聯合利華 (UL) 2002 Q2 法說會逐字稿

This conference will begin with a presentation of the results by Rudy Markham, followed by a question and answer session for the analysts.

To register your question you will need to press the number one on your telephone touchpad and if you wish to cancel your questions, simply press the hash key or pound sign. This conference is being recorded and will be available two hours after the conference ends for a period of two weeks.

The replay numbers and access code can be found on Unilever's Web site. An audio archive copy of the teleconference will also be available on Unilever's Web site, www.unilever.com. I now would like to hand you over to Mr. Markham.

Ladies and gentlemen, good morning and welcome to this presentation of Unilever's Q2 results.

These represent the halfway points in our path to both strategy. I'll use the opportunity to talk to you about our progress against the objectives we've shared. Transcripts of this presentation can be accessed, as you've heard, via our Web site at www.unilever.com. That transcript contains the usual formal disclaimer as to forward-looking statements within the meaning of relevant U.S. legislation.

In this presentation and the discussions to be subject to their disclaimer. I propose not to read the disclaimer but we take it as read, into the record, for the purpose of this presentation and the subsequent Q&A session. Before I start, let me remind you that our 2002 results are reported in euro's as constant rates of exchange. That is average 2001 rates.

Until three weeks ago, I didn't intend to start with this chart, chart one. And you'll have to excuse me if I indulge in a little historical perspective. What it says is important. Since 1984 we've outperformed the Standard and Poor 500 Index by some distance. With an average growth in our share price of 15 percent, compared to nine percent for the Index itself.

As of July 19, we were also one of fewer than 90 companies that had survived from the 500 members present at the time of our inclusion 40 years ago. Which also coincided with our listing on the New York Stock Exchange. If we look at our performance against the 100 throughout it's life, the out performance is even more marked.

We've seen average growth in our share price of 14 percent compared with the Index of slightly less than eight percent. If I look at an even longer period of time, say the 70 years from our creation in 1930, then our EPS growth has outpaced the Dow Jones Industrial Average by over 20 percent. We brought quality in our performance to our investors through a consistent focus on shareholder value.

If we were able to look behind the chart, then I believe there are two key things that best describe how we've sustained our performance relative to the market. Firstly, our brands and our expertise in their management which rests at the hub of our business. Secondly, our ability to adapt. The ability of our people to anticipate and manage change whether it be in consumer needs in the business environment or in the business model, or wherever that change may be.

But enough of history. What about today and the path to growth whose key elements are shared on chart two? On this page of our strategic evolution has several elements, at its core is a focus on a more simplified portfolio of strong powerful brands. And a sort of target, which we clearly communicated to the market.

So how have we done? Have we delivered what we promised? And do we have the plans for completing our program and delivering our 2004 targets in full and on time?

Over the next few charts, I hope to show the answer to these questions and leave you as confident as we are that we will achieve our path to growth targets in full and on time. Let me start with a scorecard of the things that we've done to shape our portfolio and organization over the last 10 quarters as shown in chart three. We have managed an extensive program of reshaping the portfolio. Acquisitions have added substantial world-class brands to our stable while through the sale of businesses we have exited from lower growth, lower margin markets.

In combination changes in portfolio have added one - around 100 basis points to Unilever's momentum growth rate and some 100 basis points to operating margin on an annualized basis. In all, we've so far disposed of 71 businesses for a total consideration of 6.1 billion euros.

Together with this program of portfolio change, business integration, including the fast track integration of Best Foods and faster growth restructuring, we've shown the depth of our ability to undertake a major change program.

We've again demonstrated our ability to make major changes to our business. We've put in place the new divisional structure with its clear focus of operation and execution and creating the framework for best leveraging unity to scale in harmony with the local consumer.

We've enriched management talent through retention of Best Foods managers recruitment and changes to our top team. Of the top 100 managers in the business, 80 are different than five years ago and 40 are different if we look over a two year time period. The average age of the leadership team has come down by 10 years.

We've also changed remuneration strategy with a higher proportion of variable pay based on meeting top line growth and economic value added based performance measures. A deepening of the range of share - of the reach of share options and the linkage of top management remuneration to .

We believe we managed a wide ranging program with determination including managing value from the tail while continuing to deliver our low double digit EPS EEIA growth.

Let me turn to some of the more numerical measures of success. Apart from improving our weighted average cost of capital through gearing up the balance sheet, what are the other three levers of value creation, margin, capital efficiency and top line growth.

Let me look at each of these. First, our margin progression and capital efficiency is shown on chart four. The chart shows operating margin progression before exceptional items and good will amortization on a moving annual total basis with the scale on the left hand side. It also shows capital efficiency measures as averages for each year with the scale on the right hand side.

We've taken it back to 1996 so you can get a more complete picture. You can see that we're making excellent progress on both measures. Our cost saving and restructuring programs are delivering on time and in full. We're taking the benefits to the bottom line just as we said we would.

Our operating margin before exceptional items and good will amortization is 15 percent in Q2. Ahead of the prior year by 190 basis points and on a moving annual total basis it is also 15 percent. Since growth fixed assets have been reduced by 300 basis points and working capital is down by 170 basis units.

Let me quickly show you how our various savings programs are proceeding. And progress is shown on chart five. The first column shows the original targets and budgets of the individual elements of our program including faster growth restructuring, global procurement and Best Foods integration. Projects accounting for some 90 percent of plan spend have already been through our internal organization procedures. And this gives us the confidence that will complete our program to schedule.

The second column shows the extent to which the program has been completed and savings delivered. It shows we've reduced head count by 28,600 out of the planned 33,000. Of the planned reduction of 130 factories, 75 have been completed.

We've delivered procurement savings of 1.5 billion euro out of our target of 1.6 billion, and we've delivered integration and restructuring savings of 1.2 billion out of a planned 2.3. I know many of you have a question about our global procurement after the end of 2002, but to get drawn into more targets, I think. I can reassure you that this is not a capability that we're going to suddenly on the 31st of December of this year. All of us are confident that there is more to be gained in this whole area, but we're equally focused on ensuring that we deliver against the targets we already have in the marketplace. How we use further savings from leveraging our global scale will, I'm afraid, have to wait for another day. The progress we've made with our savings programs gives us additional degrees of freedom of flexibility to put behind our brands as we enter the second half of path-to-growth.

Let me just briefly touch on the issue of restructuring and exceptional license in reporting. We expect the full path-to-growth and Best Foods integration programs to be completed by the end of 2004. The total expenditure of 6.2 billion would have been charged by that time and we still expect the original path- to-growth program to produce a composite DCF return in excess of 30 percent in constant money, as originally communicated to the market. We'll continue to report this expenditure as exceptional license until the programs have been completed. However, after 2004 and given the momentum in our savings programs, we will be absorbing the normal costs of business restructuring within our operating margin target of 16 percent plus. These costs are expected to be in the range of 0.5 to 1 percentage point of sales. This represents both a stepping up of our profit ambition, but also, hopefully, provides absolute clarity on our treatment of such costs as we go beyond 2004. Of course, they'll continue to be events that, by their nature or size, are exceptional. For example, profits and losses on businesses as we manage our portfolio and for which reasons of transparency we will need to show separately. This we will do and, of course, give you the information to understand any such changes.

Let me now turn to our top-line -- our rate of top-line growth and spend some time looking at the markets in which we operate our current level of performance and why we believe we will get a sustainable top-line growth rate of 5 to 6 percent by 2004. At the start of path-to-growth, we asked you to focus on the growth of our leading brands as being the key indicator of our longer term rates of sustainable growth. We look at the momentum growth rate for our business, that is, if you were to take our existing geographic and category mix for leading brands and weight it by our market growth rates, you would arrive at a sustainable rate of around 4 percent per annum, assuming that we go in line with the market. But what is an average? It's simply that, an average. It's clear to us that a company's growth rate is not constrained by the industries they're in. Companies outperform by satisfying consumers better, occupying consumer space-of-mind, making life hard for competitors. Path-to-growth is about this process, it's about taking charge of the top-line growth enablers in order to sustain our growth ambition. On chart 6, you'll see what we believe to be the three key growth enablers; category t o brand mindset, a brand portfolio, which is refreshed and aligned for consumer needs, and disproportionate growth from developing and emerging markets. Let me turn to the first of these, moving from category to brand mindset. I'm now on chart 7. This is what we call creating space for growth. Too many people analyze markets in terms of categories. Categories are just spreads or dressings, fabric solutions, wash, skin care and so on. We believe this approach creates a barrier to growth. Why do we think that? Consumers do not have categories, they have needs; the need to be nourished, the need to be clean, the need to feel good about themselves. providing comforting market shares category business models frustrate your ability to marry consumer insights with the essence of your brand. they prevent you from realizing the true potential of your brand.

Define your category narrowly enough, and you'll always have a healthy share. Categories, we believe, have become the new marketing myopia. Space for growth is about ignoring category barriers to growth. It's about expanding into new usage occasions, new segments, new channels, and new geographies. But, and I need to emphasize this, it's about doing so whilst always remaining true to the essence of the brand; what makes it useful to consumers, the essence in which they place their trust. We've some great examples of how we're developing this thinking in our business. , Lipton, Dove, , Slim Fast, Knorr, and as examples. Alignment to consumer needs was the second of our key enablers.

Many of you will remember . I hope it comes as no surprise to you to know that is alive and well, and helping to save our future. The findings of the team are shown on chart eight. There were six key catalysts of change, which we distilled into three key trends. Trends that will, we believe, shape the consumer needs of the future; health, wellness, looking and feeling good are what we call "Vitality". Convenience, consuming on the go, making life easier for the time poor, or what we call "Quality Time". An indulgence, or what we call "Enjoy". Consumers are also spending an increasing amount of time out of home. Other people talk about similar trends, but is not talk, but application within the business that turns consumer insight into top-line growth. We have, and will continue to shape both our innovation programs and the portfolio change around these trends.

In terms of innovation, as you can see on chart nine, I show, for example, Proactive as one our core Vitality brands. is one of our key Quality Time brands. Our acquisition strategy has also been shaped by the same thinking, and chart ten shows how recent acquisitions of brands fit into the future. Slim Fast, clearly, as a Vitality brand, and so on.

As I said earlier, these acquisitions, together with our Disposal program, also helped to raise the underlying sales growth rate of our business by around 100 basis points.

Let me just summarize our positioning in relation to brands, which is shown on chart eleven. Prior to growth, we were spreading our resources over some 1600 brands, a little more than 800 of these are left. With a strategy that is focused on a portfolio of 400 brand names that are on-trend, and have the potential to exploit the space

Our resources are fully focused on these brands, which we manage as 200 brand positions. Within this portfolio, there are some 40 brands, which we manage globally. Together, they represent 62 percent of our total sales, and 13 of these brands already have sales of over 1 billion euros. Balance of the portfolio are local jewels. The combination of these brands that gives us our unique multi-local--multi-national approach to brand management.

Let me now turn to our third key enabler, the potential of developing an emerging market. But let's first deal with some demographic backgrounds, set out on chart twelve. Over the next five years, economic growth in D and E markets will be double, likely to be double back in the developed world. By 2006, D and E purchasing power should exceed that in the developed world. By 2010, nearly 90 percent of the world's population will be in D and E markets. Asia alone will account for nearly 60 percent of the world's population. By 2050, Europe's share of the world population is predicted to half. Our business is a simple business; it's all about people, mouths to feed, people's desires for health and beauty, clothes and homes to clean.

Against this demographic background, the growth opportunity of D&E is clear. Growth in these markets is driven not only by population growth, but increased frequency of use and up trading as wealth increases. While many companies are put off by what they see as the volatility of these markets, we relish the challenge and know that we have the skill, knowledge and experience to profitably seize the growth opportunities that they present.

Let's look at our record, as shown on chart 13. Over the last ten years, our D&E sales have increased from under seven billion euro to 18 billion euro. Excluding acquisitions and measuring progress in euros this represents a compound annual growth rate of around nine percent. Operating profit has increased from 0.7 billion euro to 2.3 billion.

And again, excluding impact of acquisitions, this represents a compound annual growth rate over the last 10 years in euros of nearly 11 percent. Let's now look at our actual progress in Q2 and how we're using these growth enablers as part of our path to growth strategy. During this, it's important to remember that we're only at the halfway point of our strategy and as such we can and do have very different priorities by market and geography as we move our whole business towards our goals.

Another important piece of context is our HPC business being close to a level we need to achieve the path to growth, and we've proved on an improving trend. As with the previous quarter, let me try and get you behind the numbers to show you what I mean. In the headlines as shown on chart 14.

Firstly, our pro billion euro plus annual turnover personal care business, which had an underlying sales growth of 8.5 percent in the quarter. brands account for 95 percent of sales and are growing at nearly 10 percent. Forty-five percent of sales are in D&E markets.

The strength of our brands, the depth of our distribution capability and leveraging of innovation provide the important drivers for future growth. By the way, within this are nearly 10 billion annual turnovers skin, hair, and deodorant mass market business, grew by a little over 11 percent in the quarter and by over eight percent per annum over the last three years.

Secondly, in our near seven billion euro annual turnover laundry business, we saw underlying sales growth of a little over three percent in the quarter. This is still a little way short of the average growth rate over the last three years of four percent, which you'll remember that we've had a differentiated regional strategy and that our key focus area of development is the improvement in profitability.

In the quarter, gross margins have increased by around 220 basis points. What many would not realize is that our D&E presence accounts for 55 percent of our laundry sales and this is where we lead the market. In these markets we've seen underlying sales growth of over six percent and improvement in profitability as we recovered the evaluation driven cost increases.

In Western Europe, volumes moved ahead by over three percent with an improvement in profitability not withstanding a very competitive marketplace, and thus some negative price partially upsets the volume progress. Lastly, in North America, which is only 20 percent of our laundry business and with a tough comparator on sales growth in the previous year due to the phasing of innovation.

We have significantly stepped up profitability but with a small decline in underlying sales growth. We have a number of good innovations just in the marketplace. There is more planned in the second half.

I'll now turn to spreads and cooking products. We have a six billion plus annual turnover business with around 65 percent of sales in the leading brands. This is the category where we continue to have the largest trail of business but we're making good progress and finding value enhancing strategies to exit from our oils business partly through disposal.

Growth of the leading brands has been over three percent in the quarter and we now have eight successive quarters of positive underlying sales growth. We have an innovation plan that will allow us to sustain growth on the back of our proven track record of generating attractive margins.

The fourth area I'd like to look at is on the 10 billion euro annual turnover savories and dressings business which includes olive oil. We've seen underlying sales growth of around 1.4 percent. And our leading brand a 90 percent of turnover.

Within this we've seen a pick up in the growth of savory driven by the Knorr brand that grew 4.5 percent. This is driven by good momentum in both Europe and North America and good progress in Asia Pacific as we extend distribution. In dressings we saw a decline of just over half a percent in the quarter. The most important brand in dressings is Hellmann's which was maintained on share in all key markets.

However, the top line performance in the quarter has been mixed. In Latin America we saw growth in the mid teens as we moved through the integration phase and introduced innovations in both Mexico and Brazil. However, in both Europe and the U.S. sales were below last year.

Sales in Europe were impacted by a decisive action to reduce the level of promotions in advance of introducing new innovations. And in the U.S. by our exit strategy in and continued competitive promotional activity. Notwithstanding our U.S. share advanced by 90 basis points.

As we move through the year we expect to see a resumption of growth in Hellmann's as we step up the level of support, introduce innovations based on Unilever technology and the successful model applied by of brand extension. Incidentally, grew by high single digits in the quarter and we've just introduced new innovation of flavored mayonnaise under the Hellmann's brand on the U.S. based on the model.

Now, to tea based beverages. Our 2.5 billion euro plus annual turnover business saw underlying sales growth of nearly four percent. Leading brands which were 94 percent of sales grew by just over five percent. Now, offset by management as we exited from low margin markets in India.

Last page is ice cream or frozen food businesses with annualized turnover of over 7.5 billion euro. Underlying sales growth grew by 1.6 percent in the quarter with operating margins ahead by 240 basis points. In ice cream we continue to make good progress in North America and in our daily markets or the sales in western Europe were lower than planned.

countries where we've seen strong market positions had back overall progress but we remain confident in our innovation program as we see positive sales momentum in countries not affected by the weather.

Apart from a step up in innovation we've been paying equal attention to the robustness of our underlying business system. We've significantly reduced our fixed costs and this allows us to manage ice cream profitability much more in line with sales developments also the same time investing in building our equity.

So, for example, in western Europe we had sales flat against last year. We spent the same in advertising and promotions plus we pushed trading margins ahead by around 160 basis points. We know how to run an ice cream business profitably and in the year to date our trading margin is in line with Unilever's average.

In frozen foods we've done much to improve the overall profitability of the business but we are not yet satisfied with the delivery of consistent growth. And quality convenient frozen meals continue to make good progress but we need to bring that level of innovation in consumer value to the rest of our frozen foods portfolio.

I hope these few examples give you a flavor of the different aspects of growth as it gets implemented around the world. We don't claim to have finished the job in hand. We have work to do in , dressings and frozen foods. But we do know that we have the plans to deliver.

Let me now turn to the overall sales growth for the quarter and share how the various themes within the strategy I just described have impacted on our second quarter growth rate. Sales performance is shown on chart 15. Underlying sales growth grew by 3.3 percent in Q2 while leading brands grew at 4.4 percent with 6.5 percent in and 2.8 percent in foods. Within foods, the leading brands of ice cream and frozen foods grew 1.9 percent for reasons previously given. And this compares to 3.6 percent in Q1. Growth of the rest of our foods increased to 3.3 percent, which compares to 2.2 percent in quarter 1.

Our annual total basis, HBC leading brand growth is 5 percent and other foods 4 percent, giving 4.5 percent for total year . At the end of the second quarter, leading brands were some 88 percent of total sales and we're well on our way to achieving 90 percent concentration by the end of the year. Within the underlying sales growth of 3.3 percent in the quarter, we see volume of 60 basis points and price of 270 basis points. There are two key issues that need to be remembered when you look at these numbers. Firstly, we have attrition in the long leading brands, with a decline of around 3.3 percent in the quarter. Compared to the prior year, this reduced yearly the total of the line sales growth by 50 basis points. As we've said previously, the process of managing the will not be an even process, as we manage the dynamics of volume, price and profitability. In this quarter, the had a volume decline of just over 6 percent, with a positive price of nearly 4 percent. Thus, by deduction, the underlying volume growth of the leading brands was 1.8 percent, with a positive price of 2.6, underlying sales growth of 4.4.

Secondly, the process of adjusting our business to the effects of currency changes in D&E markets can have a significant effect on the balance between volume and price in our sales growth. Let me illustrate this for you. Firstly, in Latin America we have an underlying volume growth of minus 3.6 percent and a positive price of 16.1. If I exclude Argentina, then we get a very different picture. Underlying volume growth is positive, 1.6 percent, and price is 1 percent. Secondly, in Africa, Middle East and Turkey, we have an underlying volume growth of 1.3 and a price of 2.8. If I exclude Turkey, then the underlying volume growth is 2.9 percent and price is 7.9. Taken together, Argentina and Turkey depressed Unilever's underlying volume growth by 70 basis points, from 1.3 percent to 0.6 percent and increased price by 50 basis points, from 2.2 percent to 2.7 percent. The only point I make is that our numbers need to be seen in the context of the business cycle and our strategy. We remain comfortable where we are in terms of managing our business in D&E markets, which have experienced devaluation and also getting .

Let me turn to other action we've taken to tackle the , mainly disposals. The effects of the acquisition and disposals is to reduce sales growth by 370 basis points to give reported sales of 13.4 billion, a decline of 40 basis points on the prior year. Earlier I showed you that our track record for driving forward operating margins. On chart 16 I show the key drivers of our margin improvement within our Q2 results. The basis point quotes are all expressed as an effect on total Unilever operating margins.

Gross margins moved ahead by 130 basis points in the quarter. Key drivers, with the improvement in gross margins, have been continued benefits from our procurement and supply chain restructuring program, which contributed some 170 basis points of gross margin. Secondly, improved mix, which contributed some 70 basis points, through disposals and a larger proportion of higher-margin categories. Thirdly, ongoing progress with the recovery of devaluation-led cost increases through pricing action, although we still see some lag effect as new devaluations take effect. There's still a shortfall between cost increases and price of around 110 basis points, which compares to 60 basis points in Q1, and 200 basis points in the second half of 2001.

We increased the investment behind our brands in the quarter by some 60 basis points ahead of last year, and on top of this, we've continued to step up our investment in trade and consumer price promotions, lower associated costs at 50 basis points the operating margin progression with an additional benefit of 70 basis points from lower overheads.

Let me turn to chart 17 to highlight the other key financial indicators for the second quarter. Operating profit before exceptional items and goodwill amortization rises by 241 million euro, or 14 percent. EBITDA, before exceptional items, which is in current money is 2.1 billion euro in the quarter. Exceptional items for the quarter were a profit of 38 million, which includes 230 million of restructuring, and 268 million profit on disposals. Associated costs included in the operating profit, BEIA, were 43 million in the quarter. Interest payable is 332 million euros, 18 percent lower than last year, with approximately 60 percent of the reduction coming from a lower debt level, through cash flow from operations, and disposals in the balance from lower rates. Cash flow from operating activities was 2.4 billion in the quarter, and on a moving annual total basis, is now at 7.8 billion. Net debt at the quarter end at current rates of exchange was 20 billion euros, compared with 27.6 billion a year ago. Net is 68 percent, and EBITDA interest cover is 7.2 times. The effective tax rate for the quarter is 45 percent, the underlying tax rate for normal trading operations, and excluding the non-tax-deductibility of , amortization is 31 percent, which includes a favorable 1 percent from prior year-adjustments.

EPS before exceptional items and goodwill amortization moved ahead by 32 percent in the quarter. EPS after exceptional items declined by 25 percent in the quarter, reflecting higher exceptional profits in the prior year.

Now, let me turn to chart eighteen, which shows how our reporting is developed in the quarter, and shows the impact on EPS at current exchange rates. When expressed in current rates of exchange, EPS before exceptional items and goodwill amortization grew by 25 percent in the quarter, and by 29 percent to the half year. Averaged across the year-to-date, we saw no change in either the pound sterling, or the dollar euro--oh, the dollar, U.S. dollar, against the euro. In the quarter, at average rates, the pound sterling and U.S. dollar weakened against the euro by 3 and 6 percent, respectively.

Chart eighteen shows the current exchange rate, EPS--EPS BEIA, and the percentage change for euro, sterling, and U.S. dollar. When expressed in current exchange rates, we've seen both sales and EPS BEIA growth lowered by around 6 percent. On EPS BEIA, Argentina accounts for around 3.5 percentage points of this. As we understand the use of current rate reporting conventions, we believe it does not help you manage the underlying progress of a business. In our experience, we've seen inappropriate ledger reactions in countries where currencies devalue. Indeed, we believe that for our businesses--that for businesses such as ours, too much emphasis is put on short-term currency trends. We sat our targets on constant currency and certainly have not taken credit in the past, for example in 2000 when exchange rates movements have boosted current money earnings.

Of course much of this is also swings and roundabouts. If we look back over the last 10 years, sales and earning growth at current rates have on average been just 60 basis points lower than growth at constant rates. We expect this to be the case, given an average devaluation of developing in emerging markets of one percent per annum over the same period.

Our target setting process is take this and many other issues into account. We concentrate our efforts on managing long term value. And I hope I've already shown that in terms of both sales growth and profitability in D&E markets where we see the largest currency fluctuation, we manage the process properly and in a value creating way.

At this stage, I'd normally go on a tour of our regions. However, given our review of the halfway stage of path to growth, the usual text and charts reviewing the quarters results and performance by region, are available on the Web site and are also being sent out by fax and or E mail.

Before we get to the Q&A session, let me first reiterate what we said in our results announcement about the outlook for the remainder of the year. The key points of which are shown on chart 19. We expect leading brands to be 90 percent of our business by the year-end and to sustain their growth in the range of four and a half to five percent as we accelerate innovation of marketing programs in the second half of the year.

The key drivers of this as follows. First, in 2001, we had growth in the leading brands in North America of around four percent in the first half and lower growth in the second half. This year, leading brands grew by less than one percent in the first half of 2002 due to the phasing of innovation. In the second half, we have a strong innovation program in both HPC and foods and therefore expect a significant step up in growth.

Secondly, a third of acceleration in growth in Asia Pacific where we will benefit from softer comparators, momentum from innovations introduced in the second quarter and again reinforced by a strong second half innovation plan in our key countries. We expect similar growth performances in both Europe and Latin America, to that in Q2.

We're also raising our outlook for EPS BEAA growth from low double digits to mid teens growth. This reflects the robust increase in profitability thus also retaining the capacity to step up investments behind our brands. Finally, on the completion of path to growth and looking beyond 2004, we will be absorbing the normal cost of business restructuring within our operating margin target of 16 percent plus.

These costs are expected to be in the range of 50 to 100 basis points of sales. With that, I conclude my review of performance and now, Howard, who's joined me and I will be happy to take your questions.

We will now poll for questions from the analysts. Once again, to register your question you will need to press the number one on your telephone touchpad. Should you wish to cancel your question, simply press the hash key or pound sign.

Our first question is from Mr. from Prudential Securities. Please state your question sir.

Good day. I would have woke up in the middle of the night if I knew the earnings were going to be this good. Congratulations.

Nice to hear you.

To the extent you can talk about it, can you talk about the areas that we'll see increased advertising and promotional spending in the second half?

Sure. That's a question. Yes. Let me take you through those. Why don't I take it in the sequence that we took it in my brief review of the outlook?

Namely, start with North America. We have a significant number of innovations coming into the marketplace in North America, particularly the U.S. in the next couple of months. And I'll just highlight a couple of them.

On the food side we have Rich and Hearty which is our Ragu brand re-launch with meat in combined with tomato sauce. A terrific product. I've tasted it myself last week. We have the launch of Hellmann's flavored mayonnaise. I think they may already be on your shelves in some parts of the U.S. We have the launch of Lipton Asian side dishes which is now also in the market. So, on the food side we've made strong progress to introduce new products quickly into the marketplace.

On the personal care side the big news in North America will be the launch of which is a male - a young male deodorant fragrance product in the third quarter. This has been a huge success in Europe and now we're tackling North America.

We're also launching a fabric conditioner under the brand name All in the third quarter. And a number of other smaller innovations in the laundry area and in skin products. And behind these launches we have a substantial advertising and promotional campaign in order to register these products with consumers. There are a number of products that are again on air after having been off air for a while. That's North America.

If I look at Asia Pacific where we have quite good growth momentum already this year then I'm looking at shampoo launches. We're continuing to roll out Dove throughout the world. So in Asia Pacific we would expect to see it on Thailand on the market. We also expect to see it in Brazil by the way later this year. And we have two big launches in Japan where we come with and which is our Flagship brand in Japan has been market leader now for some time. And they're coming in - at the end of the third quarter beginning in the fourth quarter.

We also have Lipton - re-launch of ready drink tea in Japan. And the launch of Tetra teabags. We have a number of re-launches of our laundry brands across the world, in the Philippines. in India. You remember we commented in past quarters on some competitive action in laundry while we're rolling back hard. And the re-launch of Omo across Africa. These two will be well supported and strengthened.

If I come to Europe. In Europe for the remainder of the year we have the continued roll out of our Dove shampoos as they sort of roll progressively across Europe. We have the further strengthening of the spreads and spreads category with which is a cheese spread. And the launch of Sunrise margarine which is a bet of an enriched margarine in Europe and central Europe.

We have further moved in ready to drink tea building on the success that we've had in North America. We've moving in Spain and in the U.K. And we have a range of smaller launches in terms of individual projects but aggregate significance in strengthening the brand across Europe . . .

. . . these higher earnings projections for this year did not come because you decided to spend less marketing dollars in the second half or less marketing dollars.

Definitely not. The increase in the earnings outlook maybe I should just take you through that. We recognize when we set all our plans for this year that the first half of the year would be less innovation loaded than the second half of the year. And we're seeing the year develop broadly within that pattern. We did note that our second quarter had slightly lower growth than we had expected because of a poor summer -- a poor start to the summer -- in Western Europe and that depressed slightly our sales of impulse ice cream and ready-to-drink tea. But, other than that, we are broadly on the plans that we have set and certainly the launches that we had anticipated. So the top-line momentum is going pretty well as we planned. Within that, I should say, we are moving faster to getting the leading brands to be the bulk of the business. They started at 84 percent and they'll end the year at nearly 90 percent of the business. So this is the pattern of disposals, this is the pattern of management. So the top-line, good progress.

If I then look at the fuel for growth and the fuel for earnings development, namely the progress of gross margin, you've seen what we've done in the first half year and the source of those savings, we expect the buying savings, the procurement, the restructuring and certainly the Best Foods savings to continue through the year, strengthening our margin -- our gross margin -- contribution. We also expect that we will continue to be successful in mitigating the impact of price increases and devaluation cost increases by offsetting them with price.

So we expect those to feed through to the bottom line. I've got one more positive and then I'll come to the cautions. But we've had, as you noted, a benefit on the interest line of some significance, we have higher cash flow, again partly disposals, we have lower rates and we have the profit of the cash flow from the business, which has been a touch higher than we planned. That's feeding into and reducing the interest costs. So that all increases, if you like, the room for maneuvering as we move through the rest of the year.

We've taken account, also, of a couple of potential clouds. One is a reality, which is that we have, of course, as we move further through the year, a small dilution impact on our earnings from the disposal of DiverseyLever and from the disposal of the Mazola brand in the U.S., which we announced as completed at the first of July. So the figures are in after the end of the second quarter, but that will hit us in the third and the fourth and, of course, we've allowed for that.

You commented on the question of Brazil and Argentina, we're satisfied with the progress that our business makes in Latin America against a very difficult backdrop in Argentina and some worsening of the economic outlook, or the immediate economic outlook, in Brazil. But we continue to make good progress in terms of overall pricing and volume adjustment as of when the pricing derived that.

But we have taken a quarter's approach to the development of turnover in Latin America. We have, again, a strong innovation program, both in home and personal care and in foods. I commented on the long of Dove Shampoo in Brazil, we have launched which is an onion based cooking product extremely popular in Brazil, in the course of this year. So we've not shied from launching innovations in the market, but we're certainly a little more cautious in assuming the results of that. But it is all factored into our assumption of leading brand growth the remainder of the year, for the full year of between 4.5 and 5 percent and an earnings outlook of mid teens before exceptional items, etcetera.

OK, thank you very much.

OK, John, thanks very much, good to hear you.

Out next question is from Mr. from Capital Research. Please state your question, sir.

Hi, congratulations on the wonderful results.

Hello, , thanks.

I was interested in the decision to start treating exceptionals differently after 2004, and I applaud you on it, and was wondering if you could just elaborate a little more on your thinking about that.

Yeah, if I--just let me take a sort of a quick trip back in history. We have had, over the last 17--over the last 13 or 14 years, periodically, exceptional costs, which have been related to restructuring our businesses. Sometimes they've been around major events, like the creation of the single market in Europe, which obviously enabled us to look at a more European supply chain, rather than a national supply chain, and sometime it's been--sometimes it's been in response to normal business developments, the need for substantial productivity improvements in particular parts of the business.

Up until, I think it was the mid 90s, one could take all one's exceptional costs that one was planning to spend on restructuring, in one go, as a hit against your earnings, and thereafter, you could execute the restructuring program, and there would be no further impact to the costs on your bottom line, and you would see the benefits flowing through.

The standard allowing that changed in the mid 90s, and then, it required you to expense your restructuring as in when you actually closed factories, or nominated those who--for whom restructuring or redundancy payments were given. We have, if I look through the 90s, on average, spent somewhere between half a percent and one percentage point of sales on restructuring costs.

As we moved into paths to growth, together with, of course, the restructuring around the Best Foods integration, we were clear that we were asking for a lot of money over a five-year period; 6.2 billion. We felt that given the phasing of that expenditure, which was at that stage, extremely difficult to predict, that it would nto be meaningful and helpful for investors if we included that in the key indicator of business performance, namely our operating margin, and our EPS. This is because we have both plusses and minuses, we've had quarters where we have strong exceptional losses, and we've also had quarters where we have strong exceptional profits.

What we have done is made sure that we report each quarter specifically the performance on the spend of those restructuring costs, and the savings that we get from them, and as I indicated in my speech, we are comfortable still, that we will get a 30 percent return on the investment that we've made in these restructuring costs.

We are satisfied that when we come to the end of this program, that we will in future, be able to allow for our--in our business planning, for the normal costs of restructuring in order to maintain the substance of the business. The normal productivity improvements that you make to remain competitive, or to seize profit opportunities as you find them. We believe it is a better discipline for us to include those in our operating margin, and enable us therefore to simplify our performance measurement, and performance reporting as we go forward. We're comfortable that the level of those costs will be somewhere between half a percent, and one percentage point of turnover, which in money terms, is somewhere between 200 and 500 million euro. But the discipline on us will be to deliver our 16 percent plus operating margin, having allowed for that maintenance of productive pro-activity in the business. That, I think, is the key change. It will also make life simpler in looking at our numbers.

Carl--Carl, it's Howard. Could I just add something to that as well?

Please.

And that is that you will know that within the operating margin before exceptional items that we currently report, we are absorbing so-called associated costs.

Right.

Those were 393 million euros in 2001 and to date in this year they have been 83 million euros. And so effectively within the operating margin, BEIA, that we have been reporting, we have been absorbing the elements of that restructuring charge on the path to growth and best foods integration.

And I think that that's important background as you look at the feasibility and the sustainability of the margins as you go forward.

OK. That's great. And like I said, I applaud you on this, you know, on this environment where everyone's worried about worried earnings quality and so on. I think it's wonderful that you're going to include this in the ongoing operating results going forward and I'm glad business is so strong.

Thank you .

Our next question is from Mr. from Birmingham . Please state your question sir.

Forgive me if this appears in the material that's been forwarded or in your speech, but I - might be easier to just have you explicitly give me the number.

What was the advertising - the A&P spend as a percent of sales for the half?

We - I don't think, I mean you listened very carefully because I certainly in my speech I didn't quote the number of A&P spend over the quarter or over the half year. I can tell you that our advertising spend for the quarter is 15 percentage points - 15.2 percentage points of sales and that's 60 basis points more spend prior so therefore then it was in the same quarter in the last year.

You asked actually for the half year number, and the half year number is then an advertising spend on A&P of 14 percentage points which is about 10 basis points higher than last year. Again, I should add - just as I made, I think, in a little earlier my comments, that we have more innovation and therefore, of course, more demand for advertising support in the second half of this year rather than the second half of last year.

And, of course, we have a strong innovation comparator in 2001 with a smaller innovation effort in 2002, hence the difference.

Right. Thanks very much for your response.

OK. Thanks very much.

Our next question is from Ms. from MSS Investment Management. Please state your question madam.

Hi Rudy. Hi Howard.

Hello . How are you?

I'm fine. How are you?

Good. Thanks. Same as you.

I was just wondering if first you could give us the exact savings for path to growth, procurement and best food in the quarter?

Yes. I thought they were on the charts. Maybe I missed them, but let me read them to you anyway.

I'll take them in the usual mix.

Yes.

Which is restructuring savings in the quarter so path to growth restructuring savings in the quarter are 70 million euro ...

... seven million?

Seventy - seven oh million.

Yes.

In the quarter. The cumulative, of course, is 0.6 billion. So I'm just giving you the quarter. Half year, 155 million euro, if that helps you. In - I'll do the same for procurement savings. In quarter two they were 173 million and for the first half year, 316 million. And then the best food synergy savings are 92 million euro in the first - in the second quarter and 163 million in the first half year. So you see in all three an acceleration of momentum as we've gone through the year.

OK. The second thing I wanted to ask you is you've benefited from lower associated costs in the first two quarters. Do you expect that benefit to continue for the rest of the year?

As far as that - it's really just a phasing issue of the program. We gave an outlook at the start of the year for 300 million of associated costs. And based on the plans and the restructuring within those plans we remain comfortable with that number.

OK. And then I have a general question in merging markets. Given the further devaluation of the real and other Latin American currency what is your ability to continue to raise prices? Isn't there a risk that you're going to face a competitive response with some of your competitors taking advantage of the situation and undercutting you?

The experience of course in being in markets with devaluations - you comment on the real this time which is 28 percent off I remember up until the end of . . .

Right.

. . . July actually. It's gone on a bit beyond June. It's something of course we've had repeatedly over time throughout the world. So we're well used to operating in those markets. And I think I made some comment in the speech about our performance over a long period of time in managing devaluations - structure devaluations which have happened.

If I take the specifics and if I look at Brazil for example or Argentina in many of these markets we have very strong market positions. You know of course from many of our previous conference calls of our strength in laundry in the southern which is Brazil, Argentina and Chile. We have very high market shares indeed.

So, when we lead market prices up then of course the competition are delighted to follow because they have a much bigger profitability squeeze than we do because they have a much smaller base from which they can fall. So, we do not see that as a threat to our competitor position. Quite the reverse. We see our challenge is insuring that our prices move up to protect our cash margins, whatever the economic circumstances - our economic circumstances are.

The more important impact in most of these markets is the need to insure that the products remain affordable for consumers. Therefore, we put a lot of effort if the devaluation becomes large in looking at opportunities to make more affordable products. That could be by changing the product size. It could be by adapting the formulation and capability of the product and so on.

So, those are the sort of measures that we go through first as we adjust to the changing economic circumstances in these markets. And you may remember I think I - we probably shared with you - in fact, I'm almost certain we did on one of our visits to you last year.

We shared with you the specific progress for example in Indonesia where we had a significant devaluation. We showed you what happened to our gross margin and our sales. And you saw how at the end of that period I think it was chart 21 of the book if I remember we showed a strong increase in gross margins above where we started, sales higher. And over the whole period interestingly in real money, so dollars or euros we were actually well ahead.

So, we're quite comfortable. It can be sometimes rather painful in the immediate - in the immediacy of these sudden swings of currency. But we go - we know how to manage when we're there and we come out with a stronger business.

Just one last thing. On the price recovery, in the first quarter you had a negative 60 basis points on the gross margin from you know selling price/cost changes . . .

Yes.

In the second quarter it's up to negative 110 basis points. The difference between the two is purely emerging market devaluation or are you facing margin pressure elsewhere?

It is mainly developing in emerging markets , but there's obviously some impact of the normal cut and thrust of investment in promotions and so-called above the line expenditure. If I was looking at the then I would say it was split around about 50 -- 50 between the two issues.

OK, great. Thank you very much.

Thanks, .

There are no further questions from analysts at this time.

OK, ladies and gentlemen. Thank you very much for your interest and have a good day.

I would like to remind you that this conference has been recorded and will be available for a period of two weeks. To listen to a replay, please refer to Unilever's Website for details of the replay telephone number and access code. An audio copy of the teleconference will also be available on Unilever's Website, www.unilever.com.