Unilever's (UL) CEO Paul Polman on Q4 2015 Results - Earnings Call Transcript

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Unilever plc (NYSE:UL) Q4 2015 Earnings Conference Call January 19, 2016 3:00 AM ET


Andrew Stephen - Head, IR

Paul Polman - CEO

Graeme Pitkethly - CFO


James Edwardes Jones - RBC

Eileen Khoo - Morgan Stanley

Javier Escalante - Consumer Edge Research

Warren Ackerman - Societe Generale

Adam Spielman - Citigroup

Celine Pannuti - JPMorgan

Rosie Edwards - Goldman Sachs

James Targett - Berenberg

Alain Oberhuber - Mainfirst

Alex Smith - Investec

David Hayes - Nomura

Charles Pick - Numis


We're about to handover to Unilever to begin the conference call. [Operator Instructions].We will now handover to Andrew Steven.

Andrew Stephen

Good morning and welcome to Unilever's full year results presentation which will be given by Paul Polman and Graeme Pitkethly. Paul will open with some reflections on the results and the progress made against the strategic objectives for each of the four categories. Graeme will review the financial performance and Paul will conclude with the priorities and outlook for 2016.

As usual I draw your attention to the disclaimer relating to the forward-looking statements and non-GAAP measures.

And with that let me handover to Paul.

Paul Polman

Thanks Andrew and one of the many advantages of being first out of the block in reporting the full year results is that it's not quite too late to wish you all a Happy New Year which I'll hopefully have a chance to do with you in person. So I hope the year started well for you.

It might be good actually to start with the perspective on the 2015 results. I believe it has been a good all-round performance which again demonstrates the consistency that we're looking for. Our steady growth and margin improvements have been achieved in markets which are as volatile and as challenging as ever. That volatility I believe is likely to remain as the events of recent weeks once more have underlined, so it is vital that we continue to drive the increasing agility of our business as we go forward. I will return to that theme at the end of this presentation.

In 2015 we once more improved on all key metrics. In a year which turned out to have more headwinds than tailwinds this is a good result. Turnover grew by 10% which was helped by currencies. Underlying sales growth returned to a solid 4.1% which was ahead of the markets. It was driven by emerging markets where we grew a strong 7.1%, with 2.7% of this coming from volume despite the challenging environments there as well.

Gross margin increased by 80 basis points, core operating margin was up by 30 basis points despite some currency headwinds and other increase in brand marketing investment which hopefully you've realized is now again a further increase and consistent increases over the last seven years and certainly at the basis of seeing our brand equities getting stronger and stronger driving therefore the top line growth. Core EPS increase by 14% at current rate and by 11% at constant rate.

Free cash flow was particularly strong at €4.8 billion that is up from €3.8 billion in 2014 if we adjust for the tax on disposals in that year. And return on invested capital, something we said we would focus on increasingly so, improved to nearly 19%.

Now over the last three years we have grown underlying sales consistently at around 4% with the exception of, what you might call, the perfect storm we faced in the second half of 2014. At the same time we've increased our core operating margin steadily by 30 basis points to 40 basis points every year, managing through the impacts of volatile currencies, costs or whatever you have.

The consistencies of this sustained profitable growth contract sharply with the increased volatility and challenging market conditions that we see. The downturn in the global economy has been more prolonged than I suspected which is saying something. At the beginning of last year I said that we were starting to see more tailwinds than headwinds, but unfortunately the tailwinds proved short-lived.

We saw waves of devaluations in many emerging markets, some prompted by a lack of confidence in government actions. More expected perhaps was the necessary loosening of exchange rates in Argentina at the end of the year. Brazil, another country, fell further into recession, with GDP actually declining 4.5% in the third quarter alone and the fourth quarter is not expected to be much better. A number of the oil exporting countries like Russia, the Gulf region, part of Latin America and Africa, are equally struggling. Crop failures for a second consecutive monsoon failure have put pressures on rural demands in India.

And in China there is modern growth, you've seen the results this morning and we'll see what this year brings, but they are below historic levels and their slower growth certainly has a broader effect on other countries.

In developed markets consumer demand for our categories remains weak and prices are still falling in Europe. In the U.S. our market are now growing at around 1% to 2% but this time it's offset by ongoing customer destocking making them effectively flat. At the same time the level of uncertainty has never been higher. Geopolitical instability has intensified in many places, not least in the Middle East.

And we have once again seen the devastating consequences of climate-related incidents that wreak havoc on communities and supply chains. The monsoon failures in India I talked about, floods in Latin America and the UK, typhoons in the U.S. and the list goes on and, frankly, it's getting longer. In this very uncertain and unpredictable environment we remain squarely focused on delivering consistent growth driven by strong innovations and already strong margin improvements.

Now the good news is that our business model is not much more resilient and better able to withstand the external shocks and 2015 once more was a proof of that. We see that in market shares which are picking up, especially volume shares and our performance compares very well to others in our peer set.

At the same time, as I mentioned before, we need to continue to keep a close watch on local competition. Our consistent and competitive growth is driven by stepped-up innovations as well as renewed focus on the core. We're also benefiting from a clear and aligned strategy which is well-embedded throughout the company now.

The four pillars of the compass continue to serve as well and we're starting to see the benefits of managing the business against these differentiated strategies that we have defined for each of our four core categories. Now let's review the progress we've made against each through the lens of these strategies.

Let's start with personal care, that's now our largest categories representing 38% of sales and 48% of operating profit. Here the strategic objectives are to continue to grow the core, improve gross margins to fund further growth and build a more premium business.

In 2015 we grew underlying sales by 4.1%, a pickup from the relatively slower growth of the previous year, albeit still somewhat below historic run rates and our longer term expectations. Growth improved progressively throughout the year as the sharper strategy which Alan Jope is putting in place are clearly starting to pay off.

We're expanding the core with innovations like in the U.S., the dry spray deodorants. This has probably been our biggest innovation yet with sales already exceeding €100 million. It's helping us to widen our lead ahead of our nearest competitor, as well as grow the category as a whole.

Dove Men+Care is another great example, it has more than trebled in size over the last five years and is now around 10% of the total Dove brand. This has come from a combination of innovations in the core of deodorants as well as in skin cleansing, expansions into skin care and hair and rollout to new markets.

The core also benefits from our increased focus on digital. All Things Hair revolutionizes the way we connect with consumers using YouTube vloggers to demonstrate our products. This is already rolled to nine countries earning a rapidly-growing audience. The brand support, along with strong innovations is driving continued global market share in daily hair. In fact, it is has narrowed its share gap to the leading player in hair care by more than 300 basis points over the last three years alone.

At the same time as growing the core, we're making good progress in the second part of our strategy which is building more premium brands. Since its launch in May Zendium has established a firm base in France and Italy and with further launches in the second half of the year the brand is now present in nine countries. Zendium typically commands three to four times the market average price, made possible by a very strong consumer proposition and technology which harnesses the same protein and enzymes that the mouth uses. I can highly recommend it.

In a similar phase, Dove entered a new premium sector this year with the launch of Dove DermaSpa in Europe, bringing spa experience and dermatological care together. We see the results of the strategy and higher growth for the premium segments. Altogether those of our brands with a typical price premium of 20% or more in average to the market, grew at just over 6%, twice as fast actually as the mid-tier or lower price brands.

2015 also marked our entry into prestige skincare with four acquisitions and a turnover approaching €400 million. This gives us critical mass and a good base of strong brands from which to expand and, again, integration going well and certainly within expectations.

Let's move to food. The strategic objective for food is to accelerate growth whilst maintaining strong profitability and cash flow. We've been reshaping and adapting our portfolio to meet emerging consumer needs and this was reflected in a return to growth with underlying sales up 1.5%.

Savory which is now 42% of our food business grew at 5%, it's the strongest growth in many, many years. Half of our savory business is now in emerging markets. Here, urbanization and an increased proportion of women moving into paid employment drives demand for products that help ease the task of meal preparation. Our emerging market savory business grew actually over 8% last year. Growth in developed markets is obviously less, but we're gaining volume market share here as well.

At the heart of our strategy is a global local approach to brands and innovations. Knorr successfully combines global technologies with local insights to product a fresh take on traditional meals, like the Ginataang Gulay mealmaker in the Philippines which many of you had the chance I believe to try for yourself last month. And we compliment these global brands with local ones, local ones like Bango in Indonesia which, for example, grew 20% and now is a brand of more than €150 million in turnover alone.

At the same time we're responding to the changing consumer preferences and growing demand for more authentic, fresh, natural and sustainably sourced foods. Like our new range of naturally tasty mealmakers which are made with 100% natural ingredients.

Let's move to dressings. We also see here the benefits of our strategy, for example our move to cage free eggs, as well as the innovations on our bottle with the clean squeezy bottle. Hellman's grew a whopping 7% last year despite increased competition from new or consolidated entries in the market. Food solutions grew in the mid-single-digits as we extended our strong brands like Knorr and Hellmann's in the catering channel, both in the kitchen and on the table in the front-of-house.

Now, spreads in foods continues to be a drag on the overall foods performance with another decline of 5% as we haven't been able to stem the ongoing market decline which was compounded by a further fall, may I say, in butter prices. It was a year of transition as we set up the new baking, cooking and spreads business unit.

Up and running since the middle of the year, the new unit has lost no time in identifying the areas for much greater cost and capital efficiencies and reallocating resources to better meet consumers' tastes and trends like baking, blends of vegetable oil and butter and plant-based propositions. It is still relatively early for the new unit and we will judge the performance through the course of 2016. Cash flow from foods, already strong, increased by a further €90 million and margins remain well above the Unilever average.

Let's move to homecare. The homecare category has embraced its new strategic objective which is to step-up profitability while scaling household care. Profitability improved by 130 basis points whilst growing was sustained at 5.9%, well above the market rate again and with a very strong last quarter as you've seen.

We're making a structural correction in the margins of laundry, this includes radical simplification, like the 80% reduction in the number of detergent sachets, driving efficiencies across manufacturing and distribution and a strategic repositioning of the portfolio to higher margin formats like fabric conditioners, liquid detergents, machine-specialist products and auxiliaries.

Here again, innovation is firmly at the heart of our strategy. Fabric conditioners itself grew 10% last year, helped by the launch of Comfort Intense. The new product has a super concentrated formulation and double encapsulated fragrance technology that delivers outright superior freshness in small doses.

The pre- and post-wash fabric cleaner additive and auxiliary market we're building in Brazil, also has intrinsically higher margins. They have already achieved a volume share of nearly 20% in the first full year since their introduction.

We're also delivering on the second part of the strategy to scale household care which grew over 7%. The Cif brand alone now has sales of around €500 million and is one of the fastest-growing brands globally with double-digit growth again in 2015. The rollout of Power and Shine sprays for kitchens and bathrooms is going well and we'll continue to introduce the brand in new markets.

Let's move to refreshment. The priorities for refreshment are to step-up cash flow and return on invested capital, while sustaining growth in ice-cream and growing faster in tea. As you've seen from the numbers, here again we've had a record year with growth of 5.4%, a 60 basis points improvement in margin and cash flow up €370 million with ROIC improving by more than 300 basis points.

Good weather certainly helped and pricing helped the top line too, but even so it's been an encouraging demonstration that our long term strategy is certainly starting to pay off. It's strategy of globalizing the business, driving premium and out-of-home, whilst reinvesting in the brand and its industrial base. It's meant accepting subdued company growth and margins over the last five years and it takes time to build these categories, but I believe that we're now starting to see the results of these investments coming through.

In ice-cream Ben & Jerry's achieved a second year of double-digit growth and sales are now approaching €600 million. It's a great example of the power of a brand that combines a clear purpose, strong innovations like the core ranges and entries into new markets like Brazil. Magnum also grew double-digit and was the fastest growing of our €1 billion brands in 2015. Pink and Black has been our most successful Magnum innovation yet. And Talenti, the premium gelato business we acquired at the end of 2014 grew by more than 40%, though of course this is not yet reflected into our underlying sales growth.

Underlying sales growth in tea improved to around 3%. This is still below the overall market growth, a little bit below that which is heavily skewed towards more premium segments. Here again I'm encouraged by the fact that we have significantly strengthened our innovation pipeline, especially in premium. Three years ago less than 5% of our innovations were global, today almost 50% of them are and our overall pipeline is 30% larger.

Importantly, it's also much more focused on the faster growing, more premium segments. In fact in 2015 we started to see these landing in the marketplace with launches like the new ranges of Lipton green teas and specialty black teas, tea capsules in Europe, doing well. T.O. by Lipton our own in-home tea machine in France and another nine T2 stores opening taking the total now to 75 and helping the T2 business grow sales by more than 50% since we had acquired it just about two years ago.

We also continued to build ready-to-drink tea in partnership with Pepsi. The JV sales grew by 10% and within this the Pure Leaf brand is a premium position, as you know, is doing particularly well. This doesn't show up in underlying sales growth but does drive our EPS through the JV line.

So having reviews progress against the category strategies let me just handover to Graeme now for a brief review to the full financial results. Graeme, go ahead.

Graeme Pitkethly

Thanks Paul. Good morning everybody, let me also wish you a very happy New Year. At our investor event in Southeast Asia last month, I described how our strategy and the strength of our portfolio enables us to deliver what we call '4G' growth. That's consistent, competitive, profitable and responsible growth, specifically investing in brand and innovation-led growth that in turn drives earnings, cash flow and return on invested capital as the components of value creation.

Our 2015 results are a good illustration of this in action. Turnover grew by 10% to €53 billion. Underlying sales growth of 4.1% for the year was 2.1% from volume and 1.9% from price. Price growth accelerated towards the end of the year as we implemented price increases in countries that have seen high levels of cost inflation, particularly in Latin America. As we flagged last quarter, volumes in Latin America were strong in Q3 ahead of these increases and we saw the corresponding decline in volumes during Q4.

Overall our emerging markets businesses grew by 7.1% in the year, with volumes up 2.7% despite the challenging macroeconomic conditions and higher costs of living which have squeezed consumer incomes in many, many countries. Underlying sales in our developed markets were flat, volumes grew by 1.2% but pricing was negative with deflation in all of the main European countries across the entire year.

In a relatively low growth environment we need to work harder on all of the opportunities to grow revenue in the core of our business, so we've been piloting a net revenue management program. Now you could call this the art of pricing, but it simply means having the right packs at the right price in the right channel for every shopping occasion. It helps us optimize pricing and realize new growth opportunities. We started with laundry, ice-cream and hair in parts of Europe, in the U.S., in India and in Thailand. The results from these pilots have been encouraging and so we're now rolling out the program globally.

Turning to M&A, on a full-year basis the net impact was slightly negative because of the carryover impacts of the 2014 disposals of non-core foods brands like U.S. pasta sauces and Slimfast. However, M&A turned positive in the second half of the year as a result of the Prestige skincare acquisitions, Talenti and Grom in premium ice-cream and the Zest and Camay emerging market skin cleansing brands.

Exchange rates added 5.9% to turnover. In the first half we saw a very strong boost from a weaker euro, but in the second half this was largely offset by weaker emerging market currencies. If rates were to stay as they are today through the whole of 2016 which they won't of course, then we would expect a headwind of some 3% to 4% on both turnover and EPS.

Core operating margin increased by 30 basis points despite some significant currency headwinds. Gross margin was up by 80 basis points with mix improving as a result of margin-accretive innovations. Supply chain improvement programs again delivered more than €1 billion of savings and were again largely reinvested in offsetting cost inflation to maintain our competitiveness and affordability in markets where real consumer incomes have come under pressure.

Now this may sound a little counterintuitive, but commodity costs in local currencies actually increased in 2015 by low-to-mid-single-digits. This was entirely driven by currency devaluation, especially in Latin America which more than offset falls in most commodities in U.S. dollars.

At today's commodity prices and exchange rates we would expect a similar or perhaps slightly lower increase in commodity costs in 2016, again largely due to cost inflation in Latin America. Brand and marketing investment was up by 20 basis points. Within this digital advertising again increased as a proportion of turnover and now sits at 24% of our total advertising spend.

Overheads increased by 30 basis points. Now there are a number of moving parts here. Firstly, 30 basis points of underlying improvement came through from Project Half, net of reinvestment. Project Half has exceeded the original planned savings of €500 million over the last two years. The second moving part is an adverse currency translation impact on overheads of 30 basis points. This is the impact of the relative strength of sterling and the weakness of many emerging market currencies on our central cost ratios.

And finally the tough comparator in the second half from the gains on pensions and property sales which we called out at the same time last year. As we said then, these largely offset the adverse currency translation effect in 2014 and while this currency effect continued into 2015 the offsetting gains were not repeated. Project Half and our return on marketing initiatives have helped bring overheads and brand and marketing investment efficiency down to conventional benchmark levels. But the benchmarks will continue to improve and so must we.

At last month's investor event I shared two interlinked initiatives. First, we're developing new functional models that will lead to increased effectiveness and greater efficiency in the cost of support of support functions like HR, finance, IT and the core functions of marketing and supply chain management. We expect to find a greater level of efficiency in those functions which are not consumer of customer facing. And we will roll out a zero-based budgeting approach that has been piloted in Thailand, scaling up with our formal global program.

Both of these programs, new functional models and ZBB, will run throughout 2016 and 2017. We will realize savings progressively throughout this period and expect to see full-year savings of at least €1 billion from 2018. The savings will be realized largely across overheads and brand and marketing investment and will underpin delivery of continued steady margin improvement for the next few years. These savings are in addition to our ongoing supply chain savings which, as you know, are in excess of €1 billion per year.

Turning now to EPS. Core earnings per share increased by 14% at current exchange rates to €1.82. At constant exchange rates the increase was 11%. Operational performance which is the combination of growth and margin, contributed 9%. Joint ventures, associates, other income and minorities together added 1.2%. The purchase of the Leverhulme family rights midway through 2014 contributed a further 1% to core EPS in 2015 through the reduction in the diluted share count. Financing and constant rates added 0.9% as we benefited from lower interest rates while a higher tax rate reduced constant rate core EPS by 1.1%.

Currently translation added 2.6%, within this there are three components. First, the 5.9% tailwind on turnover which I mentioned earlier. Secondly, a2.1% reduction resulting from the 30 basis points adverse impact on our central overhead cost ratios. And third, a 1.2% reduction from the impact of the stronger U.S. dollar on our finance and tax costs. The tax rate on core EPS at current rates in 2015 was 26.9%. Going forwards we expect tax to be in the region of 26% to 27%.

Reported EPS was lower than last year which included one-time gains of €537 million, mainly from the disposal of U.S. pasta sauces. This year we have taken non-core charges of €84 million in the first half-year and €52 million in the second half, for foreign exchanges in Venezuela and Argentina respectively. We've also taken charges totaling €100 million relating to competition investigations and other legal cases.

Free cash flow for the year was particularly strong at €4.8 billion, up from €3.9 billion last year. This included a €700 million inflow from working capital compared with only a very small inflow in 2014. The average working capital ratio for the year improved again from negative 5% to negative 6.1%. And, of course, the negative ratio means that growing the business in intrinsically cash generative.

Capital expenditure was 3.9%, a little lower than previous years, but towards the top of the 3.5% to 4% range which we expect to be in going forwards. In line with our strategy, an increased proportion of the total cash flow is now coming from homecare and refreshments, so we're less reliant on personal care and foods to fund our growth opportunities.

Looking briefly to the balance sheet, net debt at the yearend was €11.5 billion, up by €1.6 billion. We invested €1.7 billion in acquisitions and there was a €1.3 billion increase due to currency as some 60% of our debt is denominated in U.S. dollars.

The IAS 19 pension deficit reduced from €3.6 billion to €2.3 billion as a result of higher discount rates and the cash contributions we made during the year. In 2016 we expect cash contributions to pension funds to be around €700 million. The reduced deficit means the pension's finance charge will reduce by some €40 million in 2016 to around €80 million. Return on invested capital increased by 50 basis points to 18.9%,this is despite an increase in dollar-based goodwill due to currency and the impact of acquisitions.

Finally, the quarterly dividend is unchanged at €0.302 following the increase of 6% nine months ago.

Now let me hand you back to Paul for his closing remarks.

Paul Polman

Thank you Graeme and let me finish by looking ahead. What you see in these results, achieved despite very tough trading conditions, is the outcome of improvements and investments we have made in many aspects of our business, not least in innovation. But in a fast-changing volatile environment we need to continue to drive increase agility throughout the whole business. This is essential to ensure that we continue to deliver consistent and competitive top line growth which, for the moment for us, means around 4%.

And we need to convert more of this growth now more consistently into earnings and cash. That means securing margin improvements year-after-year, delivering core EPS growth, whether currencies are against us or for us and driving the cash conversion. We believe we can do this without compromising the top line growth, by getting more return from our investments in brands and marketing and obviously more return from our capital infrastructure. We're already seeing this, as we have talked to you, in refreshments and homecare.

So let me highlight some of the key initiatives we will be driving in 2016 and beyond under each of the now familiar four compass pillars, starting with brands and innovation. We will put even sharper focus on growing the core whether there is still a tremendous opportunity to drive increased penetration and market share.

Innovations are the engine of growth and whilst we have already stepped up significantly we will continue to make them bigger, better and faster. The innovations we land to market in the next three years will again be 20% to 30% bigger than over the last three years, reaching more countries whilst always staying locally relevant. And 45% of these projects will incorporate new technologies that we have developed, that is up from 35% for our recent launches.

We will bring innovations also to the market faster. We've set aggressive internal targets for reducing cycle times including new country rollouts. And obviously digital marketing we will be driving to the next level by putting mobile first with an emphasis on engaging effectively with consumers wherever they are. By moving from mass marketing to individual marketing through our people data centers and by developing pioneering new models through the Unilever Foundry, like using artificial intelligence for instant and personalized conversations with consumers.

The second compass pillar is winning in the marketplace. We've made good progress here as well which is evidenced in the majority of our businesses' winning share. But the general environment is changing rapidly so we will continue our rapid capability building in ecommerce. We now already have our fair share in the categories and in the segments we operate and target to grow ahead of competition in these channels as well.

In traditional channels our focus will be on the brilliant basics, our customer service hasn't always been as good as it could but we need to make it again first class. And because we expect a continued deflationary environment in much of the world we're rolling out net revenue management globally as Graeme described earlier.

The next compass pillar is winning through continuous improvement. In a low growth and deflationary environment we have to work the cost part of the equation harder. We will continue to drive supply chain savings with Marc Engel, our new Supply Chain Officer taking up the baton from Pier Luigi who is moving to Singapore to run our business in Southeast Asia.

We have made very significant investments in IT and in our enterprise and technology solutions organization. The opportunity there also now is to sweat these investments harder, maximizing the returns from them.

And as Graeme outlined, we will make a further step-change in our overheads and brand and marketing efficiencies with the global rollout of zero based budgeting. The final compass pillar is wining with people. The simplification of processes through Project Half has helped enormously to release some of our people's time and energy and to create a more agile business. And the numbers that Graeme just discussed support this. But I still see plenty of scope to take it further and we will be pushing for that fast and aggressively in 2016.

Leena Nair, our new HR Officer, will be helping us to introduce the new functional models which Graeme referred to. It will give us more agility and over time a better alignment between our costs and where we generate our revenues. I'm convinced that we will see the results of such initiatives in more motivated people, faster decision-making and, yes, lower costs.

Finally, a few words on the outlook for the year, our current run rate, looking through the phasing of activities and comparators which affect individual quarters is around 4% and this is ahead of the markets. In 2016 I expect market conditions to be, if anything, more challenging and more volatile than in 2015. Economic growth is unlikely to improve significantly and we have seen at the start of this year geopolitical tension which is on the rise. Stock markets are jumpy, not surprisingly and currencies are volatile and the impacts of climate change, once more, are only increasing.

For all these reasons we remain prudent once more in our approach and single-mindedly focused on building the resilience and the agility of our portfolio and our organization for the long term. We've made good progress on these fronts in 2015 which gives us further confidence that we can continue to deliver our objectives in 2016 as well which are, volume-driven growth ahead of our markets, this is likely to translate to underlying sales growth in the 3% to 5% range, steadily improving our core operating margins and continuing our progress on cash flow.

Now I look forward to taking your questions.

Question-and-Answer Session


[Operator Instructions].

Andrew Stephen

So I see our first question is from James Edwardes Jones of RBC. James, go ahead please.

James Edwardes Jones

Two quick questions if may. First on refreshment inflation which spiked up in Q4, can you give us a bit of detail on how that happened given the downward pressure on dairy prices? And secondly, you mentioned this net revenue management program that's going to be rolled out globally. Could you give us perhaps a bit more detail on that and in particular some sort of quantification of the possible benefit?

Paul Polman

The second part of the question, just repeat that very briefly?

Andrew Stephen

Net revenue management and how that will be rolled out.

Paul Polman

Yes, I'll get Graeme to work on the net revenue management, let me start with the ice-cream. Very strong performance throughout the year and I think it's driven first and foremost by a strong innovation pipeline, increasingly so in premium and you've seen a changing competitive landscape and despite that our overall business does very well.

The pricing, really I don't like to get into the quarters but to answer your question, the last quarter is obviously a lot of, the summer is moving to Latin America, one of the beauties that we now have in our ice-cream business from what it was six, seven years ago if you want to, that we have made it global James and Latin America has had a reasonable summer and strong ice-cream plants in that part of the world, but the pricing component to recover cost increases is much higher there than in other parts of the world. So you might look at price declines in some of these input costs but that is not the case when currencies go down 40% or 50%.

So that's really what you have to look at. Then tea and chocolate commodity prices actually have increased, by memory, even in hard currencies. So that's really ice-cream, but having said, a tremendously strong year and tremendous good momentum between these premium brands and we're very pleased actually also with these acquisitions we've made in this also rapidly changing market.

So let's just go quickly to net revenue management as well.

Graeme Pitkethly

So net revenue management in some parts could be seen as back to basics, it's really about understanding a consumer's perception of your brand and your product value and aligning that around product pricing, placement and availability which is nothing new, it's basics, but it's a refocus back on those basics.

Now there are five pillars to net revenue management itself, but ultimately, as I said in the presentation, it's about getting the right pack at the right price in the right channel for every shopping occasion. What it lets us and gives an opportunity to do is frankly to get more value out of each unit of volume.

There is a thing called Net Revenue Realization which is just the average value you get per unit of volume. It lets you create more consumption occasions and lets you differentiate harder across the channels that are being shopped. For example, if I think about my old business in the UK and Ireland, the rise of the hard discounters and soft discounters, for example, would be an example of that. What it does ultimately, it allows us to underpin our ability to grow ahead of the markets and invest for growth, so we see it as being something that builds momentum, our delivery of a momentum growth rate and growing ahead of the markets which is still our objective of course.

Andrew Stephen

Thanks James. The next question is from Eileen Khoo of Morgan Stanley.

Eileen Khoo

Two quick questions from me, the first one, could you please give us a bit more color on your market share performances and also the underlying market in both China and the U.S.? And then secondly, this is just a quick one, could you remind us on your accounting policy on hyperinflation and to what extent your like-for-like growth might have been impacted by that in the fourth quarter? Thanks very much.

Paul Polman

Again, I'll refer to Graeme for the inflation and inflation accounting. Our performance in the U.S. and in China were good performances. In the U.S. we exited the year with over 65% of our business building share. In China we're growing well ahead of, China as a country itself, well ahead of the economic numbers that were just reported on the growth rate, so our market shares are healthy there as well.

Obviously they are different by category. In the U.S., for example, the two exceptional performances has been deodorant behind our dry spray launch which is doing extremely well, I referred to that, it's an innovation that has over €100 million in turnover in the year itself and our ice-cream business, not surprisingly, has done very well. In the U.S. we have made the acquisition of Talenti, the core with Ben & Jerry's, the Magnum premium launches, it's really moving this business fast to an out-of-home business and a profitable one which, interestingly, we barely had a few years ago. So that's the U.S. story.

And hair, we see a competitive environment, we see deflation in the hair category, the enormous price activities, but our end share it's still flat, it's not up I think on hair care it's more-or-less flat in a very, very competitive market and I think it's a good performance. Versus the global number one on hair care as a result, we have lowered our gap to about 170 basis points and it used to be, only three years ago, 470 basis points. So hair for us on a global basis is actually a record share once more, so that's a very good category.

Underperformer in the U.S. is our spreads business, is the one I would single out. And hand and body, not significant underperforming, but there's a lot of price activity in that category. The rest is doing fine.

In China itself, we have had the inventory adjustment which we have taken much quicker than our competitors which continue to talk about it. And not surprisingly, our growth has gone up again to the high single-digit numbers. And the growth is coming from really the lower tier and coastal cities, more so than the A cities. It's coming from ecommerce and it's obviously coming from the mix of our products.

In China now you need to be working much harder to get the growth. Hypermarkets I would say are flat or down, but our ecommerce business, for example which is one of our strongest businesses, is up 80% just in China alone. Good performances on our laundry business. We have very strong innovations there. Our oral care business, leveraging our herbal medicine positionings, our skincare business, our Clear with [indiscernible] upgrades, our hair care business, are actually holding up very well.

So all in all, a solid business, with, increasingly, also performance on the bottom line, may I say, if anybody from China listens in. So long may that last. And then we go to the second one which is the accounting policy on hyperinflation.

Graeme Pitkethly

On the technical question of hyperinflation which I think is, memory serves, IAS 29. Neither Argentina nor Venezuela have triggered the criteria for hyperinflation accounting and I think that's pretty much consistent with their peers. In the case of Venezuela, it might sound strange, but that's on the basis of materiality. It really is a quite small impact overall. So I think we're -- that's the question of hyper.

To go back to the other part of your question around the impact on Q4 growth, so the impact of -- I'll focus on Latin America in totality. The impact of Latin America on our UPG, on our price growth in 2015 was about 180 basis points. That's broadly similar to 2014 which was 160 basis points. Now, stepping out from Argentina and Venezuela, I'd note that almost half of that price growth comes from Brazil.

And then let me just make a quick comment on Latin American volume because I think we've been monitoring it closely, as you would when you're taking significant price increases. But you'll see from the announcement, our Latin American volume growth was 1.2% which I think is a good result. And within that, in Argentina, we had mid-single digits volume growth which is a very good result going forwards. We did single, as I said in the presentation, that volumes have been negative in Q4 following the price increases that were taken in Brazil in Q3. But that's the overall picture. And just to complete that Venezuela, is slightly over about 2% of the total company, so take -- Venezuela is much smaller. Argentina is--

Unidentified Company Representative

Much smaller, yes. Sorry, Venezuela is smaller. Thanks for correcting me. I'm talking Argentina.

Paul Polman

I said Venezuela. I apologize. But Argentina -- because we have a negligible business in Venezuela.

Unidentified Company Representative

So Argentina is about slightly over 2% of the total company.

Andrew Stephen

And the next question is from Javier Escalante from Consumer Edge.

Javier Escalante

I wonder whether you can expand on Brazil. What is the consumer response to the price increases? We expect [indiscernible] to be negative because of the advance repurchase from retailers. So if you can tell us what is the underlying volume growth consumer takeaway in Brazil and whether you are still seeing the de-acceleration in Brazil? So what would be a reasonable growth rate going in 2016?

And my second question has to do with the prestige brand that you acquire. You refer that Talenti is going up 40%. It's not productive organic growth. What is the growth rate of the aggregate of the prestige brands that you acquired this year? Thank you.

Paul Polman

Thanks, Javier. On Brazil, we're actually happy with the performance of the whole year. It's double-digit growth, but even within that, our volume is up, just to be very clear. It's enormous devaluations that we've seen and obviously it's a very tough market. The -- Brazil is definitely in recession in the third quarter and we're awaiting the numbers of the fourth quarter. From memory, the third quarter was down 3.5%.

Graeme Pitkethly


Paul Polman

4.5%. So that's quite a bit adjustment of what we've seen in the past. Despite that, we have double-digit growth, but obviously it's going to be tougher moving forward. The currency weakening, I think that will -- or is projected to continue as well in 2016. Despite that, the good performance really comes from building market share. Without going into the details, our shares are up quite significantly across most of the categories and we're happy with that. And it comes from aggressive launches of new innovations which I think makes sense for the long term.

Baby Dove is doing very well and keeps growing. The Omo auxiliaries that we have launched are doing well and keep growing. The initiatives we referred to on deodorants or ice cream are doing very well there. So we think we're managing it. And again, you need to look for growth opportunities. We're rapidly expanding to the north of Brazil, filling in these areas where we've been historically weak. So I think that although undoubtedly the growth rate in 2016 will be less than 2015 -- I would not even doubt that -- we think that we can continue to grow ahead of the market with the size and scale that we have.

On the prestige businesses, we've really continued to focus on integrating these businesses. And we've really just done that in the last quarter, so the businesses are now really part of the Unilever and we're looking at the synergies. And the growth rates that we're seeing there are in line with our acquisition economics, actually slightly ahead, if I may be honest. But we're very pleased with that, but we don't publish them.

But combined, despite what you see at the global economy, we think that these prestige brands, small as they may be, are well positioned. Because you take the U.S. as a great example. You announce a growth rate of the GDP, but what really happens is -- Oxfam just reported that the 1% in the wealth now has the same wealth as the bottom 99%.

The U.S. is the extreme of that. The GDP growth goes to a very small amount of people and they're not eating more products. The middle market is disappearing which is the bulk of the business. That's why you see a lot of retailers struggling. But the prestige segment is continuing to grow amongst that target and we're very well positioned for that.

All of our other brands that we have integrated, be it T2, be it the Talentis and being the other ones that we've done in the past, actually grow ahead of our acquisition economics. So -- and the auditors will comment on that when the report comes out, so we're feeling very pleased about that.

Andrew Stephen

And the next question is from Warren Ackerman of Societe Generale. Go ahead, Warren.

Warren Ackerman

Warren here at Soc Gen. A couple of questions. The first one is could we go back to Europe and perhaps a slightly deeper dive in Europe? How did the major geographies do for you in 2015? How are your shares looking in Europe and your outlook for Europe in 2016? Do you expect deflation for the year in 2016 as we saw in 2015? That's the first one.

And just secondly, one of the few weak spots was spreads again and I think down 5% in the year. And that really stands out now because the rest of the foods division is going very well, especially the amazing performance of Hellmann's and Knorr accelerating. I've seen you've changed management with Sean stepping down and Nicola replacing him.

So my question is, what prompted that change and do you think Nicola can actually drive the category growth? Well, you said that you judged the performance in 2016, but I guess my question is, are you losing patience with the division and what options might you consider if the improvement doesn't come through this year as you hope. Thank you.

Paul Polman

On Europe, without going into all of the countries, we obviously have some challenges, but fortunately the challenges are in the smaller parts of Europe. Greece, as you can imagine, is very challenging and will continue to be. The Nordic countries are actually challenging. But if you look at Italy, France, Germany, the UK and -- which is the other big one? Spain, we're performing well and we're actually growing share there on more of our businesses than not. So the core of it is healthy. You've actually seen a strong volume component in Europe, offset by a slight negative on pricing, but still an overall positive. A very strong performance in Europe.

In fact in some categories that I was mentioning, for example, the home care category is on fire. We've seen tremendous growth in brands like Persil here in the UK or in other -- equivalent brands in other countries. We're building market share there rapidly. Ice cream doing very well, not surprisingly. Our tea business is picking up. We've actually launched it in some countries. Innovations are starting to pay out there. So we have dressings, as I mentioned. We have the squeezy pack rollout. Savory, behind more natural products, especially Germany doing extremely well.

And so overall, Europe is actually in good shape and we're confident. We're -- as I said before, we're investing in Europe as well. And the Zendium rollout would be a good example of that. And we will be able to share with you some other rollouts soon. The premium tea rollouts are another example of that.

And despite these investments in Europe, despite some down forces that we talked about, as you've also seen, the core operating margin is again up which is what we keep saying. We keep managing Europe ahead of the cost curve, so Jan and his team are doing a great job there in delivering these results.

Coming specifically to the BCS unit which now the unit itself, BCS, it's about 4% of our total turnover, slightly higher. So we need to put that in proportion. We have spent all of our time carving out this unit and creating the standalone unit. That has proven to be a little bit more time consuming and complex than we thought because you have to put new contracts in place and all the people and you need to do that country by country.

And as you know, Europe is not an environment where people like to move fast from a governmental and regulatory point of view. So it has taken us, admittedly, a little bit longer than I would have liked. So yes, I am impatient, but having said that Sean has done a wonderful job in putting in that unit.

And here again we're driving the innovations. Unfortunately, the trend is against us. The market is down, the butter prices are against us. This unit has a lot of headwinds that we now obviously need to come to grips with. Our planned power strategy on Flora, in the U.S. Country Crock, is starting to pay dividends. The increased focus on baking which is as growing category, the blended oil and butter is now already an €80 million innovation. The May launch category is doing very well for us.

So I think that I cannot think of more bad news from this unit, if I may put it straight to you, than we have had now. And it is my sincere wish that with the structure that we have set up, that we see improvements in 2016. If we don't, we will have to think about other things. And we're obviously looking at all options, that we don't start from zero if that point arrives. But for now, we're squarely focused with everybody on making this unit work.

Andrew Stephen

The next question is from Adam Spielman of Citi. Go ahead, Adam.

Adam Spielman

Actually I had a couple of questions that have already been answered, but I'd just like to quickly follow up on Warren's very last question. You said you'd judge it. How exactly will you judge the baking and spreads unit?

Paul Polman

Well, we will have a row of seats at the end of the room and we will have five people sitting there. We'll have the spreads people come in and the spreads people will give the presentation and the judges will say yes or no. Come on, how do you judge these things? You know that better than I do.

And we will continue to look at that, if that is a good performance for the Company or not, if we continue to build shareholder value by keeping it or if we destroy shareholder value. The challenge has always been we're building share in this category. We're having a great cash flow. I can get rid of this business tomorrow by giving it away to someone, but that's criminal. From the part of the Netherlands I come from, we don't do those things.

We need to be sure that we build shareholder value. So if we can find other options that are better for the unit, we shall do that. If we cannot, we should continue to focus on driving it. That's the same answer I've given all the time.

Adam Spielman

Okay. And very quickly, can I have a comment on how Russia's going, please?

Paul Polman

Russia, actually I have to say obviously the Russian situation is not -- from a macroeconomic point of view, is not the best we've seen and the currency devaluations, the challenges with getting products in. We run Russia/Ukraine as one unit. And I want to use this opportunity again, once more, to really thank our people there because it's an amazing job in tough circumstances.

But the benefit we've had, Adam, this year, in 2015, that actually 2014 was in the base. So we're seeing this business coming back from a Company point of view, so we're actually positive in Russia and we're actually positive in the Ukraine. We're very pleased about that. And the one benefit we have is brands like Kalina and that are local brands that are also produced locally have the infrastructure less subject to the cost base.

Our tea business is a local business. Obviously we have to import some components. Our ice-cream business in Marco is a local business. And the organization has done a great job to continue to drive this business forward and frankly, at some points in time you think impossible circumstances. So we're pleased with the Russian business. Once again, in perspective, it's about 1.5% or so of the overall Unilever business.

Andrew Stephen

Okay. And next question is from Celine Pannuti of JPMorgan.

Celine Pannuti

I have two question. My first question is on pricing. You mentioned that pricing accelerated in the second half of 2015, but it seems that there are some headwinds against pricing, including you mentioned deflation and you mentioned maybe tougher conditions. So can you give us a bit of a steer of how we should think about pricing as we go into this year?

And my second question is on margin. You had a gross margin acceleration in the second half. What was that driven by? And shall we expect this kind of performance as we go into 2016? I also noted that you had some headwinds in overheads this year which I would think you would not have in 2016. So is there as well any cost we should think of that would offset those benefits?

Paul Polman

Yes. So these are basically the structural P&L questions if you take them in total, Celine, so it's better to perhaps answer that holistically by first going in one piece by one piece. So I'll just hand over to Graeme for a second.

Graeme Pitkethly

And of course, the two are intimately connected, pricing and gross margin, so I'll try and cover them both together I guess. So pricing acceleration in the second half, Latin America a substantial driver, as we said, and essentially, things break down into economies and currencies. Where we've seen currency devalue, the local commodities which are priced in dollars, but of course translated across with the currency impact, you end up with inflation. And we've been trying to recover that in those parts of the world. And that's where the acceleration in pricing has come from, is the -- is economies of continued and volatility continued with currencies. And that's what's happened.

And you also see that breaking into performance across countries. If you take countries where there has been relatively more stable currency, places like India or perhaps the Philippines, Mexico, you see volumes holding up higher. If you look to places like Brazil and Russia, you see that there's been very strong pricing activity in the second half.

And that's why we've been carefully looking at volumes in those places, because as you know, we have a balance of global and local that means that those sorts of decisions are made very close to the marketplace. And we try and remain very, very relevant to what consumers can afford in those marketplaces. Paul?

Paul Polman

So now if you take the macro picture, Celine, for a second, if I may take one step back here, there is undoubtedly the enormous currency adjustments we've seen in these emerging markets. I think there will be continued pressure to the downside, but not the enormous adjustments. So it is fair to say that there will less -- pricing component will be less moving forward as a result of that. But -- and that's why we're guiding, again, the market to 4% which is between the 3% and 5% range I've talked about. But we have to work harder to get that. It's less easy than in 2015. Let's be very clear about that.

But let's look at each of the components, why we think that the structural piece is right. On pricing, we have priced, this year. Our cost and our cost savings have come through and we're adding to that net revenue management. So we think on the top line we can get a positive contribution to the P&L.

Our innovations are certainly more robust. I believe we're now one of the most innovative companies in the industry. It is driving our growth, it's driving our shares and it's actually driving our margins. We will continue that. In fact we will step that up.

So we will get positive momentum behind our innovations.

And then on our indirects, we've had headwinds on items that are one-off items. We have to come to grips with the currency aspect because unfortunately the pound and the headquarter cost here are working against us. And we're attacking that and, frankly, attacking that a little bit more aggressively than we've done in the past. We've been unlucky with the pound, there's no doubt about it. But the underlying indirects are down again this year by 40 basis points. And we continue to do that. In fact we're looking at accelerating that.

And I saw a recent chart that one of you guys did in terms of benchmarking the SG&A in our industry versus everybody else. And in that chart you already see that we're competitive, but we still think there are possibilities.

So you add up the combination of pricing your margin with innovation and your indirects, that we should see margin expansion at the current levels or above, even in the tougher circumstances. And obviously when the growth is lower on a global basis, if we like it or not, then you have to work harder your cost. And I think that is one of the key messages you have to take out from what we're telling you.

Andrew Stephen

The next question is from Rosie Edwards of Goldman Sachs.

Rosie Edwards

Just a clarification, apologies to go back to pricing, but I just wanted to clarify exactly what you're saying here because in the presentation I think Graeme said that commodity cost in local currencies in 2016 would be up by a similar level as 2015, suggesting we should expect to see a similar level of pricing. But that's not what I think we've just heard in an answer to a recent question. So is the pricing element next year going to fall? So that's my question.

Paul Polman

No. The pricing on a macro level on a global basis is not going to be higher than last year, that you have to take. That is separate from commodity cost being the same or not. There are currency effects, there's mix effects, there's the net revenue management that we're doing. So the pricing component is not going to increase. That's a clear message and it's a consistent message. At least from where I'm sitting now. You're asking the question with 11 months to go, so -- but we will update you on that one, fortunately, on a quarterly basis.

Graeme Pitkethly

I think what we're saying, Rosie, is it's much more complicated and much more varied across the landscape than just looking at commodity pricing, even in local currency and translating that across to pricing and gross margin. And our job's to manage the totality of the portfolio and deliver consistently. That's what we're looking to do.

Andrew Stephen

Next question is from James Targett of Berenberg.

James Targett

A couple of questions from me, firstly just on home care, obviously a very strong fourth quarter and some good margin expansion for the full year. Could you just remind us if there was anything particularly driving that very strong fourth quarter from a one-off perspective or product launch? And then are you happy with the magnitude of the margin momentum you saw this year continuing next year or 2016?

And then just coming back on the U.S., you mentioned that you're seeing some destocking and clearly we saw a slowdown in organic growth in the fourth quarter from the third quarter. Was that mainly destocking or the worsening of the spreads? You talked about -- or is there something else we should bear in mind? Thank you.

Paul Polman

Yes. James, very quickly on the last one, it's not anything in the underlying business. In fact we're seeing our shared increase over the last 12 weeks in the U.S. quite significantly. So we reckon -- and some of our competitors have -- some of our retailers have already commented on that. I just saw some results of the destocking effects. So we're looking at that, but it's definitely in there.

In terms of laundry, if you look at that, Nitin without any doubt is doing a significantly better job than its predecessor. I've always said that. And I happen to be his predecessor there. And he's getting this category not only to grow on the top line, but also the bottom line, 7.6% and to come now up under 30 basis points, if you want to. But also a strong overall growth level.

What we're doing there is, first of all, on the macro level, better managing the mix, things like confident 10s or auxiliaries. And what you see with Cif, because it has household cleaners in there, better managing the mix. But also in the detergents itself, better managing the mix. We're driving very fast the low-cost business models.

Under his leadership we've seen an 80% simplification of base formulations, so that's a tremendous thing. And we have more discipline driving that now down to the bottom line. And then the commodity environment also equally helped. Let's not -- this category, as we've said before, on the bad side and the good side, the oil prices is actually helping this category more than others.

So COM improved in the second half, also like in the first half, a little bit less because we had some cost items that came in, some allocated items. But I wouldn't so worry -- I wouldn't be worried about that. This category is on track to continue its performance which there's really a very strong focus on the bottom line without giving up the top line. And I'm actually surprised, on the positive side, that despite the strong bottom-line improvement we still have 5.9% top line.

And by the way, the competitive pressure has not been really significantly eased either. We see very irrational behavior still of our competitor in some of the markets, like South Africa, the Middle East. We've just seen the buy one get one frees on all of the Middle East volume which to me is puzzling. But anyway, we deal with that and we get these results. So that's it.

The last quarter, again, we have a very, very strong business in Latin America, so there's a little bit of pricing in there from Argentina. But I think Andrew talked about it in proportion to the total. That is not that much.

So the business is in good shape. We said we would go up in March into the 10% levels. We've given you the timelines very clearly in Singapore and we're ahead of that timeline, is all I can say. And Nitin will work very hard to be on the positive side there.

Graeme Pitkethly

But it might not be linear because we need to get the top line.

Paul Polman

No, it will not be linear, but it will be definitely on the same direction.

Graeme Pitkethly

Sure. Yes.

Paul Polman

But it might not be linear.

Andrew Stephen

And the next question is from Alain Oberhuber from Mainfirst.

Alain Oberhuber

One question regarding India overall market conditions and in particular what is home care doing there? Is it a competitive environment there as well? And the other question is development in Indonesia and particularly as we have seen a strong devaluation of the currency. How is the situation there?

Paul Polman

If you look at India -- and we also published the results and again, I don't want to go into quarters, but there is headwind there, weather extremities there is important. In India it's still a very rural environment, with 70% of the people living in the rural environment. And if you really have this climate stress -- they've had tremendous droughts there again and not the right monsoon seasons. So the rural income that was growing at, let's say, 150% or 170% versus average, has now moved down again.

We've also seen reduced government spend and low inflation, in fact price deflation in some categories, like, from memory, Laundry and skin. And then we -- India has had the food issue, not with our brand, but has put a dampener on that market.

So India unfortunately has had some one-offs. If -- you have the food issue, but also some structural things. And we now need to see the growth coming through. Many people believe that the reported growth is not necessarily the real growth. Despite that, more than half of our portfolio is winning share.

I think the most exceptional growth is in actually food. We're growing well, more than double digit in food. We're growing more than double digit in refreshments. Our tea business is very strong. In personal care, it's a healthy performance, but below what we can do. But I think the brands like Fair & Lovely and Lakme are doing well. And then on home care, it's robust. What we're trying to do there is to -- there is deflation in that category and we're basically trying to stay stable. I don't have the numbers in front of me to tell you, but I don't think we're building share in home care. We're not losing share either. We're just keeping that business in control.

And then I think the second thing you were mentioning was Indonesia. Obviously I was just there. I don't know if you went there when we had the visit in the Far East, but I was just there. And the consumer confidence is weakest. It's a list of subsidiaries, so you'll see the results. Our results once more are good. They're obviously lower growth than they were before, but we're outperforming the market.

And again, our benefit of our skill there is definitely there. In fact I would argue that if the situation gets tougher, we get a better benefit from being there than if the situation is easier. We're growing there. We have a healthy growth rate and we continue to do that.

And again, the outer islands for us, where we have so much opportunity still to grow our business is one of the major engines. There's no fundamentally weak business in Indonesia. In fact some of our businesses, like this soy juice, we cannot even get enough ingredients to produce. That business is just on fire. Our hair business is doing well.

Graeme Pitkethly

I bought that.

Paul Polman

You bought that? Graeme says he bought that, so that probably just shows you why Graeme is now CFO of the Company. But I think Indonesia is going through a rough ride. There's no doubt about that. But we're well placed there. I think the pressure that is there under the smaller competitors and perhaps the more distant competitors will allow us to continue to actually increase the relative outperformance. That's how I would put it.

Andrew Stephen

Next question is from Alex Smith from Investec. Go ahead, Alex.

Alex Smith

Can you tell us please what percentage of your businesses in aggregate you think gained share in Q4? I know it's a stat you used to give us quite a lot. I guess I'm interested in the trend, how that might compare to Q3 and then perhaps to H1, when I think you were growing in line with the market.

And then I guess related, if you could maybe talk a bit more about your innovation pipeline. You made some very positive comments around innovation having improved, but can you confirm that you feel your pipeline in H2 last year was stronger than H1 and that you think 2016, in aggregate, will be stronger than 2015?

Paul Polman

We entered the year with momentum. We have about 56%, is the official number calculated probably by a lot of people. So we've moved from the 50% to the 56%, so we move out with momentum. And frankly, this is a global share number. You need to look at the trend. You understand it's difficult. The trend is more important than the absolute number, but we think with our top-line growth as well, that we have about 60% of our business growing share, would be my best guess.

On the innovation plans, I think we have become the most innovative company in the category. Some people have a hard time analyzing that, but they should buy more of our products. If you look in some of the categories, getting 5%, 6%, 7%, 8% growth, in some categories 10% growth, you can't get that by giving the product away to -- it's really driven by strong innovations.

If you look on the deodorants, the dry sprays that we have, the compressed deodorants that we're rolling out, these are great innovations. If you look at Dove, where we have the DermaSpa, that's great; innovations on hair care, where we have the silicone-free introductions, the clear -- the cleansing water introductions that we have on our brands. These are really on fire.

And I've mentioned some other ones. The Zendium rollout is doing very well, a very uniquely positioned premium-two space that actually came in via the Sara Lee acquisition. In Omo, we're growing consistently our laundry business better and one of the reasons we're growing consistently is we don't compromise on quality. We now have the new Omo with extra wash booster rollout, is doing very well, the Omo pre-treaters. The Comfort Intense is the best fabric softener on the market anywhere we test it and we're very pleased about that. Cif is on fire.

On food, the market is rapidly changing to more healthier foods, if I may simplify it for this discussion. But we're there. First of all, I'm pleased that 50% of our business is now in the emerging markets. 48% is the real number. But with Knorr Mealmakers, we're moving to 100% natural. We fortified the bullions. We just got the number one recognition as the company most working on nutrition in the food industry. You see Hellmann's growing at 7%. There's something happening there from all the investments that Antoine made and Amanda is now building on that is starting to pay off. And ice cream I don't need to worry about.

The only category where I actually worry less now, if you look at tea, if I may come back to that for one second. The overall growth of tea is 3% which is obviously less than we want, but it's not as bad as the numbers sound. Many of the bulk tea markets that we have are actually in the Middle East and others, where you have seen a significant adjustment in the economies because of the oil prices.

So our bulk tea business is going down which is what it is, but the premium segments are growing very fast. Whilst in food we're already getting that benefit coming through fully, in tea, not yet fully because it's still too small a segment. But our performance in the premium tea segment and the way we're moving into that, with capsules, with T2, with TO [ph], with the launch of green and herbals, is at the speed of 100 miles an hour. And I'm convinced that that will show up in the results.

So we're doing the right thing, but the dynamics, the macro dynamics of these markets are a little bit more against as I thought because of the countries and the footprints where we have big tea businesses. So I hope that more or less gives you the landscape and answers the question.

Alex Smith

Can I just come back? Would you say 2016 is looking a stronger pipeline than 2015?

Paul Polman

Yes. Sorry. I apologize. I should have answered that. We definitely have visibility on the pipeline because that's all going into the market now. And without going into the details -- we don't like to do that -- it definitely is a step up, as I said. We look at that in overall efficiency and proprietary technologies. And just keep in mind, again, with the improvements we've made, we expect about a 20% further improvement coming out of R&D in 2016 already.

Andrew Stephen

So next question is from David Hayes from Nomura. Go ahead, David.

David Hayes

Two from me, just firstly on the brand support spend. I think in the second half it was flat as a percentage of sales. You mentioned, Paul, that you're looking at efficiencies in brand spend across the group as well as obviously other efficiencies. I just wondered whether, as you go into next year and the budget, you think that second-half trend is something you could sustain whilst still investing substantially enough to continue that market share performance.

And then secondly, just very quickly, sorry to come back to this technicality around Venezuela/Argentina. Can I just confirm that you moved to an informal rate of around VEF200? I guess in the middle of the year when you were translating Venezuelan operations back into the Group? Thanks very much.

Paul Polman

So one of the key things to continue to get that consistent growth that we have, consistently outgrowing the market, building the top line, even in very tough circumstances, we have to continue to invest in our brands. In the seven years that I have been here, inherited a situation where brand spending was a closing item to make the forecast, with a high level of volatility. After seven years, now I think we can say with a certain level of confidence that we have continued to invest in our businesses and as a result, our brand equities are getting stronger in the bulk of our businesses.

And Keith Weed, who is here with us actually, has spent a lot of time driving that discipline into the organization and the marketing community. And I think we're seeing the benefits of that, although it's not coming through yet in a different rating from Nomura, but I'm waiting for that. So we will continue to invest in our brands to be sure that we strengthen our equities. That's actually the most important indicator I would look at if I would invest in a company.

Now, having said that, the market is moving rapidly to digital. We now have between 25% and 30% of our spending digital. The dynamics of digital are different than the classic dynamics of how you look at brand spend. So -- but I think that we will continue to see this item being at the high levels. If it's down 10 or 20 basis points, sometimes that might happen. This time it's up 20 basis points.

The other thing that is happening is, David, to conclude that, is the mix, obviously, because as we have now 48% of our profits, 39% I think I mentioned of our turnover in personal care, that mix needs a higher support. Prestige needs a higher support. So the mix effect drive that number also partially. So that's on brand support and I think we continue to invest in that until you change your recommendation. And then we go to Venezuela and Argentina. I'll hand it over to Graeme.

Graeme Pitkethly

Yes. David, you're spot on. We -- in the midyear, we were consolidated at a rate of about VEF10 to the dollar and we re-measured that at VEF208. That's what we're consolidating at now. And there's no market rate, obviously, but we think that's more reflective of the rate that we'll get future dividends back at. So yes, we're at VEF208 to the dollar.

Andrew Stephen

Okay. So we have one last question which is from Charles Pick of Numis. Charles, go ahead.

Charles Pick

You've spoken in the past about market value growth being about 2.5%. Would it now be a lower figure? And the second question, when you talked about commodity costs in local currency terms being slightly higher this year, are you able to split that between the developed and the emerging markets, particularly bearing in mind that you've said in the past that 20% to 25% of your commodity costs are oil related?

Paul Polman

Yes. So on the growth, our best aggregate is that volume growth actually in the 2.5% that you mentioned is less than 1% on the global level. And we can only measure in all the markets that we're in and we're weighing that with our products, with our basket. So of the 2.5%, it's probably less than 1% is volume.

The question that you're asking, is that going to be better or worse than in 2016 and 2015? My mindset is that it's about the same. If you look at the global economy now, we end the year with the OECD saying or the IMF saying it's about 2.6%. So they still have 2016 at 2.9%. I'm just going to Davos now for the World Economic Forum, so I have the numbers in my head. But taking 2015 as an example, every quarter they lower the forecast. And my assumption is that it's about flat for 2016.

And we have to work double as hard to get the same results on the top line. Hence our discussions on innovation, hence our discussions on brand equity. Whilst I believe on the bottom line we have set up a more solid system to start showing better improvements, even in a tougher environment that we might be getting. So I think we're well prepared. On the commodity side between developed and emerging, I'll just look at Graeme for a second.

Graeme Pitkethly

Yes. I think, Charles, it's maybe illustrative to think about home care because if we're talking specifically about oil price, etc., then that's the category that has a more direct consumption of oil-related products. Take our home care business, a good example. About 80% of that home care business is in emerging markets.

And within that, you'll see in places like Latin America, Indonesia and South Africa, where the currencies have played in, then there's been undoubted inflation that we've been trying to cover in pricing. In the developed markets, however, that's deflation. So it's a good example looking at home care and the split between the developed markets and the emerging markets. It's going down in developed and up in emerging.

Paul Polman

And obviously I want to thank Graeme as well because it's his first full-year result and I think he passed that with flying colors. So thanks, Graeme, for being part of this great management team. The way I look at the forecast, once more and the business, it's tough out there. There's no doubt about it. It would be irresponsible to assume that it's getting better right now.

The year has certainly started more volatile. There are some major issues that need to be solved in the global economy to get the growth back. The low commodity prices are not helping for many of the emerging markets which have seen large capital outflows, increased financial market volatility, unfortunately and that is translating through in a very difficult environment to navigate.

If China cools down a little more, that some people expect, it will again affect other countries. And then you have the issues of the Russias, Brazils and Indonesias. These are major countries. Not to make you all cry, but just to be realistic, this is a tough environment that we're facing.

Having said that, this company is better prepared than ever to deal with that, we just have to work a little bit harder to stay within the 3% to 5% range. And we think we can do that. We've shown you that this year, slightly overshooting your estimates.

On the bottom line, I think we're now in a good system, where our gross margins are expanding, where our mix is working for us, where we're driving discipline with net revenue management, zero-based budgeting organizational redesign, at a faster pace than we've done before. You've seen the initial effects of that in ice cream and in home care, just as we told you. You've seen a cash flow that is up to €4.8 billion, coming in from and adjusted €3.9 billion. You've seen an underlying earnings per share up 14%.

And we will continue to now ensure that as these top lines have a harder time to move beyond the 3% to 5% barrier that we now translate a consistently better performance in the bottom line. That is what we're setting out to do, that is what we're discussing with you right now and that is what we have, 11 months ahead of us, to prove and hopefully make this another year, year number 8, of consistent and competitive top-line growth, profitable bottom-line growth and equally importantly, increasingly in this environment, responsible growth.

I certainly thank you for your support. I wish you all the best, to you and your dear ones for a 2016 and good health and certainly hope to see you soon. Thanks for your engagement and thanks for your support.


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

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