Unilever NV's (UN) CEO Paulus Gerardus Josephus Maria Polman on Q2 2014 Results - Earnings Call Transcript

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Unilever NV (NYSE:UN)

Q2 2014 Earnings Call

July 24, 2014 3:00 am ET

Executives

James Allison -

Paulus Gerardus Josephus Maria Polman - Chief Executive Officer and Executive Director

Raoul Jean-Marc Sidney Huët - Chief Financial Officer and Executive Director

Analysts

Eileen Khoo - Morgan Stanley, Research Division

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

Martin John Deboo - Jefferies LLC, Research Division

Harold Thompson - Deutsche Bank AG, Research Division

Rosie Edwards - Goldman Sachs Group Inc., Research Division

Operator

We are about to hand over to Unilever to begin the conference call. [Operator Instructions] I will now hand over to James Allison.

James Allison

Good morning, and welcome to Unilever Second Quarter and Half Year Results Presentation. We think this may be the earliest that Unilever has reported half 1 results, attributed, if I may say so, to our systems and processes and to our financial accounting confidence. And whilst being first out of the blocks has some disadvantages, we're happy that it allows management more time to focus on looking forward rather than trying to explain the past.

In the usual way, the presentation this morning will be given by Paul and Jean-Marc. Paul is going to share his perspectives on the first half year, and Jean-Marc will cover the financial highlights before Paul wraps up. We'll try and keep it nice and efficient for you, but there's a lot of ground to cover, but be sure we'll leave plenty of time for Q&A at the end. We start with the usual disclaimer relating to forward-looking statements and non-GAAP measures.

And with that, let me hand over to Paul.

Paulus Gerardus Josephus Maria Polman

Thank you, James, and good morning, everyone. Before I start, let me just make a brief reference to the tragedy of the Malaysian Flight MH17. Our hearts, thoughts and prayers for peace certainly go out to all of the victims, families and their friends, and certainly for hope and safety of all of humanity to be free of fear, war and the twin consequences, in my opinion, of the face of anguish and mutual self-destruction. I think it is a clear reminder, again once more, that -- if we needed one, of how quickly geopolitical crisis in one part of the globe can affect us all intimately so close to home.

Now on a happier note that we congratulate Tesco on the appointment of Dave Lewis as the next CEO. Dave has, obviously, an outstanding talent, and he has contributed much to Unilever over the many years. We're proud of his assignment there, and we wish him every possible success. It's also attributed to Unilever's bench strengths that talent like Dave can be considered for such a prestigious role. In Alan Jope, we have someone who can take over this wonderful Personal Care business and drive it to the next level. And I hope that many of you have a chance in the near future to meet with Alan.

So let's get to our first half year results. Simply put, our ambitions that we have is to grow ahead of our markets, do that profitably, consistently and sustainably regardless of how tough the competitive conditions may be, and I think we've done this once more. The results we've published today reflect the ninth semester of good, quality growth, as you will see when Jean-Marc takes us through the details of the income statement. We continue to balance the short-term delivery with significant investment in building, what I call, the pillars that support our long-term growth objectives. First and foremost, investing in our brands, especially on the core, as well in R&D to drive to differentiated innovations, like you increasingly see from this company. Secondly, we continue to enter the right spaces on some of our strategic brands that offer superior and distinctive consumer benefits; and thirdly, actively continuing to work to reshape the portfolio towards more focused and strategic growth-oriented businesses. Underpinning all of these are a series of initiatives to drive cost efficiencies and agility. Now I'm more than ever convinced that we're taking the right actions for the long-term health of this business because we should be clear that the external environment in the first half of this year, frankly, has not been easy, and we've been commenting on that before. The context of our performance is an environment which is as tough as we faced in the last 5 years and probably for many years before that. It shows falling GDPs, currency headwinds, conflicts in many parts of the world, and unfortunately increasingly so, and then the impacts of climate change increasingly felt as well.

Just let me say a few words on each. The World Bank has again revised down its expectations for GDP growth. India, Brazil, Indonesia, South Africa and the U.S. have all seen downward revisions. The geopolitical backdrop is as unpredictable and as concerning as ever. The latest waves of conflicts in the Middle East now extend again to Israel and Gaza. The unfolding developments in the Ukraine have huge political consequences. And in Latin America, the economies of Argentina and Venezuela look increasingly exposed. Each new month, the impact of climate change shows also through in extreme weather pattern conditions, most recently again, the typhoon, Neoguri, in Japan, or Rammasun in the Philippines. And for some of you living in the U.S., you read everyday about the droughts in your part of the world. Now all of this impacts many businesses, including ours. So at a global level, we see the aggregate market growth in all of our categories now a little under 2.5%, so the lowest growth rate of the markets for many years. In developed markets, whilst there are some signs of macroeconomic recovery in countries like the U.S. and the U.K., most of our consumers are not yet seeing a pickup. They are increasingly value-conscious. Discount has continued to prosper, and this, in turn, has prompted aggressive promotional responses from other retailers. Competitive activity is extremely high. A number of emerging markets slowed further in the second quarter as well, particularly in places like Southeast Asia, South Asia, as well as China. In aggregate, market growth in the emerging countries is now only about 5%, and market volumes are actually flat. Now many of the currencies which have devalued in the second half of last year and at the start of this year have now started to stabilize or slightly recover. But the effect on our numbers in the first half is considerable, and Jean-Marc will go through that in detail in a few moments. For the time being, market growth rates are clearly subdued. And whilst we don't have a crystal ball, it may be a few more quarters before we see the first signs of meaningful recovery. The challenges of this environment underscores the solidity of our business model and strategy, including the Unilever Sustainable Living Plan. By continuing to focus on innovation, portfolio reshaping and driving efficiency and agility, we are doing the right things to adapt to a world, which, we can all see, is increasingly volatile and unpredictable.

Now against this background, I'm pleased with the first half results. We continue to grow ahead of our markets. We're now gaining or holding share in all of our 4 categories. In fact, we're gaining share in 60% of our business, up from around 55% last year. In emerging markets, it is higher with about 2/3 of our business winning share. In developed markets, the challenge is to get more of our business in the growth segments. The portfolio reshaping we've been doing through M&A is part of this, but innovation, as you can imagine, is also key. And I will talk about that in a moment. In Europe, where markets are flat, we're actually growing sales in 2/3 of the key countries. And in North America, we saw an improving performance through the course of the first half year. But with markets expected to stay weak, growth in Europe and North America is likely to remain subdued for some time.

Now the overall quality of our growth, a very important measure, is good, as you will see when you look at the investment and margin delivery. We're taking balanced decisions on pricing. The current environment in Europe puts downward pressure on prices. While in emerging markets, there is a significant upward pressure from the currency-driven cost increases. Over time, prices will rise to recover these cost increases. But in a competitive market that we're operating and with a watchful eye on consumer affordability, this actually may take several more quarters. Despite these pressures, gross margin improved again on top of the 120 basis points improvement in the first half of last year. Margin-accretive innovations continue to drive a positive mix improvement, overall, in spite of the negative headwinds from the faster growth of Home Care and Refreshment, which are still 2 lower margin categories. We have good momentum from our ongoing savings initiatives as well, with Project Half and low-cost business models supplementing our already ambitious ongoing programs. And that, you see reflected in the gross margin improvement once more.

Our brand and marketing investments are equally up again as a percent of sales and have now increased in absolute every year for nearly 6 years. This is over and above the efficiencies we are getting by reducing the nonworking part and moving more of our spending into digital, so again, quality there.

Our philosophy of continuous improvement is also evident from the progress we're making on reducing overheads, which are down more than 30 basis points at a constant exchange rate. In fact, they're down in absolute spending as well. Now this was achieved despite a high level of cost inflation, further investments in expanding our distribution in emerging markets and the unshedable cost arising from the extensive portfolio changes that we're going through, particularly in the U.S. Here, too, Project Half has supplemented our ongoing overhead reduction programs, and I think it is fair to say that you can see that play out in the numbers. Now the restructuring that goes with this is all part of our ongoing continuous improvement. It is not disruptive, big bang restructuring and not called out separately for that reason as well, just clear, disciplined management.

Core operating margin, the final measure I want to highlight, also shows quality. It was up 30 basis points at constant exchange rate and was maintained at current rates after some significant currency headwinds. Jean-Marc, again, will go into that in a little bit more detail.

In summary, I think we can be pleased with what we have achieved in the first half but, obviously, never be complacent because we expect the environment to continue to be tough and uncertain.

Now let me just say a few words about the actions we are taking to build long-term sustainable growth. The first is differentiated innovations to build presence in parts and of categories that are better positioned to take advantage of emerging consumer trends. In Europe, where the market for laundry capsules is growing rapidly, we've launched in 3 countries the first product that combines both the penetrating power of liquids and the stain-removing strength of powders in a single dose. In Brazil, we've just introduced the first range of stain-removing sprays, powders and liquids under the Omo brand name, off to a great start. And in Oral Care, we are the first to launch in the U.K. a new brand called REGENERATE with Enamel Science. It's a unique formula that actually rebuilds tooth enamel. Let me repeat that: a unique formula that actually rebuilds tooth enamel. The toothpaste retails at GBP 10, and there's a serum to boost the effect, which sells for about GBP 30. The early response has been good. Ice cream innovations like Ben & Jerry's Cores, Magnum Infinity and Breyers Gelato also show how technology can allow us to differentiate from competition and realize, increasingly, premium prices. It is now evident that the challenges set by the Unilever Sustainable Living Plan are also opening our eyes to opportunities for innovation and growth that we wouldn't otherwise have seen. I am particularly pleased to see the success of our compressed deodorants that are driving share gains in the U.K., and we are growing in mid-single digits and are actually rolling it out now to other countries in Europe as well. Lifebuoy, our most purpose-driven brand, may I say, has actually grown 16% in the first half of the year. This has been helped by soaps that promise to protect against 10 infection-causing germs. Our water purifier is also growing strongly. And sales of Qinyuan, the new acquisition in China, are up nearly 40% so far this year though that's not yet counted in our underlying growth numbers, of course. All these innovations illustrate the value of our strong and sustained investments in research and development. With these now more integrated into the category teams, we're actually getting new products faster to the market, but also new products that have more distinctive benefits that consumers are prepared to pay premium prices for and, obviously, drive the share progress that I've just reported.

Let's move on to take -- to talk about the sustainable growth in white space entries. We also continue to take opportunities to introduce our established brands into white space countries. Last quarter, for example, we made 3 significant moves: We introduced our -- or reintroduced, if you want, Omo, our Dirt is Good laundry brand, into Saudi and the Gulf states off to a flying start. We launched Clear in Japan, and we took Lifebuoy soap to China, all substantial investments for the long term and, again, once more, all of them off to a good start.

At the same time, we're investing in organic growth opportunities. We've continued to reshape the portfolio through M&A. In the last 6 years, we've disposed of about EUR 2.5 billion of turnover mostly in Food, and we've actually acquired nearly EUR 3 billion in turnover mostly in Personal Care with the Sara Lee brands, Alberto Culver and Kalina that you are now, hopefully, familiar with. Now I've talked a number of times about the first 2 of these. So let me just say a few words about Kalina for the people that are less familiar with it. You will remember that we completed the acquisition late in 2011, and in so doing, we acquired a number of strong local brands all occupying natural positions at affordable price points across face care, skin care, shampoo and mouthwash. Since the acquisition, the Kalina brands have continued to grow in markets which are stressed and, what you will call, anything but easy. We have extended the brands into new segments, like deodorants and meal ranges. All this has given us a platform to turbocharge our overall Personal Care business in that part of the world, and we've been increasingly growing ahead of market and gaining share. So Kalina is a good example of the kind of bolt-on acquisition we continue to target. More recently, we've made 2 smaller acquisitions in rapidly growing markets as well, with the T2 in premium teas and the Qinyuan water purifiers. Overall, the M&A activity, together with fast organic growth, has increased our Personal Care rate to more than 36% of total sales, up from 28% in 2008. Now this has helped to transform us into one of the world's leading personal care businesses, with its stable of outstanding brands competing in mass markets all over the world. The portfolio of reshaping has also had a profound effect on our U.S. business, where much of the disposal activity has actually taken place. It means that now, for the first time, may I say, the U.S. is well aligned to Unilever's global strategy in terms of both brands and portfolio. It's taken a while to get there. I recognize that, but I'm now confident that we have the platform in place for more consistent, improved performance in North America as well. Our portfolio is increasingly weighted to emerging markets, which are now up to 57% of total sales. And the increased stakes we have taken in India and Pakistan brings our earning exposure in these markets more closely in line with the share of turnover. These actions that we're taking to sustained, long-term top and bottom line growth are underpinned by our continuing drive for agility and cost efficiency. I've already referred to this, and Jean-Marc will come back to it. So I won't say much more. But it's critical to provide the fuel for the investment and the many growth opportunities that we still see ahead of us.

Now finally, before I hand over to Jean-Marc, let me just say a few words on Food. The Foods category continues to be a strong contributor of profit and cash to Unilever. Margins are very good, improved further in the first half of the year, and our shares are strong. The challenge is, of course, to get to consistent growth. And given the profile of our business, this is likely to be a lower growth than other categories, but it should improve over time as we change our footprint. The disposals we've made are increasing the proportion of our Food sales that are in emerging markets. And here, we actually grew at 5% in the first half and closer to 7% in the second quarter, well ahead of our markets. But 60% of our Food business is still in developed countries, where our markets are down by nearly 3%. As I mentioned earlier, our challenge is to reposition our portfolio towards the growing segments. In Savoury, for example, we've been extending the baking bag ranges that are now sold in over 40 countries to include microwave bags for vegetables. And we've taken the jelly technology from our stock pots into a new range of seasonings. Sales of soup had not helped, unfortunately, by the warm weather in Europe in the first half. Here, the growing segment is wet soup, where we have historically been underrepresented but are now more active. I know you're interested in the progress we are making on Spreads as well. There are, undoubtedly, signs that we're on the right track. Our volume trend is improving, and we are now gaining share from other margarines. The next step is to stem the market decline and stabilize our sales. We've entered the growing segment of spreads made from a blend of vegetable oil and butter; Rama, whose butter is doing well in Germany. And we have now launched Gold from Flora and Bertolli with Butter in the U.K.

So all in all, Unilever's first half performance has been solid and of good quality. While there are trade-offs across the categories, the business, as a whole, is delivering consistently despite the difficult and unpredictable external environment.

And for that, let me now pass over to Jean-Marc, who will cover the financial performance in more detail. Jean-Marc?

Raoul Jean-Marc Sidney Huët

Thank you very much, Paul, and good morning to everybody. Let me first start by just taking a few moments to walk you through the translation effect of currency since it's such a big theme and is -- has been so significant for the first 6 months of the year. Most currencies have weakened against the euro, compared with the first half of 2013. Now it's worth pointing out that this is driven by the exchange rate movements during the second half of last year, not in the recent months. The biggest impacts are Brazil, Argentina, Indonesia and India. But the U.S. dollar has also weakened compared with the first half of last year, while the sterling has strengthened. So together, this has reduced turnover in the first half by 8.5%. Now the currency translation impact on profits is larger than that on turnover. Now you know that we have a reasonably good match between costs and revenue generation by country, and there are some differences. Now normally, this is not an issue. The variations between core operating margin at constant and current rates are usually the same, typically plus or minus 10 basis points or less. But this year and in the first half, we have a double whammy. The stronger sterling pushes up the costs of all the U.K.-based part of our global resources. The category teams and R&D are examples of this. You also know our sales are more skewed to the emerging markets, where the currencies have been weaker, pulling down the revenues, as we've just seen. So this has produced a negative currency translation impact in the first half of around 30 basis points on core operating margin, hence, meaningful for the first time, with an impact on earnings per share down 12%. The impact of currency translation on cash flows in the first half of the year is close to EUR 400 million. So I just wanted to go through the whole translation impact through the P&L and cash before getting into the heart of this discussion. Now at this point in time, I'm sure you're wondering how to model these effects for the rest of the year. Now I cannot help you when it comes to forecasting exchange rates, but what I can say is if they were to stay where they are today for the rest of the year, the negative impacts for the full year would be the following: around 5% down on turnover, 20 to 30 basis points on core operating margin, around 8% to 9% on core EPS, and around EUR 300 million on free cash flow, with a small positive in the second half. As you well know, it's worth remembering that these are translation impacts of currency. The transaction impacts on local costs and pricing are included in the local currency numbers. I'll come back to that in a moment.

So with that as a context, let's turn to the financial results for the first half year. Underlying sales growth of 3.7% includes 1.9% from volume and 1.7% from price. That's a good balance. Our emerging markets businesses grew again at 6.6%, roughly the same level as in Q1; and our developed markets business, basically flat, reflecting the weak market conditions. M&A reduced turnover by 0.4%, and this is through the activities and disposals of Wish-Bone, Skippy, Unipro, Peperami, Bifi, only partly offset by the acquisitions of Qinyuan and T2. The important disposal of the U.S. pasta sauces, as well as Slim.Fast, those will be effective from Q3 onwards and, together with the other completed disposals, acquisitions, will reduce turnover in the second half of the year by just more than 1%. With the currency translation effects, turnover in the first half year was just north of EUR 24 billion at EUR 24.1 billion.

Turning to margins. Gross margins increased by 10 basis points. The impact of margin-accretive innovations continues to be a powerful engine on the ongoing mix environment and the gross margin gains. As Paul described earlier, supply chain savings programs continue to deliver well. These savings with price increases largely, but not fully, offset the effect of cost inflation. This cost inflation includes mid-single-digit increases in raw and packaging material commodity costs. The majority of these increases come from the transaction effect of currencies. Let me give you an example, a place like Brazil. Almost all our production, most of our suppliers are local, but the materials that our suppliers are buying are often traded in dollars. So the weaker exchange rate drives up the local currency costs. We've, obviously, been taking price increases, and we will continue to do so. And so over time, this will recover the on-cost. But in some countries, there is a lag, depending on the market dynamics.

Turning to brand and marketing investment. This increased by 10 basis points. Now it's important to note here the efficiency of our investment continues to improve with the less, so-called, nonworking advertising production and fees going down. We're now getting close to the best industry benchmarks. We are also continuing to shift most of our investment -- or more of our investment, excuse me, to digital, where the returns are increasing as we learn and adapt quickly. Let me give you an example. In India, we now offer a free radio channel available over mobile phones through a callback. This provides free entertainment interspersed with our product advertising in rural areas where traditional radio does not reach. Within 6 months of launching in Bihar, in northern parts of India, it became the biggest media channel in that state, Bihar, with our ads heard over 50 million times by 8 million people. That's half the size of The Netherlands. Our overheads ratio improved by 30 basis points, and this, at constant exchange rates, as Paul mentioned. We are being much more disciplined in our control of costs, have done so over the last 5 years, but more focused more recently given the volatility, as well as the inflationary headwinds in emerging markets. We're starting to realize the savings from Project Half simplification program. And we are fully on track to complete it by the end of the year. And this means that we will get the benefits of the full EUR 500 million in 2015. As a consequence of this, restructuring costs were a bit higher than in the first half of last year. But as you know, we absorbed this within our core operating margin, and that also includes the adverse currency mix effect that I spoke about earlier. This disciplined approach to maxing the mix, savings and balanced decisions on pricing has enabled us to increase the core operating margin by 30 basis points at constant exchange rates. After the currency translation headwinds, core operating margins at current rates were unchanged at 14%.

Turning to the bottom line. Core earnings per share was up 2.3% at current exchange rates to EUR 0.78. At constant exchange rates, the increase was actually seriously double digit at 14%. The contributions: Firstly, operational performance of the business added 6.9% in the first half, coming from underlying sales growth and the expansion in core operating margin. Secondly, the tax rate on core earnings per share was lower in the first half at just shy of 24%. Our guidance at this point in time for the year remains at around 26%. So the positive boost in the first half will reverse slightly in the second half. And please remember, we had a low tax rate in the second half of last year. A lower minority share of profits contributed just above 2% to EPS. This includes the effect of our increased shareholdings in India and Pakistan that took place during the course of last year. But it also reflects the fact that we are making significant marketing investments -- Paul alluded to this, in Saudi Arabia, but also in South Africa. And the minority shareholders help fund the share of this.

Turning to the purchase of the Leverhulme family rights. This contributed 0.6% through the reduction in the diluted share count. The impact in the second half of this year will be just north of 2%. Outside core EPS that's in the non-core items, we booked a disposal profit on the Bertollli, Ragu U.S. pasta sauce, but also the impairment of the remaining goodwill on Slim.Fast, finally. In total, non-core items, after tax, represented a gain of EUR 542 million. Worth remembering for yourselves that the pasta sauces business in the U.S. and Slim.Fast disposals will be dilutive to core EPS in the second half year, slightly more than 1%, but that is partly offset through the accretion of the Leverhulme purchase.

So I think you can see that we really are working on all the levers to convert the revenues into operating margin and the operational performance into earnings per share. We're managing our balance sheet effectively, gives us access to financing at very attractive rates, while preserving financial flexibility for M&A were it to arise. We've been reducing our long-term exposure to pension financing costs with the closure of direct benefit schemes and reducing funding deficits. And we've been using cash to make earnings-accretive investments, the acquisition of the Leverhulme family rights being the latest example.

Turning to a free cash flow, which was at EUR 0.8 billion. As usual, there was a seasonal outflow of working capital in the first half year. We expect this to reverse in the second half, as it always does. Rather than just looking at a position at a single point in time, it's most important to look at the average over a 12-month period when it comes to working capital. And as you know, it is negative, but it's on this basis that you see that our position has continued to improve. We are amongst the best-in-class here, although we continue to recognize the opportunity going forward in reducing stocks. As I mentioned, the adverse currency translation impacts cash flows around EUR 400 million, but this should not be repeated in the second half, in fact, a small positive. Capital expenditure at EUR 0.8 billion was slightly higher than the first half of last year, which reflects just more even phasing rather than anything else. We expect the full year to be between the 4% to 4.5% of turnover, as original guidance predicted. As you know, our free cash flow measure is easily derived. You take the cash flow statement as cash flow from operating activities, less tax, less capital expenditure and interest. This has the benefit of simplicity, transparency. But while it excludes the proceeds of disposals, it does not exclude the tax paid on these disposal profits. Again, normally not a major issue, but I wanted to highlight this because this year, this will be the case. In the first half of the year, we paid around EUR 150 million of tax on last year's disposal of Wish-Bone, quite high given the U.S. tax rate. But if you were to exclude this, our free cash flow would have been closer to EUR 1 billion. In the second half year, a heads-up, we expect to pay around EUR 600 million of tax on the profit from the U.S. sauce disposal, which will be included in the reported free cash flow. Just to give you clarity, we'll obviously show an adjusted figure. On the adjusted basis, we expect full year cash flow basically to be in line with the levels last year.

Now turning to the balance sheet. Adjusted net debt at the midyear was EUR 9.3 billion, up by EUR 0.8 billion on the year-end position, a number of moving parts, acquisition of Leverhulme proceeds of disposals and, of course, the usual seasonal working capital outflow on the other side in the first half. Net pensions' deficit increased by EUR 0.5 billion to EUR 2.5 billion, and this primarily reflects the impact of lower bond rates used to discount the liabilities, partly offsetting the good returns that we've made on our investments. Cash expenditure on pensions for the year is expected to be around EUR 700 million to EUR 750 million, with around EUR 350 million already spent in H1. Turning to the quarterly dividend, unchanged at EUR 0.285 following last quarter's 6% increase. Following our normal practice, each and every year that we've done over the last 3 to 4 years now, the next time that we will look at this is after the year is completed at the time of the first quarter results.

So in summary, the financial results reflect a solid performance in the first half year; at constant exchange rates, gross margin, brand and marketing investment and core operating margin all up. And we continue to expect to deliver another year of steady improvement in core operating margin at current rates despite the currency headwinds. These headwinds are, again, holding us back for making more progress on current rate EPS, what you are so focused on, as well as ourselves. And I know this matters, and as a result, we are focused. But I am confident that we will see a resumption of the Unilever financial growth model with healthy growth at both constant and current rates once the currency effects ease.

Let me now hand over back to Paul.

Paulus Gerardus Josephus Maria Polman

Thanks, Jean-Marc. For the interest of time, let me just wrap up. The strategy we've set out and are implementing is serving us well in a challenging and volatile environment. I think you've got that. The first half results keep us on track to deliver our priorities for 2014. In fact, these priorities remain unchanged: volume growth ahead of our markets; steady and sustainable improvement in core operating margin; and, last but not least, a strong cash flow.

With that, ladies and gentlemen, let's open the lines for questions.

James Allison

Thanks, Paul. [Operator Instructions] So I think first on the line is Eileen Khoo.

Question-and-Answer Session

Eileen Khoo - Morgan Stanley, Research Division

Just 2 questions from me. The first one is on your margin. So your core operating margin was better than your new guidance, which, I think, you said, would be slightly down in the first half. So I'm wondering where the upside of price was for you. Was it due to cost savings being achieved faster than expected, maxing the mix, et cetera? Some color around that. And then the second question is on Latin America. It looks like your volume growth there decelerated. I was just wondering whether this was purely a function of the tougher comp. Or was there any other underlying factors? And could you give us a bit more color specifically to your performance in Brazil?

Paulus Gerardus Josephus Maria Polman

Okay, thanks for the question. I'll keep it very brief because the gross margin is up again 10 basis points despite a lot of headwinds, the currency headwinds, some of the cost that keep going up, the mix, which is obviously this time, the strong growth on Refreshments and Laundry working against us. Despite that, we go up 10 basis points. I think you see here the effects of our margin-accretive innovations. Our innovations, really, have been very, very good, like the Ben & Jerry's Cores or the melange or the compressed deos. And on the other hand, you see this enormous work that we continue to do on making this company more cost-efficient and agile. Secondly, you see that show up in the indirects, 30 basis points down despite the relatively softer volumes versus other quarters that we've had or other years before. It's actually a good achievement because you have to work quite as hard to get these results. And that's why you see our core operating margin performed the way it is. We managed that balance very well. I think for the second half, we should -- we have the same factors to deal with, but we should not expect that to be significantly different than what we have seen the first half. In terms of the Latin America business -- not to go specifically in all of the businesses, but you've asked about Brazil. You have clearly seen as well by reading the newspapers that the Brazilian economy has basically come to a grinding halt. It's a 2% growth and significantly less than we've seen in previous years. And then for the region itself, you have the uncertainties that are there in places like Venezuela and Argentina that affect our business equally. Despite that, we've had good growth, outperforming the markets once more, and we'll continue to do that. In Brazil, we've had good growth in our base business, with the majority of our business building share. And at the same time, we've used the opportunity to actually launch the -- a new range of Omo boosters for the wash, which are off to a very, very good start. So we've been able to get good business in Brazil compared to our competitive set, but the overall region, obviously, is not showing yet signs of recovery.

James Allison

Thank you, Eileen. Celine?

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

Yes, Celine Pannuti from JPMorgan. I have, well, 2 questions, the first one on pricing. You just mentioned Venezuela, Argentina. Could you give us a number x your pricing, excluding this inflation? And in fact, my question on pricing is trying to understand the outlook in emerging market and in developed markets, where we -- I feel that in emerging markets, we're seeing less pricing than what I thought. And while in developed markets, we're continuing to see some negative pressure. We've seen that especially in Western Europe. So if you could comment on those 2 that would be great. My second question -- thank you for talking about the Food and how you are making that, trying to look more at the profit -- sorry, the growth angle to it and the emerging market footprint. I was wondering -- the final question, are you happy now with the disposal? Are you happy with the kind of portfolio you have? And as you look at being more growth-orientated, do you think that there are -- about the category, you should be -- or the -- or acquisition, you should be making in this category?

Paulus Gerardus Josephus Maria Polman

Yes. I'll have Jean-Marc go into the first part for a second on the pricing and take the European pricing as well then the whole thing. And I'll go into the portfolio.

Raoul Jean-Marc Sidney Huët

Yes. I think I understood most the questions about pricing around South America. And if there's an additional part that I haven't covered, please come back to me. First point, you should know that Venezuela, as a country, is very small for us. It is less than 0.5% of turnover. So it really isn't material either in South America or in the totally of our numbers. So I just wanted to be very clear on that. Argentina is an important market for us. It's basically 2% of our turnover. And absolutely, the results in Argentina have been driven by pricing and only pricing. As Paul mentioned, if you just look at South America, however, we've had very good volume contributions from places like Brazil, some of the smaller countries. By the way, we've had some very good volumes coming through in Mexico and the like. So there's a much more better volume/price balanced equation for the entirety of South America. The actual contributions of Argentina's pricing, as well as Venezuela, if you want to put it together in the quarter, is small. It's not too different, a little bit higher but not too different than the same period last year.

Paulus Gerardus Josephus Maria Polman

Yes. So on the portfolio, if I could just go to the portfolio then very quickly. We've, obviously, done an enormous reshaping of the portfolio. We've divested, by memory, about in the last 5 years, EUR 2.5 billion. We've made acquisitions of about -- a little bit higher, about EUR 3 billion. On top of that, we've obviously made the acquisition on our Indian business. So we have spent our money wisely. And we actually just had a review with the board yesterday as a coincidence on our M&A, and we're very pleased with the returns we're getting on Sara Lee, Alberto Culver and Kalina. So, so far, that has worked out well for us. As a result, we've also reshaped the Personal Care portfolio. You now see 38% of the portfolio. And in fact, we have more brands in Personal Care that our leading brands than many of our competitors now. So Personal Care is getting a certain level of gravity and maturity that is serving us well. At the same time, the big challenge that we had, which I've talked about many times, was the U.S., which, frankly, have been operating very long on an independent strategy and, if I may be frank, had a portfolio that was not aligned with the company's overall strategy. For the first time in the history of the U.S., may I say, we have done major restructuring. The Alberto Culver acquisition, obviously, was a big help, but it allowed us to do a major restructuring without losing critical mass of our Food business to bring it more in line with our company's efforts. That has been the biggest transition, I think, North America has seen in its history. We have had -- obviously, in this quarter, the last part of it, was the divestitures of Slim.Fast and the Ragu, Bertolli business. So these are major effects that Kees Kruythoff and his team have handled tremendously well. Through all of that transition in the U.S., we've continued to grow our Personal Care share, as you can see from the reports you get from some of the others who showed their numbers to you. So we are very pleased with that. I think we're at a point right now -- we were planning to do about EUR 500 million divestiture. In the last year, we've actually done EUR 1 billion. So we're running a little bit ahead of what we were thinking. The opportunities were right. The price, obviously, was superb. We're at a point right now that I think our portfolio, plus or minus, is where it is to keep growing our business.

Raoul Jean-Marc Sidney Huët

And I think, Celine, you also asked a question about Europe and pricing, specifically. There are really 2 stories taking place within Europe. If you take Southern Europe, Spain, Greece, Italy, you're actually seeing an improvement in pricing between Q1 and Q2. The pricing growth has actually been positive. That cannot be said for the more northern countries, be it France or Germany or The Netherlands, where there is downward pricing pressure. And obviously, the macro environment, the discounters and the promotional competitive activities have not been helped, so 2 different trends taking place in Europe on pricing.

Celine A.H. Pannuti - JP Morgan Chase & Co, Research Division

Yes. Actually, I asked, in fact, for emerging markets on pricing.

Paulus Gerardus Josephus Maria Polman

Yes, emerging markets on pricing. We are, obviously, pricing there because of the enormous currency adjustments that we have seen, but the currency adjustments have been on such a magnitude that we don't see the market pricing that through right away. It takes a little bit of time to get that out. So that has not been -- we've not been able to capture all of that, for sure, in the first half. But we will be recuperating that as time goes on. But we want to do that in a way that we don't lose our strong, competitive position. So it's that fine balance that we're managing, and we're able to do that, as I show you, by having our gross margins still go up and our core operating margin on a constant basis go up. So -- but it's a fine balance, and we haven't recuperated all the pricing yet, for sure.

James Allison

Thank you, Celine, a tricky line there. It's a little bit hard to hear you. Hopefully, we'll hear the rest a little bit more clearly. It think next on the line is Martin Deboo. Welcome back, Martin.

Martin John Deboo - Jefferies LLC, Research Division

You've done a great job on margin at a time when markets are doing your bidding and believed that, that momentum in H1 will carry through to H2. And Jean-Marc, you've made quite a striking commitment to earnings growth. I guess, the question I want to ask is, is the calculation changing internally in terms of the balance between growth and margin? To what extent do you think that we're in a blip situation in EMs and top-line-driven growth is going to resume? Or to what extent do you think the new normal is 5% organic growth and, therefore, there's more of an imperative to deliver earnings growth through margin? Just to appreciate a high-level perspective on that.

Paulus Gerardus Josephus Maria Polman

That's good, Martin. The high-level perspective is, obviously, fairly simple. We want to have consistent performance. We think in this volatile market, the consistent performance is very important to us, that you can rely on us every 6 months that you see numbers, where we grow ahead of the market, so that -- which we call also then competitive growth but that we also do it with core operating margin expansion, which we call profitable growth. So we're balancing that. There is no doubt that the global market has come down. The global market growth for categories that we're in is about 2%, 2.5%, and that is definitely 1%, 1.5% less than we were a year ago. I warned about that. Some people didn't believe that, but I must be subscribing to different newspapers than they are. So the 2.5% for us is there to stay within the -- at least for the next 6 to 12 months, in my opinion. Within that, we will always be sure that we keep our cost under control to deliver as well on our core operating margin. And I think we have now shown once more that we can do both and keep our business healthy. The indicator of 60% of our business growing share, to me, is an equally important indicator as the core operating margin expansion. And we would not have been able, in my opinion, if I may be frank, to do such great work on costs and indirects if we've made it not clear to the company that -- internally, that, that is how we run the business. And I think the system now understands that with an increasing level of discipline.

James Allison

Okay. Martin, thank you. Next on the line is Harold.

Harold Thompson - Deutsche Bank AG, Research Division

I had 2 questions. First one is, you've spoken quite a lot about maxing the mix and focus on gross margin overall. And we've clearly seen consistent progression of gross margins in recent results. I noticed that the gross margin is up 10 basis points in the first half on a constant-currency basis. It's somewhat slower than we've seen recently. Is there anything you could maybe add to that? Secondly, you seem to be kind of putting all the levers, achieving excellent disposal prices on the assets you're selling, tactical buybacks from the family and, clearly, the buying in of minorities clearly helping profits. And clearly, your balance sheet, overall, remains solid. I mean, this kind of very flexible approach to management is clearly helping shareholders. Is that something we should expect to continue?

Paulus Gerardus Josephus Maria Polman

Thanks, Harold. On the first one, I think the gross margin improvement, we're actually pleased about, because we had a lot of downforces. The slow growth is a downforce in a business like ours. The geopolitical environment, anything that you read in the newspapers, cost us EUR 10 million, EUR 15 million right away. In the Ukraine, we've seen the currency go down by half, or in -- what is now happening in the Middle East or -- these things absolutely don't help us, being such a global company. But likewise, what you see was the issues on the natural disasters, et cetera. Unfortunately, this world is in a period of -- a critical period of need for leadership to get these downforces reversed. And then the main effect that we have to deal with is that we've seen strong growth on our ice cream business, which was very good, helped by the weather, about 25 years, Magnum, Ben & Jerry's Cores, Gelato. We have now some good innovations. And our Laundry business, we have actually -- where we made a commitment for the long term to grow our Laundry business. We were in too many places defending. We defended fairly well. So that confidence is back. We know what the product qualities that we need, the marketing plans, and we're doing well with these attacks that are still happening at a ferocious level. But at the same time, we are also in a position to now, for the first time, again, proactively launch. And we launched in the Middle East. So the mix of Laundry and ice cream, actually, is pulling down the gross margin right now. I think that's a temporary effect that just falls into 6 months. Despite that, we're up 10 basis points. Now the second question, I'll hand over to Jean-Marc because, obviously, this discipline that you are after, that you, indeed, see and where we do the right things for the long term is very important for us. All the decisions we took in the quarter were not to manage the quarter. They are to manage this business for the long term and put it in a stronger position. So I'll let Jean-Marc talk about that in a second.

Raoul Jean-Marc Sidney Huët

Sure. So I do think that we are pulling all the levers, but it is a reflection that we're just looking at the whole model in its entirety rather than just being focused on growth 5 years ago. Then, growth and comp used to be our definitions and it were externally based definitions. As you remember, from the investor conference, the presentation I gave, it's about translating revenues into operational performance and translating comp into earnings and earnings into cash. And so we'll do what's right for the business below the line, always in a responsible manner. But yes, we will continue.

James Allison

Thanks, Harold. We've got a limit of 9:00. So we're going to try squeezing as much as we can in the next 6 minutes. Rosie, you're up.

Rosie Edwards - Goldman Sachs Group Inc., Research Division

Two quick questions from me. Firstly, China, in the second quarter, you're talking about slightly slower growth, which seems to be at odds to the first quarter. So I just wanted to know kind of what have changed there, any specific categories you can call out. And also, just, again, on pricing, you talked about the European outlook, but anything you can say on North America would be very helpful as well.

Paulus Gerardus Josephus Maria Polman

I'll do it very quickly. Thanks for asking that. On China, there has been a big slowdown in Tier 1 cities. Most of the companies have built brands and their equities in Tier 1 cities. I'm talking about the Shanghais and Beijings of this world. In fact, when you, again, read the papers, that slowdown has reflected itself in the markets that we are operating in, in now 2% or 3% depending on how you read it. There is a little bit more growth, obviously, in the Tier 2 and Tier 3 cities, but you need to build your businesses there and -- now that is what is happening right now. We are growing share in China in about 70% of our business, well ahead of our competitive set, and some very strong growth in the Skin Cleansing, the hand and body, the shampoos. So we're actually very pleased with our China business that is still performing well ahead of the market, but the Chinese economy, obviously, needs to pick up again. And that's what we're working on and, at the same time, expanding our businesses now into the broader footprint. That's why we've built -- we're in the process of building, actually, quite a lot of production facilities right now in the Chengdu region and to expand to the west of China. That's exactly meant for that reason. North America, the question on growth in North America, it's a little bit difficult because although you see the numbers of unemployment going down, which is, obviously, very good news, what -- for some reason, the newspapers don't pick up on this. There are less people in the active workforce, young, and the rest of the population as well has never been so low. So the broad base is not there. And then the compensation for work is not the same as what the compensation used to be. People don't actually have the same spending power. So we see this downward pressure on the markets in the U.S. You see that reflected in high promotional activity. We have competitors that run 4 "buy 1, get 1 frees" on shampoos, and we have to survive in that environment. So I don't think that will fundamentally change moving forward, but our portfolio now is stronger. So I am banking on our initiatives and our portfolio. You could -- a good example would be the cups launch on Lipton, an under-supported brand for way too long. We are now relaunching that. The brand is growing again. We are now, in a relatively short time, market leaders in cups. And it's one of the fastest selling SKUs now for the retailer. It's a good example of that. The speed at which we bring in the premium ice cream, we have now taken a firm market leadership on ice cream in the U.S. And more importantly, it's come behind premium variant, whilst we delist the unprofitable variant. So -- and the same, you see in other parts of the business. So I'm hopeful that -- and the numbers need to support that, that the U.S. will actually continue to show more positive numbers moving forward.

James Allison

Thank you, Rosie. I think we've only got time for one more. So any others, please come to IR in the normal way, and we'll endeavor to answer your questions afterwards. So the final question is you, James.

Unknown Analyst

It's a small number, but the underlying depreciation charge, I think, fell by about 10 basis points in the half year. It's 2.2% of sales. How does it keep going down given that you're consistently spending over 4% of sales by way of CapEx? And can we expect that to continue much further?

Raoul Jean-Marc Sidney Huët

I won't get into the specific point. Please ask the investor team on the actual 10 bps. What I can tell you is that our CapEx, the depreciation levels are actually going to slowly come down given the period of serious CapEx investment, including in places like Europe, where we have been at 1 in 3 quarters. We'll be going down towards the 1.1, 1.2x to a much more healthy CapEx-to-depreciation level.

James Allison

Paul, just to wrap up?

Paulus Gerardus Josephus Maria Polman

The -- well, first of all, I wish you all a happy holiday season, and get some rest before we start again on the second half. We are very confident that we will deliver the numbers, but we have to work on it very hard with the team. I also want to thank you all for not asking, for once, a question about Spreads now that the numbers are getting better. So that is appreciated. But seriously, we certainly look forward to a good second quarter again, and your support and interest is highly appreciated. I think the world deserve a break. And hopefully, we see many of you at the investor event in December. Thank you very much, and hopefully, see you soon. Bye-bye.

Operator

Thank you. This conference has been recorded. Details of the replay number and access code can be found on Unilever's website. An audio webcast will also be available on Unilever's website, www.unilever.com, and on the Investor Relations app.

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