Unilever (UL) Q1 2016 Results - Earnings Call Transcript

Apr. 14, 2016 10:27 AM ETUnilever PLC (UL)
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Unilever Plc (NYSE:UL) Q1 2016 Earnings Conference Call April 14, 2016 4:00 AM ET


Andrew Stephen - Head of IR

Graeme Pitkethly - CFO


James Targett - Berenberg

Warren Ackerman - Societe Generale

Harold Thompson - Deutsche Bank

Martin Deboo - Jefferies

Celine Pannuti - JPMorgan

Alain Oberhuber - Mainfirst

Javier Escalante - Consumer Edge

Eileen Khoo - Morgan Stanley


We are about to hand over to Unilever to begin the conference call. [Operator Instructions]. To ensure all participants receive a high quality audio experience please ensure you’re calling from a landline telephone and not a mobile phone. Please avoid using a speaker phone to ask your question, please use the telephone handset to minimize background noise. If you experience bad quality audio then please try redialing. We will now hand over to Graeme Pitkethly.

Graeme Pitkethly

Good morning everybody and a warm welcome to our first quarter trading update. Thanks for joining us at a slightly later time than usual; we will back to 8 AM UK time from next quarter. I will begin with the market context and a brief review of our growth performance. Andrew will then take us through the categories and the regions and I will conclude with an update on three big initiatives; net revenue management, new functional models which is the next stage in our organizational transformation, and zero-based budgeting. Before we go further let me draw your attention to the usual disclaimer regarding forward-looking statements and non-GAAP measures so let’s get going. We've had a good start to the year with another quarter of consistent and competitive growth ahead of our markets. In January, we said that we were prepared for the business environment to become even more challenging and that has proved to be the case. In Europe, markets continue to decline with stable volumes but falling prices; while in North America growth in our categories has eased back to only around 1%.

In Brazil and Argentina, market volumes are contracting as consumers struggle with rising unemployment and the high local inflation brought on by currency adjustment. Falling real wages are also holding back demand in commodity exporting countries like Russia, South Africa and in the Gulf. The economies in China, India and Southeast Asia are holding a better but even here grown in consumer demand remains relatively subdued against historic trained levels. Looking on aggregate and taking a broad global average, market volumes in our categories are flat and pricing is around historic norms. But within these aggregates we continue to see some strongly diverging trends. Many consumers are up-trading to higher value items for at least part of the daily or weekly shop. Well at the same time those consumers are looking to economies by down-trading for other purchases. In a number of countries especially in Latin America there are strong price inflation while sales were price growth is relatively low or as in Europe there is price deflation.

Now despite this very challenging market backdrop it is clear that it is still possible to drill through a broad portfolio, sustained investments in brands and locally relevant innovation. In fact we are growing and winning share in all four of our categories. Our first-quarter underlying sales growth of 4.7% was towards the upper end of the 3% to 5% range we have guided to for the year. The pickup in growth versus last year, again mainly in volume which was up 2.6%. Price of 2% continued at around a level we assumed for the last couple of years albeit with differences by region which Andrew is going to come back to in a few minutes. While underlying sales grew 4.7%, turnover was down 2% at EUR12.5 billion. M&A added 0.7% mainly through the acquisitions of the Prestige personal care brands. These are performing well. Currency translation reduced sales by 7.1%. About half of this comes from the weakening of the Brazilian real and the step devaluation in Argentina. For the year as a whole if exchange rates were to stay as they are today, the currency translation headwind would be between 5 and 6 percentage points on both turnover and EPS.

Now let me hand you over to Andrew to take us through the categories and the regions.

Andrew Stephen

Thank you Graeme. And as usual we’ll start with our largest category, personal care; here our priorities are to continue growing the core while building more premium segments. Underlying sales grew 5.8% mostly from volume. This is back to being ahead Unilever average in line with our strategy. Growth and premiumization of being driven by innovation. In the US the new dry spray format is going from strength to strength with the launch of another 10 variants in the first quarter. They continue to drive overall category growth with more and more consumer switching to this more appealing and higher margin segment and they're helping us further widen our market leadership. At the same time, we're rolling out a range of antibacterial deodorants under the Rexona brand offering 10 times odor protection. After good results in Latin America, we just introduced them to 15 new markets with another new 15 planned for the second quarter.

Axe has become a major global upgrade. The new campaign Find Your Magic appeals for more mature and more sophisticated audience and broadens the emphasis across a range of male grooming products. Though for the men listening, if you haven't seen the advertising or tried the new product that’s just coming out, I encourage you to do so even if like me you're slightly older and thought that your Axe or Lynx days were behind you. In hair, we’ve launched a new system which is literally revolutionary. TRESemmé Volume is a reversed two-step process with the conditioner applied first and the shampoo applied in the second step. This keeps the hair residue free, which means its lighter and has more volumes. Turning to foods, our priority is to accelerate growth while maintaining a strong margin and cash flow that this category generates. In the first-quarter underlying sales grew by 1.9%, all from price. Savory continues to grow well driven by increased consumption in emerging markets and innovation that combines global scale and branding and technology with local relevance like the meal makers in Southeast Asia that we spoke about last quarter or a new range of Knorr Masala seasoning mixes shown here that we launched in India offering restaurant quality taste and innovative zip lock packs.

We’re also seeing good traction across foods portfolio for products that meets the growing demand for authentic fresh natural and sustainably sourced products Knorr Mealmakers with 100% natural ingredients are growing well in Germany and Hellmann’s is gaining share with a new real campaign and launches in the US as an organic range and a new vegan alternative under the banner of carefully crafted. In the UK, we are repositioning Flora spreads as powered by plants emphasizing that they’re made from natural plant oils and not from animal source fat. We've also introduced a dairy-free variant for vegan and lactose intolerant to consumers. However the spreads market continued to decline in both Europe and North America dragging on the overall food's performance.

In home care, our priorities are to improve profitability in laundry and to scale up household care. Our innovation funnel is focused on up-trading consumers to more value-added and thus margin accretive products. The good news is that as well improving margin their focus is helping to sustain strong growth and share gains against both global and local competition. Underlying sales grew 7% mostly from volume. Omo with wash boosters was introduced into a further eight countries in the first quarter taking the total markets reached so far to 18. The range of Omo specialist pre-treaters and stain removers already successful in Brazil is now being launched across Latin America. And we’re creating premium cares for our established brands like Comfort Intense fabric conditioners which combines fragrance and sustainability benefits in a super concentrated formulation and Surf Sensations which we are launching now the first-ever fabric comfort cleaner with perfume like fragrance.

Meanwhile in household care Cif and Domestos continue to do well and are taking Sunlight dish wash to new countries most recently with the launch in China exclusively through e-commerce. Turning to refreshments, our priorities are to improve the margins and cash flows in ice cream and to grow faster in tea by repositioning the business to on-trend segments. Underlying sales grew 3.8% equally split between volume and price. Growth is being driven by our premium brands and variance. In ice cream, Ben & Jerry's shows the power of combining a perfect led brand with innovations like recent launches of Wich sandwiches for snacking and a non-dairy ice cream made from our almond milk. Magnum's new Release The Beast campaign is getting strong support to the Magnum double range. And Breyers Gelato Carte D'Or premium desserts are benefiting from new recipes like tarte au citron meringue and Rainforest Alliance vanilla.

In tea, growth is driven by specialty teas like T2 and by green teas which had helped to restore our overall leadership position in India. The traditional black tea market remains highly competitive with deep promotional discounting particularly in the UK. On the other hand, we are seeing double-digit growth in ready to drink tea both with Lipton and the Pure Leaf brand. Pure Leaf is another good example of a brand appealing to the trend for naturalness and is up by more than 30%. As a reminder, the ready-to-drink results are included in the JV line and we do not count it in our underlying sales growth measure. That completes the category review.

Now turning to the regions, growth is driven by emerging markets up 8.3% including 3.7% from volume. Our largest region Asia./AMET/RUB represents around three quarters of our emerging market’s turnover and grew 5% nearly all from volume. Pricing here is less than 1% on average the lowest it's been for five years. Momentum in Southeast Asia has improved and we are growing strongly in e-commerce in China which has nearly doubled over the last year largely through our partnership with Alibaba and JB.com. Our business in Russia moved back into positive volume growth although market conditions there remain fragile. Volumes in South Africa declined as disposable incomes have been squeezed by the weaker currency. But elsewhere in Africa, we’ve seen good growth as we implement the leverage distribution system already proven from Southeast Asia. Latin America, which represents 25% of our emerging markets, grew nearly 18%. Much of this came from pricing to recover devaluation led cost increases but importantly volumes also grew by 2.4% albeit against somewhat easy comparator.

In Brazil and Argentina consumers have cut down on purchases and are down-trading in response to the high level of price inflation. We’ve been able to mitigate this and gain market share with sustained investment in our brands, strong execution and by using our full portfolio which includes local value brands. We are cautious on Latin America volumes for the balance of the year as market conditions are likely to deteriorate further before they improve. That said we've grown strongly in Chile, Colombia, Mexico and Central America in the first quarter. In North America, underlying sales were flat. We had good growth and share gains in deodorants and ice creams, but this was offset by the continued decline of the spreads market and our exit from some private label and export business. As we signaled in January there has been a further modest reduction in trade stocks here. In Europe, underlying sales declined by 0.6%. Volumes grew by 1.8% with a little help from slightly earlier Easter. Volume growth was broad-based across countries but more than offset by accelerating price deflation. Prices were down across almost all countries and particularly so in the UK. In part this comes from benign commodity costs but also reflects the challenging retail environment.

With that I’ll hand back to Graeme.

Graeme Pitkethly

Thank you Andrew. At our Investor event a few months ago we set out three key initiatives to underpin sustained value creation in the coming years. Now well these are still in their very early stages, I thought it would be helpful to give you a brief update on each of them. The first is net revenue management. The essence of NRM is understanding consumer's perception of product value and aligning product price, placement and availability. I've called this before the art of pricing but we could also call it part of the billion basics of consumer goods. And to some extent we’re in catch up mode with the leading practitioners here, for example in the drinks industry. On the chart, you can see a very simple realized example using the Brilhante our whiteness laundry brand in Brazil. In this case, we have increased the relative price of our 1 kg and 3 kg packs and reduced slightly the price of the 2kg pack. Since making the change, all three packs have gained share. Of course we simplified this example to illustrate the point and in fact there is a very detailed set of analysis across all SKUs and multiple channels.

We’ll look at key price points that trigger purchase and the drivers of actual and perceived consumer value. This results in differentiated pricing and promotional plans for each pack and channel. The program has been rolled out globally in waves and by the end of 2016; we’re looking to have cover 40% of our turnover with NRM. We typically into realize our own 1% incremental turnover either in price or volume in the priority country or category sale. We expect NRM to help to underpin consistent share gain and underlying sales growth in the 3% to 5% range despite the challenging retail and competitive environment. The second key initiative is the organizational change which we referred to at our Investor event as new functional models. Unilever’s solid performance in recent years has been made possible by a continual evolution of our organization from one Unilever to the eight clusters and four categories to the integration of R&D into the category teams. This has served us well with the world around us continues to change very rapidly. It is becoming more interconnected and more global in many ways.

Clients are gaining global scale and innovations with new technologies have been rolled out faster than ever before. But at the same time consumers are more than ever identifying with local cultures are looking for brands and products that meet their individual needs. We see this reflected in the fragmentation of media, the diversity of consumer preferences and the growth of many local competitors. And new business models are emerging with speed, the rapid growth of different e-commerce models in the UK, France and China is an obvious example of this. So we are taking the next steps to evolve our own organization to make sure it is well adapted to this changing environment. The fundamental building blocks of four global categories and eight clusters of countries will not change but we will change the organization within this framework to make it faster, simpler, more consumer and customer centric and ready for the connected world.

We are currently in the design phase which is being led by Peter Ter Kulve that many of you will know already from your visits to the Philippines and Singapore last year. We will start to implement design changes during the second half of this year. We'll talk more about this in due course but for now the key points to note are that there will be a stronger more impactful and more directly connected global organization to help speed up the adoption of global ideas and technologies. But at the same time, the organization will be more market facing with more execution of resource deployed locally and countries. There will be fewer layers and less resource in regional hubs and head offices. This will allow clear accountability and responsibility, faster decisions and action, as well as lower cost.

The third initiative is our zero based budgeting program. This one is in parallel with the organizational work and complementing. The scope ZBB is our spend on over hedge and marketing other than salaries. The first step, which we will take by the end of this month is to get much greater visibility to exactly what is being spent and by whom. During the step, we have defined business leaders responsible for each one of 18 cost segments, which cover most of the total spend.

The second step is volume targeted, which means a green savings with each of the individual budget holders are locking them into our clients. We will start with the 22 largest markets and with the corporate locations between now and July and then move on to the next 60 countries in the remainder of the year.

The third step of the process is implementation and control. This involves regular reviews to ensure that the savings are delivered. In combination, we expect ZBB and new functional models to deliver at least EUR1 billion of savings by 2018 with the benefits realized progressively through the second half of this year and during the course of 2007.

It’s worth remembering that this follows many years of continuous improvement programs, programs like return on marketing investment, net realized efficiencies and advertising production or Project Half that has helped bring the overhead level very close to conventional benchmarks.

So these new initiatives while significant, represent the latest wave of savings. We will as before take some to margin, while some are being invested behind growth opportunities. We see them helping to underpin the competitive growth and steady year-on-year margin improvement that we have been achieving and expect to sustain. And as a remainder, this includes continuing absorb the associated restructuring costs.

To conclude then, the first quarter represents a good solid start to the year. We expect market conditions to remain volatile and hence challenging for a while yet. However, we remain confident in the longer term prospects for emerging markets as currency stabilize and we just catch up with price inflation. We have a lot of experience of these cycles, we know how to manage through volatility and come back even stronger.

The Group comparators do get tougher in the second half of the year, but we remain confident of delivering against our objectives, which remain unchanged. These are volume growth ahead of our markets. We expect this to translate its underlying sales growth in the range of 3% to 5%, steady and sustainable margin improvement and strong cash flow. These underpin a sustainable attractive and growing dividend. We’ve today announced that this will again increase by 6%.

Finally, before we move to Q&A, I would like to thank those investors who took part in the recent survey we conducted. We ask for prospectives on investment horizons, quarterly reporting and sustainability, and we were reassured by the results. I won’t go through them now, but they are on Unilever.com, so you can see them there. One point that was clear with an overwhelming level of support for us to continue with quarterly trading updates in the current form, so it’s nice to know that what we do is appreciated.

With that, let’s open the line to your questions.

Question-and-Answer Session

A - Andrew Stephen

Thank you, Graeme. So our first question is from James Targett of Berenberg.

James Targett

Good morning, everyone. Two questions for me. Firstly just on the UK business. You mentioned there were some weaker pricing, and I think personal care in particular. Are there any other areas which were driving the slowdown in UK in the first quarter and maybe if you could give some color on the magnitude of the sales decline there?

And then secondly, on the new functional models you highlighted, could you just - sorry, just quickly recap maybe the timeframe for implementation and initial benefit trend, should we think about this more as being a revenue driven project or cost driven in terms of the benefit? Thanks.

Graeme Pitkethly

Hi, James, good morning. First of all, in the UK, the market was particularly tough as an environment, but in Q1 we did see good volume growth and some value share gains, but that was all offset by price deflation. I don’t want to go specifically based on one quarter into details of the UK’s performance, but it’s a continuation of a very, very competitive marketplace across all categories. You’re aware of the consumer changes in the UK, very value conscious, continued growth of discounters, but above all very competitive on a high level of the promotional intensity, which was particularly sharp in the first quarter.

On your question on new functional models and the implementation of it, as I said in the presentation there, we are currently in the design place, Peter Ter-Kulve has set up an organizational transformation office and he will be working the detail with all categories, with the four categories on principally an integrated marketing design that we will work, not for the short-term, very much what takes us into the next 5 to 10 years of growth. Very much focused on growth, very much focused on being more global and more local, being able to be more agile, sharper translation of local insight into global clients, being faster and being more connected to the consumer at a time when the consumer is fundamentally much, much more convicted through digital and through channels, et cetera.

Andrew Stephen

Next question comes from Warren Ackerman of Societe Generale. Warren, please go ahead.

Warren Ackerman

Good morning, Graeme. Andrew, Warren here. So two questions as well. First one is on pricing. I think if my calculation is right, ex-LatAm pricing overall was negative in the quarter. So how much of the $0.15 pricing in LatAm was high for inflation countries versus say Brazil and Mexico. And Graeme, what’s your view on pricing going forward. Do you think recent strong rebound in EM currencies means that LatAm pricing decelerates from here?

And then secondly on China, can you say where the growth was in the quarter? I think you’re saying the same, all the growth is online, would you say the - what would you say the e-commerce market is growing overall in China versus the modern trade? And do you feel you and your peers have been maybe behind the curve and how rapidly the market had shifted to online? Thank you.

Graeme Pitkethly

Hi, Warren, good morning. First of all, on pricing. Your math is correct. If you take the pricing growth of 2% that we had in the first quarter and you take the Latin American element about out, it’s slightly negative overall. But I do want to emphasize the very, very varied landscape with regard to pricing around the world. So just take emerging markets, let’s take Latin America, which is 25% of the emerging markets, that’s the case. None of the markets are hyper-inflationary by the way, but we are seeing very, very strong price increases. We took price increases of 10% for example in Brazil. And as we expected, we are now seeing volumes come off a very challenged consumer, a fair bit of down trading. The good news is that second and third to your brands were continuing to hold on to the consumer within our categories, and we are continuing to innovate on those markets, Dove Baby and laundry service et cetera. So the fundamentals are still there. And as you’re well aware, we have lot of experience in handling these markets and handling the safer pricing volatility and over the long-term, tend to come out of that a little bit stronger.

Just to go to the other 75% of our emerging markets and let’s take South Asia and Southeast Asia as examples, and that group, as Andrew said, I think in the presentation, we are seeing price growth of only around 1%, which is the lowest that’s been in five years and they are - that’s where we expect to see things get back to a normalization over time and doing as we get through the course of the year.

Turning to pricing outlook overall, we think it will continue to be negative in Europe. We think we will probably be sort of flat, flattish to protect us down in North America. It will continue to be high in Latin America, and we’re below historic average, as I said, in Africa, Asia and Turkey, but we expect that to start to normalize. Andrew?

Andrew Stephen

Second question on China, so I’ll take that. In China, in the first quarter, we had mid-single digit growth, all from volume, that is as you say, being strongly driven by e-commerce and market for e-commerce is growing around 50%. We are growing substantially ahead of that around 80%. Currently around 7% of our business is in e-commerce. It could well be 10% by the end of the year that’s what we are aiming for. We just I think by the nature of our categories, yes, we probably were a little behind some others in developing our e-commerce capabilities. We now have more than 100 people there, so catching up very rapidly, and the partnerships of Alibaba and our relationship with JD.com that we mentioned are helping us.

Warren Ackerman

Thank you guys.

Graeme Pitkethly

Thanks, Warren.

Andrew Stephen

Thanks. Our next question is from Harold Thompson of Deutsche Bank.

Harold Thompson

Good morning everyone. Just two questions. On your net revenue management, just want to make sure I heard properly what you said. You’re saying that you expect to cover 40% of your turnover by year-end and you typically see a 1% uplift in value or volume contribution from that. So do you expect that program to benefit you or boost your growth for possibly two years and then roll over? Would you expect that to be a non-growing benefit for the group medium to long-term?

My second question slightly relates to what sort of been discussed on pricing. You said that Russia volume wise was kind of slightly better or back to positive growth. Is that basically a function of the price now having rolled over and therefore the volume is recovering a bit or is the volume simply doing better on ongoing high pricing? Thank you.

Graeme Pitkethly

Good morning, Harold. On NRM, yes, we have set ourselves an objective of covering 40% of our turnover, but it’s very much done at a category in country. So the point I would emphasize about net revenue management, although it’s a global program with various colors and various philosophies and types of analysis that happens relatively consistently. It’s essentially an on the ground in country by sale local program. And what happens when you run the analysis and done the thinking, done the facilitation, as you end up with the series of potential actions that get taken. And then there is a decision to be made about whether those actions are implemented or not. So it’s not automatic, and I don’t want to imply the 40% of our turnover, we have 1% uplift going forward. That tends to be the size of the opportunity that we see across price and volume, but it faces an over time. And I should also point out that it - when you do the analysis, you tend to come up with a good list of ideas and then whilst that gets embedded in order to continue that, you have to refill the hopper with new analysis, new insight on channels, new insight on value opportunities that exists. So it’s not a mathematical science, it’s much more a capability that’s being reintroduced back into the business with a lot more granularity. It’s very close actually to what we are talking about with global and local - combination of global, what kind of categories on new packs for example and new sizes, new price positions, but the insights tend to be extremely local. So it’s a good example of global and local.

And I will - your question on Russia volume, yes, Russian volume came back after a strong, strong amount of pricing that was taken before. The improved performance I think it’s largely going to sustain branded marketing investment. We have continued to invest in the Russian marketplace. We have been particularly strong in personal care. As you know, our portfolio which I think that is 50% personal care in Russia with strong local brands has benefit to this. So I think that’s where the volume comes from. I’ll ask Andrew if he has got any other.

Andrew Stephen

Yes, just to say that it was characterized, Russia really by the very sharp currency volatility that we had through the course of last year and of course that continues. So we took a lot of pricing fairly early on last year and we saw some significantly negative volumes. We have since then made adjustments. The currency has moved back a little bit, we’ve made adjustments to our price positions across our portfolio, including using our local brands and that has certainly helped us move back into volume growth and particularly strong growth in personal care. But we do remain cautious, it does remain a fragile market.

Harold Thompson

And Andrew, would you say in other markets, you have seen pretty big price increases kind of similar patterns would probably repeat themselves as currency stabilized, pricing rolls over that volumes just gradually improve in those markets?

Andrew Stephen

I wouldn’t like to draw specific conclusions about Russia based on past experience elsewhere. I think as I say, it remains fairly volatile in fragile market. We don’t look to see those volume growths continue, but I think it’s early days yet.

So our next question is from Martin Deboo of Jefferies. Martin, please go ahead.

Martin Deboo

Yes, morning everybody. I want to come back for the three core change programs, and the mean - first of all, I think it’s very impressive what you’re doing there. But my question is around implementation risk and organizational workload and how you’re managing that? I mean, I guess if I’m sort of middle level marketing manager in Vietnam or somewhere, I’m being able to rework my pricing and promotional plans while my role is being redefined, and suddenly I am being asked to pay for my own photocopying by some sort of ZBB guy. So it seems like if it’s not well managed, it’s a recipe for organizational distraction. So I just value Graeme, probably your take on that and how confident you are that you can manage these three big programs while not taking your eye off the growth and margin goal I guess.

Graeme Pitkethly

Good morning, Martin. I mean, you make a very good point of course. The question of organizational capacity and sustaining our consistent delivery and the momentum that we have in challenging markets has to remain at the absolute fore. And couple of comments, first of all, the very reason why in the new functional models, the organizational transformation, we put Peter into a very, very key role essentially is to do exactly that. He is there to run air traffic control, he is there to make sure that we are integrated the way we think about things, to make sure that the end-to-end alignment of the business through R&D, supply chain, through the marketing organization into the sales organization with the functions of finance and HR, the whole thing is integrated and make sense and it’s sequenced in a way that is proper. And importantly there is a lot that doesn’t change. As we said earlier, the 8/4 structure doesn’t change, the fact that we manage deliver performance on a geographic level doesn’t change. The way in which we target the business doesn’t change. So there is a lot doesn’t change in addition to making this more integrated organization come together.

On NRM, I touched on that a little bit, Martin in the presentation. There is an element of back to basics and relearning what we already knew around net revenue management. If you are, as you said, the brand manager in Vietnam, you’re probably thinking well, this is a sort of reiteration on the basic principles of good 6P [ph] marketing. It is nothing particularly new about net revenue management, it’s more re-energization and a refocus of the organization on the fundamentals of channel architecture, pricing, similarly with core of the core as we call it, looking at penetration and distribution, staying on the fundamentals and billion basics, so that’s not so much a change as a refreshment if you like.

And ZBB, I just want to emphasize, we talked a bit about a 4G version of ZBB which isn’t a play on what it’s about our 4G growth model which we’ve talked to you about several months before, but why do we think ZBB is going to be a potentially good cultural fit in the business and why it will be welcomed and energize the company, first of all, it’s very data driven and analytical and they have key competencies, we like that sort of thing, it’s about eliminating waste. Again a good fit. We don’t like waste. We like to be more effective in what we do. It moves away from incremental and moves to a more absolute assessment of where we spend our cost and by opening up brand and marketing investment in addition to overheads, I think that’s liberating especially when there are so many changes happening within the consumer level.

And finally, and most importantly I think having highly respected operational business leaders, typically the heads of large countries responsible for the insights, responsible for the strategic decisions we make around cost savings, I think when we need it, it creates a lot of energy in the organization in addition to being a major change program. So you are right in your assessment. There is a lot of change, but we have to make sure that we don’t take our eye off the ball, that’s job one in sequencing all of this.

Andrew Stephen

Our next question is from Celine Pannuti from JPMorgan.

Celine Pannuti

Yes, good morning. My first question is on North America. Can you share the sellout with us and can you as well be bit more explicit on your performance in terms of your HPC versus food in that market and how your market is tracking? In fact, can we get the margin growth rate for in fact US and Europe since we added? My second question is on your sequencing of the different program you mentioned and you mentioned that you are going to upsell the cost as you go along, I just would like to understand whether the costs are going to be laid bare first and then we get the saving or whether there is a bit of a matching between the two and in that is there anything we should slide on H1 versus H2 margin? Thank you.

Graeme Pitkethly

Good morning, Celine. Obviously North America, and I will let Andrew have a bit of a think about the sequencing of cost versus benefits for the programs, if I may. First of all, your question about sellout, we do continue to see a little bit of trade destocking in North America. Sellout continues about 2%. Our selling is about flat, so that’s our main litmus test of the impact that exists there. To get into the balance between what’s winning and what isn’t so much rather than HPC in foods and personal care, we are seeing pretty - we are continuing to see share gain driven by deos and hair, but we are down in skin and oral. And overall share gain in North America has been driven by refreshments and PC. Foods is declining a little bit as you said driven by spreads. I don’t want to get into the detail on a quarterly update of really with spreads by geography. That’s probably too higher level of detail. Andrew?

Andrew Stephen

Yes, in terms of the operating margin development, we are not guiding on the phasing of margin development, but you should of course expect that we are expecting to see the first benefits from zero based budgeting in the second half of this year onwards, new function models will progressively start as we implement to deliver some savings as well. It’s worth remembering that those savings to some extent just the next like refilling the hopper if you like, our savings programs have delivered strong savings already. So we’ve already been incurring restructuring costs that we already have in savings. But I think the level of restructuring cost will be a little bit higher as well, but equally the savings maybe as well. But we are frankly looking for this to continue to the level of the sort of margin improvement that we’ve seen delivering for the last three years which is 30 to 40 basis points. So that’s the sort of margin improvement I think you should assume including the absorption of restructuring costs associated with these programs.

Celine Pannuti

Thank you.

Graeme Pitkethly

Thanks, Celine.

Andrew Stephen

And the next question is from Alain Oberhuber of Mainfirst. Alain, go ahead.

Alain Oberhuber

Good morning, gentlemen. Alain Oberhuber with Mainfirst. I have two questions. The first is regarding the spreads. It is getting pretty volatile, positive, negative. Could you give us a little bit on outlook, what you expect for the business, when we could expect bottoming out for US specific spreads business or for the category itself? And secondly coming back to Celine’s questions regarding the margins, so could we expect in H1 slightly lower margins than previously expected because of the more investments we see particularly for ZBB?

Graeme Pitkethly

Good morning, Alain. Let me take the second one first to actually just build on what Andrew said in response to Celine’s question as it’s fresh in the memory. No, we don’t expect that the investment phase by ZBB in the first half will cause any different phasing of margin delivery. I think, as Andrew said, historical rate of 30 to 40 basis points is what we seek to maintain. With many moving parts within that, as we realize savings, as we make choices about where we invest those savings, it could be behind growth and increasing the competitive margins. It could be somewhere in the bottom line, it could be some invested in the investments we will have to make in order to give access to the savings both in ZBB and then the new functional model. So we expect to manage a lot of moving parts, but look at the totality of our delivery and how our overall operating margin delivery just continue at the steady rate that has been at historically.

Turning to spreads, when we expect that would bottom out when spreads market first of all remains very challenging. It’s the same in the first quarter. Really it was as we exited 2015 which is continued market decline in both Europe and North America and volume declines in particular because and we talked a little bit, this reduced consumption of bread, reduced spreading and falling brussel prices. And what that means in terms of our own performance is still mid-single-digit declines which are mostly driven by volume. I should say that that’s important when you think about our foods performance. That’s incorporated in the 1.9%, it was delivered by foods in the quarter. Our savory business and our dressings business have had a very strong quarter and so not to unpick things too much, but I think it’s important to recognize the strength that our performance within foods if we think beyond spreads.

And otherwise, with spreads, we are continuing to pursue the strategy and we are spending quite a lot of time with Nicola and actually we’ve had a very strong baton passed from Sean focusing on the brands and the strategy for the business to Nicola focusing on the operational execution of those plans and that’s the phase that we are at the moment as we go forward. As you know, the business continues at this very strong margin contribution to Unilever and generates a lot of cash. And most fundamentally what we are focused on doing is executing the plans and preserving the value of the cash that the business generates and the interest of shareholders. That’s what’s on our mind.

Andrew Stephen

The next question is from Javier Escalante of Consumer Edge.

Javier Escalante

Good morning, Graeme, Andrew. My question is around just by the commentary about where you mentioned that it could be the spread as the polarization of the emerging market. Consumers, some of them trading up, some of them trading down, so if you can help us understand, we thought that that was something that it was mostly developed market. So if you can help us understand which countries you are seeing these or in which categories this polarization is taking place. Are you seeing, for instance, more price sensitivity say in food or in household products relative to personal care? If you can give us more color understanding that the aggregate of these countries is very complex.

And the other thing is that if you explain - I mean I was a little bit confused about what is a takeaway with regards to emerging markets, because it seems to me that you are expecting some of them to get worse, so if there is any particular one-timer that somehow flatter the volume in Q1 as, say, a trade destocking in Brazil or something like that if you can give us any sense whether the volumes in these quarters somehow were flatter and then you are expecting this stuff to roll off or is this more macro conditions that you expect to worsen? Thank you.

Graeme Pitkethly

Thanks, Javier. Good morning. Let me take the second one first again. No, there isn’t anything I can think of that has been a one-time flattering of volumes or any particular destocking, any particular channel shake-out events across the emerging markets. Just generally what we see is that those markets are more volatile. There is no polarization. I like the expression that used in - at the start of the question. But we have seen this before, perhaps we have not seen the same degree of polarization, the same degree of volatility, but we are confident that we know how to manage our way through these markets.

And I think Latin American, where take Brazil and Argentina which are particularly acute at the moment, we know how to focus first of all on the consumer. By having local management teams who are empowered to make pricing decisions and think about consumers trading up and down within categories in those markets, we focus first on the consumer, relevance of our pricing, making sure that we are competitive. We continue to invest behind the brands, we stay in for the long term and typically we come out stronger. I mean, you can never be entirely sure that history will repeat itself, but if you take the example of Argentina, 15 years ago, the last time there was a major devaluation event there, our business certainly came out stronger as a consequence of that philosophy of management and leadership in the market as we manage through the choppiness.

On your question about polarization and specifically it’s hard to give you a specific example on a particular country about trading up and down, but I do think that what we see in taking European marketplace of a very value conscious consumer are looking to save money, but also trade up and treat themselves as a piece of consumer behavior which isn’t limited to the developed markets and you see that behavior in what we generalize and call the emerging markets, but of course within a very emerging market there is a pocket of that market which is the same demographic as most of a developed market. So that’s where you see that.

The consumers are trading up and down. The example, if I go across categories perhaps where we see that more strongly could be in personal care and home care. They’ve all been expensive category, home care in particular and just wanted to share the example of laundry in India where I was a couple of weeks ago and the more fundamental, because I mean India has been less impacted, stronger economy, currency less impacted and therefore the deflation that we’ve seen in a couple of categories in India is much more function of the commodity cycle, but more fundamentally in the laundry business in India, a brand like Surf Excel, a little bit above we are continuing to see consumers trade up from the bottom brand of [indiscernible] into a position like Surf Excel and that thinking more longer term is exactly the sort of thing we expect to see and continue in very much what our strategy is focused on.

Andrew Stephen

Okay, we just have one more question from Eileen Khoo of Morgan Stanley. Eileen, please go ahead.

Eileen Khoo

Good morning, gentlemen. Thanks for taking my call. I just want to just follow up. Actually the first one is about LatAm pricing. I am just trying to understand your pricing here has been very strong for a number of years now, in fact accelerated this quarter to over 15% and I know you said, Graeme, that none of your markets are hyperinflationary, but obviously 15% is quite high and Brazil is 10% and that’s by far your biggest market. What are the other markets that are moving the needle for you and how should we think about the volume pricing equation here in the coming quarters? And then the second one is just on refreshments. I mean all the commentary is pretty positive as you’ve obviously got great innovations et cetera in ice cream, but at least versus our and the market expectations, the 3.8% like-for-like seem to be below what we were expecting. Is there any particular reason there? Was it because of LatAm summer et cetera? Is there any color you can give around that? Thanks very much.

Graeme Pitkethly

Hi, Eileen, thanks for the questions. On Latin American pricing, it has been strong in Brazil and Argentina. We talked a fair about the specific actions that we have taken. Markets where we lead and markets where again focusing on the consumer, focusing on affordability, the combination of commodity bounce around, but washed away - more than washed away by currency devaluation has been on the ground inflation and which had to be very consumer centric in a way that we have taken those prices increases, but we have taken a lot of price increase.

Now, the contribution that Latin American pricing has had overall to Unilever hasn’t really changed. Yes, it contributed most of the global pricing in 2014 and ‘15 and it was all of the global pricing in 2016 if you choose to just carve it out in that sense, but that hasn’t really changed much over the course of the last two or three years.

In terms of what we expect looking forwards from a volume perspective, in Brazil, we’ve got negative volumes in an ever deepening recession and we expect that will continue. Innovations, we are doing quite well. We are growing penetration, we are growing distribution. As I mentioned earlier, we are making sure that ass consumers down trade, the tier 2 and tier 3 brands like Surf or Brilhante, they are trading down within our portfolio. Argentina, another challenging economic reset, we have seen volume growth actually in the first quarter. We continue to invest behind the brands where we do think that consumer demand will contract in the remainder of the year. Andrew, do you want to comment on the refreshment?

Andrew Stephen

Yes, on refreshment, if you know, we’ve had a couple of good years Eileen, with 5% plus growth. I would always say, don’t read too much into any one quarter and I think that’s particularly the case in a business like refreshment which is more seasonal.

Graeme Pitkethly

Yeah, just a flat Q3, we had a very good - as we go through the balance of the year.

Andrew Stephen

Okay. We will bring the call to a close there. As ever, myself and Ansgar, we are happy to take any further questions when we get back to our desks and so with that, Graeme, if you want to say anything beyond that.

Graeme Pitkethly

Yeah, just thanks from Andrew and myself for your time today. I know it has been a busy morning for everybody. Sum up with a few words. We are on track to delivery another year of competitive top line growth. We think that that would be in the range of 3% to 5%. If we think about the momentum we have in the business, we think our business is still continuing to grow at about the 4% rate. There were a few - there was an extra trading day that movements in east, there were base things. We haven’t deconstructed that. We don’t think it’s at a particularly rigid and tight, but there will be some impact without doubt we just haven’t been precise with it. But we remain on track to deliver - we will continue with steady margin improvement. I hope you got our message. On the initiatives we are taking we think position us well to deliver long term value creation into the future. And with that, I hope you enjoy the rest of your day. Thanks very much.


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 and on the Investor Relations' app.

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