Unilever NV Management Discusses Q2 2012 Results - Earnings Call Transcript

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Unilever NV (NYSE:UN)

Q2 2012 Earnings Call

July 26, 2012 3:00 am ET


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

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


Celine AH Pannuti - JP Morgan Chase & Co, Research Division

Marco Gulpers - ING Groep N.V., Research Division

Harold Thompson - Deutsche Bank AG, Research Division

Robert Waldschmidt - BofA Merrill Lynch, Research Division

Martin John Deboo - Investec Securities (NASDAQ:UK), Research Division

Jeremy Fialko - Redburn Partners LLP, Research Division

Paulus Gerardus Josephus Maria Polman

Well hello, everybody, and welcome to Unilever's Second Quarter and Half Year Results Presentation, being presented to you on the eve of the London 2012 Olympics. It's actually a great time to be in sunny London, and we wish everybody well in what promises to be a really exciting period for the city and, hopefully, for the country as well.

With all the noise around the global economic and political situation, I believe it's important not to lose sight of the essential principles that underpin the Olympic Games, which is actually to unite the peoples of the world through fierce but friendly competition, may it long last. Today, we will keep it brief so that we can get to the questions and the discussions, which I know you most of you value most.

But let me start with the usual disclaimer relating to the forward-looking statements and the non-GAAP measures. Now before we talk about the results, let's briefly remind ourselves of the wider context in which we operate. A further deterioration of the macroeconomic climate, increased volatility in commodities and currencies that frankly doesn't seem to get less. And last but not least, the competitive environment that remains challenging despite all the noises out there to the contrary sometimes.

Now increasingly, the continued high level of economic and political uncertainty further fuels an already concerning macroeconomic picture. It's fair to say that following the 2008 crisis, unprecedented policy support had not resulted in the desired levels of growth, and the enormous de-leveraging we've been always talking about, and we see now happening especially in the developed world, is starting to dampen market growth and consumption.

In the emerging markets, growth rates are slowing as well. In China you've seen it go down from about 10% to 7.5%. Brazil, always running around the 6%, 7%, now 1%. India dropping from the 7%, 8% to 5%. And currencies are weakening as well. That adds to the inflationary pressures and squeezing consumer disposable incomes. Take for example, the Brazilian real, depreciated 15% against the euro, more against the dollar, between middle 2011 and mid 2012. And I think I keep the same for the Indian rupee and some other things. The developed markets are likely to remain difficult as well with unemployment further increasing and consumer confidence decreasing as austerity measures are starting to bite.

At best, we can hope for the status quo to persist but we need to prepare, as usual, for the worst. In the U.S., for example, retail sales have now fallen for 3 consecutive months which was last seen in 2008. The situation in Europe is well known to all of us, so no point rehashing it here. Better to confront the realities and to deal with it, and that's the position we've always taken.

I've spoken before about scale youth unemployment in parts of southern Europe and the potential consequences from a lack of social cohesion. That Europe's difficulties are not anymore confined to the south. 2012 growth prospects here in the U.K., for example, have been slashed again, this time from 0.8% to 0.2%. A year ago just to remind ourselves, the IMF had still forecasted 2.3% and the numbers that I just saw this morning coming out for the second quarter are actually a negative, minus 0.7%.

We also see no signs of reduced competition. Price and promotional activities continue to be heavy in some markets, as well as in some categories, despite the rhetoric of some to the contrary. What is actually happening in the markets will continue to be the key driver for our decision-making.

Finally, we expect increased volatility in commodity costs behind structurally underlying changes such as the population growth and the increasingly weather-related events. Take for example, crude oil, which traded at around $120 per barrel through March and April, then hit $90 a barrel end of June, and now is again $105 and rising. Or in the U.S., the severe droughts in large parts of the country already leading to sharp inflated prices for soybean, corn and wheat prices.

Yet despite all of these, as the results show, we, Unilever, are increasingly able to weather all these storms and deliver the consistent results most of you are getting accustomed to from this company. Although I fully realize that it is hard to move the few remaining glass is half empty guys out there, in this climate we'll continue to work on it.

We continue to drive and be driven by an opportunity mindset, not a scarcity one. The population will grow from 7 billion to 9 billion. In fact, every year 150 million people are entering the middle classes every year and global income per capita over the next 15 to 20 years is expected to more than double.

As the emerging markets consumer goods company, our expanding footprint there is increasingly a source of competitive advantage. Our brands and our organizations are getting stronger as well, and our strategy is delivered each time with more and more discipline.

Now much of the work over the last few years has been to get Unilever fit to compete in this challenging environment, capable of managing our own destiny rather than being thrown off course by external factors. When I reflected on this recently, 3 words came to mind: agility, discipline and performance. Agility is key, as it is more and more difficult to predict what will happen next in an increasingly volatile external environment. It allows us to respond, allows us to allocate resources quickly where they are most needed or where we can add most value. As Pier Luigi, our Head of Product Supply, always says, speed is the currency. At the same time we need to be willing to take risks and be less tolerant of debate, which does not lead to better decisions. Our new, leaner organizational structure is starting to show its advantages and so are our continued efforts to take complexity out of the system.

Discipline, is driven across the organization, it's the compass, allowing us to smartly leverage scale and best practices where it makes sense, yet stay locally relevant where it is most needed. If something now works well in one part of Unilever, it is clear that we can now test and exploit it fast everywhere. We haven't always done so. This approach shows up everywhere, in working capital, customer service, on-shelf availability, cost savings and many other areas. Equally, we're getting more disciplined to make those few choices that really count rather than spreading ourselves too thinly.

The last is performance, where it all comes together because we are well aware of the importance of consistent delivery. We are getting noticeably better, but also realize that there are still many areas in which we can sharpen our performance edge as well. Be it in ensuring that all of our initiatives are aligned to the compass with clear measure of our targets, be it in sharper career development discussions, or be it in the pursuit of simply excellence in all we do.

Now as you can see, from these results, for us, all of this translates into significant investments in better products and a stronger innovation pipeline. Advertising that meets tougher action standards before we actually put it on air. Faster global rollout of some of our bigger bets: better people, better trained and better tools for the job. And encouraging and rewarding great performance and no longer tolerating mediocrity.

Now we're pleased with the numbers that we've put in front of you this morning. They continue the trend of better and more consistent results. In markets that are now growing between 4% and 5% globally we have again delivered underlying sales growth above this, in this case, 7% in the first half and 5.8% for the quarter.

For Unilever, as a whole, that's now the fifth successive quarter of underlying sales growth in fact an excess of 5%, and the 13th successive quarter in which we have grown volumes. In fact, our volumes today are 13% higher than it was in 2008. In the same period, the volume growth in our markets has only been about half of that. As a result, we also see continued share progress, which is now positive in the bulk of our business with our brand and equities obviously strengthening.

Emerging markets contributed over 55% of Unilever's turnover in the first half with underlying sales growth of 11%, that's the sixth consecutive quarter of broad-based, double-digit growth with excellent performance in Latin America and a continued strong delivery across Asia.

We have solid results in many places, but I'm particularly pleased with the progress in Personal Care which is up over 10% year-to-date driven purely by stronger innovations and pricing. So many important milestones in this business have been achieved. For example, our global deodorant shares are at an all-time high. We have market leadership now in daily hair care in the U.S. and our share of the U.S. soaps market is over 50% for the first time ever.

Someone once told me that Dove is for Unilever either a curse or a strength. But let me tell you, it's a strength. It is now over EUR 3 billion in turn over as we roll out a number of outstanding innovations across hair, skin cleansing and deodorants. It nearly took 50 years for Dove to become a EUR 1 billion a brand, but it has taken only 11 years to add a further EUR 2 billion. These are just a few of the many examples of the progress we've been making in Personal Care.

Now we're equally encouraged by the continued Home Care momentum despite the competitive environment not easing. On Europe, I'm sure that some of you whom I, especially the people living here -- I've always told you that our goal is to stabilize this business, which by the way is now more or less 20% of our total turnover.

Now here also competitive performance has continued to improve with both volume and value shares firmly positive over the last 12 weeks. As expected, growth in Europe slowed in the second quarter. We've been talking about that as a result of the reversal of the early Easter benefits we saw in quarter one. But also in part impacted by the poor weather, which has especially hit ice cream, and as you well know, a further deterioration in southern Europe.

Indeed, we have delivered growth in what is a very difficult environment and we will continue to invest where appropriate. But there is no doubt that in this environment, we will need to continue to keep an iron grip on cost. That means continuing to make some very tough choices as we seek to avoid big restructuring efforts that can destabilize an organization for a long time. And frankly, we've had our share of those, historically.

We are keeping the pressure on cost, as you can see, by regrettably closing manufacturing sites in France, the U.K. and Spain as we open others. And reducing the burden of unsustainable pension arrangements in many places. We will do what's right for the long-term, regardless of how difficult it may seem. And we certainly will not fall into the trap of the easier wrongs versus the harder rights. Now if you ask me what's making the difference today in Unilever, I would say that first and foremost, we're making clearer choices -- allocating resources more sharply and concentrating our advertising and promotional investments behind those brands and categories where we see the greatest potential for profitable growth.

We're also driving the business for the benefit of the group as a whole and not go blindly after every opportunity. Each brand and category has its role to play. We also have been very controlled and focused with new brand expansions. Fifty new brand-wide space expansion so far this year on top of the 270 introduced since the beginning of 2009. And you would see from the results this morning, where we invest, we grow.

The second differentiator is consistent, stronger innovation and better exploitation of the assets we have acquired through the mergers and acquisition activities. I spoke earlier about Dove in hair, our range of Dove Damage Therapy shampoos is outstanding on the innovation front, selling at a higher premium price point at the same time whilst we see the competitive set decreasing prices.

Magnum Infinity is the latest in a long line of innovations, helping the Magnum brand towards the EUR 1 billion mark, again, a premium. In food, Knorr Jelly Bouillon, at a premium, is crossing the EUR 100 million threshold this year behind the launch of gravy products, wonderful by the way if you haven't tried them yet.

It's now routine for more than 30% of our turnover in any quarter to come from innovations launched in the previous 2 years. And as we said consistently, you should judge us on the quality of our innovations, on the quality of our M&A and to make these assets that we've acquired flourish. Here again, good progress. The launch of TRESemmé in Brazil, with an improved formulation, will contribute over EUR 100 million in turnover, while within its first year of launch with only modest cannibalization of our overall hair care portfolio.

Elsewhere, our simple range of facial care products have been launched. For example, in the U.S., the iconic Signal brand has been rejuvenated. The Motions brand for African hair has now been launched in South Africa. And the list goes on.

Now by adding operational excellence to the disciplined financial process, which we've always had in Unilever, we can significantly enhance these returns of the bolt-on M&A strategy.

The third thing, which is making a big difference is the way in which the Unilever Sustainable Living Plan is underpinning all aspects of our business model. And it's unfortunate that some of you still don't spend the necessary time on fully understanding this. From the way we source materials to the way we run our factories. From the way we develop products to the way we interact with consumers and customers. It is embedded in all we do. We will say more about it later in the year when we get together at our investor conference in Paris. But let me be clear, it is now an integral part of our strategy, and not just like others, a nice to have CSR activity on the site.

One thing is clear. It is rapidly building our corporate brand and reputation with new recruits, customers, consumers and stakeholders and is increasingly an engine for growth. This is because we're trying to resolve many of the issues that society and consumers are wrestling with at a time, frankly, when the political system is increasingly unable to provide the answers. I believe in the sense that European companies, especially, inherently get this, and as a result, have a huge competitive advantage, moving forward.

The final area I will single out, which is making a big difference, is our focus on continuous improvement. If you leave waste in the system, you have less money to support your brands. Less money to drive innovations, and ultimately, less money to return to shareholders. And the waste can take many forms. An unnecessary complex range of SKUs will drive an inefficient supply chain, which in turn results in higher cost and, often, poor customer service.

In tea, for example, we've reduced our formulations by 27%, flavors by 20% and pack format by 19%. We have to continue to challenge ourselves to find new ways to do, routinely, things -- to do routine things systematically, taking advantage of the increasing access to technology we have. For that reason we continue to build our enterprise support organizations with this in mind.

As we will continue to take the actions necessary to remove the long-term costs, regardless of how difficult the process may be, I think we're well-placed for the future, and I gave a few examples of that earlier. Our philosophy in cost savings is clear. We now have required the habit of removing costs each and every year rather than waiting and having to implement major restructuring programs. This is always a unwelcome distraction when it happens.

The supply chain, for example in Unilever, has delivered over EUR 3 billion in savings over the last 3 years, with a further EUR 2 billion of cash coming from lower working capital. And yes, this year, and yes next year, we'll try to do the same. There is plenty to still go for.

So what I've tried to do in these last few minutes is to share with you, again, the context to illustrate that by focusing on agility, discipline and performance, we have been prepared for the challenges that we continue to face outside. And that is -- this is leading to consistent, good performance. Now I've also given you my view of what I believe is increasingly starting to make the difference.

Let me now pass onto Jean-Marc who will summarize the financial performance. And after that, I'll briefly loop back before we open for a few questions.

Raoul Jean-Marc Sidney Huet

Thank you very much, Paul. And good morning, to everyone. For the first half of this year turnover was EUR 25.4 billion, that's up 11.5%. We have underlying sales growth of 7%, which is well ahead of our markets. M&A contributed 2.2% to turnover growth. Underlying volume growth for the first half was 2.8% with price at plus 4.1%. Currencies had a beneficial impact of 1.9%. If you take rates, today, at the end of July levels for the balance of the year, you would see a positive full year currency impact on turnover of around 3%.

Most of the growth has been driven by continued strong performances in Home Care, as well as Personal Care and across most of the emerging markets. Turnover was EUR 13.2 billion in the second quarter, up 11% on the same period last year and that's with a positive contribution of 3.1% from currencies. Here too, we saw a positive impact from M&A of nearly 2%, and this reflects the final quarter before the Alberto Culver acquisition is lapsed. The minority squeeze out of Concern Kalina has now been completed, and the new acquisition has started very well indeed. Underlying sales growth of 5.8% had a strong volume and price component as you can see from this chart.

Now let me pick up just a few of the category highlights. Turning to Personal Care. In the first half of 2012, Personal Care accounted for more than 1/3 of group turnover. Underlying sales growth was 10.4% over the first half with 6.7% coming from volume. Value share gains have accelerated with particularly strong performance across hair, skin cleansing and deodorants driven by a combination of strong innovation, brand rollouts into new markets and excellent execution.

Turning now to Foods. Underlying sales growth in Foods continues to be driven by price, and this has impacted volume growth particularly in spreads where the pricing has been highest. The timing of Easter, a peak period for baking and consequently, margarine sales, also negatively impacted sales volume only in the second quarter. Overall growth in spreads, over the course of the first half of this year, is however over 4% with a new range of liquid margarines performing strongly in Europe and the new aerated margarine variants beginning to be rolled out.

Turning to Dressings. We grew strongly and gained share with especially good performance in Latin America. And there, our campaign to encourage new uses of Hellmann's mayonnaise is working really well. Our market development initiatives are also coming through in Savoury, where we are encouraging new users for bouillon as a seasoning for meat. We continue to roll out Jelly Bouillon and the Knorr range of baking bags that is now being extended to over 40 countries. At the half year, point sales of Knorr products are ahead of last year by over 4%.

Let me now turn to Home Care where the strong momentum continues. The strong growth trends of the first quarter in Home Care continued in quarter 2. This results in an underlying sales growth just short of 10%. Volume growth contributed strongly, up over 5% for the first half of 2012. Our investments to improve product performance and strengthening our brands are really paying off here. Market shares in Laundry have increased not only in emerging markets such as Indonesia, India or Brazil but also in Europe with strong performances here in the U.K., as well as France. Innovation is a key driver of our success in this category. The rollout of the new and improved Omo and Comfort Anti-Bacterial are just 2 examples of this.

Let's go to Refreshments. Despite the abysmal, poor weather conditions in many parts of Europe, ice cream sales have held up well, as we continue to drive innovation through our iconic brands. In China, our 7-minute digital Cornetto microfilms have been watched 280 million times in the last 8 weeks, now that is really helping Cornetto by some distance our biggest ice cream brand in China, which is now growing more than 30% versus last year.

The launches of Magnum in the U.S., Indonesia and more recently in the Philippines, have been very successful and Ben & Jerry's has just opened its first premium ice cream store in downtown Tokyo, queue, I am told, initially of more than 1 kilometer just to sample the products. It's already the biggest Ben & Jerry's scooping operation in the world. In tea, our performance is improving with shares up in the quarter. In key markets such as Russia and the U.S., the launch of new products, such as Lipton Tea & Honey. Lipton Tea, which incorporates liquid essence, have accelerated growth and helped us to gain share. Elsewhere, there remains a lot more to do when we flag this over the last couple of quarters.

Moving a little further down the income statement. Gross margins were down 40 basis points over the course of the first half with clear sequential improvement between the first and the second quarter. We continue to expect to see a positive gross margin for the year as a whole, 2012. The recent softening of some commodity costs will have minimal impact on our income statement for fiscal 2012. This is partly as a result of the timing of the covers but also the impact of weakening currencies in a number of our markets, as Paul alluded to at the beginning of the presentation.

So the guidance we gave with Q1 results largely remains unchanged, that is we expect commodity cost inflation to be just a little higher than mid-single digits for the year with inflation more weighted towards the first than the second half of 2012.

Our continuous improvement programs continue to generate substantial savings across the supply chain, but also in our overhead structures. This allows us to offset the impact of inflation and it provides us the important funds to invest in formulations, training, recruitment and to better support our brands.

Turning to A&P. Advertising and promotions investment in the first half was at EUR 3.3 billion, that's up 10 basis points as a percentage of turnover, with advertising now accounting for over 70% of the increase. So happily it's not just the quantity, but it's also the quality of advertising, which is improving. And although still a small proportion of the total, digital advertising is up by 50% year-on-year reflecting the increasing time spent by consumers online. So again a small proportion but very high rates. We continue to expect A&P to increase for the full year at least in line with our turnover growth.

As you can see from this chart on core operating margin, it was flat in the first 6 months. Overhead has contributed 30 basis points, and business restructuring was lower by a further 20 basis points. We continue to expect business restructuring for the year, as a whole, to be similar to the levels of 2011 and that's around 130 basis points.

Now turning to the bottom line, core EPS. This increased by 6.2% to EUR 0.76, with the earnings accretion from turnover and core operating margin, offset by higher minority interests. In this case, reflecting the sharing of the after-tax proceeds of the Indian property sales with the other shareholders at Hindustan Unilever.

Let's now just briefly turn to the balance sheet. Net debt increased by EUR 400 million over the first half of the year with cash flow from operating activities covering dividends, as well as M&A, the increase in our net debt really reflects the impact of a stronger dollar on our U.S. denominated debt. The net pensions deficit increased by nearly EUR 1 billion to EUR 4.1 billion at the end of June, largely unanticipated due to try an increase in the liabilities arising from the historically low corporate AA bond rates. The cash expenditure on pensions for 2012 is still expected to be around EUR 700 million with over EUR 300 million spent in the first half.

Free cash flow, at EUR 1.5 billion in the first half, is up EUR 700 million versus the same period last year. This is largely due to a much reduced cash outflow from working capital from the very low year-end position.

Capital expenditures in the first half were at EUR 800 million, and we continue to expect full year CapEx to be at around 4.2% of turnover.

Trade working capital has been negative for 11 consecutive quarters. As at the end of June, the cash conversion cycle was 2 days, that's 4 days lower than the same point last year, with the majority coming from lower inventories, and we recognize that there is still much more to be done in this part of trade working capital.

With that whistle stop tour of the numbers, let me pass it back to Paul.

Paulus Gerardus Josephus Maria Polman

Thank you, Jean-Marc. So the numbers again confirm that we're making solid progress as we transform Unilever into a sustainable growth company. Yes, confidence is growing. We continue to build consistency in the business performance, and we continue to invest in the long-term health of our business, in our brands, in our products and in our people.

In the challenging environment that we continue to see ahead of us, I'm sure we'll ensure that we'll keep our feet -- both of our feet actually on the ground, with no room to have this confidence become complacency. We will be sharper, still, in how we allocate resources, and we will instill further iron discipline across our cost base and in our executions.

Even though we've come a very long way, I'm not yet satisfied at our operational capability even today it's sufficiently close to being best-in-class. Our performance in tea and parts of our food portfolio is getting better in places, but not sufficiently good yet everywhere. Our service and quality levels are still not good enough in some important markets.

Our inventory levels, although improving as Marc alluded to in places, are simply still too high. Our IT systems are becoming increasingly a source of competitive advantage, but we need to invest there as well to more firmly link it to our growth agenda. Our innovation and management of mix is not yet sufficiently accretive to margins. Our products are not sufficiently available yet in some of the channels like the drug or pharma channel and in e-commerce. And yes, we do hear back from our employees despite this increased level of confidence and enthusiasm that we're still too complex. It still takes longer than it should to get some of the key decisions implemented in the marketplace.

Now each and every one of these opportunities for us is an opportunity to further accelerate our growth and to continue Unilever on this path of success. At the same time, we will stay focused on the model we now call the virtuous circle of growth, because I believe it works through good times and bad. I'm more convinced than ever that the future is in our own hands. Our priority therefore remains, volume growth ahead of the market, steady and sustainable improvements in core operating margin and a strong cash flow driven by increased capital discipline.

With that, ladies and gentlemen, we will now open up the lines for questions.

Question-and-Answer Session


[Operator Instructions] And your first question comes from Celine Pannuti from JPMorgan.

Celine AH Pannuti - JP Morgan Chase & Co, Research Division

My first question is on your guidance growing faster than the market. If I remember well at the beginning of the year, you were saying that you were expecting total market growth of 4% to 5% and that you would grow ahead of that market. Given what you said in the context of a weakening consumer confidence and other macro points, do you still feel confident with that 4% to 5% outlook for the market? And then my second question is on Latin America, which has been very strong in the quarter, and yet you were as well mentioning that the economy is actually weakening. So could you give us a bit of an understanding of what will continue to do well, is the consumer still happy and buying staples in these emerging markets?

Paulus Gerardus Josephus Maria Polman

Okay. Bonjour, Celine. Thanks for both of the questions. The -- let me go quickly through them. In the 4% to 5% market growth, I still think we can stay ahead of the market. What you will see over the second half is probably slightly different mix, as we said before, between volume and pricing. But the growth rate should continue to be ahead of the market with the stronger and stronger innovations that we have on the new brand expansions. I don't want to compromise on that. As far as Latin America, it is challenging because we see a situation in Venezuela that's not getting any easier. We see a situation in Argentina that is very difficult and we have a deodorant factory there, difficult to import things, export things. So it's disrupting a little bit our supply, but we're confident despite the very competitive situations in both Brazil and Mexico. Also in the competitive front, we've been invested, I gave you the example of TRESemmé, we have some other wonderful innovations in these markets, and not surprisingly, they're putting in double-digit return. And as you know, at the end of the day in Latin America, if you win in Brazil and Mexico, you solved the bulk of the challenge there. So I feel confident that on both of these, we will not disappoint you as we face the next 6 months of this year.

Celine AH Pannuti - JP Morgan Chase & Co, Research Division

All right. But -- just to come back on Latin America where the pricing component remain high. Should we expect that to continue or do you see that weakening?

Paulus Gerardus Josephus Maria Polman

No. You should expect that to see that continue but easing off but a little bit. There is obviously a carryforward effect that you have to take into account. But contrary to what some people always thought, and do we have pricing power, in this and that, we actually have pricing in the quarter again, and we've quite priced it over 6 months. If you see real's devaluing, the way we've seen it in Brazil, we unfortunately have to put it into pricing. We don't see any other option. So depending on what happens, moving forward, you have to further carry over effects of that for sure, but that should ease a little bit on the year-to-year comparison.


Your next question comes from Marco Gulpers from ING.

Marco Gulpers - ING Groep N.V., Research Division

I wonder where you can talk a bit more on the volume growth trend. You mentioned in the developing markets they are still negative. Could you tell us a bit more on the trends that you're witnessing in the markets, quarter-on-quarter, and what you expect on volumes for the second half of the year? The second question is on your excellent performance in Personal Care compared to your, I would say, a more challenging performance in Refreshments. What are, let's say, your expectations for the second half of the year in Refreshments and in the Ice Cream?

Paulus Gerardus Josephus Maria Polman

Marco, very quickly, our quarter-to-quarter performance is definitely better than the Dutch soccer team, but we like to look at it on a 6-month basis. And what we see obviously is that the volume in the markets, in total, are under pressure a little bit. In the emerging market it is because of pricing that we need to do behind the weakening currencies. Often you need to compare the currency cost in dollars so that's often in double hit in these countries. And there is volume slowdown. And in Europe, I don't have to talk to you about that, that's a continuous saga. The way we compensate for that is as you've seen in the results our A&P is up again. Our innovations are getting stronger. We're doing these right spaced launches. Just take the last 6 months alone, launches of Clear in the U.S. ,or Simple in the U.S. Our Dove in the Philippines, our TRESemmé in Brazil, and I could go on, Magnum in 2 or 3 places, these are big launches that are really starting to kick in now to help us stay ahead of that curve. So we don't need to compromise on that. If we go to the second part of your question, which is equally important on refreshments, I think Kevin Havelock and his team have done an outstanding job in that category. As you know Refreshments now comprises, tea and ice cream. And here again we're starting to see the benefits of our new organizational structure by putting it together. A lot of consumer commonalities around the feel good -- about the technology, the texture, the mouthfeel, the flavor technology. Also the way we go to market in the outer home, it's starting to kick in for us and we're starting to see the benefits, once more, of this new organizational structure. But even if you peel the onion and, frankly -- and you know I'm not a guy that likes to use excuses, but we've had a lousy 6 months on the weather. If you are in the ice cream business, you ought to be worried when it just pours down for 6 months, and when you have the wettest spring in living memory, and yet, our total ice cream business over the first half is up over 6%. If the second half, the weather turns a little bit positive for us, we'd be very happy. On Tea, we actually see the economic climate resulting in people downgrading a little bit to the more bulky tea, which is obviously a value lot. We don't like that, but that is the reality. But here again if you look at the last 12 weeks, we're actually starting to grow share. Tea is mixed picture and I've always said that and I've been very straight about that, we need to do better on Tea. We're now launching in the U.S., the new honey variant, which is doing extremely well. That's the first time in years that we're starting to invest in the Lipton brand in the U.S. We're doing the same now in some other places in the world. And I think, I would put it this way, I would be disappointed if we don't start to show a better number on that front as well. But the overall Refreshment category is actually a reasonably good performance if you look at that, given the environment that we were facing.

Marco Gulpers - ING Groep N.V., Research Division

And maybe one final question if I may. It's regarding the cost savings delivery, you basically highlighted for the full year you expect more or less in line with 2011. Could you help us out whether there will be some phasing in the first half versus the second half in terms of realization of those cost savings?

Raoul Jean-Marc Sidney Huet

Yes. Unfortunately, this is my first question, the answer is we're not going to give you that type of disclosure between first and half. The only view that we give in terms of phasing first half and second half is that of all the commodity cost inflation, it's more weighted to the first than the second half so that's the only type of guidance that we give between the 2 halves.


Your next question comes from Harold Thompson from Deutsche Bank.

Harold Thompson - Deutsche Bank AG, Research Division

Just 2 or 3 questions please. The first one is on pricing. Clearly, Paul, you said the ongoing volatility of inputs and that's just not making life too easy. But are you suggesting that maybe pricing might have to start going up given the -- or start to go up again given the ongoing movements, or did I read you wrongly on that one? On emerging markets, as I look at your volume growth, it's clearly an absolute term picked up, and if one thinks volume is the best judge of demand. Are you still saying that's largely you're winning more volume share rather than better market condition? And finally on pensions, clearly, the deficits gone up by EUR 0.9 billion. IAS 19 will be implemented from 2013, next year. Could you maybe help us with the implications of that standard?

Paulus Gerardus Josephus Maria Polman

Thanks, Harold. And all 3 questions are good ones. Let me just briefly go through the first one and then Jean-Marc on the pensions. And then I'd like to make one final comment in the end. On the pricing, I want to be clear because the commodity volatility is -- makes it a little bit unpredictable, and the currency volatility makes it also a little bit unpredictable. But contrary to what some people out there were thinking, we actually had in-quarter pricing above 1% in -- coming mainly from the D and E markets in quarter 2. For the whole year, I don't like to be as specific, but I think if you -- my best guess is that the pricing component will be 3%, 3.5% for the year and don't pin me to this please, but it will be 3%, 3.5% for the year with 2% coming from carryover. And we haven't done the exercise, but that's about what I have in mind. So there is pricing in the year contrary to what some people think. And it shows you the strength of our brands and innovation. I'll give you examples, I just came back from a trip to the Far East with 6% to 7% price increases on Comfort in Thailand or price increases on detergents in India, contrary to what some of the others in the market are doing, price increases in South Africa. So we do have price increases there. And Brazil, I've obviously talked about. So that's it really on pricing. Volume on the emerging markets, we are building share, that's absolutely true, and partly driven by growing where we are like, for example, in China, which is a very important market, which is more developed than India. We always tend to focus on India and you've seen our results, which we just published, so nothing to complain about, despite an incredible competitive pressure. But more importantly, actually, China has a much bigger market and we're growing share in all categories bar one. So that's clear share growth that is driving volume. And then you add to that our new brand expansions where we are very focused and are hitting some good returns. On pension I'll just quickly turn it to Jean-Marc.

Raoul Jean-Marc Sidney Huet

Sure. Thanks for actually raising this because this is something that will impact all European companies, not U.S. companies but -- you're referring to IAS 19, and this will impact Unilever in relation to the calculation of our pension costs in the net finance cost line. And in the future, as of the 1st of January, the same discount rate will be applied for assets, as well as liabilities. Very briefly couple of points, has no impact on cash, has no impact on core operating profit and the actual impact if you were to take the assumptions at the beginning of this year would be around EUR 0.01.

Paulus Gerardus Josephus Maria Polman

So -- I want to comment. The only comment I wanted to make on the pension, that's why I wanted to end this, it's absolutely crucial that we make the tough choices in this environment and we've adjusted pension plans in most places now to go to career averaging or DC. The benefits will only show up in 15, 20 years, but many people and many companies are postponing them because these are tough choices, and obviously, especially in Europe and in North America, if we don't do this these economies are never going to become competitive. So here again, your company has taken the harder rights versus the easier wrongs. And the reality is if you don't do this, you'd hate to be a CEO for some of these companies 15, 20 years from now. So take that into account as you look at valuations.


Your next question, apologies to the pronunciation, is Robert Waldschmidt from Merrill Lynch.

Robert Waldschmidt - BofA Merrill Lynch, Research Division

I just wanted to touch base in terms of the margin developments. You mentioned going -- getting volume share and things in places like China. Can you just -- first in terms of the margin trend that you've characterized in terms of China and Russia before? And can you also explain to us, over time, how you intend to improve further Home Care margins? I see there's some progress in the quarter year-on-year. And then lastly, in terms of Personal Care, margin is down 140 basis points in the quarter. You've called out gross margin and A&P there. I'm just wondering if there's any mix in there or if it's just phasing a cross recovery or any color you can shed there?

Paulus Gerardus Josephus Maria Polman

The margin progress, overall, is good. Core operating margin flat, but what I like is we've been further -- we've been able to get further efficiencies in our operating model. You see, again, our indirects are down, it has allowed us to invest in A&P. Whilst our gross margin declined, which we've always flagged over the first half, is actually coming out a little bit better than we thought. Moving forward, margin progress has to come from a few things that we are doing. And the first thing we're doing is obviously our innovations that have to and are becoming more margin-accretive. A lot of the things that you see also in Personal Care it might show a margin decline in the numbers we're publishing right now, but that is actually putting significant innovations in the market that will have higher margins. But you're dealing with a lot of the launch costs right now in these innovations, and that's reflected there. The second thing is continuing to work on our cost sides like we're doing now. Indirects, cost savings have a tremendous opportunity still to drive our margins. As we said, we are growing in the markets like Russia and China above the company efforts, but we also, with iron discipline, ensure that our margin progress in these market is also above the market of other company average. Otherwise, the investments are not responsible. And fortunately in these markets especially China, we have good gross margins that allow us to do that. So I feel very confident that we increasingly see that happening. And one of the reasons our core operating margins are flat over the first half, is actually that we're starting to see our mix picking up in a positive sense. So that is where it comes from. We're still cost focused again working our mix margin-accretive innovations.


Your next question is from Martin Deboo from Investec.

Martin John Deboo - Investec Securities (UK), Research Division

Two questions please. Can I just ask you for some more color on the laundry business? It seems to have particularly strong results to me. And I think Jean-Marc said that you were going share in Brazil and India, which is a, sort of, resident achievement in my view. Can you just give some commentary on what you're doing there and the results that you're seeing? And can I just ask you about the A&P? You increased A&P versus percent of sales in FY '12, but against a soft prior year comp. Does that reflect the fact that you're seeing competitors pulling back spend? Are you getting more value out of digital? Just some commentary on the A&P movement would be helpful.

Paulus Gerardus Josephus Maria Polman

Martin, the A&P is a total company comment, not laundry, I presume.

Martin John Deboo - Investec Securities (UK), Research Division

Correct, yes the A&P is a total company comment, that's what I probably asked.

Paulus Gerardus Josephus Maria Polman

All right. Thanks. On the Laundry business, obviously, we are growing share. We are growing very fast, and I'm glad you picked that up. We are building share in all of the key places that we're focused on despite competition still lowering prices and putting pressure on these market. And the answer is really how you have to run the business. We've upgraded our Omo formula, we've upgraded Suave formula, we're putting some wonderful technology out there like dye shading and other things that are proprietary, and we're investing behind that. I think we have a good discipline now. All of our formula are improving, and our marketing plans are getting stronger. Our copy is better, our brand equities are strengthening. We're doing it the way that we should be doing it. And I think we've always said, we're well-prepared and we -- but the one thing we don't do is let competition buy business away from us. In some of the markets we've probably been slow, sometimes, to react, but that's finished. And this is a business that needs as much discipline as it needs innovation. And we're striking the sweet spot right now. The reason the margins go up is exactly this, despite this tough environment, we're becoming better, also, in the cost side by putting in these low-cost models that allow us to achieve these objectives. So I'm confident that we can continue to build share in these businesses which are extremely important to us. On the A&P side, there's a 10 basis points increase despite the overall strong topline growth. So in absolute, I don't have the numbers right, EUR 300 million, thanks, Jean-Marc. So in absolute, we've added another EUR 300 million to A&P, and here again, there are many skeptics out there. I think that should stop now, we're investing whilst we are making it more efficient with the move to digital and some other things that we're doing. So we're definitely getting more bang for our buck. And as I said, I don't see any reason why the full year A&P spend should not be up, and I hope these first 6 months results put that at ease for a lot of people. We're also getting better, as our copy is getting better, our testing is getting better. We also have more discipline to invest that money where we get our returns. And we're doing that -- we're watching that obviously very closely, especially behind some of the big bets that we're putting out in the marketplace. And whilst undoubtedly I know we have a lot of opportunities to still improve in this area. I feel happy that we [indiscernible] leadership in the markets and the categories that in terms of the effectiveness of our A&P spend, we're doing well. There are some markets where we have seen competition pulling back. Some of our -- one of our main competitors, especially in hair and laundry, prefers to pay the price in pulling back on A&P. We're not going to make that a decision for us to pull back on A&P. We continue to think that the best way, long-term, for our shareholders is to strengthen our brands and brand equities, and that, frankly, is innovation and A&P. And that's -- coming back to laundry, that's what you see there. So I hope that, Martin, answers the question.

We'll take one more question because we have the Olympic flame coming past this building. And I'm sure that you all want us to see that.


Okay. We have one more question for you then, and this, apologies for the pronunciation again, Jeremy Fialko from Redburn.

Jeremy Fialko - Redburn Partners LLP, Research Division

Okay. Jeremy Fialko at Redburn, here. Really just, kind of, following up on one of the earlier question. To the broader point as how you view the emerging market, because clearly there's a pretty large, kind of macro economic slow down in a lot of those countries, yet your own performance has remained -- you're very, very robust. But the fact is you are such a large player within your Consumer Goods in so many large and emerging market. But at some point, the macro slowdown would start to affect disposable income, and would to affect consumption. So even if you're continuing to take share, your growth rates will start to fall. Really what I want to ask is, how you view that dynamic and how you see the risks albeit you'll get a more significant slowdown in your rate of growth in the emerging market?

Paulus Gerardus Josephus Maria Polman

Well, Jeremy, once more, I think there will be a slow down but there are 2 billion more peoples coming and it's only in the emerging markets that these people are coming. There's a tremendous opportunity still from market development. If you would just move for, let's say, laundry well I'm running a little closer to that, but if you'll just move people from hand wash to machine wash, you'd move these markets up 2.5, 3 times just in consumption. So the potential in these market is enormous still, and we are obviously a very small part of the overall economy. Yesterday, there was twice a big delegation of Chinese that are here for the Olympics with the government. And all you see is possibilities when you talk to those people. The reality is the macro environment is slowing down in these markets a little bit, and we have to be realistic about that. I think it would put a little bit of pressure on the numbers versus what we've been able to do in the last 2 or 3 years. We should not be denying that. But I think, again, with the combination of new brands, investments continuing to build share as what we're doing now, we should be able to mitigate some of that. But yes, the wind is not in our sails in these markets. I also think, though, that many of these markets are becoming less dependent on the rest of the world. Now China really is focusing on building its internal consumption, and we see that happening in Brazil and some of our other key growth markets. We will be benefiting from that as well. But you should expect a slight slowdown in the volume growth in these markets, that would be really realistic.

So anyway coming to an end on the call, once more, I want to end by, first of all, thanking you for your support and your interest. We feel happy with these numbers in a tough environment. We also feel good with a certain level of confident, but not complacency, that the company again is better prepared than it ever was for an even more difficult environment. That's exactly why we keep the tension in the company, why we don't want to be complacent. So we've never been stronger than before but it has never been more needed than before. We've come a long way, but we also believe that there are many things to do in this company, still. For that reason, I don't want to have any excuses from the outside, not the GDP growth, not in government, not in the election, not on the political leader, not the weather either, nor Ramadan or any holidays. The destiny is in our own hands and we know what we need to do. Next to that, which is hard work and I want to thank all the 170,000 people of Unilever who do this day in, day out and do a marvelous job. I also want to encourage all of us to take off this summer enjoy some of this time with your families, recharge the batteries if you have a chance, enjoy the Olympics, and hopefully, see you soon again in the marketplace or anywhere. I thank you, and talk to you soon. Thanks.

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