聯合利華 (UL) 2005 Q2 法說會逐字稿

Welcome to Unilever’s 2005 second quarter and half year results conference call. This conference will begin with a short introduction by Mr. John Rothenberg, Senior Vice President of Investor Relations, followed by a presentation by Patrick Cescau, CEO of Unilever, and Rudy Markham, Financial Director of Unilever, concluding with a question and answer session. [OPERATOR INSTRUCTIONS]. We will now hand you over to Mr. Rothenberg.

Good morning, everyone, and welcome to our Q2 Conference Call. I am here with Unilever’s CEO, Patrick Cescau and our CFO, Rudy Markham. Patrick is going to kick off by giving his perspective on where we are at the half year. Rudy will then take you through the results in a bit more detail and we will then take your questions as usual.

Before passing over to Patrick, I would just like to draw your attention to the usual disclaimer relating to forward looking statements, which is included in Chart 1 and will be posted with the text of this presentation on our website.

I would also like to point out that, following the sale of the UCI prestige fragrance business to Coty on 11th July, under IFRS, the business is reported under discontinued operations in both the current and prior year results. The profit generated by this disposal will be taken to results in Q3. With that, I would like to hand over to Patrick.

Good morning everyone. As John mentioned, I want to take this opportunity to share with you my impressions of how things are going. Turning to Chart 2, I should say from the outset that I am more than a little disappointed to have to share with you a set of results that include a further write-down on Slim*Fast.

Rudy will talk about this later, but I can assure you that we are doing what is necessary to ensure that we rebuild this small but still valuable part of our business. We should not let this disappointment cloud the bigger picture where we can report some real progress on the road to recovery.

Back in February, I said that my most immediate task was to return this business to growth. To do this, we would have to raise our game, improve our competitiveness in the marketplace, and reverse the share losses that we had been suffering during the latter half of 2003 and through 2004.

At the same time, I announced major changes in our organization and top team. These changes had 2 aims, first, to create a small, empowered executive team under my leadership, with shortened reporting lines into our major markets. Second, to sharpen responsibility and accountability between those responsible for developing brilliant marketing mixes - the Categories, and those responsible for excellence in ‘Go to Market’ operations - the Regions.

These changes have been rapidly implemented. The Unilever Executive was up and running by the beginning of April, and by the end of April, we had made over 100 senior appointments within the new organization. It is still early days but there are clear signs that the changes we are making in the business are gaining traction.

As I review progress with my top team, and visit our operations around the world, I see increasing evidence that the focus on competitiveness is translating into more and better innovation, into keener pricing of our products and sharper execution in the way in which we bring our brands and innovations to the market.

This is starting to show through in our top-line. The 3.3% volume driven sales growth we posted in Q2 is a meaningful improvement in our growth performance, coming on top of an improving trend in each of the previous 2 quarters. The acid test for our competitiveness lies in our market shares.

Since the beginning of the year, our market shares have stabilized and even increased slightly in some important battle grounds around the world. We have increased investment to bring about this improvement. Our pricing is flat at the half year, at a time when input costs have risen significantly and after a year of price decreases in 2004. We are investing more in in-store activity and have made a number of decisive moves to improve our price positioning where this is appropriate.

At the same time, we have increased advertising and promotional expenditure in a disciplined way behind our business priorities, in each of the past 3 quarters. We have also focused resources and management effort behind an innovation plan that is significantly stronger in terms of quantity and quality and that will be sustained through the second half.

Cost pressure caused by higher commodity costs is an issue that is affecting the whole of our industry. The good news is that, so far, we have been able to limit the impact on our margin of both higher input costs and our increased investment in competitiveness thanks to improving business mix and the benefits of our savings programs.

Our procurement programs continued to deliver a steady flow of savings and our One Unilever program is starting to impact favorably on our administrative costs. And there is more to come.

I have previously indicated that, while we believe we have the right portfolio going forward, we will continue to act to improve it where shareholder value can be enhanced. John has already mentioned the UCI disposal, which will generate a pre-tax profit of around €450m in the third quarter. This was the right decision at the right time and at the right price.

So, Slim*Fast aside, I am pleased with the way that our business has developed in the first half of 2005. That does not mean that I am complacent. We are still at a relatively early stage of our recovery plan.

The new executive team has been in place for only a few months and there is still a considerable amount of work to be done to strengthen our marketing and innovation and to achieve a consistently high level of operational performance across the business.

There are still important parts of our business where our competitive performance is below par, most notably in Europe. So, in summary, encouraged by our progress to date – yes. Confident that we are on the road to recovery – yes. Congratulating ourselves on a job well done – certainly not yet. I will now ask Rudy to go into a little more detail on our performance in Q2 and for the half year, and to add a little more color to our assessment of progress towards recovery.

Thanks Patrick. Turning to Chart 3, I would like first to say a few words about our trading environment. Looking across the world, I would have to say that there has been little or no change in market conditions since the start of 2005, and no obvious signs of changes to come.

Developing and Emerging markets remain buoyant and consumer demand is steady in North America. Western Europe remains difficult, with weak consumer demand and no let up in the price competition between retailers.

In aggregate, we estimate the growth rate of the categories and regions in which we are growing at between 3% and 3.5%. Within this, our European markets are flat, North America is growing at around 2.5% to 3%, with the Rest of the World making up the difference.

Commodity costs continue the trend of previous quarters. Edible oil and other key agricultural commodity prices are lower year-on-year, but this is more than cancelled out by the higher mineral oil price, affecting particularly HPC raw materials, packaging and distribution costs.

In the first half, Unilever absorbed around €275m of additional material and distribution costs, equivalent to a year-on year increase of 4%. A number of consumer products companies have commented on the difficulty of raising prices to recover input cost inflation, and we see a similar picture across many markets, but especially in Europe.

In spite of the consequent pressure on margins, we see little signs of a reduction in support levels within the industry. Against this background, I now turn to Chart 4 and the drivers of our top-line growth. As Patrick mentioned, our underlying sales growth of 3.3% in the second quarter represents the third quarter in a row of improving like-for-like growth, coming on top of 1% in Q4 2004 and 2% last quarter.

We are particularly pleased with the quality of this growth, which is entirely volume driven and reflects a much better share performance across our categories. Our global market shares in both Foods and HPC have stabilized since the beginning of the year. We take this as a clear indication that we have indeed improved our level of competitiveness compared with 2004.

A key driver of improvement has been the strengthening of our innovation program during 2005. We have increased both the quality and rate of our innovation in 2005 across both Foods and HPC.

Vitality driven innovation like the new Flora pro.activ mini drinks that we have just launched in the U.K. and Portugal. Following on the success of our cholesterol lowering products, these new products incorporate naturally occurring milk peptides which have been scientifically shown to help control blood pressure as part of a healthy diet.

We are first to market with this technology and it is yet another example of the consistent flow of innovation that has driven our Flora/Becel heart health brand to double digit growth during 2005.

We have also got better at exploiting our successes. Thus, our ‘Dirt is Good’ initiative in Fabric Cleaning, that has proven so successful in Latin America, is being rolled out with renewed vigor and determination across Europe and Asia. This has led to double-digit growth of Omo, and is an important contributor to the nearly 5% growth in Home Care in the quarter.

We have also been working hard to ensure that our products offer value to our consumers. We took pricing action in a number of categories and markets during 2004, for example in Laundry and Hair in India, and in Spreads in Europe. We continue to monitor the price positioning of our product offerings carefully, making adjustments where we believe it is necessary.

Turning to Chart 5, I would now like to run quickly through our business priorities for 2005 starting with D&E markets. Our D&E markets, which contribute around 35% of our sales, grew by over 10% in Q2, with a strong contribution from almost every major market across Latin America, Asia, Africa and Central and Eastern Europe.

So far this year, these markets have delivered almost €650m in incremental turnover and as such, are once again a key engine of growth for Unilever. The key to unlocking the potential of our D&E businesses has been better innovation targeting the vitality needs of local consumers, as well as leveraging our distribution reach in both the modern and traditional trade.

Our Omo Laundry brand has performed particularly well across our D&E world, through a combination of great innovation and excellent brand activation. In Turkey, where 10% of households have babies and nearly half of young mothers wash their baby’s clothes separately, we have launched Omo Baby, an effective but hypoallergenic product designed specifically for this purpose.

In Brazil, a high profile campaign around the theme of ‘No Dirt, No Sport’ endorsed by the football star, Ronaldinho, has engaged the Brazilian consumer’s passion for football. In Thailand, the ‘Dirt is Good’ concept is proving effective in yet another corner of the World. Marketing initiatives such as these helped drive Omo growth in Q2 well into the mid-teens.

There are plenty of other exciting initiatives that are driving growth in our big brands in D&E markets. For example, ‘Knorr Cubitos’ affordable bouillons have proved successful in Latin America and are being rolled out into parts of Africa. Green leaf teas and milk teas are helping Lipton to grow in markets such as Turkey, Arabia and China.

Turning now to our second business priority, Personal Care, as detailed in Chart 6. With over 50% of our Personal Care business in D&E markets, our strong performance there is obviously a major contributor to the 5.6% underlying sales growth we achieved in Personal Care in Q2.

In developed markets, a good performance in North American Personal Care, and a discernible improvement in Japan were offset by the weakness in Europe. I will talk more about Europe, but let me first say a few words about Personal Care in the U.S. where we recorded high single-digit sales growth in the quarter.

We have gained share both year-on-year and versus exit 2004, thanks to a strong but focused innovation program behind brands such as Dove, Vaseline and Axe. In Hair Care, where we are working hard to strengthen the Suave brand, we have stabilized market shares since the beginning of the year.

Dove cool moisturizing is an excellent example of how to bring real news to consumers and therefore growth to the core of our business. A new soap bar and body wash that combines new sensory properties with the moisturizing benefits of Dove is recruiting new consumers to the brand and helping to drive double-digit growth for the Dove brand in North America.

In Japan, we have seen our market shares in the hair category improve in recent months, in response to the innovation and brand activation we have put behind Lux Super Rich and Dove. The battle is a long way from being won, but this, together with the outstanding performance of Lipton, has brought Japan back to growth in the quarter.

Turning to Chart 7, Europe, our markets in Europe have grown in aggregate by less than 1% so far in 2005, which remains well below historic rates. We are no longer losing share in Europe, but neither have we regained the share we lost during 2004.

These 2 factors help to put our Q2 underlying sales decline of 0.6% into perspective. It represents modest progress over the 2% like-for-like decline that we saw in Q1, but we are still lagging the market as a consequence of the share we lost during 2004. Clearly, we have more work to do to.

Looking in more detail, Ice Cream was an important contributor to the better sales performance in Q2. With the seasonal weather in Q2 2005 only slightly better than 2004, a large part of this growth is attributable to market share gain, driven by successful innovations such as ‘Magnum 5 Senses.’

Elsewhere, sales are flat to slightly down in Spreads & Cooking Products, in Savory and Dressings and in Beverages after a strong first quarter. Our shares in these categories are broadly stable and, on balance we are satisfied that we are making steady progress in what are difficult markets.

On the other hand, our performances in Home and Personal Care and in Frozen Foods remain disappointing. In Frozen Foods, we have maintained share in those segments of the category where we are present, which give us some encouragement that our work to rebuild our brand equity is having some effect.

However, in the current market environment, consumers continue to shift towards the commodity end of the category where we are not represented, and our market segments continue to decline.

Turning to HPC, our sales are heavily impacted by the shares we lost during 2004 and in the first quarter of this year. We are improving the quality and quantity of our innovation, and our Go to Market activities, especially in key markets such as the U.K. and France.

For example, the Skip brand in France has been gaining share since the beginning of the year in response to the ‘Dirt is Good’ activation, and recent share readings suggest that Persil in the U.K. is benefiting from a similar program.

Meanwhile, the launch of Sunsilk Styling in ten European countries has helped the Sunsilk brand to grow by nearly 20% so far this year. These products are uniquely positioned to offer women accessibly priced styling products that solve their daily hair battles, whether it is to be, flat hair, hairstyles that don’t hold, or hair that is prone to kinks or frizz.

As a result of these and other market initiatives, our European HPC market shares have started to turn up, but we still have a long way to go before we are back on track. Whether to build on strength in D&E and Personal Care, or regain momentum in Europe, we need to generate the money required to strengthen our competitiveness.

This leads into our third business priority in Chart 8, under the heading ‘Funding Growth’. Our savings programs are essential for ensuring that we can sustainably gear up our competitiveness across the portfolio.

Our global procurement program has been well established for a number of years and continues to generate significant quarter-on-quarter savings of just under €100m per quarter. Our One Unilever program, which was announced back in July last year has been reinforced by the new executive organization and is progressing well.

To recap, the purpose of this program was to implement a simple common design for our operations across Foods and HPC in each of our countries. This will allow us to more effectively leverage Unilever’s scale within individual markets, by ensuring a common face to key customers and suppliers, by simplifying systems and processes and by speeding up decision making.

It also gives us significant cost benefits, through a de-layered management organization and functional excellence and shared services in our business support activities.

To give you a few examples of One Unilever initiatives, first, in moving to a single Foods/HPC organization. In a number of countries across the world, such as Germany, China, and Brazil, we have announced moves to a single operating company, bringing together the Foods and HPC business units to share resources for support services such as Marketing Services, Finance, HR and IT.

In the U.S., we have created a unified Foods and HPC ‘Go to Market’ organization that will drive our business with our key customers. Second, in leveraging Unilever’s scale more effectively.

Across Europe, our media planning and buying operations are now being handled by a single agency, giving us a deeper strategic relationship in a vitally important area of the business, as well as significant cost savings that flow directly back into our media budgets.

Also in Europe, we are consolidating our regional supply chain management into a single organization that will manage our sourcing activities from procurement through to primary distribution.

In Latin America, we have set up two financial shared services centers, one in Sao Paulo and 1 in Santiago. These are designed to handle the transactional activities of the entirety of our €4b business in the region and are already servicing Brazil and many of the Spanish speaking countries. In the U.S. and Canada, we have gone 1 stage further and recently completed the outsourcing of our accounting operations to IBM.

We had previously indicated that ‘One Unilever’ the project would yield savings of around €700m per annum by the end of 2006. We remain confident that this will be delivered in full. Furthermore, we are identifying projects that go beyond our original plans, and that will ensure that savings continue to flow beyond 2006.

So turning to Chart 9, looking now at the first half of 2005, savings have been instrumental in helping us protect operating margin, while absorbing the considerable headwind caused by higher input costs and our increased investment in competitiveness.

Operating margin in the 1st half year is 1.4 percentage points below prior year at 13.7%. This includes a further €353m write-down of the carrying value of Slim*Fast taken in Q2. We are obviously disappointed that we have had to take an additional charge for Slim*Fast after the €791m charge already taken.

The reason for this additional charge is that the meal replacement category in the U.S. has continued to decline, and at a faster rate than we anticipated. Year-on-year sales in this category are down by around 25%. Although our market share is increasing again, the sales base from which we project future growth is now considerably lower than we previously assumed.

Under IFRS, we are required to reflect this in a lower valuation of Slim*Fast’s intangible assets. We remain committed to restoring Slim*Fast to growth. We have taken further steps to reduce the cost base of the business by moving Slim*Fast operations from Florida to our U.S. Foods headquarters in New Jersey.

We also continue to bring news to consumers through innovations such as high protein bars and shakes. We are confident that the business can create value going forward.

Looking at the other key drivers of operating margin, restructuring during the first half is running around 60 basis points below the same period last year, while profit on disposals are about 20 basis points higher. Price growth is flat and therefore has little impact on margin development.

The benefits of our savings programs and improved mix largely offset the impact of increased input costs, and increased A&P investment. A&P investment is up again in the second quarter, both in absolute spend and as a percentage of sales.

So far this year, our underlying profitability has remained pretty robust, in spite of increased input costs and our determination to sustain a higher level of market competitiveness.

Turning now to Chart 10, we can see how our operating performance translates into other key financial indicators. Earnings per share on our total operations declined by 29% in the quarter and by 6% in the first half. The Slim*Fast charge reduced EPS by 22% and 12% respectively.

The tax rate in the quarter was 30%, bringing the rate at the half year to 27%. Our net debt at the end of the quarter was €11.5b, €0.3b above the level at the start of the year and reflecting a €1.3b adverse movement due to the effect of currency movements, partly offset by the conversion of the NV preference shares in the first quarter.

Net cash flow from operating activities in the 1st half was €1.4b. This is €0.6b down on last year, mainly due to the particularly low level of working capital that was achieved at the year-end, combined with higher tax payments in the first half of 2005 compared with 2004.

Capital expenditure remains under tight control, and our trading working capital efficiency continues to improve year-on-year. The capacity of our business to generate cash remains strong. Because of this, we will be able to continue with our plans to buy in NV shares to replenish our ESOP hedges, and then commence our buy-back program of up to €500m in 2005. Up to the end of July, we have purchased 8.1m NV shares at a total outlay of €435m.

That completes what I wanted to say about our results for Q2 and the half-year. Looking forward, as we have said before, we do not intend to give specific annual top and bottom line guidance. However, in Chart 11, I set out some of our assumptions for the second half of 2005.

First, we are not expecting any significant change in the business environment over the next 6 months. Cost pressures will continue, and opportunities to pass these on through price increases are likely to remain limited.

Second, we remain committed to restoring our top-line growth, and will therefore continue to invest appropriately in our market competitiveness. I would also like to remind you that we will have 6 fewer days in our reporting calendar in the fourth quarter, which will impact on our reported sales growth.

Third, we are confident that our savings program will continue to make a major contribution in the second half, helping to limit the impact of cost pressures and our additional marketing investment.

Fourth, we expect higher restructuring costs in the second half, although given the gains that we have generated on disposals, we now expect net restructuring to be at the lower end of the 50 to 100 basis points range for the full year. And finally, as we said following our Q1 results, we expect the tax rate for the full year to be slightly below our long-term expectation of 30%.

In summary, turning to Chart 12 and to reiterate Patrick’s opening remarks, we are confident that the changes we have made in order to raise our competitiveness in the marketplace are starting to show through.

We are pleased to be able to share with you some real evidence of progress on the road to recovery. However, we do need to keep things in perspective. Our new organization is barely 4 months old, and there are still important parts of the business where we have much work to do to restore performance to acceptable levels.

So progress, but much more to do, and far too early to confirm that we have returned to the kind of growth that you know this business can and should deliver. And with that, Patrick, John and I would now be happy to take your questions.

[OPERATOR INSTRUCTIONS]. And our first question is from John McMillan of Prudential. Please go ahead.

Good morning.

Good morning John.

Congratulations and the numbers were worth getting up for in the U.S. Just in terms of any specifics you can give to the A&P number being up and as a percentage of sales, I know it’s a sensitive issue but can you give any color to that, Rudy?

Oh, John, Patrick here. Let me answer the question not with percentages but try to give you as much color as I can on A&P. The first comment is that in every quarter in the past 3 quarters we have increased our A&P spend in absolute terms as well as in percentage of sales.

Furthermore, the increase in A&P has been more in A than in P. It’s clear that we have not spent as much as the market was expecting that we would spend on the basis of the fourth quarter 2004. I would like to add that we have spent this additional money very selectively and behind our business priority, so you’ll certainly find us spending more money behind Personal Care, behind building and maintaining strengths in D&E, for example, other than in Ice Cream.

I’d like also to add that we are aiming at a more consistent pattern of spending in A&P so avoid to have very significant increases in 1 quarter in the absence of any huge innovation in a big geography, for example. So consistency, priorities, every quarter increase more A than P and the money behind our priority, and that’s as much as I would like to say on this subject.

And just as a quick follow-up, is that the only business segment that was a little disappointing and had negative growth trends were Spreads and Cooking Products? And I just wondered if you could go into a little more detail in terms of the problems in that area?

Well, I would start by maybe a surprise, looking at the numbers in the second quarter, but we had a very good first quarter in Spreads and enjoyed quite a lot of growth, and you know that a couple of factors such as timing of Easter and the like which influenced it. But first quarter was very good. Second quarter was a bit weaker in family brands, part of Spreads. We continue to do pretty well in our Health segment.

But I wanted to point out to development, specifically in the U.S. is the way we have leveraged some of our brands and carefully extending them in adjacent categories. In the U.S. very specifically we’ve launched the brand name “Country Cork” a series of chilled products which are meeting with huge consumer success.

If I look at the performance of the brands in Spreads, much better than other category developments such as. I don’t think we have anything fundamental there. I’m confident that we will recover in the second part of the year. We come in with full innovation as you heard in Flora, and Healthcare, so it is not on my watch-list agenda for the time being, John.

Okay. Well, congratulations. Thank you.

Thank you. Your next question comes from Mr. Julian Hardwick of ABN Amro. Please go ahead.

Morning gentlemen. On your outlook statement you refer to input costs and investment behind your brands increasing pressure on margins in the second half, and my reading of that is that both input cost pressure and marketing spend will be higher in the second half than in the first half. Is that a correct interpretation and could you put a bit of color around what is happening, particularly on the input costs side of things?

Julian, I’ll take that 1, it’s Rudy here. We’ve said in the first half we’ve had a significant increase in commodity costs going for the first half year, and we don’t expect the outlook to improve in the second. In fact, if we look at oil prices, if anything, it could get worse.

Secondly, as Patrick has outlined, as part of our core strategy to restore top-line growth, investment behind our brands and in our market places has top priority. So these 2 are putting pressure on our margins and as we go through the year.

The external environment, we don’t expect to change much, so the assumptions that we’ve made for the rest of the year are those that we’ve outlined in our outlook statement and that I just summarized for you.

Right. Net net, do you expect input costs to be higher in this second –- the increase in input costs to be higher in the second half than in the first half?

I said, Julian, that we’ve had an increase, particularly in the costs of oil based commodities, so mineral oil based commodities and packaging. Not all of that has flowed through into our input costs. This is an ongoing thing. I don’t know where the oil price will finally end up and what pressure we will ultimately have to bear as we go through this year.

I indicated we’ve had a little more relief on edible oil prices, so the soft oils, and again, these take time to work through, so we are extremely cautious in terms of the scale and impact of the pressure of input costs on our margins going forward, and we recognize the need to continue to support our brands adequately and competitively – that’s probably the right word – and as we go through the second half.

Okay, and could you –- you gave us a number for procurement savings in the first half. Could you give us a figure for the overall cost savings in the first half?

We have indicated specifically the procurement cost savings as part of the ongoing program that we’ve had that has underpinned our performance through the year as a path to growth, and basically continuing at that level. We said when we launched the program of One Unilever that the specific cost savings for that, which feature partly, of course, in gross margin, partly in our indirects, would come progressively as we went through the period and that presumption still maintains.

We’ve talked also in the balance of restructuring and disposals in the first half of the year and I don’t think I’ve anything really to add in terms of color beyond that, Julian.

Okay, and just finally, you mentioned that the weather was only a small benefit here in Europe, quarter-on-quarter. Can you give us a sense for what it contributed to, to your sales?

Julian I think first, the headline in the newspaper concerning the weather and ice cream will be that Unilever has increased share in ice cream in Quarter 2 because this is what happened. There was certainly a contribution of the weather.

I think the weather index is a couple of percentage better but nothing really that dramatically in this quarter influenced the Ice Cream performance. I take pride in the fact that the volume in Ice Cream which has been strong has really benefited from increasing market share, riding on good innovation.

Okay, thanks a lot.

Thank you very much.

Thank you, your next question comes from Mr. Andrew Smith of Citigroup. Please go ahead.

Yes, good morning. I’ve got 2 questions. Can you give us any guidance on gross margin development in the first half, and specifically the magnitude of the cost savings in positive mix, just to get a handle on the moving parts there?

And secondly, Patrick, could you comment please on your innovation pipeline in the second half of the year versus the first half? I think you indicated that you expect to see a consistency in the A&P to sales ratio looking forward. Will it be of the same sort of level in the second half as in the first half?

I think first on innovation, we have indeed improved the quantity and the quality of our innovation flow and I see that sustained throughout the year. I think we are in good shape. It really depends on the category, but by and large, I think many of you have noted that there was a bit more activity there and we believe indeed that it has been materially up in the first half and that will continue in the second part. We’ve balanced very much this program.

The other thing that I would like to say is both Food and HPC. We’ve improved and I see there the benefit of the new structure. We have a smaller number of innovations because we have cleaned the portfolio, but we have bigger innovations, and more importantly, we roll them out somewhat faster than -– a little bit faster than we used to do in the past and [throw up what is] blood pressure is a good example.

The other comment is that we have a better balance of innovation. If you look at what we’ve done since the beginning of the year, there’s as much in the core of our brand, which had been really neglected in the past, and a more selective approach in innovation in adjacent categories and new product forms. So that is going to continue.

As to the percentage, first you probably know my view that I don’t think that the percentage A&P in terms of sales is a good indicator, simply because of the diversity of the category and the geography, difference in competitive intensity. What I wanted to say with a comment earlier is that there should be much less variation going forward in our A&P rate because we believe that it is appropriate to improve the A&P lesser investment, but do that very consistently.

We used to have in the past a big quarter and low quarter. In fact, we’re looking for a more regular investment behind our brand. So you should see less variation in the percentage from quarter to quarter. That is what I wanted to say. As to the first question, Rudy?

Yes, you were asking, Andy, about gross margin. You know that when we reviewed path to growth we came to the conclusion that we were overloading the market with detailed focus on individual elements of our performance and P&L.

And therefore we gave no specific guidance or comment on the individual elements, and Patrick has just dealt with A&P. What we have given, and I laid that out in the call just a little earlier, is the key drivers of the underlying performance for this year by taking out the impact of Slim*Fast, by commenting on the difference in the first half year between profits on disposals this year and last and doing the same for restructuring costs.

And that gives you an underlying development of operating margin if you’d make those deductions that I’ve just described of around 40 basis points for the half year. And beyond that, Andy, as you’ll understand, I don’t want to go.

Just 1 final question if I may. Could you break down for me the developments of like-for-like sales growth in Laundry versus other Household for the quarter and the half year? You’ve obviously had a pick-up in the overall growth rate of Laundry.

Andy, without going into the details, I think you will see that the Homecare growth rate was good and both parts are contributing. We had a strong quarter on Laundry but Household was no problem.

Thanks a lot, John, thank you.

Thank you. Your next question comes from Mr. John Parker of Deutsche Bank. Please go ahead.

Yes, good morning. I think you’re saying 35% of the business is in the emerging markets, and that was up by more than 10% in the second quarter. So implicitly adding 3.5% or a bit more to growth of Unilever which you are giving us a total growth figure of 3.3%, so I don’t know whether this is right, but I would deduce from that that the developed world business, in aggregate, saw negative growth.

You’ve given us what Europe was, and clearly that was negative, but I think it would be helpful if you could just comment on the other developed markets, obviously pre-eminently North America and perhaps if Japan or elsewhere were relevant as well. Have those overall, Japan and North America been very stagnant or can you give us some indication of what’s been going on there?

Sure, John. I commented on Japan specifically in the speech, when I said we were stabilizing and have seen some improvement in our Hair shares and we’ve seen a return to growth. Australia, I should just point out, is also 1 of the Asia Pacific countries which doesn’t feature in our definition of developing worlds, and that’s certainly disappointed us this year.

The U.S. performance, on balance, has been solid. Clearly you have to include in that the impact of the poor sales on Slim*Fast which led to the impairment charge that we’ve taken, but on balance, we’ve had a solid performance in the U.S. in this quarter.

Okay, and may I have a second question? Just going back to your outlook statement where you say that input costs and investment behind the brands will increase the pressure on margins, are there any counter-veiling factors we should take into consideration here? I’m thinking particularly whether your paybacks from the One Unilever restructuring program?

I assume they would be getting bigger as the program goes on. Would that be a reasonable assumption that those paybacks will be greater in the second half than in the first half?

Yes, you’re quite right, John. We do expect to see, as I indicated, a progressive impact of the One Unilever savings. The other thing to, of course, factor in is we do expect to see continuation of our restructuring cost budget, so you need to recognize that both of those will happen as we go through the remainder of this year. And I did give a guidance for the full year of somewhere at the lower end of our range of 50 to 100 basis points.

Thank you.

Thank you, your next question comes from Mr. Andrew Wood of Bernstein.

Yes, good morning. I’ve got a question on the emerging markets. It’s slightly following up from John’s question. Clearly 10% organic growth is pretty impressive. I was just wondering if you could give us any insight as to what proportion of that was due to the markets and what proportion was due to your own performances in the market?

Secondly, I was wondering if you could give us any guidance as to whether that was broad-based or it was specifically 1 region or the other? And thirdly, I was wondering if you could tell us if you have seen any reduction in competitor activity and competitive pressure in those markets? Thanks very much.

Andrew, first, indeed we had a very good performance in D&E in Quarter 2. I happen to say that in the first quarter we’re also up something like 7%, I believe in D&E. Additional color, first it is mainly volume driven. That’s very good news, less than 2% coming from price, and it’s also both Food and HPC. Food grew around 8% and HPC around 12%.

It is broad-based also in terms of geographies and I thought about the way I could picture that. If you look at the 15 biggest countries in D&E, for these countries, the average growth is about 12% and every 1 of these 15 countries grew at least by 7% and 11 out of the 15 grew double digit. We in some of these markets, and some of the most competitive markets, I think we have improved share. That’s the case for Japan. That’s the case for India, also in places like Turkey.

And the margins were good too, so it has not been unprofitable growth, quite the contrary. We are close now to the average of the Group in terms of margin. So it has been good. The market has been better, but within that, I think we have been able to deliver good performance.

And we had 1 more point which is in some of this area, we have been able to price even, especially in Laundry, in the light of development of costs, which means that our margins are well positioned going forward to benefit from this growth. So broad-based any way you look at it, and good market also improvement in shares.

And competitive activity?

I think there is no let go of competitive activity. We have improved very much in Laundry, and take the 2 big markets, India and China. India, I think we’ve made very good progress in Laundry. Our share in Haircare has also improved, but it’s not yet at the place where I would like to see it. We’re very active with the launch of many of our properties in the haircare environment.

In Japan, Dove is doing well. Lux Super Rich has been stabilizing pretty well too, so in both places we are in good shape, but the environment remains very competitive in the months to come, the rate growth competition.

Okay, thanks very much.

Thank you.

Thank you. Your next question comes from Mr. Michael Steib with Morgan Stanley. Please go ahead.

Good morning, I have 2 questions, 1 relates to the organizational changes. Patrick, you referred several times to the fact that the organization is now only about 4 months old and that you’ve made a number of changes already. Could you give us an update as to where you stand and what changes are still coming in the next couple of quarters please?

And then my second question relates to pricing. Overall pricing has been, I guess zero flat. It’s been down in the EU, in Europe, actually. Is that a trend that you expect to continue in the second half this year?

I will do the first question and Rudy will answer on the pricing. On the organization, we have indeed moved very fast. We’ve appointed within 1 month, basically, the new top leadership of the business. We also are dedicating the organization 1 side on the category. That’s the side driving the brand development, so brand mixes.

And the other side is improvement in Go To Market where we believe we have some way to go before being best practice. We’ve allocated the resources in both areas, also simplified the organization. I spoke earlier about a 15% reduction in top level. We’re aiming at much more aggressive numbers as we go through the organization, and we’re preparing the next wave of simplification.

We see some of the benefit. That’s what I wanted to say. There are developments, for instance in the U.S. We move with the [high-tails] larger in a mix which is very close to the worldwide mix. We see speed in simplifying our portfolio for innovation and consolidating around the fewer but bigger number of innovations, and we at the same time are improving the quality of the people. We made quite a number of changes in the marketing areas and also we see the benefit of brand development organization which are now a global remit with the power to craft first class mixes.

On the Go To Market, the second part of the organization, I think the task is a bit more complicated. In development, brand development, the task was to do everywhere what we do well in many places. In Go To Market, we need to improve our competitiveness.

And the way we have chosen to do that is rather than having a global program of improving capability, we are very, very selective as to the places where we want to improve capability. We take the big ticket item which currently for us is Europe, where we have selected 3 or 4 countries and you’ll be surprised to see France or Germany are among them, where we want to make a strict change in our Go To Market capabilities.

Everywhere else, we’re trying to leverage scale with One Unilever. We’ve announced in the U.S. we moved to 1 organization and 1 sales force. This is welcomed by the trade and is going to yield us considerable benefit. We’ve made such announcements in Germany. We’ve done it in the Netherlands, and many examples in the world now where we move to 1 organization, leveling the synergies.

And last but not least, we’re making very good progress in our outsourcing program, trying to get more consolidation in outsourcing transactional process in HR, in finance, and last but not least, we are looking at a more European supply chain and that will bring with it some good operational benefits. So a lot of progress on this stage, and I’m confident that we’re on the right track there.

And you’re not worried that you’re perhaps changing too much too quickly?

Well, you know, [indiscernible] was the best food. The best 2 years that we have in terms of growth were the 2 first years when we were in the middle of integration because we went at it in a very disciplined way. We have a risk management program. We’re working with the Unilever Executives every month the progress of the integration. We look at the risk level we need. We look at where value can be threatened. We have put in place a new team very rapidly, and these are good people, so we try to balance at a time which is a [big office] certainly, but that’s what you want us to do.

Michael, on pricing, let me first just give a bit of color across the geography. You’ve seen we’ve price declined in Europe, almost a percent, in America, flat, and an increase in Asia/Africa.

So the 2 different trends that we are dealing with here, 1 is competitiveness and here in a number of cases we’ve taken action ourselves to correct, if we felt it’s out of line, the value or proposition of our brands and that particularly would apply in Europe to things like Laundry where we have adjusted pricing in a number of markets, in Ice Cream where we’ve come with products at the lower end of the range to help combat or offset the value concerns of consumers, some in Frozen Foods, a little bit in Hair in the U.S. and in Spreads.

On the other hand, we have, as I’ve outlined, significant cost pressure and there are a number of markets where we are able to recover this costs pressure through price increases and that’s where we have strong market positions. So you see, not untypically, in some of our strong D&E markets, but particularly Laundry which is 1 of the big categories there, we have been able to achieve price increases in the market because we lead the market, and you’ve seen a price increase overall of, I think, 1% in Asia/Africa and that’s pretty typical for the sort of progress that we can make.

Okay, thank you very much.

Thank you. Your next question comes from Miss Deborah Aitken of WestLB. Please go ahead.

Hi, 2 longer-term questions. Regarding your Developing and Emerging markets, where do you really think the margins can go, longer-term if you’re commenting that they’re moving towards the Group average right now? And then secondly, if you could maybe give some numbers behind your comments on the extension of your saving plans?

Well, I’m going to do the first question with your second 1. Our D&E margins are very close to the Unilever margin, and in some cases they are very, very healthy and I won’t mention very specific regions or countries but we have places where the margins are indeed above the Unilever level and there other places – India would be a good example, because of the affordability or the need to be competitive, there will be a tick below.

I think the key words in our margin development are that we want to stay relevant for a variety of consumers. We want to have a product at the bottom of the pyramid as well as products and brands at the top of the pyramid. So you’re going to see us, in fact, try to get better margins more by playing the mix rather than by widening the margin and we intend to pass the productivity improvements in part of our portfolio back to the consumers.

Just on the question of the extension of our savings program, Patrick has put as 1 of our priorities ensuring that we continue to search for ways of providing the additional funds for the growth that we need. So continuously we’re surveying all our operations looking for further opportunities for cost savings.

You’ll have noticed that we’ve also said that we expect to continue, also going forward with restructuring to the tune of between 50 and 100 basis points, and you can be assured that that money is spent on projects which give good returns and good paybacks in line with the history and the track record that we’ve demonstrated over the last number of years.

Okay, and maybe just a final question actually on disposals. Looking through the business and the amount of disposal that you still have coming through the business at the Q2 stage, could you just talk about how much disposal of current business you see going forward through this year and through 2006?

No, of course, I’m not going to talk about disposals going forward. The only thing that I would like to do is take the example of UCI, just to give a bit of color to what we are doing. First, I’m very strongly of the view that you don’t dispose simply of the problem to [see] this appearing from the bad news. We have a responsibility to shareholders which is to try to deliver maximum value and aim to fix these businesses.

If they don’t have space in our portfolio going forward, or if we believe that other people will be sharing more value, then we make the move, at the right time and the right price. I think the debate we have had on UCI is very relevant to this discussion. We have had to explain for the past couple of years that why is it we were keeping UCI in our portfolio?

We were very always clear that it may not be part of our future but also very clear that our number 1 priority was to fix this business and when the time would have come, to extract maximum value. And this is what we did.

So, going forward, we will continue to monitor the value creation of the businesses in the portfolio. We will work very hard to improve them because that is where the maximum value for the shareholders. But if there is at a certain moment and for the right price and opportunity to improve the [credit] portfolio we will take it. And that’s where we’d like to start on that.

Okay. Thank you.

Thank you. The next question comes from Mr. [Jerard Reich] of ING. Please go ahead.

Yes. Good morning. 2 questions. 1 question is on book profit. Book profit Europe in the second quarter I can read from page 3. Can you give a guidance how much that was? And also in which category EBIT it came down?

Secondly, between the lines, 1 of your answers on the outlook for the second half operating margin pressure, could I read between the line that the contract renewals in the middle of the year or hedge positions in the middle of the year means that some of the input contracts will be on -- concerning price will be on a higher level.

Well, I can only paraphrase what Rudy said. We don’t expect that we will be operating in an easier environment when it comes to commodity cost. Indeed, we saw in the second quarter an acceleration of the increase in input cost.

So far, we have been successful in mitigating this impact and the impact of increased marketing spending, mainly thanks to a better mix but also, and more importantly, improved competitiveness.

Going forward, we continue to see price increase -- cost increase, sorry, especially because we don’t see improvement in the overall commodity cost picture. We try to take price increase as and when it is competitively possible and acceptable to our consumers. But our main area of focus will be to improve our competitiveness, not [unequal to] the existing program. But, more importantly, driving ‘One Unilever’ and other programs even further and faster in order to deliver savings.

So they will be the combination of all that which, at the end, will impact our margins.

Just to let you understand, we don’t have long hedges on commodity cost. We tend to trend a little bit behind. So we have a few months’ cover. The oil price has been rising -- the mineral oil price. And that will take a few months to work through. Your guess is as good as ours what happens over the next few months to the oil price. But we are still working that through.

I think that’s the pressure more than that there’s large 1-year or 2-year hedges that are unwinding or anything like that.

Okay.

And third, you had a comment on, just which I’ve interpreted as disposal profits in Europe for the first half of the year, that’s the way I’ve taken it.

No, second quarter.

Only in Q2. I’m not going to comment on individual ones. But you will have seen that the announcement that we have disposed of our frozen feed pizza business in Austria, for example. That means that comes into the Ice Cream and Frozen Foods category, as 1 example.

And the second one, I think we disposed also in Q2 of our [Dextro] business in Germany. That fits into our Health & Wellness brand. So I give those as 2 examples. The rest then gets into too small a detail.

Okay. Thank you.

Thank you. Our next question comes from Miss [Selene Panuti] of JP Morgan. Please go ahead.

Yes, good morning. Just 2 questions. The first 1 is to come back on the pricing situation. You say that you took price increases related to cost pressures in some D&E markets. Could you see possibility in the second half, or into 2006, to do the same in some developing -- developed, sorry, economies? I think I remember you already took some pricing increase in the Laundry segment in the U.S. Could you comment on that?

The parallel to that same question is on competitiveness. Your value proposition in some of the western European markets when you saw price deflation, should we expect this to have bottomed and that will have flattening of pricing in the second half in that region?

And my second question is concerning the Real Beauty campaign. I thought that was 1 of the highlights of your -- or 1 of the main launches you did in Q2. I have not heard you speaking about it. Could you comment on that please? Thank you.

Well, the Real Beauty question is -- we are talking so much about Dove. But let me reassure you that this beauty campaign has met with extraordinary support that translates, by the way, in improved sales. And in a very, very good image for Dove. In the second quarter Dove had double-digit growth. So it is doing pretty well and we are very proud of it. So we don’t talk about it. We always talk about Dove. But it’s working very well.

As to the pricing, I can only make a general answer is that we are very careful, especially in Europe, as to the competitive and trading environment with the competitors and the retailer when it comes to pricing. Yes, we have cost pressure. But our number 1 priority is to ensure that our brand and product remains very competitive on the marketplace.

And if I would go through the categories on the geography, which I am not going to do, you will see that they are very, very different pictures in terms of pricing. In the areas where we feel the battle is very competitive, and we need to be also competitive on price, you see us bringing down the price very effectively.

In other areas where we are leading, where we have good market share, where we have good momentum and we believe that we have the innovation and the brand to enable a price increase, we are taking this price increase. So we have a very, very different picture within Personal Care and within Laundry, by geography and by category.

It remains that the European environment will continue to be Western Europe specifically, much more challenging when it comes to price. And I don’t expect dramatic changes in this environment and in the pricing environment here.

Alright. Thank you.

Thank you. Your next question comes from Miss Victoria Buxton of Lehman Brothers. Please go ahead.

Good morning gentlemen. In Patrick’s speech you mentioned that there had been a step up in store activity as well as the increase in marketing investment. Is that what we used to call trade promotion and rebate and is it possible to quantify that at all?

And my second question is going back to Laundry. Obviously we have heard commentary from your competitors that they are finding it difficult to take price increases in Laundry, specifically in developed markets. If you’re all finding it difficult I think the consumer understands the input cost pressures, is it the retailers effectively refusing to let you take the price increases or is it the consumer effectively trading down and perceiving it as an inherently commoditized category? What’s really stopping you take pricing in European Laundry?

Well, the first -- I can answer the second question first. The European environment, as a whole, is difficult in terms of pricing. As to the very specific Laundry category, yes, indeed, it has been -- it has been a difficult category for price increase, despite the fact -- in Europe here, despite the fact that this is a category which has been effected probably more than others by increasing commodity prices.

It is a mix of all that what you said. It is competitive manufacturers. But it is also the retailer. And it is also visibility of all brands and hard discounter. This is the environment in which we operate. There are quite significant price differences between these brands, being a distributor of the brand or manufacturer of the brand. And we have to continue to watch price gaps between the different competitors.

I’m just going to give you an example, just to make clear the sort of environment in which we are operating. I’m going to take it in Haircare, just not talking about Laundry. If you were to exchange with a supermarket in France you would probably see the first entry price in Haircare products at about €1 for a 250 milliliter bottle. You will have a second price point about €1.20. And you will find the brand -- the best brand, of course, I put Dove there, around €2.83 for 250 milliliter.

Now, we see that substitution in many markets. These are considerable price differences. And you need to have a very solid and strong brand in order to justify these price gaps. And that’s the marketing, innovation, communication job. And we are very careful that these price differences remain within, let’s says, bands that we can justify.

So it’s the retailer, the competitor, the distributor, you name it, the difficult price environment.

As to store activity, no, it’s not simply a new name for temporary price reduction [on Health]. What is absolutely true and I see it’s not simply for Unilever, but from everybody else in different form, from how important it is to win on the -- at the point of sale, which would be our language and the other talk about the moment of truth.

What is true is that in the retail environment it’s extraordinarily important to present your brand to the consumer in a dynamic way. It is also [of feeling] the product on the shelf. It’s not about [indiscernible]. It’s about activity. And activity can take any form, indeed, as you mentioned, from price promotion. But there are other forms of activation on the marketplace. So it is this overall increase of activity at store level which we understand as the in-store activity.

Now, without putting numbers, I would comment that there is probably more in Europe than there would be in the U.S. or in the rest of the world currently because Europe is currently 1 of the most competitive environments we are operating in.

Does all of the cost of this activity come off grey sales as obviously trade promotion rebate does?

Yes. Yes, they do. That goes for margin and, of course, if there will be too much of it you will see that in adverse development of our margin, which has not been the case, of course, in this quarter. In fact, since the beginning of the year for us.

And just quickly going back to Laundry. Obviously you highlight the price differential between branded and private label. Does this mean effectively going forward that you basically won’t be able to get pricing as a higher value-added brand of manufacturer because the consumers perceiving the value added simply isn’t worth the price gap and therefore there’s pretty consistent downward pressure on pricing going forward?

I wouldn’t say that. It’s all about -- it’s not about pricing, it’s about value accretion. It’s about us presenting our consumer with propositions which are relevant and add value or simplify their lives.

If I look at the performance of our home care business as a whole in this quarter, we have had good growth in excess of 4%. And pricing has been slightly up. Now, it’s different by geography. But what it tells us is that overall our home care proposition has been well received this quarter by the consumer. We will take price increase as and when we have the opportunity. That’s the bottom line.

Ladies and gentlemen, I think we’re going to run out of time. I’ll take 1 more question and then, of course, we’re always open on the phone afterwards for any further questions. So if we could take the last question.

Thank you. The last question comes from Mr. Tim Potter of Goldman Sachs. Please go ahead.

Good morning. A question, if I may, to revisit the restructuring issue. Could you just remind me what the definition is? And does the restructuring that you have included to date contain profit on disposals?

Shall I take that, Tim. The answer is that we have, I think, shown in the announcement what our restructuring is and what we have done on disposals. We net the 2 off and we are talking about gross restructuring which is the additional restructuring taken in the period. And any disposals that have come in the period are netted off from that in the net when we talk about the 50 to 100 basis points. But not obviously something of the order of UCI which would swamp all the numbers. We’re talking about ongoing, normal restructuring and ongoing small disposals.

Thank you. And how will you treat the assets held for sale?

How will we treat the assets held for sale? We will report next quarter the UCI profit as a profit. And we will explain what that is.

In the second quarter, or the half-year balance sheet there’s 373m of assets held for sale.

Yes, that includes UCI.

That’s UCI?

By and large, yes, predominantly.

And another question, if I may, about the buyback. The amount expensed so far, Rudy, I think you said €465m to date. Does that include buyback or is it all ESOP?

This is ESOP.

So there’s none of the €500m buyback yet take place?

Not yet, no.

Okay. Thanks very much.

Thank you Tim.

Right. Just let me say a few words in conclusion. Encouraging quarter. I am partially pleased by the top line because that was our 1 priority, the quality of the top line. I am also pleased with the D&E which is 1 of our priorities. We have put a lot of effort in improving our competitiveness there. And also Personal Care. And that’s all under the chapter, or the heading, doing more of what we do -- we do well.

But, I have to say, neither myself nor my top team are under any illusion that there is still much work to do. And obviously, whilst I am pleased with the resilience of our business in the area which I have mentioned, I know that there is still a lot of work to do on the performance of Europe which, despite being improved compared with the first quarter and with more stable share, but that performance is not yet delivered where we want it. And it reminds us that in many places, in some places like Europe, certainly, we have not turned the corner.

So it’s an encouraging step on the journey but that’s a step only and I would not congratulate myself or the team at this stage for the performance. That’s what I would like to say in closing.

Thank you very much.

Thank you.

Thank you.

Okay. This conference has been recorded. Details of the replay number and access codes can be found on Unilever’s website. An audio archive webcast will also be available on Unilever’s website at www.unilever.com. Thank you very much.