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Earnings Call Transcript 2022-Q2

[Operator]

Hello, and welcome to the Unilever's Q2 and Half Year 2022 Results. [Operator Instructions]. We would like to now hand over to Richard Williams, Unilever's Head of Investor Relations, to begin the presentation.

[Richard Williams, Head, IR]

Thank you. Good morning, and welcome to Unilever's half year results update. We expect prepared remarks to be around 30 minutes, followed by Q&A of around 30 minutes. All of today's webcast is available live, transcribed on the screen. First, can I draw your attention to the disclaimer related to forward-looking statements and non-GAAP measures. And with that said, straight over to Alan.

[Alan Jope, CEO & Executive Director]

Thanks, Richard, and good morning, everybody. This is how we're going to run today. I'll give a quick overview of the first half of 2022 and an update against our performance on our strategic priorities. Then Graeme will take you through the details of the results and will share our outlook.

Unilever's first half performance does build on the growth that we delivered in 2021. We've been quick to price in response to significant commodity inflation, and that's given us the ability to continue to invest in our brands. Our big brands, priority markets, and key channels have again performed well in line with our strategy, as I'll cover in a minute or 2.

We've continued to improve the growth exposure of our portfolio, most recently by successfully completing the disposal of the ekaterra tea business, and with the acquisition of Nutrafol. And on July 1, we implemented our new organization model that does dramatically simplify Unilever and will support higher performance through increased speed, accountability and category focus.

That being said, the external environment remains very challenging. Input cost inflation continues to run at record levels. Graeme will show how costs are still significantly up versus a year ago. And even though a few commodity spot prices have eased in recent weeks, we're likely to see peak cost inflation sometime in the second half of the year. The threat of recession is starting to impact consumer confidence and change spending patterns and behaviors. And the pandemic is still with us with spikes in infection rates in several countries and the rolling lockdowns that we all know about in China.

However, against this difficult backdrop, we believe Unilever is well positioned. Our brands are in good health with more than 80% of our turnover with either stable or growing brand power. And this is critical as we reset pricing. And then dealing with inflation, we're drawing on our deep experience across many of our markets. We have a playbook, which has been fine-tuned in high-inflation markets over the years. It starts with precision pricing taken quickly and single-mindedly to protect the shape of the P&L and retain our ability to invest behind our brands. This is the correct strategy even if it results in low single-digit volume declines in the short term.

The new Unilever organization is now up and running. It's a major change for the company, and we're already seeing some of the benefits, for example, in the speed of very recent decision-making around pricing. So far, we're seeing volume elasticities that have been better than we expected and competitiveness has broadly held up well. So against this backdrop, we've delivered second quarter USG of 8.8%. That's 11.2% from price and minus 2.1% volume. And that takes first half USG to 8.1%, of which price is 9.8% volume, minus 1.6%.

The pricing momentum established during the second half of 2021 and early 2022 has continued. And we've landed increases across all geographies and divisions. We continue to win competitively with 53% of our business winning share. As expected, this is down from the 58% we reported in Q1. We are careful not to push pricing levels to a point where we compromise the long-term health of the business. But as we said before, we are prepared to accept a short-term hit to competitiveness in some places as we lead on pricing.

Underlying operating margin was 17%, and that's a reduction of 180 basis points versus the same period last year and within the 16% to 17% guidance that we gave with our first quarter results. Underlying earnings per share is €1.34, which is an increase of 1% versus last year. And free cash flow remains strong at €2.2 billion. Graeme will give more details on that.

Let me now get into some detail on the first half performance through the lens of Unilever's 5 strategic priorities from our Compass growth strategy, and I'll start with brands and innovation. Our €1 billion plus brands now make up over 50% of our turnover and delivered USG of 10% in the quarter and 9.4% in the first half. Our growth is being underpinned by bigger, better innovation and our relentless focus on functional product superiority. And our brand investment was up in absolute euro in the first half as planned.

Ensuring that brand support is at competitive levels remains a priority as we navigate the second half and into 2023. Our second strategic pillar is to move the portfolio into higher growth spaces. The ekaterra disposal completed on the 1st of July for €4.5 billion. And this is a culmination of a huge amount of work to establish the world's largest pure-play tea business. We wish ekaterra every success under its new owners.

We announced the acquisition of Nutrafol in the quarter and the transaction completed early in July. It's an exciting brand in business, which we welcome into our Health & Wellbeing portfolio. It's the #1 dermatologist-recommended hair growth brand in the United States, underpinned with extremely robust clinical evidence and without the challenging side effects that accompany some of the other solutions on the market. Sales are almost entirely online with the largest proportion direct-to-consumer.

Unilever Ventures was a minority investor in Nutrafol prior to the acquisition. And I must say it's great to see this investment mature into a fully-fledged part of Unilever's portfolio. Prestige delivered second quarter growth of 14%, helped by the launch of Tatcha into the U.K., the return of consumers to off-line channels, and the expansion of some of our Prestige brands in China.

Health & Wellbeing delivered 28% growth with another particularly strong quarter for Liquid I.V.

Let's now look at our priority geographies, the U.S., India, China and our key emerging markets. The U.S. maintained strong growth momentum at 8.7%, and that was driven by price, with volumes very slightly negative. Growth in the U.S. continues to benefit from our portfolio changes with Prestige Beauty and Health & Wellbeing contributing strongly. As we anticipated with the Q1 results presentation, we've continued to see ongoing customer service challenges in the U.S. caused primarily by labor availability. The situation is improving quickly, but it will continue into the third quarter.

E-commerce growth has moderated in the U.S. as consumers return to physical stores and we see greater number of consumers researching online and then purchasing offline, and that emphasizes the growing importance of digital channels in the path to purchase.

India, as already reported, post 19.5% growth, price up 11.8%, and volumes up 6.8%. This growth is broad-based and is driven by strong competitiveness and a portfolio that's been built with brands competing up and down the price tiers. The Indian markets are growing in value, but market volumes are declining. This consumption weakness is due to the impact of inflation on Indian consumers, particularly those in rural areas. We are confident of HUL's ability to continue to grow ahead of the market and we see that reflected in very strong market share performance.

China declined by 9.3% in the quarter with volumes down 10.5%. This, of course, reflects the impact of the lockdowns on both consumer and last-mile deliveries, mostly in April and May. Our competitiveness in China remains strong and we did begin to see some easing of the restrictions in June. €17.4 billion of our first half turnover, nearly 60%, came from emerging markets. However, EMs is not really a particularly helpful aggregation. It comprises markets with very different structures and different consumer dynamics. So we thought it might be helpful if we shared performance in some of our key emerging markets in a little bit more detail.

In Turkey, consumers are adjusting to the reality of extremely high inflation. Despite higher prices, we see consumer demand and market volumes holding up, due partly to pantry loading. We're ensuring that we adjust our portfolio to offer the right product formats and pack sizes and strengthen our position in the right channels to navigate these conditions successfully. Not surprisingly, we see good growth, for example, in the discounter channel in Turkey. Our business is performing well so far with 44% USG and 15% volume growth in the quarter.

In line with our treatment of other hyperinflationary countries, the underlying price growth in Turkey was capped from the second quarter. In Southeast Asia, we see a range of slightly different conditions. For example, in Vietnam, the economy and consumer confidence are both relatively strong. And we're seeing a continued shift to multichannel shopping and premium propositions like Pond's Age Miracle.

In Thailand, the market remains overall flat with positive price being balanced by negative volumes. The removal of government support packages put in place during the pandemic is having some impact on consumption, and associated with this, we see a shift towards modern trade from smaller traditional outlets. The country desperately needs the economic boost of a return to full tourism levels.

Overall, our business in Southeast Asia grew 8% in the quarter with only a small decline in volume. In Indonesia, we see growing consumer confidence as people get back to more normal lifestyles. With the high inflation levels, some consumers are trading down to cheaper brands in Home Care, much less so in Beauty & Personal Care or in Foods & Refreshment. We're taking action to ensure that our brands cover all relevant price points.

From a channel perspective, the mini market proximity store channel continues to grow, as does e-commerce in the major cities, and we're now seeing smaller independent outlets returning to growth. So we saw 10% growth in Indonesia in the quarter. It was led by price with volumes down. Indonesia is a market where we continue to work to restore competitiveness. We're seeing benefits from increased investment in, for example, the configuration and reach of our distribution network from higher levels of marketing support and from some important changes to our pack price architecture, but there is still more to do on competitiveness in Indonesia.

In Latin America, we are seeing inflation have a direct impact on consumption with consumers shopping around to find the best deals. This is reflected in very clear channel shifts to cash and carry and to wholesalers and to street markets. And that's coupled with greater shopping frequency, smaller basket sizes, and some switching to lower price points.

Our LatAm USG was just under 17% in the quarter, price up by over 21% was partially offset by volumes down 4%. This high level of price increases is necessary to protect the ability to invest in our brands and the impact on volumes was very much in line with our expectations. We continue to pay very close attention to competitiveness.

And I'd also like to give a quick mention to Africa, which has continued its run of strong delivery with 14% USG in the quarter. Relevant and impactful innovation remains critical to success in emerging markets during these tougher economic times. And you can see some examples at the bottom of the chart. They cover premium solutions that provide functional superiority such as the color and fiber protection offerings from our premium laundry care brands, and premium propositions like Pond's Age Miracle that I already mentioned. But also the need to ensure that our brand portfolio and pack price architecture cover all the relevant price points. And you can see the example here of Dishwash in Indonesia. And finally, propositions, which unlock new ways to offer great value to consumers and OMO dilutable a great example of that.

So while the emerging markets are living through more difficult economic times, they're certainly not 1 homogeneous group. The right local insights offer great opportunities for brands to meet those needs with great products that deliver great value and not just lowest possible price.

So next, leading in channels of the future. E-commerce grew 25% in the first half with growth coming from omnichannel retailers and our B2B platforms. Pure play was flat, and that reflects primarily the impact of the COVID lockdowns in China. Worth noting that in just 5 years, e-commerce has grown from 2% of Unilever's turnover to 14% in the first half. We do continue to invest in channel expertise and the right technology and in channel-specific innovation. And a couple of examples, in recent months, we've launched these Dove premium hair treatment masks and the Clear scalp care range, which is aimed to meet the needs of the younger male consumer in China, as well as Lifebuoy bundled products in the U.K., and they're all designed to increase the value density and achieve high transaction value for our online channels.

Now at the start of the year, we set out our intention to implement a new organization and operating model. And the new model went live on the 1st of July. It marks a significant moment for our company. The objectives of the change are to make Unilever simpler, faster, more agile, even more focused in our categories, and with greater impairment and accountability. It is a simple model with 5 business groups, a lean corporate center, and a low-cost technology-driven transactional backbone Unilever Business Operations.

The new business groups are now in place. They're fully responsible for their portfolios from strategy to monthly performance. And Unilever Business Operations is now responsible for all our transactional processes that benefit from Unilever's scale, the power of one. We'll update you on the distinct strategies for the business groups and Unilever Business Operations later in the year. It is still early days for the new model, but I'm already impressed by the difference in the focus, the energy, the urgency that this change is creating. Our task for the coming months is to bed in the structure, refine it, help our people adjust to the new ways of working. And we are being cautious to avoid declaring victory too early in what is a substantial change for the company. We'll be sharing the restatement of our financials through the lens of the new business groups in September. And our third quarter results will be presented on this new basis.

So let me now repeat the full summary of our first half performance. We're starting to see the consistency of growth that Unilever looks to deliver. It's coming in line with the strategic priorities that we identified early last year. And the underlying growth potential of our portfolio has been transformed through judicious disposals and focused acquisitions. Of course, we cannot know exactly what lies ahead, but I am confident that Unilever is a very different business than it was before the pandemic, stronger, faster, hungrier, more fit to compete.

And with that, over to you, Graeme, for more details on the first half performance.

[Graeme Pitkethly, CFO & Executive Director]

Thanks, Alan. Good morning, everybody. Our focus on operational excellence and our 5 strategic choices continue to drive competitive growth. After posting growth of 7.3% in the first quarter, we grew by 8.8% in the second quarter, putting the half at 8.1% USG. Of this, price growth was 9.8%, volume growth was minus 1.6%. And we feel that this is a good performance in what are very challenging inflationary conditions and in line with our shorter-term strategy that Alan has just outlined.

We delivered broad-based growth across all 3 of our divisions. Pricing has stepped up sequentially now over the last 6 quarters in response to the rising commodity inflation. If we aim off for the specific impact of the lockdowns in China, volumes are tracking pretty much as we anticipated when we presented the Q1 results, and better, in fact, than our historical price elasticity models had predicted for us.

If we click down now into performance through the regional lens. Our largest region, Asia/AMET/RUB grew 9% in the second quarter with 11.9% from price and minus 2.6% volume. The China lockdown impact was negative 160 basis points on volume, and we saw continued strong volume growth in India, as Alan has described earlier.

So quite a few moving parts to the reported minus 2.6% volume for Asia. Latin America stepped up from 9.8% growth in Q1 to 16.8% in Q2 with 21.7% price and minus 4% volume. Elasticity levels have been performing in line with our expectations and very much reflect the strength of both our brands and our in-market execution across the LatAm region.

North America grew 8.9% despite the constrained supply we're experiencing. We saw good growth across Foods & Refreshment and Beauty & Personal Care and especially in Prestige and Health & Wellbeing. Europe grew 4.6% with 6.5% price and minus 1.8% volume. Whilst there are local nuances, the U.K., France and Germany all delivered low single-digit growth with pricing largely offset by lower volumes. Food Solutions posted strong double-digit growth, and ice cream growth was strong as the out-of-home channel reopened.

Turnover for the half year was €29.6 billion, up 14.9% versus 2021. Underlying sales growth contributed 8.1%, and we saw a positive impact from acquisitions and disposals of 0.6% with the inclusion of Prestige Beauty brand, Paula's Choice, being the main driver of that. Currency had a positive impact of 5.6% as nearly all of our basket of currencies strengthened against the euro. Based on spot rates, we would now expect a full year positive currency translation effect of around 4.5% on turnover for the full year 2022.

Turning now to our divisions. Beauty & Personal Care grew 8.0% in the second quarter with 10.5% from price and a 2.3% decline in volume. Price stepped up in all categories versus the first quarter, and we expect to see continued impact of price on volume going forward with the growth of Prestige Beauty and Health & Wellbeing offsetting some of this.

Deodorants delivered double-digit growth with volume flat as social and work occasions continue to return across our markets. Rexona 72-hour protection continues to perform strongly, and Axe is benefiting from the success of a full brand restage with longer-lasting fragrances and superior order protection for body sprays. Skin Care grew low single digit on the back of a strong prior year. Pond's delivered double-digit growth in India, partially offset by more muted growth in the U.S. and the decline in China. Hair Care grew mid-single digits, driven by strong performances in India and North America and helped along by the success of Sunsilk Activ-Infusion, which is our best ever blend of vitamins, oils and proteins to improve the health and look of skin and hair, supported by the Sunsilk brand mission, which is to open up possibilities for girls everywhere.

And with our mission to tap into new growth channels, Unilever International has forged a partnership with InterContinental Hotels Group to supply their guest bathrooms with larger packs of personal care products in a move that will significantly reduce IHG's single-use plastics footprint.

Growth in Food & Refreshment was 8.1% in Q2 with a small decline of 1.2% in volume. Continued out-of-home channel recovery drove growth in both Ice Cream and Food Solutions. Out-of-home Ice Cream benefited from strong price and volume growth as the ice cream season in the Northern Hemisphere took off to a flying start. Magnum and Cornetto were both strong, supported by the Magnum Classics Remixed and Cornetto Soft innovations.

Performance in the U.S. and especially in Ben & Jerry's, was constrained by supply issues, which are continuing into the third quarter. Hellmann's delivered double-digit price led growth in the quarter with a step-up from Q1. Hellmann's brand purpose to reduce food waste is gaining real traction, and the new Turn Nothing into Something campaign is driving growth whilst having a positive impact on food waste.

Sales at our Food Solutions business, which serves professional chefs, are now 6% higher than prepandemic in 2019, and that is despite the impact of the lockdowns in China in the second quarter.

Looking forward, though, we are aware that inflation could have an impact on consumer discretionary spending and hence, eating out habits, and we're going to closely watch and follow that. Home Care grew 12.2% in Q2, led by price growth of 16.6% and a volume decline of negative 3.8%, mostly across the European and Latin American home care markets. Fabric Cleaning delivered strong double-digit growth, with volumes holding up well, helped by strong contributions from the brands, OMO and Radiant.

South Asia and Turkey both delivered positive volumes, coupled with double-digit price increases, supported by the category format shifting ever more towards liquid detergents. Fabric enhancers accelerated in the second quarter with a strong performance by Comfort in Brazil and China, with the latter helped by the success of Comfort Fragrance Beads. We also saw good growth in the professional channel with the launch of OMO Perfect White, time to coincide with the return of travelers to hotels. This range is super concentrated, meaning less plastic packaging per wash, and is unbeatable stain removal for the common stains found in the hospitality industry, whilst also needing less energy and water in the wash cycle. So OMO Perfect White is really a quadruple win for guests, for the hospitality operators, for Unilever, and for the planet. Home & Hygiene growth was more muted as consumers used less hygiene and disinfection products than they were last year.

Let me shift gears now to the cost environment, specifically how inflation is impacting our business and how we're managing it. Now we spent quite some time in previous quarters discussing the particular cost pressures that we're facing. This chart shows that these cost pressures remain despite some recent falls in the spot prices of palm kernel oil and aluminum, which demonstrates the continued volatility we are seeing in the global commodity markets. In April, we projected €4.8 billion of net material inflation over the course of the year. Just as a reminder, net material inflation is the absolute impact that we see after savings, after buying efficiencies, after product logic changes, et cetera, et cetera.

Our latest view of net material inflation is a little lower at around €4.6 billion with nearly €2 billion already baked into the first half and around €2.6 billion projected for the second half. Now of this second half spend, 80% is now covered through contracts and inventories and hedging, reducing the levels of uncertainty for the second half, but also meaning that it takes a little time for spot price falls, if they're sustained, to enter fully into our cost base. We are expecting to hit peak year-on-year inflation in the second half, and therefore, we will continue to price responsibly while managing consumer demand elasticity and competitive dynamics.

This then brings me on to margins. Underlying operating margin for the half year was 17%, down 180 basis points from last year and within our guided range. Gross margin was down 210 basis points, reflecting the fact that despite stepping up pricing significantly, it was not sufficient to fully offset the cost inflation. Brand and marketing investment in constant currencies was €3.7 billion, and that's up €0.2 billion versus the prior year. High levels of turnover growth, of course, mean that BMI as a percentage of turnover was down 40 basis points, but this is a less useful measure when turnover growth has been driven so high by pricing. Our internal analysis reassures us that our support levels are competitive and we remain focused on this as the year progresses. Overheads were up by 10 basis points with productivity programs and turnover leverage more than offset by some investment behind our strategic priorities.

Constant rate earnings per share were down 3.9%, mainly due to the lower operating margin, higher financing costs and tax, partially offset by the impact of the share buyback program. The higher tax rate reflects changes in profit mix and some favorable one-offs in the prior year, which led to an underlying effective tax rate of 24.4% versus 21.9% in the prior year. The main reasons for the increase are changes in the profit mix, as I said, and favorable one-off settlements.

Underlying earnings per share were up by 1% in current currency with a favorable currency tailwind contributing 4.9%. Based on spot rates, we would now expect a full year positive currency translation effect on earnings of around 4%. We continue to adopt a disciplined approach to capital allocation, and that has 3 key elements to it. First, we continue to invest in our business operations. This includes CapEx, which is now increasing post COVID, as we had anticipated, but also into BMI and into R&D.

Now I know that the latter 2 are included in the operating margin, but I call them out here to emphasize their fundamental importance to our business model. A key theme underpinning our CapEx is the investment in digital, whether that be in our supply chain, our marketing, or in our relationship with customers and platforms. This digital investment is enabling us to better understand consumer needs, to better serve customers and to run an efficient supply chain.

We are making significant investments in our supply chain networks in our priority markets with India and U.S. network resets and a new multi-category site in China underway. And we're also investing to increase capacity for premium ice cream in Europe and in North America.

Secondly, from a capital allocation perspective portfolio, Alan covered this earlier, so I'll not repeat the details, but we continue to use bolt-on acquisitions and selective disposals to reposition our portfolio towards higher growth. And finally, returns to shareholders. In addition to the ongoing attractive dividend that we pay, we're also well-advanced in our €3 billion share buyback program over 2022 and 2023 with the first €750 million tranche now completed, and it's our intention to launch a second tranche of €750 million early in the third quarter.

Free cash flow in the half was €2.2 billion. That's down €0.2 billion versus the prior year, which reflected higher CapEx and cash tax, partially offset by improved operating profit and working capital. Our net debt-to-EBITDA ratio increased from 2.2 at the end of 2021 to 2.3x, in line with our broad leverage target.

Our net debt level stands at €27.1 billion, up from €25.5 billion at year-end. The increase was driven by the dividends paid, our share buyback program, and an adverse currency movement, partially offset by free cash flow delivery. The cash proceeds from the tea disposal are in the bank, but they were received after the quarter closed, so they're not yet reflected in any of these numbers.

Our pension surplus increased from €3 billion at the full year-end to €5 billion today. The increase was driven by lower liabilities as interest rates, partially offset by negative investment returns on pension assets. So what does this mean for the outlook for 2022 and beyond? With higher pricing, we now expect underlying sales growth in 2022 to be above the top end of the previously guided range of 4.5% to 6.5%. And that will be driven by price with some further pressure on volume.

We will navigate the inflationary pressure while investing for growth to support the long-term health of our brands. We will continue to invest competitively in advertising, in R&D and in capital expenditure. And we will embed our new operating model without losing the improved momentum we have built, maintaining our cost discipline and delivering the leaner and simpler organization we have designed. We expect underlying operating margin for the full year 2022 to be 16%, within our guided range of between 16% and 17%. We will continue to drive savings very hard and take actions across all lines of the P&L. And if exchange rates continue around the same levels for the full year, then we expect overall euro earnings to be largely unchanged.

Looking beyond 2022, we expect to improve margin in '23 and '24 through pricing, mix, volume leverage, and savings delivery, and as market conditions normalize. And as I said before, we will not be setting a margin target. That concludes our prepared remarks. And with that, let me hand you back to Richard for Q&A.

[Richard Williams, Head, IR]

Thank you, Graeme. [Operator Instructions]. Our first question is from David Hayes at SocGen.

[David Hayes, Societe Generale]

Two questions from me. Firstly, just on LatAm pricing. Obviously, a big contributor to the growth profile, 22%. If I look at CPI in Brazil and Mexico, they're kind of running 10%, 12% lower, so just trying to understand, a, where that pricing is coming from, any specific markets? And b, again, going back to your point earlier about market share, whether that's the market where you are seeing market share erosion because you're not getting followed as quickly as a market leader there?

And the second question is on the margin outlook for the second half and into next year. So in terms of the second half, 15% margin implied, I wonder if you can just talk through any dynamics on how much pricing is actually in place already for the second half, what percentage of pricing? And also you seem to have alluded to A&P spend maybe going up perhaps versus previous expectations. Is that a fair interpretation? And on that basis, could we see A&P spend being less of a contributor to the margin progression versus the 40 basis points in the first half.

[Alan Jope, CEO & Executive Director]

Great. Thanks, David. I'll deal with your question on LatAm, and Graeme can pick up on margins. So yes, LatAm actually are our Ninja masters on landing pricing. It's something they've been doing for many years. They're extremely experienced at it. But you're right, this is the highest pricing that we've seen since 2017 in LatAm. It is driven by all categories. But it doesn't yet reflect the full pass-through of all cost increases. So at a total level in the company, we've only passed through so far just around 70% of cost increases.

And for the MAT, let me just give you one level more detail than we normally share, which is the percent business winning in Latin America is at 67%. So we have managed to land very high levels of pricing driven by the double whammy of ForEx depreciation and commodity increases, and at the same time, hold high levels of market share as measured by business winning. So good job done so far by our team in Latin America. And there's not huge differences across the different markets within LatAm. They're all heading in a similar direction. Graeme, margins?

[Graeme Pitkethly, CFO & Executive Director]

So yes, I mean, as we've said, our full year expectation of margin is still at 16%. The first half is at 17%. So we do expect the second half margin to be below 16%. Frankly, it's always been the case over the last 5 years that our second half margin is below our first half margin. That's principally due to sales mix and phasing between the 2 halves, but that's consistently been the case.

And of course, as I said, we're still expecting €2.6 billion of inflation in the second half. 80% of that is now covered. So it's a fairly certain number. And that compares to a figure of, I think it was €2 billion in the second half of last year. Just on one other data point on that. In terms of total cost inflation, that's net materials inflation plus logistics inflation and controlled cost inflation in our factories, we're around about 70% to 75% covered in terms of the pricing. So that, I think, is a good expression, David, of the lagging effect between the pricing that we're putting through and the cost that we're seeing. So that will be the principal driver of the lower margin in the second half.

As we said, we're continuing to invest behind our brands. We think it's extremely important to do that in driving growth and keeping that brand equity high. The reason for being early and pricing proactively, as Alan said earlier, is to protect the shape of our P&L in order that we can invest back in our brands. And we did that in the first half with €200 million of more BMI investment, A&P investment in constant rates, it was more than that in current rates, but I think constant rates is a better comparison for that.

And as far as the second half is concerned, we'll continue to invest more in brand and marketing investment. In terms of the basis points, it's hard to say because a lot depends on the pricing and what happens with the top line in terms of what the actual basis point movement will be. But you can expect that we'll continue to invest more behind our brands.

[Richard Williams, Head, IR]

Thanks for the question, David. Next question, Warren Ackerman of Barclays.

[Warren Ackerman, Barclays Bank]

Warren here at Barclays. I've got a couple as well. First one is, can we assume a bit more into competitiveness. I mean you said 58% of the portfolio was winning in Q1, and now 53% at Q2 on a 12-month MAT basis, so I guess that must mean below 50% in the second quarter. And you also said to David just now, LatAm was 67%. So I was scratching my head a little bit to try and work out which areas, geographies, categories where there has been a competitiveness step back in Q2, which areas are in the 40s? I imagine it's Europe, but could you maybe sort of comment specifically on that?

And then the second one is just around your volume outlook in H2, in light of, I guess, the Walmart warning yesterday overnight talking about now quite aggressive trade down. And more generally, which categories, geographies are you starting to see that trade down, if you could elaborate a bit? If I can just squeeze in a housekeeping on out-of-home ice cream. I don't know if you can just tell us what the number was on USG for the quarter?

[Alan Jope, CEO & Executive Director]

Okay. Let me talk about competitiveness. We do have a point of view on how to reconcile our strong U.S. performance with the Walmart announcement last night. And Graeme can share that with you. Graeme can also decide if we want to lift the carpet on the out-of-home ice cream.

So on competitiveness, Warren, you know we're going to hold the line on talking about MAT. Business winning for us is a very harsh and strict measure, which is we only count when we are gaining market share. Flat shares for us does not count as winning. You'll know from our engagements last year that you cannot aggregate quarterly business winning to get to the full picture on moving annual total.

We are pricing ahead of the market, and we're prepared to tolerate low single-digit volume declines and some compromise on competitiveness for a limited period of time in order to land that price. Some examples of where we are gaining, actually, it's across the world and it's cell-by-cell. So places like U.K. body cleansing, also China hand and body, Mexico body cleansing, we're winning share. Some of the places where we have to keep a close eye, for example, in the U.S., to your last question there, the mass ice cream business in the U.S., we've conceded share there. It's a particularly unprofitable part of our portfolio.

And there are a number of cells across Europe where we've moved ahead on price and are watching carefully to make sure that we don't have sustained losses of shares. A lot in foods actually, Foods Europe. We've had a few cells where we've gone from winning to losing share. As you see, it's dropped from 58% on an MAT basis to 53%. We want to keep it above 50%, but our priority actually is the ability to continue to invest in our brands. And I think you can see that reflected in the numbers that we've posted today. Graeme?

[Graeme Pitkethly, CFO & Executive Director]

I'll pick up the Walmart point. First of all, you saw, of course, the release that we put out last night. A couple of things I think just contextually around that. As I read the comments, I think a lot of it was around the sort of durables, I'm probably using the wrong words here, but this is the durables part of the...

[Alan Jope, CEO & Executive Director]

General merchandise and apparel.

[Graeme Pitkethly, CFO & Executive Director]

General merchandise and apparel, there you go. So durables and I guess that's clothing, and less around what they describe as consumables, which is the part of Walmart's business that we represent. I think there's probably some currency impact on the earnings outlook, of course, as a U.S. dollar reporter.

And just generally around what we're seeing in terms of U.S. retail, and this would include, I suppose, Walmart as well, but we are seeing, I think Alan mentioned it earlier, a shift from online channels to offline channels. But with a lot of the sort of pre-shopping, if you like, being done in digital, research being done in digital, with the customer then visiting the store, I think one of the drivers of that we believe is that consumers, when they're seeking value, believe that a store visit will expose that value more actively to them and they have a more engaged and active shopping decision. And I think overall footfall in-store in the U.S. is up. So that's really the picture that we're seeing there, Warren.

Now in terms of volumes, let me just talk at a general sort of category level. Our volumes are down most in Home Care, because that's where we've taken most of the pricing. So you see the elasticity impact there. It's more muted in BPC. In BPC, of course, we get the benefit from Prestige Beauty and Health & Wellbeing, and it's more muted in Foods & Refreshment, where we get the benefit from the strong out-of-home ice cream, which I'll come on to in a second. And our Food Service business, which I've said is now recovered back to levels above the levels of prepandemic in 2019.

Just to go a little bit of geography for you, particular areas of strength from a volume perspective have been India, which have double-digit pricing and still maintain high single-digit volumes in a market where volume is in decline. Really, that reflects a big price coverage of our brand portfolio. North America, which had price growth of 9.4%, with volumes down only 0.5%, and that is despite some service challenges in BPC and ice cream, which we mentioned earlier. And it benefits, of course, from the high growth of our Prestige business and our Health & Wellbeing business, which has got a big North American footprint.

In Latin America, well, Alan just covered a lot of it actually through the competitiveness discussion, but pricing was 21.7%, volumes down 4%, that's less volume impact than we saw in the first quarter despite higher pricing. And again, that reflects a very well-positioned portfolio of brands that covers all price tiers, capturing trading up and trading down, because in both India and in Latin America one of the trends we're seeing is a trade-up in addition to a trade down for value. And of course, we've built a very significant presence in the key value channel in Latin America, which is cash and carry. And then China, we spoke a bit about it on the call, but volumes were down by 10.5%, but that was largely related to the lockdowns, et cetera.

And finally then, if I just come on to ice cream trends for you. So just a reminder, our out-of-home ice cream business is about 40% of our total ice cream business. So it's 60% in-home, 40% out-of-home. In the first half, the in-home business was pretty flat, to be honest. And that's pretty good against the high base, because as you remember, in-home ice cream got a very significant boost during the pandemic when the out-of-home ice cream channel was largely closed. But then out-of-home ice cream is the big contributor. It grew at just over 20% in the first half.

[Richard Williams, Head, IR]

Thanks, Graeme. So straight to your next question, which is Bruno Monteyne at Bernstein.

[Bruno Monteyne, Sanford C. Bernstein & Co.]

Things seem to be better than it were a few months ago based on everything you've said. I mean your net material inflation for the full year has come down by €200 million despite a lot of these costs already being locked in a few months ago. So the underlying improvement is probably better. You've increased your sales guidance, your elasticities are better than you expected. So all of that is incrementally good news in a very short period of time. But at the same time, your margin guidance doesn't change. I'm not reading that correctly that any upside you would have in the P&L, you're basically reinvesting in faster growth. Would that be a correct interpretation?

[Alan Jope, CEO & Executive Director]

Thanks, Bruno. The short answer is yes. Things are looking better, but it isn't a fast -- we've been working for years now to step up our execution muscle to shift the portfolio into higher growth categories, to make sure we're winning in the important geographies. And the cost environment still means that the second half is going to be peak inflation heavier than the first half.

We are deliberately avoiding a margin target. We're stepping away from any margin target as a signal that our priority is compounded steady top line, high-quality growth. And we want to preserve the ability should we need to step up our investment in our brands, then we want to preserve the ability to do that without any disappointment on the margin levels that we are anticipating. So that's a slightly longer answer, but the short answer is yes, we're studiously avoiding a margin target to preserve the ability to invest more in our brands should we need to.

[Richard Williams, Head, IR]

Thanks for the short blunt question, Bruno. Next question is Pinar Ergun from Morgan Stanley.

[Pinar Ergun, Morgan Stanley]

The first one is on volumes. You've noted that volume elasticities are performing in line with your expectations. Looking ahead, would you anticipate volumes to get weaker as consumers and retailers digest the higher prices? And do you have the tools to inform you if pricing ever goes too far?

Then the second one is a follow-up to Bruno's actually. The tone on '23, '24 margin outlook seems to have changed from recovering the margins to improving them. Could you talk a little bit about the reasons behind that? Is that because you're looking to reinvest any benefits you might see from commodities pulling back? Or are you expecting a more challenging operating environment? And look, I appreciate you just said you're not setting margin targets here, but do you have an idea of when we should see margins recover back to pre-COVID levels?

[Alan Jope, CEO & Executive Director]

Pinar, I think we can give very straightforward answers to your questions. I anticipate that second half volumes will be down by more than first half volumes as the full impact of pricing lands. But I can also assure you that we are watching pricing category by category, brand by brand, country by country. And in fact, we have already reversed a couple of prices in sales where we feel that competition are not following or we've moved too far.

And actually, our new organization model is allowing us to do that with far greater speed, speed measured in a couple of days. And so it is a very dynamic equation that we're managing, looking across input costs, pricing competitiveness, and protecting the ability of our P&L to invest in our brands. So blunt answer is, prices will go up and down in the second half. And I do expect the volume impact to be slightly more substantial in the second half than in the first half. Graeme, margin outlook?

[Graeme Pitkethly, CFO & Executive Director]

Let me begin, as I always do on the subject, and that is that delivering faster and more consistent growth remains the #1 priority, and we're going to continue to invest in the health of our brands. We did deliberately change the language in the outlook statement this quarter just to make it really clear that we don't have a margin target for 2024. To be honest, our previous language was prompting a lot of questions. And I think I have used sometimes that we had a margin target, which, of course, we do not. So we think it's a better expression to say that we expect margin to improve in '23 and '24.

And we do expect that, that will come through pricing, mix and savings. And we remain committed to that profitable growth that's implied by that. But it's still very uncertain and volatile from a macroeconomic and a cost inflation perspective. But we do continue to expect, as we did when we first made the statement about '23 and '24, some normalization in cost inflation over '23 and '24. And as we've explained with the scenarios that look at the kind of mechanics of how that plays through in our P&L, that should mean that we're able to increase margins in those 2 years.

[Richard Williams, Head, IR]

Next question to Jeff Stent, Exane BNP.

[Jeffrey Stent, BNP Paribas Exane]

If I recall correctly, there was approaching -- there was nearly 100 basis points of COVID costs in the margin, if we go back a couple of years, and you were pretty adamant at that time that those were going to bounce back. So I was just wondering if you could maybe update us on what's happened to these costs and what's happened to your benchmark expectation?

[Alan Jope, CEO & Executive Director]

Yes, we can, Jeff. I think the -- let me just dig out the exact right numbers here for that. If I remember correctly, in the first half, we're seeing a favorable impact versus prior year of 30 basis points from COVID costs. But that still leaves us minus 60 basis points versus 2019. So I would say we're kind of 1/3 of the way back towards recovering the COVID costs.

Interesting question, they do become a smaller area of focus for us in the context of these gigantic input costs increases that we're seeing. But the straight answer is that we've recovered about 30 of the 100 or so basis points, but we're still down 60 or so versus 2019.

[Richard Williams, Head, IR]

Next question to Tom Sykes at DB.

[Thomas Sykes, Deutsche Bank]

You mentioned that your peak cost inflation is obviously in H2. In terms of the prices and pricing discussions, have you basically put through everything at the moment that you need to cover the €2.6 billion? Or do you need some more? And how the pricing discussions go when your own inflation is going up, but the spot prices are coming down?

And then just on the depreciation, I think the depreciation to sales was down by about 50 basis points. Is the full year depreciation just expected to be roughly 2x H1, please?

[Alan Jope, CEO & Executive Director]

Right. I'll try and explain in one level more detail the cost outlook. And Graeme, you can address the depreciation point. So just to remind, Tom, on the cost inputs, we've locked in about 80% of our costs for the second half. And those lock-ins did not happen at peak commodity pricing. So for instance, some of the categories or segments where we've seen softening of commodity prices, they've softened back towards the level that we've locked in.

That being said, you'll have seen very clearly in the chart that we're still expecting €2.6 billion in the second half. That's a record high that we still have to cover. We would expect pricing in the second half to carry on in a similar territory to where we are right now, and that does mean that we'll have to land some further sequential price increases in the second half to maintain that level of pricing versus a year ago. And so the short answer, have we put through all the pricing yet? No. And have we seen all the costs flow through so far? No. I think on that, I'll let Graeme talk a bit more about depreciation.

[Graeme Pitkethly, CFO & Executive Director]

I think in terms of the application of the depreciation rates of this year, you can probably just double the number for the first half. A couple of comments on it, though, if I can just expand it out a little bit. A couple of things we've had. Most of our big investments in ERP are getting close to being fully amortized or depreciated now.

A word about overall CapEx. We've stepped up CapEx by a couple of hundred million in this half. That takes us to about 2.1% of sales, which is back to around the pre-COVID levels. That's been a long road back because we had to slow down some of our capital investment projects because of the impacts of the pandemic. And you might have heard me mention in the prepared remarks that we've got quite a fulsome program coming up, including the investment in a complete, very extensive network reset of our supply chain in India. So India is making a lot of investment. We've got a very extensive plan, which will operate over the next couple of years in our business in the U.S. Again, it's a network reset. It's quite exciting piece of investment that will change the business quite significantly there. And we're also investing in capacity expansion upgrades in China. So it's really across those 3 priority markets.

Now we think that the sort of long-term CapEx level, probably 2.7% is about right. And one reminder on that, because very often people do long-term comparisons of CapEx as a percent of turnover. Just a reminder, I have said this a few times, but contract manufacturing and our use of third parties is now used for about 20% of our volume, and that's roughly doubled over the course of the last 6 or 7 years.

And what that means is that the CapEx that sits on our third-party balance sheet, if you want to get a like-for-like long-term analysis of CapEx, you should probably add about 50 basis points on a percentage of turnover level when you look at those analyses. So sorry for using the opportunity to talk CapEx, Tom. But your question on depreciation is, yes.

[Richard Williams, Head, IR]

That's great. Thanks, Tom. Let's go to the question from John Ennis at Goldman Sachs.

[John Ennis, Goldman Sachs Group]

I guess apologies because they are on the same theme, again, of course. But I wanted to ask more explicitly about the retailer price negotiations, please. I guess we're seeing, anecdotally, a bit more pushback on pricing from the likes of Tesco with Kraft Heinz or Mars and Walmart and Target in the U.S. So from your perspective, have these become much more challenging now relative to maybe the start of the year? Or is it just the usual part of business from your perspective?

And then my second question is on the inflation outlook into next year 2023. Obviously, a number of commodities have begun to unwind in recent months, and your NMI figure has slightly moderated versus the 1Q. And I do appreciate it's a very hard thing to have a strong view on it this time of the year given the volatility. But with your hedging policies and based on current spot prices, do you have an early steer on how NMI will look into the first half of next year or better still for the full year?

[Alan Jope, CEO & Executive Director]

Yes. John, the answer to your first question about retailer price negotiations is that we are being very constructive in fact-based discussions with our retail partners. It's a nonissue in 60% of our business in emerging markets where the focus has always been much more on growth than on cost.

Our U.S. retail partners similarly have a strong growth mindset despite pushing back on price increases, but there's a rationality in the discussions at the moment where everyone recognizes the external environment. And in Europe, we've been through now the intense period of price negotiation. We think we've come out in a balanced position. And I would say of all the issues that we have to deal with, there will still be patches of disagreement with our retail partners. But overall, I think there's a sober and rational tone to the engagement. It's not a space that I'm losing much sleep on at the moment.

Then as far as inflation in 2023 is concerned, I think anyone who's giving you too precise an outlook on 2023 commodities, any comments there need to be taken with a pinch of salt. We don't have a crystal ball. We're less than 10% forward covered for the first half of 2023. There will be a significant carryover inflation in the first half. That could be partially offset in the second half depending on future commodity price movements. But I must say we are more focused at the moment on pricing agility than locking in a view on what commodities are going to do into the future.

[Richard Williams, Head, IR]

I think we probably have to make that the last question. Alan, do you want to make any final summary remarks.

[Alan Jope, CEO & Executive Director]

Yes, I would actually, Richard. So of course, as the theme of the questions on the call has reflected the signature contextual impact comes from the high inflation that the world is experiencing, and it's not over yet, we're likely to see sustained inflation and a period of slower macroeconomic growth, but Unilever's strategy is crystal clear. We know to be bold to price first to be able to protect our long-term P&L health and the ability to invest in our brands. How we apply that pricing strategy varies by category and by geography, but we are leveraging our long-standing experience of how to price in high inflationary environments, like David's question to open the call from Latin America, and it's working.

We're going to continue to stay focused on operational excellence and on reaping the benefits of our simpler organization. We've made the big moves to strengthen our execution ability and to reshape our portfolio. And our priority remains simple. It's focused on high-quality, consistent top line growth. And on that note, thanks, everybody, for joining us, and have a good morning.

[Richard Williams, Head, IR]

Thank you, Alan. Thank you, everybody, for listening, and we'll end the call there. Thank you.

[Operator]

This now concludes today's call. Thank you all for joining. You may now disconnect your lines.