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Unilever NV(NYSE:UN)

Q3 2007 Earnings Call

November 1, 20076:00 am ET

Executives

Jim Lawrence - CFO

John Rothenberg - SVP of IR

Charles Nichols - VP of IR

Analysts

John Parker - Deutsche Bank

Marco Gulpers - ING

Julian Hardwick - ABN Amro

Robert Jan Vos - Fortis

Graham Jones - Panmure Gordon

Arnaud Langlois - JPMorgan

Thomas Rousseau - Rousseau Gardner

Jeff Stent - Citibank

Polly Barclay - Cazenove

Simon Marshall - Bear Stearns

Jim Lawrence

Good morning, everyone. It is a great pleasure to be hostingmy first quarterly results call as CFO of Unilever. I have now been working atUnilever for two months. What I have learned so far reconfirms the duediligence, which I did before joining the Company.

Now is a great time to be a part of the Unilever team.There's a lot of hard work still to be done, but there's great opportunity tocontribute to a business that has already started to unlock its true potential.Some of you who are listening today I have already met; most of you, however,not yet.

Over the next few weeks, I hope to meet many more of you.Our forthcoming investor event in Indiawill provide one opportunity and I'll also be taking some additional days tomeet shareholders later this month, and into early December, just before we gointo our next blackout. I cannot promise universal coverage straightaway, but Ido hope that by the end of the year that most of you will know me a little bitbetter. In any event, I look forward in the near future to meeting all of youin person.

Today I am joined by John Rothenberg and Charles Nichols ofour IR team. I am sure you know each of them quite well. As John will explain,our results in the third quarter are, very much, a continuation of the momentumestablished during the first half of 2007. Sustained organic top-line growthwas at the upper end of our 3% to 5% range, delivered in a quality way.

We're focused on our growth priorities and we're supportedby stronger innovation, improved speed to market, and better in-market execution.This all results in the third consecutive quarter of underlying marginimprovement, despite a significantly tougher input cost environment, and we'llhave more on that in a moment. And these results are against the background ofour accelerating change program, change in terms of organizationsimplification, supply chain restructuring and portfolio development.

With this brief introduction, I now turn it over to John.John?

John Rothenberg

Thanks, Jim, and good morning everyone. As usual, I drawyour attention to the disclaimer relating to forward-looking statements andnon-GAAP measures.

Our sales in the third quarter were EUR10.2 billion, whichis 1.2% ahead of last year. This was after 0.9% impact from disposals, and anadverse currency effect of 2.3%. The latter reflects the strengthening of ourreporting currency, the euro, against a wide range of currencies.

Many of these currency movements date back through 2006. Iftoday's exchange rates were to remain unchanged, the full year currency impact wouldcome down from the 3% year to date to around 2.5%.

Underlying sales growth in the third quarter was 4.5%. Butfor the previously announced systems implementation in the United States, which moved EUR70 million of salesout of Q3 into Q2, underlying sales growth in the third quarter would have been5.2%.

This means that growth momentum across all three quarters in2007 has been pretty steady, at just over 5%. Within this, there has been asteady increase in pricing, from around 1% in the first quarter to just over 2%in the third.

Turning to our growth performance: by region: Underlyingsales growth in Europe for the first nine months standsat just under 2%. The performance across Southern European markets, and inCentral, and in Eastern Europe remained strong, with Russia,in particular, continuing to grow in the high teens. Performance in our mainNorthern European markets has been more varied, with some underlyingimprovement in Franceand Germany,but continued weakness in the United Kingdom.

Sales in the third quarter in these markets were especiallyimpacted by a sharp decline in Ice Cream, caused by poor weather across Northern Europe. This lowered underlying sales growth in the whole regionby around 200 basis points in the quarter to 0.7%.

Volumes in Europe are up by around2.5% year-to-date, but pricing remains negative. We have raised prices in anumber of categories, most notably in Spreads, Dressings and Savory, and wehave more increases in the pipeline. However, at the same time, we haveresponded to a step-up in competitive promotional activity in a number ofmarkets. This, together with substantially lower olive oil prices, has led to asmall overall price reduction so far this year.

The Americasregion grew by 4.2% year-to-date, and 2.8% in the quarter. The latter impactedby the EUR70 million of sales pull-forward in the United States. Without this, Americas'growth in Q3 would have been 4.8%. The USgrew by 3.6% across the nine months, a number that is unaffected by the salespull-forward. There is, as yet, little sign of a significant slowdown in USconsumer demand affecting our business.

So far this year, we have seen good growth in the USacross our foods categories, foods categories other than Ice Cream, in PersonalCare and in laundry. In recent months, we have been taking some aggressivepricing action in some of our categories. This has had some impact on volumes,most notably in Personal Wash and Ice Cream.

Latin America grew by 5.1%year-to-date, with a slightly stronger third quarter driven by better growth inMexico. Brazilcontinues to be a difficult market for us this year, where we face challengesfrom local competition in several categories, especially tomato products. Alsoin the third quarter, we raised prices in hair, which triggered some tradede-stocking. Other Latin American markets continue to grow strongly.

Asia/Africa remains a major driver of Unilever growth. Theregion grew by over 11%, in both the quarter and year-to-date. This includes asignificant contribution from pricing of just over 3%. Growth remains broadbased, with all our large categories growing strongly and with double-digitgrowth in most key markets, including India,China, Indonesia,South Africaand Turkey.

The growth across Asia/Africa is a reflection of ourportfolio strategy, which is focusing resources on markets which offer the bestgrowth opportunities, and where we have competitive advantage. Overall,developing and emerging markets around the world now represent 44% of our totalsales, growing at 10%.

Moving from: the regions to categories: We have benefitedfrom a strong innovation program in 2007 which is directed to our growthpriorities, leverages our global brands and technology with more rapid rolloutsacross markets, and targets “vitality opportunities” in both the developed andthe developing world. This, together with carefully targeted marketinginvestment, is giving us a much more balanced growth profile across ourcategories in 2007, ranging from just under 4% in Ice Cream and Beverages to6.5% in Personal Care.

Looking at each category in turn: Savory, Dressings andSpreads grew by nearly 5% year to date and over 6% in the quarter. This wasdriven by consistent investment behind priority brands, such as Knorr andHellmann's, both delivering growth of 7% year to date.

Important recent innovations, including the continuingsuccess of Hellman's Extra Light in Europe,cholesterol-lowering mini-drinks in the United States: under the Promise Activ Heart Healthbrand, and new and improved Knorr bouillons and soups in many markets. Forexample: an entirely new type of bouillon gel under the Knorr brand in China.

Ice Cream and Beverages grew by nearly 4% year-to-date, butwas slightly down in the quarter. Although in the quarter European ice creamdeclined sharply, our market shares are up this year, driven by innovationssuch as Frusi: a low-calorie frozen yogurt, and new Magnum variants: ColombiaAroma and Ecuador Dark.

In the US,the steps we have taken to strengthen our business by shifting to a lesspromotionally driven marketing strategy, and raising prices to protect margins,have led to flat sales in the quarter after a decline in the first half.Elsewhere, ice cream growth and share performance has been strong across Asia,Africa and Latin America. In tea,Lipton has grown by over 7% so far this year, helped by innovations in pyramidtea bags, the introduction of Lipton Linea, slimming teas in Europeand the extension of milk tea products across South East Asia.Our existing Pepsi-Lipton businesses continue to grow strongly although, beingjoint ventures, these are not reflected in our growth numbers.

Home Care grew by over 6% year to date and 7% in thequarter. This includes continued strong performance in household cleaners,driven by innovations such as Cif oven sprays and Domestos Zero-Limescale.

Laundry is also performing well. All three of our globalfabric cleaning brands, “Dirt is Good”, “Surf” and “Radiant” are growing inmid-single digits. “Small & Mighty” concentrated liquids are performingwell in markets across North America, Latin America and Europe. We have stabilized, orimproved, our Laundry market shares in a number of key markets where we havebeen under competitive pressure, including: South Africa, the Philippinesand India.However, we have still to see a turnaround in our two biggest Laundry marketsin Europe: the U.K.and France.

Personal Care grew by 6.5% year to date, but by just under4% in the quarter. Growth was slower in Q3 due to the phasing of innovation,weighted towards the middle of 2006 with activities such as Sunsilk in the United States and Dove Summer Glow in Europecompared with a heavy first half program in 2007.

In addition, there was the systems effect in the United States and there have also been one or twomarkets where we have seen some short-term volume impact from price increasestaken in the third quarter, most notably in Hair Care in Braziland Personal Wash in North America.

The global innovations introduced in the first half of 2007are performing well. These include Clear: anti-dandruff shampoo, launched in China,Russia, Brazil,the Philippines,Egypt and Arabiaand re-introduced in Turkeyand Indonesia.

Axe in Japan,now with a 10% share in male deodorants, is driving development of this marketsegment. Dove Proage, a cross-category range of skin care, hair care anddeodorant products, launched in both Europe and North America.

Let me now turn to operating margin. I'll start with theyear-to-date position and then go on to look at the third quarter. Our reportedoperating margin in the first nine months of 2007 was 13.7%, 0.8 percentagepoints lower than 2006, due to higher restructuring costs and lower proceedsfrom disposals. Before these items, there was an underlying improvement inoperating margin of 0.3%.

We have continued to spend competitively behind our brands,and increased our investments in advertising promotion inline with salesgrowth. This means that, year to date, the combined benefits of volume mix,positive pricing and cost savings were more than sufficient to offset risingcommodity prices and other cost increases.

Coming to the third quarter: the operating margin at 13.7%was 1.1 percentage points lower than last year, but with a 20 basis pointsunderlying improvement before restructuring, disposals and impairments.Absolute spend on advertising and promotions was maintained against a sharpincrease in the prior year. The significantly lower Ice Cream sales in Europehad an adverse impact on operating margin in the quarter, however, the moreimportant factor for margin development going forward is the impact ofcommodity costs, and the extent to which we continue to counter these throughpricing, savings and operational leverage.

As expected, we have seen a sharp increase in commodityrelated costs in Q3, equivalent to an on-cost in the quarter of EUR260 millionor 250 basis points. There have been some reductions, for example: olive oiland more recently tea. But these are small in comparison to the increaseselsewhere, most notably for edible oils and fats and for dairy products. Theprice of mineral oil has also increased sharply in recent months, now exceeding$90 a barrel.

The acceleration seen in Q3 will not ease off in Q4, so wenow expect the full-year impact to be around 200 basis points. We continue tomitigate this impact through a combination of pricing action, forward covers,product reformulations and savings. I’ve already mentioned the acceleratingcontribution from pricing. With more price increases in the pipeline, we willcontinue to see a significant pricing component through the rest of 2007 and oninto 2008.

Our savings programs are also accelerating. Having deliveredat a fairly consistent level of around EUR200 million per quarter over recentquarters, savings in Q3 reached EUR260 million, with increased contributionsfrom both buying savings and overheads reductions.

EUR234 million of restructuring was charged in the thirdquarter, bringing the year-to-date total to nearly EUR475 million. This signalsthe substantial progress we are making with this element of our change programand gives us confidence that we will continue to benefit from a sustained levelof savings over the coming quarters.

In terms of organizational simplification and restructuring,we’ve announced during the third quarter plans for three new multi-countryorganizations: “the U.K.and Ireland”, “Germany,Austria and Switzerland”,and “Central Africa”. The integration of our NorthAmerican Ice Cream business into the existing “One Unilever organization”reorganized our businesses in South Africaand Israel withour joint venture partner, and the streamlining and/or closure of 10 factoriesin four European countries.

We have also been active in the area of portfoliodevelopment. We’ve completed the sale of our margarine brands in Brazil,acquired the Buavita fruit drinks brand in Indonesia,announced our intention to sell the Boursin cheese brand, and agreed anextension of our successful ready-to-drink tea joint venture with Pepsi Cola tocover 11 new countries. So, a significant step-up in activity designed tostrengthen the business, improve its growth potential and increase itsresilience to short-term pressures, such as: commodity costs.

Turning now to other aspects of our financial performance:Earnings per share from continuing operations for the nine months were up 20%.In Q3 last year, a EUR300 million provision was taken to cover compensationpayments relating to the conversion of the NV preference shares. This charge inthe prior year accounts for 8% of the year-to-date EPS growth.

Operating profit was down 5%, as the benefits of salesgrowth and underlying margin enhancement were offset by the increasedrestructuring charges, lower proceeds from disposals and adverse currencymovements. Below operating profit, we see structural improvements in a numberof areas having a substantial positive impact on our EPS growth.

Net financing costs, excluding the preference shareprovision, were 42% lower, through a reduced level of net debt and a betterfunding position on pensions. Our share in net profit from joint ventures hasincreased by 60% to EUR82 million for the year to date, mainly driven by thestrong growth in the partnerships between Lipton and Pepsi for ready-to-drinktea.

The EUR88 million, for associates and non-currentinvestments, was boosted by a gain in the first quarter in one of our venturecapital funds.

The tax rate of 21%, in the first nine months, benefits froma better country mix, and the favorable settlement of tax audits in a number ofcountries, some of which fell in the third quarter. As a result, we now expectthe tax rate for 2007 to be closer to 23%, rather than the 24% previouslyindicated. Our long-term tax rate guidance remains unchanged, at 26%.

Discontinued operations for last year included acontribution from frozen foods sold in the fourth quarter. This is partlyoffset by performance-based payments in the first half of this year relating toUCI.

Net debt at the end of September was EUR8.2 billion, downEUR0.9 billion from the same period last year, but up EUR0.7 billion overyear-end 2006. This includes the impact of EUR1.1 billion of share purchases,as part of our EUR1.5 billion share buyback program for the year. Our netpension liability at end September was EUR0.8 billion. This is down from EUR3.1billion at the start of the year, driven by higher asset valuations and ahigher discount rate applied to long-term liabilities.

Cash flow from operating activities was EUR3.5 billion inthe first nine months. This compares with EUR3.8 billion in the same periodlast year. This reflects higher cash outflows on restructuring, and on workingcapital, the latter a consequence of the low level of working capital withwhich we exited 2006. The fundamentals of our cash flow generation remainstrong. Consistent top-line growth, underlying margin improvement, and a tightcontrol on working capital and capital expenditure.

And with that, I'll hand you back to Jim.

Jim Lawrence

Thank you, John. Perhaps, as a newcomer to Unilever, I mightoffer you my take on the quarter's results: I believe that we're demonstratingmomentum in the business. We’re delivering top-line growth and translating thatinto structural improvement in operating margins.

I am confident that we’ll deliver our outlook for this yearfor organic revenue growth around the top end of our 3% to 5% range, with anunderlying improvement in operating margin. We’re in the midst of a majorchange program. This is aimed to raise the bar for innovation, restructure toreduce our cost and asset base, and shape our portfolio more aggressively.

We are pressing ahead rapidly on all three fronts. At thesame time, we are not losing our focus on consumers, on our retail customers oron the competition. I believe that skilful delivery of this total program willbuild a faster growing, more profitable, and even more resilient business. We arenot yet where we want to be, but, from my point of view, just coming on board,this is a very good place from which to build. Therefore, I feel comfortableabout our longer-term goals to deliver an operating margin in excess of 15% by2010 and organic top-line growth in the 3% to 5% range along the way.

And so, with that, we are now happy to field any questionsthat you may have.

Question-and-AnswerSession

Operator

(Operator Instructions) Okay. We now have our firstquestion, which comes from John Parker of Deutsche Bank. Please go ahead.

John Parker -Deutsche Bank

Yes. Good morning. I've got a question on the cost price miximpact on the margins, which you give as a 2.6% negative in Q3. I wonder: ifyou could detail the components of that a little more? Because you've given usa 2.5% negative impact from raw materials and a 2.1% positive impact on price,which more or less net out, so, the 2.6% negative impact on cost, price mix. Isthat a big mix negative effect and, if so, why? What lies behind that? Or arethere other negative cost effects in there as well, other than raw materials?

Jim Lawrence

I'm going to turn that one over to Charles.

Charles Nichols

Thanks, Jim. Yes. As you said, the operating, we mentionedon the call, the impact of the commodity costs, which in the third quarter wassome 250 basis points. That's about EUR260 million. And indeed, that's aconsiderable step up from what we saw in the first half of the year, which wasrunning at around 160 basis points for the first half. As far as savings areconcerned, which is, if you like, one of the offsets in that, our savings alsoshowed a step up during the quarter. We're talking again about EUR260 million,which was up quite sharply from the first half of the year.

Jim Lawrence

Any more, John?

John Rothenberg

Yes. John, to get underneath your question, you're lookingat the chart with the 260 cost price mix over and above the savings. And withinthat we've got, of course, costs on other areas that have continued to go up.But there's also the effect of mix within the categories, and we've had clearlya reduction from Ice Cream. On the other hand, Savories is up. So, there is adifferent mix effect in the quarter, which is coming through in that. And Ithink, by and large, that would be the thing. Our general mix across thebusiness is normally, slightly, positive and in this quarter, it's affected bythe European ice cream, which goes the other way.

John Parker - Deutsche Bank

Okay. And Ithink that would probably be it. Thanks. And can I have one other question?

Jim Lawrence

Sure.

John Parker -Deutsche Bank

Will you be able to give us some? I don’t think you gave usa Russian growth figure on indication. How does Western Europeand Eastern Europe compare? Can you give us the figuresfor those, the European region split: Western Europe andEastern Europe?

Jim Lawrence

Give us one moment.

John Rothenberg

It's very much a continuation of the trends that we've seenbefore. In terms of Western Europe, we still have asmall positive in Western Europe cumulatively andobviously it's a significant positive within Eastern Europe.

John Parker - Deutsche Bank

Okay. Thanks.

Jim Lawrence

Thank you, John.

Operator

Thank you very much indeed. Okay. We now move to our nextquestion, which comes from Marco Gulpers of ING.

Marco Gulpers - ING

Yes. Good morning. Marco Gulpers from ING. A couple ofquestions, if I may: You mentioned further pricing actions, still about tohappen in the remainder of the year. Could you share with us the magnitude ofthose price increases relative to the first half and to the Q3? The secondquestion is on disposals: You've stated that you're going to sell the Boursinbrand. You've also highlighted US Laundry. Could you provide us, perhaps, withan updates on the interest so far that you've seen on these two assets? Andwhilst Jim, is on the line, I would like to ask you a question with respect toyour first impression on the balance sheet and the under gearing that you'recurrently seeing: Would you agree with my line of thinking that the balancesheet is under geared? And, if so, what would you be willing to do about this?Thanks.

Jim Lawrence

Marco, thanks for the three questions. I'll take the thirdand the second, in that order. And then I'm going to turn over to one of mycolleagues for your first question about pricing. First of all, my first impressionsof Unilever are, a company, which is undergoing a tremendous change, moving inthe right direction. I would not characterize our balance sheet as: underlevered. I would characterize our balance sheet as: strong. We maintain A+rating. It's a strong balance sheet, which gives us the opportunity to havelower cost of capital and gives us the opportunity of financial flexibility. Asto disposals, we do have the two businesses up for sale that you've mentioned,the US Laundry business and Boursin. Interest has been very keen in both ofthem. The sales process is underway and I think that's about all I'll say, atthis point, on them.

Now, over to Charles on your first question.

Charles Nichols

Yes. Hi, Marco. On pricing, you all have already seen there'sbeen quite an acceleration in the contribution of price during the course ofthe year. And indeed, we've been taking some fairly significant price increasesin HPC categories across Asia or Africa.We've started to see some price movements in foods in North America.In terms of going forward, and looking at the magnitude and what we mightexpect going forward, I think the first thing to say is that in Europe, wherewe haven't so far seen a positive contribution to price, there have been some,if you like, some; although we have been putting price increases in, and thensome fairly significant price increases on categories like Spreads, Savory,Dressings, etc. We've also had this offset from the price decline in olive oil.And at the same time, we've also seen an increase in the promotional intensityin a number of markets in Europe. And I guess, to someextent, that's not surprising at a time when we ourselves, and quite a few ofour competitors, and indeed retailers, are trying to push price increasesthrough, that you will find a little bit of an increase in trade activity. So,areas where we would expect to see more of a price contribution going forward,Ice Cream in the US,where we've only recently put in prices. We'll see that starting to work throughand, indeed, in several categories in Europe.

Marco Gulpers - ING

A final question, if I may, it's on the launch of AdeZ. Howis that proceeding?

John Rothenberg

We've launched in the Netherlands,as you probably know, Marco, given where you're from, and we're very happy withthat. We've had difficulties in the UKand it is not meeting our expectations. And that's really where we are. So,we've got more to do and we still believe that this is an opportunity whichwill produce this.

Marco Gulpers - ING

Okay. Thanks. Congratulations.

Jim Lawrence

Thank you, Marco.

Operator

Thank you very much indeed. Okay. We now move to our nextquestion, which comes from Julian Hardwick of ABN Amro. Thank you. Please goahead.

Julian Hardwick - ABNAmro

Thanks. Good morning. Can I ask, just following on the issueof the balance sheet, can I just clarify: is your view that an A-plus rating isthe appropriate credit rating that you would want for the balance sheet? Youwould not want to go…?

Jim Lawrence

Julian, yes. Let me reiterate: Unilever is committed to anA-plus rating on our long-term debt. We are in the middle of the pack, if youcompare people like P&G or Nestle who are higher rated and you take othercompetitors who have lower ratings. With that rating, we have a lower cost ofdebt. We have a greater resilience, something which frankly was very helpfulduring August-September, and it provides flexibility. So we are quite happywith that.

Julian Hardwick - ABNAmro

And does the size of your pension deficit influence anythingyou might do in terms of future buybacks?

Jim Lawrence

Well, you're absolutely right that when looking at thebalance sheet you have to also consider the state of your pension. We arepleased that actually, we have improved on that front through this year, asJohn mentioned in his remarks. But that's something which obviously has to bekept in mind as part of the total financial picture.

Julian Hardwick - ABNAmro

Okay. And on the commodity cost picture, we've clearly seena significantly rising trend through the course of this year. Could you do alittle bit of crystal ball gazing for us? If you look out to next year,presumably the first half of next year, where we are lapping relative to theeasy comparatives from the first half of this year, so are you expecting biggerthan 200 basis point increase in the first half of next year?

Jim Lawrence

Julian, thank you very much for that question, because itgives me a good opportunity to say: we're not going to be giving guidance todayfor 2008. As you rightly said, we're going to be lapping a different level ofprice rises next year. That's a fact. We have given you guidance for thebalance of this year. And, quite frankly, given our forward purchasing, we havea very good idea of what our costs will be in the fourth quarter. And my finalremark is: we don't see any early easing off of this commodity cost pressure.But beyond those observations of fact, I'm not going to give any guidance for'08 on this call.

Julian Hardwick - ABNAmro

Okay. Thank you very much.

Jim Lawrence

Thank you very much.

Operator

Thank you very much. We are now going to our next question,which comes from Robert Jan Vos of Fortis.

Robert Jan Vos -Fortis

Yes. Hi. Good morning, gentlemen. I have a couple ofquestions: When looking at the restructuring costs until the third quarter ofEUR475 million. Do you still stick to your guidance for the full year ofbetween EUR700 million and EUR1 billion, or can you narrow down that range abit? And I have a follow-up question on the divestment program: Is it fair toassume that there will be some announcements still this year on divestments?And a second question on that: during what period of time do you expect toclose the divestment program of EUR2 billion? In other words: how long will ittake, do you assume?

Jim Lawrence

Yeah. I'll take your questions, Robert, in reverse order. Asto divestments, we will divest the business when we can realize a price whichis greater than the value of the business to our shareholders. So I should justsay that if, in our view we don't get a price which is greater than our ownview of the value to us, we won't sell it. So, in that sense, the answer is: wemight never sell the business.

On the other hand, I'll stick with what I said about the twobusinesses which were asked about earlier: Boursin and US Laundry. We've had asubstantial amount of interest for both of those. I'm not going to predict whenwe will be able to make an announcement on any of those, because you never knowuntil you've actually struck a deal. So I'm not going to give any time forecaston that.

As to the restructuring in this fiscal year, we're not,again, going to give quarterly guidance. We're going to stay with the annualguidance that we gave at the mid-year. And so, we stick with the guidance thatwe gave on restructuring, with one comment that I'd make that you just don'tknow until you actually have taken the actions and that's when it triggers theaccount.

So, thank you very much for the two questions.

Robert Jan Vos -Fortis

Thank you for the answers.

Operator

Thank you very much indeed. Okay. We now go to our nextquestion, which comes from Graham Jones of Panmure Gordon.

Graham Jones -Panmure Gordon

Good morning, Gents. Welcome on board, Jim. I've got twoquestions, one about European margins and one about Brazil.Firstly, in terms of Europe, you delivered a cleanmargin improvement in Q3, if I calculate correctly, from 16.2% to 17.6%, and Ijust wondered: whether you could run us through what the drivers of that are? Becauseclearly the pricing has been negative in Europe in Q3. Iwould have thought the Ice Cream mix effect would have been negative. Andyou've also commented about the increased promotional activity from competitoractivity. So: if you can just run me through how you've managed to get such apositive margin result in Europe?

And then my question on Brazilis: how long do you think it's going to take to return the business to morenormal levels of growth and what are you doing to reinvigorate growth againstwhat's clearly a tough competitive environment?

Jim Lawrence

Well, first of all, thank you very much for the welcome. Asto Brazil, wedo have a program underway. Actually, I'll be visiting Brazilat the beginning of December, so I will look myself. I'd rather not give anyparticular forecast on that. And I'll turn your first question over to Charles.

Charles Nichols

Yeah, hi. As far as European margins are concerned, you'requite right. If you strip out the effect of restructuring, disposals andimpairments, you're seeing an underlying improvement in operating margin. Andyou're also correct in saying that having had a weak Ice Cream season in Europe,we have actually lost a margin contribution of Ice Cream that we would haveotherwise expected.

A couple of things to say about that: First of all, we'vealso had a particularly good quarter in Savory, which is a high-margincategory. So to some extent, we've had the benefit of that. Advertising andpromotional spend as a percentage of sales in Europe isdown in the quarter. Interestingly, it's down more in promotions and actuallyslightly up in advertising year-to-date.

And, I think I referred to earlier, the fact that we've seenan increase in promotional intensity in a number of European markets. And, tosome extent, there is a bit of a switch between consumer promotional activity,which is in our A&P number, and trade promotional activity, which is takenas a deduction of price.

Graham Jones - Panmure Gordon

Okay. Couldyou just allow one follow-up: In terms of the minus 0.7% pricing in Europein Q3, could you quantify how much of that was relating to olive oil?

John Rothenberg

Just over half is olive oil related.

Graham Jones - Panmure Gordon

Okay.

Jim Lawrence

Thank you.

Graham Jones -Panmure Gordon

Thank you.

Operator

Thank you very much indeed. Okay. Our next question comesfrom Arnaud Langlois from JP Morgan.

Arnaud Langlois - JP Morgan

Yes. Good morning, everyone. I have a couple of questions.The first one is on the Personal Care business: Looking at your third quartermargin, actually your margin year-to-date, it seems to be down by roughly 100basis points. I understand this number may be impacted by a restructuringcharge. So, could you actually give us a clean number for the operating marginin Personal Care and maybe tell us what sort of evolution you've seen there?

My second question is related to pricing and actually priceelasticity: Looking at the third quarter, we've seen a very strong increase inpricing in the Americas.And there I think, unlike what we saw in the previous quarters, volumesactually turned negative to minus 1%. So, I was wondering: to what extent youfelt comfortable with pushing prices further, given what appears to be arelatively negative experience in the Americas?

And the last question is on the working capital: We've seenan increase in working capital year-to-date. I would like to ask you, Jim:whether you see any room for improvement in that field going forward? Thank youvery much.

Jim Lawrence

Well, thank you, Arnaud. I'll take your last question first.Yes, I do see an opportunity for improvement in working capital. We're going toget to work on it right now in the fourth quarter and see what we can do in thatdimension.

On price elasticity: I'm going to give a general answer frommy experience in consumer products and then I'm going to turn it over to Johnfor any additional comments he has. And then finally, we'll turn your firstquestion over to Charles.

So, as to price elasticity, we have actually, across ourportfolio in the third quarter, have not seen any real signs that the pricingactions that we're taking are significantly dampening our volume. We feel goodabout our volume in the third quarter. We feel good about our consumer off-takein the third quarter. In the Americaswe had some particular issues where we substantially raised price as the marketleader in the face of commodity costs. So, we had some retailers who basicallydug their heels in and de-stocked, but that's not price in the consumer priceelasticity. That's the normal give and take between manufacturers andretailers.

Going forward: is there some possibility that the level ofprice increases which will be necessary to hold margins will have some impacton volume? It is conceivable, but we have not, in fact, seen that in our ownbusiness through the third quarter.

John, anything to add on that?

John Rothenberg

The only thing to add is obviously the effect of thepull-through affects the volume in the third quarter in the US And over theyear-to-date, we've got around 2% volume growth in the States, which is notshowing major deviation.

Arnaud Langlois - JP Morgan

Okay. It was minus 1% in Q3 after growing by…

John Rothenberg

But you've got to add back the volume effect of thepull-forward to that minus 1%.

Arnaud Langlois - JP Morgan

Okay. And then, in which category did you take such bigprice increases in the Americas?

Jim Lawrence

Hair Care in Brazil.

Arnaud Langlois - JP Morgan

Okay. That's the only one, really?

Charles Nichols

Sorry, there was also -- we've put in some fairlysignificant price increases on Personal Wash in the USand more recently in Ice Cream as well.

Arnaud Langlois - JP Morgan

Okay.

Charles Nichols

I think, if I could just come back to your first question, Ithink was about category operating margins, particularly Personal Care.

Arnaud Langlois - JP Morgan

That's right, yes.

Charles Nichols

I mean: the first thing to say is that it's much easier tolook at operating margin movements year-to-date rather than individualquarters, because there are swings and to-and-fros in the quarter. But thefirst thing to say is that actually, if we look at Personal Care year-to-dateand we strip out the effect of higher levels of restructuring, we actuallyarrive at an underlying improvement. And, in fact, all our major categories,with the exception of Ice Cream, are showing an underlying improvement inoperating margin so far this year.

If we now look at the specifics of the third quarter, therewas indeed a higher level of restructuring charges taken against Personal Care.There was also a step-up in some promotional pricing in Europe.I referred to that earlier.

So, underlying, the margin was slightly down in the quarter,but, as I said, I wouldn't put too much against that. I think the key issue isthat year-to-date we are in fact up.

Arnaud Langlois - JP Morgan

Okay. That's very useful. Thank you very much.

Jim Lawrence

Thank you, Arnaud.

Operator

Thank you very much indeed. Okay. We now go to our nextquestion, which comes from Thomas Rousseau of Gardner Rousseau & Gardner.Please go ahead.

Thomas Rousseau - Gardner Rousseau &Gardner

Good morning, Jim.

Jim Lawrence

Hey Tom, how are you?

Thomas Rousseau - Gardner Rousseau &Gardner

Good, good. Thank you. It's early here, but congratulations.It's early in your run at Unilever. Congratulations for your…

Jim Lawrence

Tom, thank you very much and I appreciate you getting upearly to take the call.

Thomas Rousseau - Gardner Rousseau &Gardner

That's alright. Talk a bit about the share buyback: What wasyour price paid thus far? And what are your plans going forward with continuingthe program?

Jim Lawrence

I'm going to turn that over to one of my colleagues, who, Ithink, has to actually make a calculation to answer that. And if we can't makeit now, we'll get it to you later.

Thomas Rousseau - Gardner Rousseau &Gardner

Thank you, Jim. And then, Jim, the progress towards the 15%operating margin by 2010, to what extent are you building in the effectiveplanned divestitures on the overall operating margin? And to what extent areyou building in any plans for the possibility of acquisitions lifting thoseforward-looking operating margins? How do you -- what are you basing the 15%on?

Jim Lawrence

Yes. We are definitely basing, and I should say it's 15%plus, Tom.

Thomas Rousseau - Gardner Rousseau &Gardner

Okay.

Jim Lawrence

We're definitely basing that on expected divestitures. Andanother piece of guidance we've given is EUR25 billion to EUR30 billioncumulatively of cash flow by that period of time, which is a governor of that.

Thomas Rousseau - Gardner Rousseau &Gardner

Yes.

Jim Lawrence

But we're not counting on any acquisitions. This is we'regoing to do it with the existing business, less whatever we divest. And, I justwill also remind you that, that's a net operating margin in 2010.

Now, do we have the answer to the question or do we?

Charles Nichols

We have an approximate answer, Tom. The answer is: thatwe've bought back, as you know, all NV shares at the moment, which is thecheaper one at the moment. And we have paid an average which is pretty close toEUR22 year-to-date.

Thomas Rousseau - Gardner Rousseau &Gardner

Thank you. And the funding plans for forward share buybacks?

Jim Lawrence

What we have said is we're going to do EUR1.5 billion ofshare buybacks in this year. We have not commented on whether we'll do a sharebuyback program beyond. And what we're going to do is when we give guidance fornext year, we'll have what we have to say about returning cash to shareholders,either through share buyback or through dividend.

Thomas Rousseau - Gardner Rousseau &Gardner

Thank you. And then last, Jim, the question about thepension and the impact on value in the balance sheet. What steps do you have,in terms aside to the fees, to somehow immunize forward-looking growth in thoseliabilities? In light of today's low, but high, interest rate, which affectsthe discount, and your asset growth that's helped you narrow it year-to-date?

Jim Lawrence

Tom, I have not really gotten into great detail on ourpensions, other than to assure myself that we're in good shape.

Thomas Rousseau - Gardner Rousseau &Gardner

Right.

Jim Lawrence

First of all, the accounting -- the IFRS accounting isdifferent from US GAAP, so I've got to get used to that. But what I can tellyou is that across the Board some of our pensions are in deficit, but,actually, many of our pension plans are in surplus and the -- so, you have anaccounting calculation, which is provided here, and I feel comfortable with it.I don't have any plans to change policy from what you saw today.

Thomas Rousseau -Rousseau Gardner

Good luck and thanks for your updates.

Jim Lawrence

Tom, thank you.

Operator

Thank you very much indeed. Okay. We now go to our nextquestion, which comes from Jeff Stent of Citibank.

Jeff Stent - Citibank

Hi, good morning, everyone. Two questions, if I may. Thefirst one's on Ice Cream: whether you'd be willing to quantify the impact onthe margin from the drop in sales in the quarter?

And secondly, on developing and emerging markets you'vequantified that sales are now -- sales, it's now 44% of the Group. I waswondering: if you'd be able to give us a steer on the profits contribution?

Jim Lawrence

Let's take these in the order that you gave them. Ice Cream:

Charles Nichols

Yes. Jeff, hi. It's Charles here.

Jeff Stent - Citibank

Hi.

Charles Nichols

Yes. Sales of Ice Cream in Europe weredown about EUR70 million in the third quarter versus the last year. And, as youwill probably remember, Ice Cream is a category with a high variable margin anda significant fixed cost base. So, I think you can work out from that, thatit's quite a few tens of millions of Euros of margin impact in the quarter.

Jeff Stent - Citibank

So, probably on Group something like 10-20 basis points?

Charles Nichols

To be honest, I haven't got a precise number in front of me,but it is clearly a significant figure.

Jeff Stent - Citibank

If I recall correctly, back in Q3 when we had the bumpersummer, I think it was 10 bps then. Anyway, okay. Thank you.

Jim Lawrence

On the D&E question, obviously, developed markets wouldhave a higher contribution to margin than D&E markets. I don't know ifwe've guided precisely beyond that.

John Rothenberg

No, but I think it's fair to say that we don't have asignificant difference. Our profitable D&E markets are as profitable as ourprofitable developed markets. We are obviously investing in a couple of places,and we've highlighted Chinaand Russiabefore as being areas where we are operating at below Unilever average margins.And that's basically it, I think. But overall, not a major influence.

Charles Nichols

I think the key point, Jeff, is that when you look at thegross margin level our gross margins in places like Chinaand some of the other countries in which we're investing are as good as, if notbetter, than they are in developed markets. So, growth is incrementallyprofitable.

Jeff Stent - Citibank

Thank you. One final one before I go for here. At thehalf-year stage, Patrick said that he expected that the margin developmentthrough the second half would be more back-end weighted. Does that continue tobe your expectation?

Jim Lawrence

We think that, at the time of the mid-year, I think we saidit might be a little bit better in the fourth a little bit, not quite as goodin the third. We've actually done a little bit better in the third than wethought. So, I'd say about even improvement across the two quarters now.

Jeff Stent - Citibank

Okay. Thank you.

Jim Lawrence

Thank you.

Operator

Thank you very much.

Charles Nichols

I think we've got time for two more questions, so.

Operator

Okay, certainly. And we'll put our next question through,which comes from Polly Barclay of Cazenove.

Polly Barclay -Cazenove

Hi. Yes. It's Polly Barclay from Cazenove. Two quickquestions, please. I appreciate you've touched on this in earlier questions,but: any more color on European pricing would be appreciated, also lookingforward. And the second question is just a housekeeping one on the taxguidance: I appreciate that you've maintained the long-term tax guidance of26%, but perhaps you could just explain that in the context of the new guidanceof 23% for this year? Thanks.

Jim Lawrence

I'll take the second one. Then I'll turn it over to ourEuropean pricing expert, Charles here, for the first question. What hashappened in the third quarter is we have had tax audits come back in variouscountries, and the tax authorities said, you were right, you don't have to paythese taxes, and we then have taken off provisions that we made for them. Andthis is something which you can't forecast. You do what you think, and you paywhat you think is right in terms of taxes, but you protect yourself by makingaccounting provisions and you wait until you're audited. And then, when you'reaudited and it comes good, you reverse those provisions. And that happened tous in the third quarter. And then the other thing is we pay different tax ratesin different countries and depending upon the mix of our business, it will beslightly different.

At this stage, we know where we sit for the quarter, justpast. We have a pretty good idea, although, you never know for the fourthquarter. We believe, structurally, at this time the 26% is the right way toguide. My own experience has been, though, that actual tax ratesquarter-by-quarter are quite a bit choppier now than they ever used to be, giventhe accounting requirement that you take things straight through and you don'tsmooth it.

So, with that, our European pricing expert:

Charles Nichols

Well, thanks for that, Jim. Pricing in Europe,I think John referred to earlier that the impact of olive oil price is somewhatmore than half of the price decline that we've seen year-to-date. So, we'retalking about a 0.7% price decline year to date. So, somewhat over half of thatis down to olive oil. So, by and large, where we are at the moment, our pricingis net flat across Europe.

Now, within that, I said earlier that we are already puttingthrough some fairly significant price increases which are coming through inSpreads, in Savory, in Dressings, and indeed a number of HPC categories, but atthe same time, we've also seen a step-up in promotional intensity. And this isoften the case, in a market like Europe, where it isdifficult to get price increases through, that there is, if you like, a phasingperiod when there's some to-ing and fro-ing in the market.

What I would say about going forward is, is that clearly,the pricing environment in Europe is moving. We've seencomments by a number of our peers in the context of European pricing. We'vealso seen comments by some large European retailers, including some retailerswho haven't talked about the need for price increases for many years. So, Ithink that there's no doubt with where commodity costs are at the moment. Butwe do expect to see a positive contribution from pricing from Europeas we go forward.

Polly Barclay -Cazenove

Thanks.

Jim Lawrence

Thank you, Polly. I guess, we have the last question comingup now, coming towards the end of our hour.

Operator

Yes, indeed. Our final question comes from Simon Marshall ofBear Stearns. Please go ahead.

Simon Marshall - BearStearns

Yes. Good morning, everybody. Just a couple of finalquestions and coming back to your A&P spend on the quarter, which was down40 basis points. Your margins were up 30. How can you square that with thecontinued increase of focus on your new product launches? I'm just a little bitconcerned that your A&P has come back. I appreciate some of the commentsyou made on the decline in your promotional spend, but: how would you see therest of the year? And would you expect this A&P factor to remaininflationary mid-term, as you roll out more innovations?

Jim Lawrence

Well, first of all, I should say we are very pleased withthe productivity of our A&P spend in delivering the kind of sales growththat we've gotten. I should remind you all, though, that while it's been veryproductive, we have not cut A&P. In fact, we've invested EUR130 millionmore over the course of the three quarters, the growth in A&P has broadlybeen in line with the growth in sales. There have been different timings thisyear versus last year in terms of innovation.

Our Personal Care innovation was skewed towards thebeginning of this year, whereas last year, our big activity, Sunsilk in the United States, Summer Glow in Europe,was in the middle.

Simon Marshall - BearStearns

Okay. My second question is really regarding theexceptionally strong growth rates you've showed in Savory and Dressings, andalso in Home Care products in the third quarter. Would it be fair to say,looking at it from a positive perspective, but that it was mostly driven by thenew products that you've been launching over the previous quarters? Or arethere really other factors that we should be taking account of at this stage?

Jim Lawrence

Well, certainly we have had success from our new productlaunches. Charles, anything more?

Charles Nichols

Yes. Again, Simon, I mean, whilst it's tempting to point tothe 7% in the third quarter, I think looking at the year-to-date numbers isprobably more realistic, and there we see growth in both Hellmann's and Knorr’sof around 6%. So, that is clearly a significant step-up in growth in these twobig brands, compared to what we've seen in previous years.

And I think innovation has a very significant role in that.We talked about the importance of globally inspired innovation rolled out morerapidly across markets, and I think that's exactly what you're seeing. WithHellmann's, for example, we've seen some fairly simple concepts backed bytechnology, rolled out to multiple markets in a relatively short space of time.

With Knorr, we're beginning to see again, some of theformulation work that we've been doing on bouillons, upgrading the quality,etc., not just landing in one market, but landing in multiple markets in arelatively short space of time.

And I think John mentioned in passing earlier on the call,we have just launched a novel format for bouillons in China.Again, recognizing that Knorr is…

Jim Lawrence

Novel to China,but the point is that it is a formulation that we were using on a worldwidebasis.

Charles Nichols

So, I think -- and, again, it's very much a case of lookingat this as a major opportunity across developing and emerging markets, andbringing global resources to bear on a local market opportunity.

John Rothenberg

I think, it is true also to say that we're getting goodgrowth on both Foods and HPC in the D&E world and we're finding that that'shelping to drive, as we take our food businesses outside of strongholds inEurope and North America, that we're starting to see growth in foods comingthrough at the same sort of levels in the D&E world as we're getting on HPCand that's also very encouraging.

Simon Marshall - BearStearns

Alright.

John Rothenberg

And that's got to be a combination of both the innovationand rolling out in existing operations.

Simon Marshall - BearStearns

Thanks very much for that. If I may, just one finalquestion: Jim, you didn't want to sort of pin your colors to the mast inrespect to timescales of disposals. Maybe could you give us an indication interms of the restructuring program and the ratcheting up of that restructuringprogram announced with H1 results? Could you give us some indication, maybe, inthis third quarter, in terms of numbers of plants: how much are you down? Hasthere been any action on the reduction of numbers of plants? Same thing onheadcount, maybe can you update us on that? Or is it too early to do so?

Jim Lawrence

We don't release headcount numbers. As to numbers of plants,we've announced, how many?

John Rothenberg

We've announced that we're looking at 11 plants around Europein the last quarter.

Simon Marshall - BearStearns

Right.

John Rothenberg

And we continue working on things that were done beforethat. So, there is an -- as you see, a step-up in the savings that we'reactually getting now but more importantly, also an acceleration to make sure weget more savings going forward.

Simon Marshall - BearStearns

Well, thank you very much for the answers and Jim,congratulations on joining at an auspicious time.

Jim Lawrence

Simon, thank you very much. And thanks to everybody whoparticipated today. I'm sorry we have to close it off, but we're actually pastour scheduled hour. However, the IR team here at Unilever House is ready totake any questions, so feel free to ring us up. I look forward to meeting thoseof you who are coming out to Indiaa week after next and otherwise where I get a chance to meet you. And untilthen, thank you all. I appreciate your being with us this morning.

Operator

Thank you very much indeed, Mr. Lawrence. Ladies andgentlemen, this conference has been recorded. Details of the replay number andaccess codes can be found on Unilever's website. An audio archive webcast willalso be available on Unilever's website, www.unilever.com. Thank you and goodmorning.

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Source: Unilever Q3 2007 Earnings Call Transcript

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