sort of corrects to about a 3.2% level. So I think we're broadly in the sort of areas that you and I talked about two or three years ago around that, Pinar. And just whilst I've got the mic... Just a comment on the amount of restructuring spend that we've passed through our supply chain. I think it's important when you're thinking about investment of capital. We, as you know, stepped up the level of restructuring from 2017 onwards. As I said in the presentation, we'll continue that until the end of this year. And thereafter, we expect we'll drop down to the more normalised level of about 100 basis points of turnover. So, roughly speaking... about 500 million of restructuring investment a year versus the broadly 1 billion a year level that we were investing since 2017. A lot of that has gone on supply chain restructuring. It's been focused in Europe. It's been focused in North America and focused in Latin America. So that's what we've also been doing in terms of spending capital in improving the performance of the capital base of the company.

Graham, our next question comes from John Ennis at Goldman Sachs. Go ahead, John.

Yeah, hello, everyone. Thanks for taking my question. I wanted to ask about the business reorganization. I wondered if you could give some examples to detail how you think it will improve future performance, both in terms of sales growth and market share delivery. And I guess what made you realize that the old structure wasn't quite working for Unilever? And maybe just one more on this topic. How did you decide some of the category separations? I think most notably between beauty and personal care. Any details around that would be helpful.

Great. Okay, let me deal with that, John. There are increasing differences emerging between what we're now calling those business groups, in particular in the channel footprint, where if you look at the beauty channel and health and well-being, it's very strongly dominated by the drugstores, health and beauty independence. Online is a particularly important part of that business. And I'll use the example you asked about. By contrast, personal care, which in our case we've populated with deodorants, skin cleansing, and oral care, is a business that's much more dominated by more mass channels. And so the channel footprint and the focus that each of those businesses requires in the different channels is a key difference between them. Secondly, the competitive landscape is very different. Our ice cream team are very focused on a very different set of competitors from our home care team, who in turn are very focused on a different set of competitors. So whether it's a consumer, a competitor, or a channel landscape, there are emerging differences between these different business groups. And that's why we've chosen to focus them in five different areas. Secondly, Our matrix organization served its purpose, but matrices are not notorious for being the most agile way of organizing a large company. And it does slow down decision making when you're aligning across different dimensions. And frankly, I think it diffuses accountability. So I am looking forward to having five business leaders who are absolutely proven in their ability to drive short and long-term performance, who I can work with, Graham can work with, and who we can performance manage. on a week-to-week, month-to-month basis. And then the final point, we haven't really teased this out, but today, Unilever's P&L is being optimized across categories at a country level, and we think that's resulting in some suboptimal outcomes. We will now optimize the P&L within a category across countries. so that we retain the strategic integrity of the agenda of each of those categories. And that's the fundamental decision-making shift that comes with this model. But the headline is, it's just simpler. It's just clearer who's accountable. We can't wait to get into it, to be honest.

Okay, thanks for that, Alan. Our next question comes from Celine Panuti at JPMorgan. Are you there, Celine?

Yes, thank you for taking my question. My first question is for you, Alan, and it comes to the first sentence you said that you are dissatisfied with value creation. I'm looking at the presentation, and it seems that nonetheless, you know, the business is progressing in terms of market share. There's enough capex. There's, you know, product superiority and so on. So what is the problem? Clearly, I think your investor base as well was dissatisfied with performance, and that's why they would like you to concentrate on organic growth versus M&A. So just would like to understand where the problem lies in your analysis. And then the second point, I just want to also maybe looking back into 2022, in terms of business risks, the implementation of the new structure, is that a risk for you to land prices or operate in the market? And also I want you to know whether inflation in salary was also included in your cost base. Thank you.

Okay. Thanks, Celine. I think the gap between how we see the business and how it's currently valued comes back to this concept of 4G growth. We believe that Unilever has to and is capable of delivering growth that is consistent. competitive, profitable, and responsible. And that's frankly how we drive the internal organization. We want to see consistent growth, competitive growth, profitable growth, and responsible growth. And there has been, over the last five years, a gap on the consistency and on the competitiveness of the growth. And what you're seeing is a steady step up in the consistency of our growth delivery. Of course, last year was a little bit flattered by the prior year comparator. But if you take a two-year stack basis, our performance last year went from, on a two-year basis... 2.8% in Q1, 2.3% in Q2, 3.4% in Q3, and 4.2% in Q4. So we are seeing that steady step up in consistent delivery. Second is competitiveness of delivery. As you know, three, four years ago, we were donating market share. And we've corrected that. We're now winning market share in more places than we're holding or losing market share, 53% in both of the last two years. And I think that's what we need to focus on delivering to the market now, is that steady, reliable, operational performance and growth, which is consistent, competitive, profitable, and responsible. Perhaps, Graham, you can handle some of the risks as we do our risk matrix in such a thorough way.

Yes, yeah. Morning, Celine. Hi. I think it's a very good question. I mean, obviously, this is a major organizational change for Unilever. I don't want anybody to think that it is. a tweak of the model or an incremental improvement. As Alan said, it's quite a fundamental change to how we've managed the company for most of the last couple of decades. Really, it's as significant as when we made the change called One Unilever many, many years ago. And as Alan said, it is fundamental. The fundamental point is that we will be managing and optimizing our performance across a narrower set of categories and multiple geographies as opposed to a more limited range geographic market envelope across multiple 13 or 14 categories. And that's a significant change. Now, how are we going to manage that? The first thing to say is the appointments of the leaders that Alan touched on earlier, that's really, really important. Today, we have around about 90 country general managers in the business. And we have people who lead our divisions who are mainly responsible for global brand strategy, portfolio M&A decisions, et cetera. And they set the targets for the markets. targets are set, it falls to our chief operating officer to be the gearbox of optimizing that short-term performance in-year delivery across our 15 performance management units. That's today's model. Going forwards, however, we will have five, as Alan said, very, very senior and experienced and fully accountable business group presidents. And we will have 38 business units. That's the number of business units that ladders up into the business groups. with our most senior and experienced leaders. These are big jobs, the business unit jobs, going from, say, a country general manager position to a business unit general manager is a significant increase in responsibility and the ability to performance manage because we're bringing both strategy and capability to deliver performance absolutely into the same place with no split across the matrix. Now, that will be very liberating. That's the basis for our belief that this will continue to be a further step up in the performance that the company can offer. But it is a big change. And to manage that... we have asked Nitin to lead our transformation office. So Nitin will be the chief transformation officer. Of course, for the first half of the year, he's the chief operating officer. And rest assured, the entire leadership of the company is focused first and foremost on making sure that we don't drop balls during the first half of the year before we move to the new transformation. and people will be targeted for that and held accountable for that. And as I said, it's helpful that Nitin retains both hats. Nitin's also, in addition to the transformation, managing the transformation office, the chief people officer, and I think that's a simplification as well because so much of this is around leadership change and people change and accountability. So that will help us. And then the final thing is we have staffed We've done it already. A very significant transformation office to take us through the change. Some of the most senior and experienced leaders in Unilever are coming out of their roles and will be dedicated to making sure that we can execute this change in our operating model successfully. For example, Rohit Jawa, who many of you will know, who's very successfully led our business in North Asia recently. For the last few years, Rohit is coming in to do that. On the finance side, the CFO of our big and successful business in Brazil will be coming in to work alongside Rohit in managing that. So there's just a couple of examples of how we're going to manage the risk.

Thanks, Graham. Thanks, Celine. Our next question comes from James Edward Jones at RBC. Go ahead, James.

Thank you very much. A couple of questions, please. Do you see the need for cultural reboot opportunities to coincide with the reorganization you've announced. And secondly, your return on capital has fallen over the last five years from, I think, a bit over 19% to 17.2%. You've emphasized your acquisitions have performed well. So does that mean the pre-existing business is seeing its capital efficiency deteriorating?

James, culture is an ephemeral issue to deal with. It's hard to put your arms around it or define it. We've done a lot of work over the years to define how we want Unilever's culture to show up. And it is as a business that is human, purposeful, and accountable. And if I'm honest, I think we're long on the human. We're definitely long on the purposeful. And the design of this organization is single-mindedly to step up the sense of accountability in the organization. Our people feel very accountable today for their responsibilities, but a matrix tends to diffuse that responsibility. Our big business unit general managers and the business group leaders it will be absolutely unambiguous who is accountable for what. And so if there is going to be a cultural shift, it will be to dial up that sense of accountability. And we literally, in our materials, define Unilever's culture as human, purposeful, and accountable. And I think I've been crystal clear which of those three dimensions this organization is designed to amplify. Graham, Royke.

Yeah, hi, James. So your numbers are bang on. Throughout this period of significant change that we've had around the bolt-on acquisition strategy and the divestment of 5 billion of turnover from foods, you know, the sort of 90% that Alan took you through from 2017 that's been focused in building prestige, beauty, our health and well-being business, and in personal care, 90% in that very focused area. and almost 100% being in the slower growth areas of our food and refreshment portfolio. That caused a reduction in ROIC from 19% to 17%. I should say that that still means that the ROIC in Unilever is high and attractive, but we've been very careful about managing that. Now, to your specific question, yes, our acquisitions have broadly performed well, as Alan said. Not all of them. DSC, Blue Air, carver challenges within those. And Alan's been very clear on those today. But the reality is that when you do acquisitions, because you're bringing all of the goodwill and intangibles in, acquisitions tend to be dilutive to heroic. The way that we've managed that is by the underlying operation low performance of the business being so good one of the earlier charts that Alan put up showed the progress that we've made on our margin and I know we're gonna go back on that in 2022 and recover in 23 and 24 but that progress in margin the diligence of investing finding the savings restructuring our business in a healthy way and creating the margin that operational performance of top line which has been disappointing at 3% don't get us wrong But 3%, combined with the progress that we've made in operating performance of the business, has been the thing that's mitigated the impact. So we've been able to rotate the portfolio significantly, find ourselves in a situation where the capital that we've deployed and that we have harvested through the divestments we've made, have added 70 basis points and an estimated 40 basis points respectively to the 4.5% growth that we're reporting now. And we showed you in the charts how that's built up. That judicious repositioning of the portfolio aligned with strategy is securing faster growth for us. and we've been able to mitigate the impact of that on the ROIC through the operating performance of the company. It does not mean, just to answer your question directly, that the pre-existing businesses are deteriorating ROIC.

Okay, thanks, Graham. Next question from David Hayes at SockGen. Go ahead, David.

Thank you. Sorry, we've been covered because I had a bit of a connection issue, but I'll go with it anyway. And you can tell me whether I've missed this exciting bit. So just firstly on strategy and then on the outlook. So on the strategy side, just going back to the sort of GSK situation, clearly the board and the EXCO, which are all well experienced in CPG management, have got the best insights there. trends and so forth. But that deal, that change in dropping food as part of that, which you talked about, was the right way to go. But the shareholders clearly didn't give you that support. So I guess the question is, are your hands tied? And there's a frustration there because that actually is option A, but you just can't do it if you didn't get the sponsorship. Or have you genuinely changed your mind about what the best direction is for Unilever and what's changed in that? Or I guess is GSK your unique proposition. That's the only option. And then what was unique about it, if that's the case. And the second question on the 22 outlook, I just wonder whether you can give details on a couple of bits. So BMI, I think comes in at 13.3% in 2021. It was 14 plus going back to sort of 18, 19. Is that number going to go up as part of the margin reset as you invest back in the business? And I guess related to that, the restoration Are we talking 19% to 20% margins again by 2024? Is that the use of the word, or that you recover the margin up over 2023 and 2024, but it may not get back to 19% plus by that time? Thanks so much.

Thanks, David. Deep reflections by the board and the EXCO on the strategic direction of the business have identified where we think the most attractive growth prospects are. And you can see evidence of that in our behavior over the last three years. The bulk of our capital deployment in M&A has been into luxury beauty and health and well-being through the VMS business. And we think those trends are going to continue. I won't go into all the reasons now, but you can imagine the world becoming a little bit more affluent is associated with an increased concern on health and well-being. It's a secular trend. And we are absolutely resolved to move our portfolio in that direction. I feel absolutely no sense of our hands being tied because there are plenty of opportunities for us to pursue in the business that we have right now and through continuing to make bolt-on acquisitions to take luxury beauty and to take health and well-being up to from 1 billion to 3 billion plus. That's an exciting agenda for me. It's an exciting agenda for the company. And as far as the shareholder reaction to GSK is concerned, you can imagine we've spent extensive time talking to shareholders in the last three weeks. And what we hear consistently is support for this direction of travel, but just feedback that the proposed or the transaction that was under discussion was, was too big and at the wrong time. So we park it and we move on, but it certainly doesn't mean we're out of options or out of ideas. In fact, we're excited about the agenda that lies ahead. Graeme, you want to talk a little bit about 2022 Outlook?

Yeah. Hi, David. Let me take the Outlook first and then come back to your BMI question. First thing to say on the Outlook is is the three levers that give us the confidence that we will restore the margin are in three main areas. First of all, it does not take much in terms of a return to normalization of commodity prices and fundamental input prices to make a big difference on that number. That's what you see happens historically in the sort of 10 years period. 15 years of data that we showed in the presentation, David. Second thing that requires to happen is we need to keep going with pricing and do that diligently and sensibly. But it does take time for the benefit of pricing to flow into the gross margin. And the third thing is we need to continue to step up and deliver the savings. We have an extra lever with that, as Alan said earlier, from the operating model change. The purpose of the operating model is to change Unilever's performance. It's a growth-driven, competitive-driven change, but there are benefits in reducing the matrix to the tune of about $600 million of annual savings. About 100 million of that is already counted from ongoing projects that would be in our 2 billion of normal savings delivery, and we delivered another 2 billion in 2021. But there is incremental savings there to allow us to navigate through that period. So a combination of normalisation of the commodity landscape, and as we said, that's a little bit uncertain to us. We've given you Everything that we know at the moment, and we have good experience in it, we've put those numbers out there for you to see them. A moderation of that, a continuation of pricing, flow-through, and savings are what we will use in order to get there. We're not going to set a margin target. But we have confidence that that margin will be restored quickly and will drive shareholder value through a combination of that stepped-up growth that we'll hold on to and margin improvement, but with growth being the priority. Which takes me on to levels of investment in the business and BMI in particular. I mean, as a percentage of turnover, you're right. We've gone from about 14%. to 13%. But in absolute levels, in absolute currencies, we've invested broadly around $7 billion for each of the last three years. And we think that's the right level to invest. We know we're competitive with that. We know we maintain competitive BMI in 2021, and we will do in 2022. We also invest strongly in marketing through our overheads. And we've been quite differentiated, and the business has been quite thoughtful in how we invest our BMI with 21 is a good example of that. In the context of high growth, we spent more BMI, more brand investment in North America. That includes our VMS businesses. We spent more in China. We spent more in our foods business in South Asia. And we spent more in Prestige Beauty. In lower growth areas, we spent a bit less in Europe, and we spent less in Southeast Asia because of the ongoing COVID restrictions there, particularly in Q3 and SEAA. And then there's another bucket, which is sort of Latin America and Arabia, where we chose to spend a bit less because of the extent of the pricing that's going through. And what happens when there's a lot of pricing is that the market generally starts to deflate from a marketing investment perspective, and we're anticipating that. So if you click a couple of levels down, we continue to invest competitively. SOSOM is still above 100. We've been investing at consistent levels. But going forwards, we've been very clear, and hence the outlook on margin. Our priority is to invest competitively in the business, behind our brands and marketing, R&D, CapEx, and manage the business for the longer term. And that's why you see the outlook that we're giving you. We think that will recover relatively quickly. But our focus will be in investing in the business.

Okay, thanks, Graham. Let's go straight to our next questioner, which is James Target at Berenberg. Go ahead, James.

Hello, good morning, everyone. Two questions from me. Firstly, just to come back on the organic growth guidance for 22. I mean, just looking at the slide with the historical level of pricing, you would need to cover the 3.6 billion NMI. And it looks like you have a high single digit. So that does imply you're expecting a couple of hundred basis points to decline in volumes in FY22, or is there a different way to look at that? And then secondly, just on the portfolio, just sort of sorry to come back to this, but Alan, are you confident in the current portfolio you can deliver organic growth in the upper half of the three to five midterm range once inflation levels normalise? Or does that still require the modest bolt-ons and disposals you've mentioned? Thanks.

Yeah, thanks. Let me take both those questions, James, and I'll try and be brief in the answer. I know there's lots of other people online. The organic growth guidance is very clear that it will be pricing-led, and it is possible that will result in negative volumes. However, we're tracking elasticities very carefully. I But it's critical that we protect the P&L and that we protect our ability to invest in our businesses and don't get into a spiral of collapsing margins. Remember, the unmitigated gross margin impact of these cost increases is 700 basis points. And we're going to take leadership positions on pricing to offset that. And that will have some impact on volume, yes. And a straight answer to a straight question, the portfolio we have today in normal pricing environments where we are winning competitively and growing market share can deliver in the top half of our range. And the reason for that is the actions that we've taken on disposing of low growth businesses and building super attractive businesses in prestige, beauty, and health and well-being are that disposal and acquisition programs added 100 basis points of growth in the last year. And so the short answer is yes, we can because of the actions that we've taken.

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

Hi, good morning. A few for me. Looking at your Euro pricing data, it looks like pricing hasn't really kicked off in Europe at all, and we see the same in all the market data out there. Is anything changing in the European grocery landscape, sort of market structure, e-commerce, more discounters, that makes it a lot harder in Europe these days to pass through pricing? And if so, what does it really bode for the next few years? What do you expect to change, given how hard Europe seems to be to pass through pricing? That's the first one. And on the second one, clearly the step-up in growth, four and a half to six and a half, is sort of well above what we expected, largely pricing-driven. Try to better understand it, because are you going to use more BMI to be part of that kind of brand equity to accelerate growth? Or is it actually a longer-term risk that if you do increase prices by that much and already have negative volumes In 2022, could there be ongoing set of brand problems in the year afters because you basically increase prices by too much versus private label and other brands? Is there a longer term risk to that very high price driven growth in 2022?

Bruno, good morning. Nice to speak to you. It's certainly true that pricing is slower to land in Europe. There's a couple of reasons for that. In the emerging markets, remember, we are used to being extremely agile in pricing because we're dealing with two effects. both cost increases and FX changes. So it's more part of the way of life in places like Latin America, Southeast Asia, to be agile and fast on landing price increases. In Europe, that's much less common, and we're actually in the middle of the cycle of retailer negotiations at the moment. and the exact pricing that we land in Europe will be a consequence of the outcome of those negotiations, although I think there's an awakening reality in European retail that it is going to be necessary for prices to go up. But that's the reason for the time lag. It's the structure of the market and the double effect of cost and FX that we see in emerging markets. Let me talk about our growth step-up and whether that's sustainable. I'm going to give you a few data points on just what good shape our biggest and best brands are in. So the billion euro brands that make up half of Unilever's turnover are growing 6.4% last year and are... By any measure in good health, the brand equity has strengthened. Brand power, which is a slightly different measure that we measure, has strengthened. Our share of spend to share of market is above 100. There were many years when that was not the case. And we will not back off on competitive investment in our brands forever. A, for the long term, and B, so that they can support the type of pricing that we're talking about. The, I think, unwise thing we could have done would have been to take a bigger dip on things like BMI, R&D, operational capex in the current cost climate. But we're not going to do that. We're going to spend at the levels that we think are necessary to maintain competitiveness. Graham also made the point that in times of very high price inflation, many emerging markets around the world see a reduction in overall spend in our categories. So remaining competitive may cost less in markets that make up the majority of Unilever's turnover. But that's how we think about it. It's essential to protect the P&L, and therefore we will lead on pricing. It's essential to ensure that our brands remain healthy, and therefore we will spend adequately on R&D and marketing investment. And we will not pursue a short-term margin outcome, but rather deliver the margin commitments that we've made over time.

Thanks, Alan. Next question comes from Alicia Fari at Investec. Go ahead, Alicia.

Oh, hi. Good morning, everyone. Just two questions. Maybe I missed this, but I'm not sure if you updated us on your competitiveness or the percent of business winning or holding share for the group. So I'm just curious whether during this highly disruptive pricing period. Is that being impacted? Can you provide us some sort of update on that? And then secondly, given that there's no big deals on the horizon now and you seem to be feeling more confident about the medium-term prospects for the business, why not raise the dividend a bit more or commit to a larger buyback? Thank you.

Right, I'll deal with the first question. Percent business winning, Alicia, is very simple. It's 53% on a moving annual total basis. So that's the second year of competitive growth as measured by percent business winning, which we're convinced is the best metric in this space. Maybe more importantly, it's particularly strong in the areas that we've called out as a priority. So the U.S. has stepped up consistently to now 65% business winning as we exited the year. India was over 70%. China was over 55%. And we are confident that that is a real improvement in competitiveness. Of course, in the coming months, we will be playing the trade-off between leading on pricing, protecting the P&L of the business, and maintaining competitiveness. And in general, what we'll do is we will lead pricing And where competitors don't follow and we start to see an erosion of our competitiveness, we'll roll that back. Remaining competitive is our top priority. So, yeah, we were quite, I think in both the release and the presentation, we were clear that it's running at 53% moving annual total business winning share. Graham's going to cover the question about capital allocation and distribution of capital. Graham.

Yeah. Hi, Alicia. So let me start with the dividend. You know, we look to pay an attractive dividend and we've been doing that for the past 40 years. It's very, very important. We offer a good dividend yield and we don't have a specific goal on this, but our payout ratio has generally been in the mid 60s. Sometimes it's been a little bit higher than that. and when we look across others in the sector, et cetera, we tend to have a higher level of payout ratio and a lower amount of distributions returned to shareholders in the form of share buybacks. Now, we've been moving that over time, as I said on the call, since 2017, and including the $3 billion buyback for 22, which we've announced this morning. That will add up to $17 billion of capital return to shareholders since 2017. So it's a balance between these things. That's it. And it's anchored in our financial strategy. And our financial strategy is to sit with our credit rating in the A band, in the midpoint of the A brand generally, That's consistent with a sort of long-term leverage number of around about two times net debt to EBITDA, sometimes two and a half, sometimes a bit lower than that. That largely depends on the timing of acquisition and disposal activity. And once we've invested back in the business, once we've funded our dividend, and once we've looked at the bolt-on acquisition strategy... and timing of divestments. That's what we bring to bear when we think about things like capital returns to shareholder, and that's how the $3 billion has been sized in this case. It does anticipate that we get the after-tax proceeds of T in in the middle of next year. It anticipates another year of really strong cash generation. But in reality, the impact of the gross margin decline that we'll see in 2022 from the net material inflation will mean that earnings will be likely negative. And therefore, from a payout ratio perspective, we think about all of those things. It does allow us the flexibility to continue investing. the portfolio change through bolt-on acquisitions and divestment that is contributing so strongly to the growth performance of the company. So that's a bit of a roundabout answer, but all of those things are relevant in thinking about the size of capital returns to shareholders.

Thanks, Graham. Next question is from Guillaume Delma at UBS. Go ahead, Guillaume.

Good morning, all. A couple of questions for me, please. The first one is on your 2022 margin outlook, but by division, product category. Would you expect all five business units to show some marked margin contraction, or do one or two units particularly stand out? I mean, in particular, I'm thinking home care could be the unit the most affected by this inflationary pressure. versus maybe beauty, not immune, of course, but maybe less affected. And then my second question, it's on your employees. I mean, it must have been quite an emotional rollercoaster, to say the least, in the past few weeks, with first the possibility of this transformational deal, potential big disposals as a result, and now followed by an extensive reorganization and expected redundancies. So and all that, of course, happening against a particularly challenging backdrop with record high inflation levels. So and maybe it's a very candid question, but what is the mood among Unilever's employees right now? And are you not worried to some extent maybe your employees are being far too distracted by these changes or some by some job uncertainty? to actually be able to fully focus on flawless execution. So not questioning the medium-term benefit of the reorganization, but more curious about the short-term morale of the troops and the short-term disruption. Thank you.

Yep. Can I just say, I think the second question is a particularly interesting and insightful question. On margin outlook by division, all will be impacted. It will be more pressure on businesses where cost of goods is a higher proportion than of the sales, i.e. the lower margin businesses, and that means home care will have a heavier task to restore margins than some parts of, for example, luxury beauty, which is very much more protected. So it's exactly as you characterized, but none of the businesses will be immune from the input cost pressure. As far as employee sentiment is concerned, We measure Unilever's employee sentiment quite rigorously in a major annual survey where we get a very, very high response rate, but also in a monthly sentiment survey. Employee engagement is running at an all-time high when we last measured it towards the tail end of last year and is well up in the top quartile of the world's leading companies in terms of culture and employee engagement. Other metrics that we would look at, for example, would be attrition. And our attrition in the company would suggest that the great resignation hasn't arrived in Unilever yet. We have strong retention during and post the height of the pandemic. But I don't want to be naive about this. I don't like our employees reading some of the things that have been in the press about the company. And it certainly will have been unsettling. But so far, we have no data to show that it's materially impacting sentiment. And it certainly is not materially impacting performance. Obviously, I can't say too much, but we started 2022 well. Final thing is we are very active on internal communication. In fact, through the pandemic, we've been running weekly global town hall meetings with tens of thousands of employees participating every week. And the very next thing that Graham and I will do now is go and share these results with our employees. in an all-hands global town hall meeting, which is two-way. We take feedback and answer questions from employees, just as we are doing here. I would say our team are more focused and more sensitive to the performance of the business than the performance of the share price. And the performance of the business is strong. Let me stop there.

Let's go straight to Jeremy Fialco at HSBC for the next question. Go ahead, Jeremy.

Hi, morning. Thanks for taking the questions. A couple from me. First one, can you talk about trading down? Any evidence of that so far and what your expectations of that will be, particularly in some of the emerging markets with a lot of pricing? And the second question is, can you talk about the role of the country manager in Unilever, kind of how that is changing and what the sort of accountability they will have in the new setup is? Thanks.

Yeah. You know, Jeremy, these inflationary pressures are not unique to Unilever. And so it's important to understand that this is something that's affecting more or less all of our peers in the markets. And over time, over the last three years, actually, we've seen trading up and trading down happening. And Unilever happens to have a very strong position in markets like Southeast Asia, like Latin America, like Africa, in the lower part of the price pyramid. And you won't be surprised to know that our LATAM business, particularly our African business, And increasingly, our Southeast Asian businesses are returning to good growth, probably with the exception of Indonesia, which is returning to growth but not where it needs to be just yet. Maybe another kind of surprise fact is that Unilever's bottom of the pyramid brands tend to operate at more or less identical net operating margins as the rest of the portfolio. So if down trading were to happen, and there's some of it happening, we're well placed to mop that up. And we do so without margin dilution. So it's not an overwhelming phenomenon. It is there at low levels. And we're well placed for it. One comment I would make is that private label is not seeing any benefit from the current pricing trends in the market. The country manager question is a good one. I've already touched on the fundamental change. Previously, the country manager in Unilever was responsible for delivering a P&L by trading off between categories. That will no longer be the case. The country manager in the future will usually double hat running one of the business units across multiple geographies. So they're very exciting new roles for our country managers, because in many cases it will be coupled with running a business across multiple geographies. However, we still want someone on the ground who can take care of Unilever's reputation in the marketplace, engage with stakeholders like government and the media, and most importantly, create a sense of community for the Unilever team on the ground in that country. So it's a critical role. In many ways, it will be an enhanced role because it will often involve looking across countries, but it will not involve today's responsibility of optimizing the P&L across categories within country.

Thanks, Alan. I think we're looking at the clock here, but I think we'll try and take a couple more. So, Chris Pitcher at Redburn, would you like to ask your questions?

Yep, thank you very much. A couple of questions. Firstly, thank you for the candour around the GSK consumer healthcare approach, and I appreciate the IPO, the foods and refreshments, the contingent on the acquisition. But how much work did you do on the benefits of that as a standalone business? And are you convinced these can be replicated under the existing structure, particularly considering there's competition for capital? Can you give us an idea of the relative returns for ice cream and nutrition? And then secondly, on the management of commodities and procurement, thank you for the more detail. Raw materials are about 30% higher than they were in 2020 than they were back in 2008, but the net impact is almost doubled. Can you give us an idea of what your commodities are in euros versus 2008? And is there less productivity or reformulations to explain the scale of the impact this time? Or has something changed in your hedging going into 2021-22? You mentioned I think you were relatively unhedged this year. Thanks.

Right. Let me deal with the question on GSK. First of all, there are... enormous dis-synergies associated with any separation of foods and refreshment. And that's why we ensured that we were clear that any separation there was conditional on transformational acquisition. Secondly, these have become very attractive businesses. In fact, Ice cream and nutrition have outperformed the company over the last couple of years. And some of our fastest growing brands are brands like Knorr growing at 7%, Hellman's growing at 11%, Magnum growing at 9%, or Ben & Jerry's growing at 9%. So these businesses are in rude good health. We do think that they will benefit from the increased focus that they will have from the separation into five business groups because there are different characteristics between an ice cream business and a beauty business. But they all benefit from many of Unilever's skills and capabilities and our deep presence around the world. So we are very confident that those businesses will thrive under Unilever. And thank you for picking up that any notion of separation was entirely contingent on a transformational acquisition. And that is off the table now. Graham.

Yeah, hi, Chris. Let me just give you, I just want to start with some of the biggest commodities that we have and how they've moved. So crude oil, which impacts resins, packaging, transportation, a lot of impact on surfactants within home care, building off where Alan was earlier in response to the question about relativity across parts of our business. That's up 60%. year on year. We also have palm oil up 130%. And soybean oil, which, by the way, palm oil impacts pretty much all categories of Unilever, particularly beauty and personal care. Particularly personal care is hit by palm oil. That's up 130%. And soybean oil, which largely goes into our dressings business, is up by 100%. And then everybody's aware of the Shanghai freight up five times and US transportation up two times. So that's the most relevant thing. I can't go back to 2008. I haven't got the data on it. But that's the scale of what we're facing. And that is on a cost base of 23 billion euros. We have about 20 billion euros of input costs and the transportation of those raw materials into our factories. And then on top of that, we have about three billion of outbound logistics. So that's the addressable cost base on 23 billion. Now on hedging, There's about 40% of our portfolio of commodities that can be hedged, by which I mean that there's just no hedging market or hedges are not possible for 60%. But in that 40%, we do hedging for one disciplined reason. We don't hedge to create speculative positions or gains. We hedge in order to create the necessary window market by market dependent on consumer and customer dynamics that allows us to land pricing to mitigate the impacts of inflation. That's how we hedge and we do that market by market. And just to give you a sense of why there's a range of uncertainty around particularly the second half NMI outlook and why we have 100 basis point range within the margin guidance that we've given you for 2022. Currently, in terms of what we have contracted or hedged or have in inventory, we're about 90% of Q1 is done, 70% of Q2, and then it drops to about 30% for Q3 and Q4 in terms of the procurement landscape. So that's why there's variability around that. Potentially opportunity if we see a normalisation, but that's the landscape that we're facing.

Okay, thank you, Graham. We're just squeezing one last question, which will go to Carol Zirta at Kepler. Carol, can you just ask one final question rather than two, because we are out of time.

Yes, thanks for taking the question, then I'll keep it brief. On the new model, you already explained fewer touch points and a simpler business. But at the same time, you still have the same amount of categories in smaller countries. So in order to make the business really simpler and closer, why don't you consider to exit more small or low-growth categories? And the other somewhat related question is, what is the speed that these kinds of changes can actually have an impact on the overall company that we can see it? Thank you.

Thanks, Carl. We certainly will look at underperforming brands and small parts of the business and continue our program of disposals. But let me just give you a sense. Beauty and well-being, personal care, home care, and nutrition are all 10 or 11 billion euro businesses in their own right. They're giants. Our ice cream business is a 7 billion euro business in its own right. Also, a very substantial big business. I didn't want to really go into all the details of the organization model because I didn't think it would be interesting to people, but when we get into very small countries, we won't have a five-division structure within the small country. We'll run it as a one-unilever business because we don't want to create that complexity. But overall, we'll continue pruning the business, but the five business groups that we're creating are all bringing a tremendous scale There's very high levels of excitement in the company about moving to this new model. People can see how it will make us more externally focused, more focused on consumers and customers, and people are itching to get stuck into it. And, of course, there'll be a transition period, I think. Q2 is probably where there'll be the most transitional turmoil. But I'm hoping we start to see the impact of these changes as soon as the second half of this year. And I can tell you the five new business group leaders that we've appointed are also dying to roll up their sleeves and getting into really running these businesses with a high sense of accountability and responsibility. So thanks very much, Carl. Should we wrap up there? Yes, thanks.

Alan, would you like to wrap up?

Well, yeah. I mean, I don't really have any prepared remarks to wrap up just other than to say Unilever's overriding priority is growth, and our performance continues to accelerate. We've just announced the highest growth in nine years. Our big brands are driving that growth and are in great shape. We're growing well in the priority markets that we've called out, U.S., India, China. And in the priority channel that we're focused on e-commerce growing 44%. So a lot to be proud of. We are focused and resolved in our determination to unlock the true value of this company. And I look forward very much to engaging particularly with the shareholders on the call in the coming weeks ahead. So thank you very much indeed for your time. And God bless and see you soon.