聯合利華 (UL) 2007 Q3 法說會逐字稿

Ladies and gentlemen, welcome to Unilever's third quarter results 2007 conference call, hosted by Jim Lawrence, Chief Financial Officer, and John Rothenberg, Senior Vice President of Investor Relations, followed by a question-and-answer session. (OPERATOR INSTRUCTIONS). This conference is being recorded and will be available for a period of two weeks. Details of the replay numbers and access codes can be found on Unilever's website. A webcast and podcast of the teleconference will also be available on Unilever's website, www.unilever.com. We will now hand you over to Mr. Jim Lawrence.

Good morning, everyone. It is a great pleasure to be hosting my first quarterly results call as CFO of Unilever. I have now been working at Unilever for two months. What I have learned so far reconfirms the due diligence which I did before joining the Company. Now is a great time to be a part of the Unilever team. There's a lot of hard work still to be done. But there's great opportunity to contribute to a business that has already started to unlock its true potential.

Some of you who are listening today I have already met. Most of you, however, not yet. Over the next few weeks, I hope to meet many more of you. Our forthcoming investor event in India will provide one opportunity. And I will also be taking some additional days to meet shareholders later this month and into early December, just before we go into our next blackout.

I cannot promise universal coverage straightaway, but I do hope that by the end of the year that most of you will know me a little bit better. In any event, I look forward in the near future to meeting all of you in person.

Today I am joined by John Rothenberg and Charles Nichols of our IR team. I am sure you know each of them quite well.

As John will explain, our results in the third quarter are very much a continuation of the momentum established during the first half of 2007. Sustained organic top-line growth was at the upper end of our 3% to 5% range, delivered in a quality way. We're focused on our growth priorities and we're supported by stronger innovation, improved speed to market and better in-market execution.

This all results in the third consecutive quarter of underlying margin improvement despite a significantly tougher input cost environment. And we'll have more on that in a moment.

And these results are against the background of our accelerating change program, change in terms of organization simplification, supply chain restructuring and portfolio development.

With this brief introduction, I now turn it over to John. John?

Thanks, Jim, and good morning, everyone. As usual, I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures.

Our sales in the third quarter were EUR10.2b, which is 1.2% ahead of last year. This was after 0.9% impact from disposals and an adverse currency effect of 2.3%. The latter reflects the strengthening of our reporting currency, the euro, against a wide range of currencies. Many of these currency movements date back through 2006. If today's exchange rates were to remain unchanged, the full year currency impact would come down from the 3% year to date to around 2.5%.

Underlying sales growth in the third quarter was 4.5%. But for the previously announced systems implementation in the United States, which moved EUR70m of sales out of Q3 into Q2, underlying sales growth in the third quarter would have been 5.2%. This means that growth momentum across all three quarters in 2007 has been pretty steady, at just over 5%. Within this, there has been a steady increase in pricing, from around 1% in the first quarter to just over 2% in the third.

Turning to our growth performance by region. Underlying sales growth in Europe for the first nine months stands at just under 2%. The performance across Southern European markets and in Central and Eastern Europe remains strong, with Russia, in particular, continuing to grow in the high teens.

Performance in our main Northern European markets has been more varied, with some underlying improvement in France and Germany but continued weakness in the United Kingdom. Sales in the third quarter in these markets were especially impacted by a sharp decline in Ice Cream caused by poor weather across Northern Europe. This lowered underlying sales growth in the whole region by around 200 basis points in the quarter, to 0.7%.

Volumes in Europe are up by around 2.5% year to date, but pricing remains negative. We have raised prices in a number of categories, most notably in Spreads, Dressings and Savory, and we have more increases in the pipeline. However, at the same time, we have responded to a step-up in competitor promotional activity in a number of markets. This, together with substantially lower olive oil prices, has led to a small overall price reduction so far this year.

The Americas region grew by 4.2% year to date and 2.8% in the quarter, the latter impacted by the EUR70m of sales pull-forward in the United States. Without this, Americas growth in Q3 would have been 4.8%.

The U.S. grew by 3.6% across the nine months, a number that is unaffected by the sales pull-forward. There is, as yet, little sign of a significant slowdown in U.S. consumer demand affecting our business. So far this year, we have seen good growth in the U.S. across our foods categories other than Ice Cream, in Personal Care and in Laundry.

In recent months, we have been taking some aggressive pricing action in some of our categories. This has had some impact on volumes, most notably in Personal Wash and Ice Cream.

Latin America grew by 5.1% year to date, with a slightly stronger third quarter driven by better growth in Mexico. Brazil continues to be a difficult market for us this year, where we face challenges from local competition in several categories, especially tomato products. Also in the third quarter, we raised prices in Hair, which triggered some trade de-stocking. Other Latin American markets continue to grow strongly.

Asia/Africa remains a major driver of Unilever growth. The region grew by over 11% in both the quarter and year to date. This includes a significant contribution from pricing of just over 3%. Growth remains broad based, with all our large categories growing strongly and with double-digit growth in most key markets, including India, China, Indonesia, South Africa and Turkey.

The growth across Asia/Africa is a reflection of our portfolio strategy, which is focusing resources on markets which offer the best growth opportunities and where we have competitive advantage. Overall, developing and emerging markets around the world now represent 44% of our total sales, growing at 10%.

Moving from the regions to categories. We have benefited from a strong innovation program in 2007 which is directed to our growth priorities, leverages our global brands and technology with more rapid rollouts across markets, and targets Vitality opportunities in both the developed and the developing world. This, together with carefully targeted marketing investment, is giving us a much more balanced growth profile across our categories in 2007, ranging from just under 4% in Ice Cream and Beverages to 6.5% in Personal Care.

Looking at each category in turn. Savory, Dressings and Spreads grew by nearly 5% year to date and over 6% in the quarter. This was driven by consistent investment behind priority brands, such as Knorr and Hellmann's, both delivering growth of 7% year to date. Important recent innovations, including the continuing success of Hellman's Extra Light in Europe, cholesterol-lowering mini-drinks in the United States under the Promise Activ Heart Health brand, and new and improved Knorr bouillons and soups in many markets. For example, an entirely new type of bouillon gel under the Knorr brand in China.

Ice Cream and Beverages grew by nearly 4% year to date, but was slightly down in the quarter. Although in the quarter European ice cream declined sharply, our market shares are up this year, driven by innovations such as Frusi, a low-calorie frozen yogurt, and new Magnum variants, Colombia Aroma and Ecuador Dark.

In the U.S., the steps we have taken to strengthen our business by shifting to a less promotionally driven marketing strategy and raising prices to protect margins have led to flat sales in the quarter after a decline in the first half. Elsewhere, ice cream growth and share performance has been strong across Asia, Africa and Latin America.

In tea, Lipton has grown by over 7% so far this year, helped by innovations in pyramid tea bags, the introduction of Lipton Linea slimming teas in Europe and the extension of milk tea products across South East Asia. Our existing Pepsi-Lipton businesses continue to grow strongly although, being joint ventures, these are not captured in our growth numbers.

Home Care grew by over 6% year to date and 7% in the quarter. This includes continued strong performance in household cleaners, driven by innovations such as Cif oven sprays and Domestos Zero-Limescale.

Laundry is also performing well. All three of our global fabric cleaning brands - Dirt is Good, Surf and Radiant - are growing in mid single digits. 'Small & Mighty' concentrated liquids are performing well in markets across North America, Latin America and Europe.

We have stabilized or improved our Laundry market shares in a number of key markets where we have been under competitive pressure, including South Africa, the Philippines and India. However, we have still to see a turnaround in our two biggest Laundry markets in Europe, the U.K. and France.

Personal Care grew by 6.5% year to date but by just under 4% in the quarter. Growth was slower in Q3 due to the phasing of innovation, weighted towards the middle of 2006 with activities such as Sunsilk in the United States and Dove Summer Glow in Europe, compared with a heavy first half program in 2007. In addition, there was the systems effect in the United States and there have also been one or two markets where we have seen some short-term volume impact from price increases taken in the third quarter, most notably in Hair Care in Brazil and Personal Wash in North America.

The global innovations introduced in the first half of 2007 are performing well. These include Clear anti-dandruff shampoo, launched in China, Russia, Brazil, the Philippines, Egypt and Arabia and re-introduced in Turkey and Indonesia, Axe in Japan, now with a 10% share in male deodorants and driving development of this market segment, Dove Pro.Age, a cross-category range of skin care, hair care and deodorant products, launched in both Europe and North America.

Let me now turn to operating margin. I'll start with the year-to-date position and then go on to look at the third quarter. Our reported operating margin in the first nine months of 2007 was 13.7%, 0.8 percentage points lower than 2006, due to higher restructuring costs and lower proceeds from disposals. Before these items, there was an underlying improvement in operating margin of 0.3%.

We have continued to spend competitively behind our brands, and increased our investments in advertising promotion in line with sales growth. This means that, year to date, the combined benefits of volume/mix, positive pricing and cost savings were more than sufficient to offset rising commodity prices and other cost increases.

Coming to the third quarter, the operating margin at 13.7% was 1.1 percentage points lower than last year, but with a 20 basis points underlying improvement before restructuring, disposals and impairments. Absolute spend on advertising and promotions was maintained against a sharp increase in the prior year.

The significantly lower Ice Cream sales in Europe had an adverse impact on operating margin in the quarter. However, the more important factor for margin development going forward is the impact of commodity costs and the extent to which we continue to counter these through pricing, savings and operational leverage.

As expected, we have seen a sharp increase in commodity-related costs in Q3, equivalent to an on-cost in the quarter of EUR260m or 250 basis points. There have been some reductions, for example olive oil and more recently tea, but these are small in comparison to the increases elsewhere, most notably for edible oils and fats and for dairy products. The price of mineral oil has also increased sharply in recent months, now exceeding $90 a barrel. The acceleration seen in Q3 will not ease off in Q4, so we now expect the full-year impact to be around 200 basis points.

We continue to mitigate this impact through a combination of pricing action, forward covers, product reformulations and savings. I have already mentioned the accelerating contribution from pricing. With more price increases in the pipeline, we will continue to see a significant pricing component through the rest of 2007 and on into 2008.

Our savings programs are also accelerating. Having delivered at a fairly consistent level of around EUR200m per quarter over recent quarters, savings in Q3 reached EUR260m, with increased contributions from both buying savings and overheads reductions.

EUR234m of restructuring was charged in the third quarter, bringing the year-to-date total to nearly EUR475m. This signals the substantial progress we are making with this element of our change program and gives us confidence that we will continue to benefit from a sustained level of savings over the coming quarters.

In terms of organizational simplification and restructuring, we have announced during the third quarter plans for three new multi-country organizations, the U.K. and Ireland, Germany, Austria and Switzerland, and Central Africa, the integration of our North American Ice Cream business into the existing 'One Unilever' organization, reorganized our businesses in South Africa and Israel with our joint venture partner, and the streamlining and/or closure of 10 factories in four European countries.

We have also been active in the area of portfolio development. We have completed the sale of our margarine brands in Brazil, acquired the Buavita fruit drinks brand in Indonesia and announced our intention to sell the Boursin cheese brand, and agreed an extension of our successful ready-to-drink tea joint venture with Pepsi Cola to cover 11 (sic - see documentation) new countries.

So a significant step-up in activity, designed to strengthen the business, improve its growth potential and increase its resilience to short-term pressures, such as commodity costs.

Turning now to other aspects of our financial performance. Earnings per share from continuing operations for the nine months were up 20%. In Q3 last year, a EUR300m provision was taken to cover compensation payments relating to the conversion of the NV preference shares. This charge in the prior year accounts for 8% of the year-to-date EPS growth.

Operating profit was down 5%, as the benefits of sales growth and underlying margin enhancement were offset by the increased restructuring charges, lower proceeds from disposals and adverse currency movements.

Below operating profit, we see structural improvements in a number of areas having a substantial positive impact on our EPS growth. Net financing costs, excluding the preference share provision, were 42% lower, through a reduced level of net debt and a better funding position on pensions.

Our share in net profit from joint ventures has increased by 60% to EUR82m for the year to date, mainly driven by the strong growth in the partnerships between Lipton and Pepsi for ready-to-drink tea. The EUR88m for associates and non-current investments was boosted by a gain in the first quarter in one of our venture capital funds.

The tax rate of 21% in the first nine months benefits from a better country mix and the favorable settlement of tax audits in a number of countries, some of which fell in the third quarter. As a result, we now expect the tax rate for 2007 to be closer to 23%, rather than the 24% previously indicated. Our long-term tax rate guidance remains unchanged, at 26%.

Discontinued operations for last year included a contribution from frozen foods, sold in the fourth quarter. This is partly offset by performance-based payments in the first half of this year relating to UCI.

Net debt at the end of September was EUR8.2b, down EUR0.9b from the same period last year but up EUR0.7b over year-end 2006. This includes the impact of EUR1.1b of share purchases, as part of our EUR1.5b share buyback program for the year.

Our net pension liability at end September was EUR0.8b. This is down from EUR3.1b at the start of the year, driven by higher asset valuations and a higher discount rate applied to long-term liabilities.

Cash flow from operating activities was EUR3.5b in the first nine months. This compares with EUR3.8b in the same period last year. This reflects higher cash outflows on restructuring and on working capital, the latter a consequence of the low level of working capital with which we exited 2006.

The fundamentals of our cash flow generation remain strong - consistent top-line growth, underlying margin improvement and a tight control on working capital and capital expenditure.

With that, I'll hand you back to Jim.

Thank you, John. Perhaps, as a newcomer to Unilever, I might offer you my take on the quarter's results.

I believe that we're demonstrating momentum in the business. We are delivering top-line growth and translating that into structural improvement in operating margins. I am confident that we will deliver our outlook for this year for organic revenue growth around the top end of our 3% to 5% range, with an underlying improvement in operating margin.

We are in the midst of a major change program. This is aimed to raise the bar for innovation, restructure to reduce our cost and asset base, and shape our portfolio more aggressively. We are pressing ahead rapidly on all three fronts. At the same time, we are not losing our focus on consumers, on our retail customers or on the competition.

I believe that skilful delivery of this total program will build a faster growing, more profitable and even more resilient business. We are not yet where we want to be. But, from my point of view, just coming on board, this is a very good place from which to build. Therefore I feel comfortable about our longer-term goals to deliver an operating margin in excess of 15% by 2010 and organic top-line growth in the 3% to 5% range along the way.

And so, with that, we are now happy to field any questions that you may have.

(OPERATOR INSTRUCTIONS). We now have our first question, which comes from John Parker of Deutsche Bank. Please go ahead.

Yes. Good morning. I've got a question on the cost/price mix impact on the margins, which you give as a 2.6% negative in Q3. I wonder if you could detail the components of that a little more, because you've given us a 2.5% negative impact from raw materials and a 2.1% positive impact on price, which more or less net out. So the 2.6% negative impact on cost, price and mix, is that a big mix negative effect, and if so why? What lies behind that? Or are there other negative cost effects in there as well, other than raw materials?

I'm going to turn that one over to Charles.

Thanks, Jim. Yes. As you said, the operating -- we mentioned in the -- on the call, I think, the impact of the commodity costs, which in the third quarter was some 250 basis points. That's about EUR260m. And indeed, that's a considerable step up from what we saw in the first half of the year, which was running at around 160 basis points for the first half.

As far as savings are concerned which is, if you like, one of the offsets in that, our savings also showed a step-up during the quarter. We're talking again about EUR260m, which was up quite sharply from the first half of the year.

Any more, John?

Yes. John, I think to get underneath your question, I think you're looking at the chart with the 260 cost/price mix over and above the savings. And within that we've got, of course, costs on other areas that have continued to go up. But there's also the effect of mix within the categories, and we've had clearly a reduction from Ice Cream. On the other hand, Savories is up. So there is a different mix effect in the quarter which is coming through in that. And I think, by and large, that would be the thing. Our general mix across the business is normally slightly positive, and in this quarter it's affected by the European Ice Cream which goes the other way.

Okay. I thought that would probably be it. Thanks. And can I have one other question?

Sure.

Are you able to give us -- I don't think -- you gave us a Russian growth figure on indication. How does Western Europe and Eastern Europe, can you give us the figures for those, the European region split, Western Europe and Eastern Europe?

Give us one moment.

It's very much continuation of the trends that we've seen before. In terms of Western Europe, we still have a small positive in Western Europe cumulatively, and obviously it's a significant positive within Eastern Europe.

Okay. Thanks.

Thank you, John.

Thank you very much indeed. Okay. We now move to our next question, which comes from Marco Gulpers of ING.

Yes. Good morning. Marco Gulpers from ING. A couple of questions, if I may. You mentioned further pricing actions still about to happen in the remainder of the year. Could you share with us the magnitude of those price increases relative to the first half and to Q3?

The second question is on disposals. You've stated that you're going to sell the Boursin brand. You've also highlighted U.S. Laundry. Could you provide us, perhaps, with an update on the interest so far that you've seen on these two assets?

And whilst Jim is on the line, I would like to ask you a question with respect to your first impression on the balance sheet and on the gearing that you're currently seeing. Would you agree with my line of thinking that the balance sheet is under-geared and, if so, what would you be willing to do about this? Thanks.

Marco, thanks for the three questions. I'll take the third and the second, in that order. And then I'm going to turn over to one of my colleagues for your first question about pricing.

First of all, my first impressions of Unilever are a company which is undergoing a tremendous change, moving in the right direction. I would not characterize our balance sheet as under-levered. I would characterize our balance sheet as strong. We maintain a A+ rating. It's a strong balance sheet, which gives us the opportunity to have lower cost of capital and gives us the opportunity of financial flexibility.

As to disposals, we do have the two businesses up for sale that you've mentioned, the U.S. Laundry business and Boursin. Interest has been very keen in both of them. The sales process is underway. And I think that's about all I'll say at this point on them.

Now, over to Charles on your first question.

Yes. Hi, Marco. On pricing, you will have already seen there's been quite an acceleration in the contribution of price during the course of the year. And indeed, we've been taking some fairly significant price increases in HPC categories across Asia/Africa. We've started to see some price movements in foods in North America.

In terms of going forward and looking at the magnitude and what we might expect going forward, I think the first thing to say is that in Europe, where we haven't so far seen a positive contribution to price, there have been some, if you like, some -- although we have been putting price increases in, and some fairly significant price increases on categories like Spreads, Savory, Dressings, etc., we've also had this offset from the price decline in olive oil. And, at the same time, we've also seen an increase in the promotional intensity in a number of markets in Europe. And I guess, to some extent, that's not surprising at a time when ourselves and quite a few of our competitors and, indeed, retailers are trying to push price increases through that you will find a little bit of an increase in trade activity.

So areas where we would expect to see more of a price contribution going forward, Ice Cream in the U.S., where we've only recently put in prices. We'll see that starting to work through and, indeed, in several categories in Europe.

A final question, if I may, is on the launch of AdeZ. How is that proceeding?

We've launched in the Netherlands, as you probably know, Marco, given where you're from, and we're very happy with that. We've had difficulties in the U.K. and it is not meeting our expectations. And that's really where we are. So we've got more to do and we still believe that this is an opportunity which will produce this.

Okay. Thanks. Congratulations.

Thank you, Marco.

Thank you very much indeed. Okay. We now move to our next question, which comes from Julian Hardwick of ABN Amro. Thank you. Please go ahead.

Good morning. Can I ask, just following on on the issue of the balance sheet, can I just clarify, is your view that an A+ rating is the appropriate credit rating that you would want for the balance sheet? You would not want to go (multiple speakers)?

Let me reiterate. Unilever is committed to an A+ rating on our long-term debt. We are in the middle of the pack, if you compare people like P&G or Nestle who are higher rated and take other competitors who have lower ratings. With that rating, we have a low cost of debt. We have greater resilience, something which frankly was very helpful during August, September. And it provides flexibility, so we're quite happy with that.

And does the size of your pension deficit influence anything you might do in terms of future buybacks?

You're absolutely right that when looking at the balance sheet you have to also consider your -- the state of your pension. We're pleased that actually we've improved on that front through this year, as John mentioned in his remarks. But that's something which obviously has to be kept in mind as part of the total financial picture.

Okay. And on the commodity cost picture, we've clearly seen a significantly rising trend through the course of this year. Could you do a little bit of crystal ball gazing for us? If you look out to next year, presumably the first half of next year it's lapping relatively easy comparatives from the first half of this year, so are you expecting a bigger than 200-basis-point increase in the first half of next year?

Julian, thank you very much for that question because it gives me a good opportunity to say we're not going to be giving guidance today for 2008. As you rightly said, we're going to be lapping a different level of price rises next year. That's a fact. We've given you guidance for the balance of this year. And, quite frankly, given our forward purchasing, we have a very good idea of what our costs will be in the fourth quarter.

And my final remark is we don't see any early easing off of this commodity cost pressure. But beyond those observations of fact, I'm not going to give any guidance for '08 in this call.

Okay. Thank you very much.

Thank you very much.

Thank you very much. We are now going to our next question, which comes from Robert Jan Vos of Fortis.

Yes. Hi. Good morning, gentlemen. I have a couple of questions. When looking at the restructuring costs until the third quarter of EUR475m, do you still stick to your guidance for the full year of between EUR700m and EUR1b, or can you narrow down that range a bit?

And I have a follow-up question on the divestment program. Is it fair to assume that there will be some announcements still this year on divestments? And a second question on that - during what period of time do you expect to close the divestment program of EUR2b? In other words, how long will it take, do you assume?

Yes. I'll take your questions, Robert, in reverse order. As to divestments, we will divest a business when we can realize a price which is greater than the value of the business to our shareholders. So I should just say that if, in our view, we don't get a price which is greater than our own view of the value to us, we won't sell. So, in that sense, the answer is we might never sell the business.

On the other hand, I'll stick with what I said about the two businesses which were asked about earlier, Boursin and U.S. Laundry. We've had a substantial amount of interest for both of those. I'm not going to predict when we will be able to make an announcement on any of those, because you never know until you've actually struck a deal. So I'm not going to give any time forecast on that.

As to the restructuring in this fiscal year, we're not, again, going to give quarterly guidance. We're going to stay with the annual guidance that we gave at the mid-year. And so we stick with the guidance that we gave on restructuring, with one comment that I'd make that you just don't know until you actually have taken the actions and that's when it triggers the account.

So thank you very much for the two questions.

Thank you for the answers.

Thank you very much indeed. Okay. We now go to our next question, which comes from Graham Jones of Panmure Gordon.

Morning, gents. Welcome on board, Jim. I've got two questions, one about European margins and one about Brazil. Firstly, in terms of Europe, you delivered a clean margin improvement in Q3, if I calculate correctly, from 16.2% to 17.6%. And I just wondered whether you could run us through what the drivers of that are, because clearly the pricing has been negative in Europe in Q3. I would have thought the Ice Cream mix effect would have been negative. And you've also commented about the increased promotional activity from competitor activity. So if you can just run me through how you've managed to get such a positive margin result in Europe.

And then my question on Brazil is how long do you think it's going to take to return the business to more normal levels of growth and what are you doing to reinvigorate growth against what's clearly a tough competitive environment?

Well, first of all, thank you very much for the welcome. As to Brazil, we do have a program underway. Actually, I'll be visiting Brazil at the beginning of December, so I will look myself. I'd rather not give any particular forecast on that.

And I'll turn your first question over to Charles.

Yes, hi. As far as European margins are concerned, you're quite right. If you strip out the effect of restructuring, disposals and impairments, you're seeing an underlying improvement in operating margin. And you're also correct in saying that having had a weak Ice Cream season in Europe, we have actually lost a margin contribution of Ice Cream that we would have otherwise expected.

A couple of things to say about that. First of all, we've also had a particularly good quarter in Savory, which is a high-margin category. So, to some extent, we've had the benefit of that. Advertising and promotional spend as a percentage of sales in Europe is down in the quarter. Interestingly, it's down more in promotions and actually slightly up in advertising year to date. And I think I referred to earlier the fact that we've seen an increase in promotional intensity in a number of European markets. And, to some extent, there is a bit of a switch between consumer promotional activity, which is in our A&P number, and trade promotional activity which is taken as a deduction of price.

Okay. Could you just -- just one follow-up. In terms of the minus 0.7% pricing in Europe in Q3, could you quantify how much of that was relating to olive oil?

Just over half that is olive oil related.

Okay.

Thank you.

Thank you.

Thank you very much indeed. Okay. Our next question comes from Arnaud Langlois from JP Morgan.

Yes. Good morning, everyone. I have a couple of questions. The first one is on the Personal Care business. Looking at your third quarter margin, actually your margin year to date, it seems to be down by roughly 100 basis points. I understand this number may be impacted by a restructuring charge. So, could you actually give us a clean number for the operating margin in Personal Care and maybe tell us what sort of evolution you've seen there?

My second question is related to pricing and actually price elasticity. Looking at the third quarter, we've seen a very strong increase in pricing in the Americas. And there I think, unlike what we saw in the previous quarters, volumes actually turned negative to minus 1%. So, I was wondering to what extent you felt comfortable with pushing prices further, given what appears to be a relatively negative experience in the Americas.

And the last question is on working capital. We've seen an increase in working capital year to date. I would like to ask you, Jim, whether you see any room for improvement in that field going forward. Thank you very much.

Well, thank you, Arnaud. I'll take your last question first. Yes, I do see an opportunity for improvement in working capital. We're going to get to work on it right now in the fourth quarter and see what we can do in that dimension.

On price elasticity, I'm going to give a general answer from my experience in consumer products and then I'm going to turn it over to John for any additional comments he has. And then finally, we'll turn your first question over to Charles.

So, as to price elasticity, we have actually, across our portfolio in the third quarter, not seen really signs that the pricing actions that we're taking are significantly dampening our volume. We feel good about our volume in the third quarter. We feel good about our consumer off-take in the third quarter.

In the Americas we had some particular issues where we substantially raised price as the market leader in the face of commodity costs. So, we had some retailers who basically dug their heels in and de-stocked. But that's not price -- consumer price elasticity. That's the normal give and take between manufacturers and retailers.

Going forward, is there some possibility that the level of price increases which will be necessary to hold margins will have some impact on volume? It is conceivable. But we have not, in fact, seen that in our own business through the third quarter.

John, anything to add on that?

I think that is obviously the effect of the -- the pull-through affects the volume in the third quarter in the U.S. And over the year to date, we've got around 2% volume growth in the States, which is not showing major deviation.

But it was minus 1% in Q3 after growing by 2% in Q -- in H1.

But you've got to add back the volume effect of the pull-forward to that minus 1%.

Okay. And in which category did you take such big price increases in the Americas?

Hair Care in Brazil.

Okay. That's the only one, really?

Sorry, there was also -- we've put in some fairly significant price increases on Personal Wash in the U.S., and more recently in Ice Cream as well.

Okay.

I think, if I could just come back to your first question, I think was about category operating margins, particularly Personal Care.

That's right, yes.

The first thing to say is that it's much easier to look at operating margin movements over year to date rather than individual quarters, because there are swings and to and fros in the quarter. But the first thing to say is that actually, if we look at Personal Care year to date and we strip out the effect of higher levels of restructuring, we actually arrive at an underlying improvement. And, in fact, all our major categories with the exception of Ice Cream are showing an underlying improvement in operating margin so far this year.

If we now look at the specifics of the third quarter, there was indeed a higher level of restructuring charges taken against Personal Care. There was also a step-up in some promotional pricing in Europe. I referred to that earlier. So, underlying the margin was slightly down in the quarter. But, as I've said, I wouldn't put too much against that. I think the key issue is that year to date we are in fact up.

Okay. That's very useful. Thank you very much.

Thank you, Arnaud.

Thank you very much indeed. Okay. We now go to our next question, which comes from Thomas Rousseau of Gardner Rousseau & Gardner. Please go ahead.

Morning, Jim.

Hey, Tom. How are you?

Good, good. Thank you. It's early here, but congratulations. It's early in your run at Unilever. Congratulations for your (multiple speakers).

Tom, thank you very much and I appreciate you getting up early to take the call.

That's right. Talk a bit about the share buyback. What was your price paid thus far and what are your plans going forward with continuing the program?

I'm going to turn that over to one of my colleagues, who I think has to actually make a calculation to answer that. And if we can't make it now, we'll get it to you later.

Thank you, Jim. And then, Jim, the progress towards the 15% operating margin by 2010, to what extent are you building in the effective planned divestitures on the overall operating margin? And to what extent are you building in any plans for the possibility of acquisitions lifting those forward-looking operating margins? How do you -- what are you basing the 15% on?

Yes. We are definitely basing -- and I should say it's 15% plus, Tom.

Okay.

We're definitely basing that on expected divestitures. And another piece of guidance we've given is EUR25b to EUR30b cumulatively of cash flow by that period of time, which is a governor of that.

Yes.

So -- but we're not counting on any acquisitions. This is we're going to do it with the existing business, less whatever we divest. And I just also remind you that that's a net operating margin in 2010.

Now, do we have the answer to the question or do we --?

We have an approximate answer, Tom. The answer is that we've bought back, as you know, all NV shares at the moment, which is the cheaper one at the moment. And we've paid an average which is pretty close to EUR22 year to date.

Thank you. And the funding plans for forward share buybacks?

What we have said is we're going to do EUR1.5b of share buybacks in this year. We have not commented on whether we'll do a share buyback program beyond. And what we're going to do is when we give guidance for next year we'll have what we have to say about returning cash to shareholders, either through share buyback or through dividend.

Thank you. And then last, Jim, the question about the pension and the impact on value in the balance sheet. What steps do you have in terms -- [aside] to the fees or to somehow immunize forward-looking growth in those liabilities in light of today's low -- high interest rate, which affects the discount, and your asset growth that's helped you narrow it year to date?

Tom, I have not really gone into great detail on our pensions, other than to assure myself that we're in good shape.

Right.

First of all, the accounting -- the IFRS accounting is different from U.S. GAAP, so I've got to get used to that. But what I can tell you is that across the board some of our pensions are in deficit. But, actually, many of our pension plans are in surplus and the -- so, you have an accounting calculation, which is provided here, and I feel comfortable with it. I don't have any plans to change policy from what you saw today.

Good luck and thanks for your updates.

Tom, thank you.

Thank you very much indeed. Okay. We now go to our next question, which comes from Jeff Stent of Citibank.

Good morning, everyone. Two questions, if I may. The first one's on Ice Cream, whether you'd be willing to quantify the impact on the margin from the drop in sales in the quarter.

And secondly, on developing and emerging markets you've quantified that sales are now -- sales, it's now 44% of the Group. I was wondering if you'd be able to give us a steer on the profits contribution.

Let's take these in the order that you gave them. Ice Cream.

Yes. Jeff, hi. It's Charles here.

Hi.

Yes. Sales of ice cream in Europe were down about EUR70m in the third quarter versus the last year. And, as you will probably remember, ice cream is a category with a high variable margin and a significant fixed cost base. So, I think you can work out from that that it's quite a few tens of millions of euros of margin impact in the quarter.

So, probably on Group something like 10, 20 basis points?

To be honest, I haven't got a precise number in front of me, but it is clearly a significant figure.

If I recall correctly, back in Q3 when we had the bumper summer I think it was 10 bps then. Anyway, okay. Thank you.

On the D&E question, obviously developed markets will have a higher contribution to margin than D&E markets. I don't know if we've guided precisely beyond that.

No, we -- but I think it's fair to say that we don't have a significant difference. Our profitable D&E markets are as profitable as our profitable developed markets. We are obviously investing in a couple of places, and we've highlighted China and Russia before as being areas where we are operating at below Unilever average margins. And that's basically it, I think. But overall, not a major influence.

I think the key point, Jeff, is that when you look at the gross margin level our gross margins in places like China and some of the other countries in which we're investing are as good as, if not better, than they are in developed markets. So, growth is incrementally profitable.

Okay. Thank you. One final one before you go for me. At the half-year stage, Patrick said that he expected that the margin development through the second half would be more back-end weighted. Does that continue to be your expectation?

We think that -- at the time of the mid-year, I think we said it might be a little bit better in the fourth, a little bit -- not quite as good in the third. We've actually done a little bit better in the third than we thought. So, I'd say about even improvement across the two quarters now.

Okay. Thank you.

Thank you.

Thank you very much.

I think we've got time for two more questions, so.

Okay. Certainly. And we'll put our next question through, which comes from Polly Barclay of Cazenove.

Hi. Yes. It's Polly Barclay from Cazenove. Two quick questions, please. I appreciate you've touched on this in earlier questions, but any more color on European pricing would be appreciated, also looking forward.

And the second question is just housekeeping on the tax guidance. I appreciate that you've maintained the long-term tax guidance of 26%, but perhaps you could just explain that in the context of the new guidance of 23% for this year. Thanks.

I'll take the second one. Then I'll turn it over to our European pricing expert, Charles here, for the first question.

The -- what has happened in the third quarter is we have had tax audits come back in various countries and the tax authority has said you were right; you don't have to pay these taxes. And we then have taken off provisions that we'd made for them. And this is something which you can't forecast. You do what you think -- you pay what you think is right in terms of taxes, but you protect yourself by making accounting provisions and you wait until you're audited. And then, when you're audited and it comes good, you reverse those provisions. And that happened to us in the third quarter.

And then the other thing is we pay different tax rates in different countries, and depending upon the mix of our business it will be slightly different. At this stage, we know where we sit for the quarter just past. We have a pretty good idea, although you never know, for the fourth quarter. We believe structurally at this time the 26% is the right way to guide.

My own experience has been, though, that actual tax rates quarter by quarter are quite a bit choppier now than they ever used to be, given the accounting requirement that you take things straight through and you don't smooth it.

So, with that, our European pricing expert.

Well, thanks for that, Jim. Pricing in Europe. I think John referred to earlier that the impact of olive oil price was about -- is somewhat more than half of the price decline that we've seen year to date. So, we're talking about a 0.7% price decline year to date. So, somewhat over half of that is down to olive oil. So, by and large, where we are at the moment, our pricing is net flat across Europe.

Now, within that, I said earlier that we are already putting through some fairly significant price increases which are coming through in Spreads, in Savory, in Dressings, and indeed a number of HPC categories. But at the same time, we've also seen a step-up in promotional intensity. And this is often the case in a market like Europe, where it is difficult to get price increases through, that there is, if you like, a phasing period when there's some to-ing and fro-ing in the market.

What I would say about going forward is that clearly the pricing environment in Europe is moving. We've seen comments by a number of our peers in the context of European pricing. We've also seen comments by some large European retailers, including some retailers who haven't talked about the need for price increases for many years. So, I think that there's no doubt that, where commodity costs are at the moment, that we do expect to see a positive contribution from pricing from Europe as we go forward.

Thanks.

Thank you, Polly. I guess we have the last question coming up now, coming towards the end of our hour.

Yes, indeed. Our final question comes from Simon Marshall-Lockyer of Bear Stearns. Please go ahead.

Yes. Good morning, everybody. Just a couple of final questions, coming back to your A&P spend on the quarter, which was down 40 basis points. Your margins were up 30. How can you square that with the continued increase of focus on your new product launches? I'm just a little bit concerned that your A&P has come back. I appreciate some of the comments you made on the decline in your promotional spend, but how would you see the rest of the year? And would you expect this A&P factor to remain inflationary mid-term, as you roll out more innovations?

Well, first of all, I should say we are very pleased with the productivity of our A&P spend in delivering the kind of sales growth that we've gotten. I should remind you all, though, that while it's been very productive we have not cut A&P. In fact, we've invested EUR130m more. Over the course of the three quarters, the growth in A&P has broadly been in line with the growth in sales.

There have been different timings this year versus last year in terms of innovation. Our Personal Care innovation was skewed towards the beginning of this year, whereas last year our big activity, Sunsilk in the United States, Summer Glow in Europe, was in the middle.

Okay. My second question is really regarding the exceptionally strong growth rates you showed in Savory and Dressings, and also in Home Care products in the third quarter. Would it be fair to say, looking at it from a positive perspective, that that was mostly driven by the new products that you've been launching over the previous quarters? Or are there really other factors that we should be taking account of at this stage?

Well, certainly we have had success from our new product launches. Charles, anything more?

Yes. Again, Simon, whilst it's tempting to point to the 7% in the third quarter, I think looking at the year-to-date numbers is probably more realistic, and where we see growth in both Hellmann's and Knorrs of around 6%. So, that is clearly a significant step-up in growth in these two big brands compared to what we've seen in previous years.

And I think innovation has a very significant role in that. We talked about the importance of globally inspired innovation rolled out more rapidly across markets, and I think that's exactly what you're seeing. With Hellmann's, for example, we've seen some fairly simple concepts, backed by technology, rolled out to multiple markets in a relatively short space of time. With Knorr we're beginning to see, again, some of the formulation work that we've been doing on bouillons, upgrading the quality, etc., not just landing in one market but landing in multiple markets in a relatively short space of time. And I think John mentioned in passing in the -- earlier on the call, we have just launched a novel format for bouillons in China. Again, recognizing that Knorr is --

Novel to China, but the point is that it is a formulation that we were using on a world-wide basis.

So, I think -- and, again, it's very much a case of looking at this as a major opportunity across developing and emerging markets, and bringing global resources to bear on a local market opportunity.

I think it is true also to say that we're getting good growth on both Foods and HPC in the D&E world and we're finding that that's helping to drive, as we take our Food businesses outside of strongholds in Europe and North America, that we're starting to see growth in Foods coming through at the same sort of levels in the D&E world as we're getting on HPC. And that's also very encouraging.

Right.

And that's got to be a combination of both the innovation and rolling out in existing operations.

Thanks very much for that. If I may, just one final question. Jim, you didn't want to pin your colors to the mast in respect of timescales of disposals. Maybe could you give us an indication in terms of the restructuring program and the ratcheting up of that restructuring program announced with H1 results? Could you give us some indication, maybe, in the third -- in this third quarter, in terms of numbers of plants, how much are you down? Has there been any action on the reduction of numbers of plants?

Same thing on headcount, maybe can you update us on that or is it too early to do so?

We don't release the headcount numbers. As to numbers of plants, we've announced how many?

We've announced that we're looking -- yes, at 11 plants around Europe in the last quarter.

Right.

And we continue working on things that were done before that. So, there is an -- as you see, a step-up in the savings that we're actually getting now but, more importantly, also an acceleration to make sure we get more savings going forward.

Well, thank you very much for the answers and, Jim, congratulations on joining at an auspicious time.

Simon, thank you very much. And thanks to everybody who participated today. I'm sorry we have to close it off, but we're actually past our scheduled hour. However, the IR team here at Unilever House is ready to take any questions, so feel free to ring us up.

I look forward to meeting those of you who are coming out to India week after next and otherwise where I get a chance to meet you. And until then, thank you all. I appreciate your being with us this morning.

Thank you very much indeed, Mr. Lawrence. Ladies and gentlemen, 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, www.unilever.com. Thank you and good morning.