聯合利華 (UL) 2008 Q2 法說會逐字稿

Good morning everyone and welcome to the quarter two and half-year 2008 results presentation. I'm joined this morning by Jim Lawrence, our CFO, also John Rothenberg, on my left. And it's a pleasure to introduce today his successor, James Allison, our new Head of Investor Relations who is taking over from John.

In the audience we have Vindi Banga, our President Foods, Home and Personal Care; Harish Manwani, President of Asia, Africa, Middle East, Turkey, Central and Eastern Europe. And certainly last but not least, Professor Genevieve Berger, our newly appointed Chief R&D Officer.

As usual, I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures. This disclaimer is included here and will be posted with the text of this presentation on the Unilever website.

In a moment, Jim will take you through the detail of the result for Q2 and the half-year, but first let me remind you of the priorities we set out at the beginning of the year. First and foremost, to maintain our competitiveness in the marketplace and deliver consistent top line growth. Second, to drive for sustainable margin improvement, keeping us on track to deliver our long-term financial goals. And third, to gain market share where the opportunity arises and when the return on investment is attractive.

Measured against these priorities, the performance in the first half has been good, with organic sales growth of 7% and aggregate growth broadly in line with our market, and an underlying operating margin improvement of 40 basis points. And we have achieved this despite operating in a more challenging environment.

And we have faced two particularly strong headwinds. First, the continuing escalation in commodity costs, mainly driven by mineral and edible oil prices. This has added 550 basis points of additional cost in Q2 versus the prior year and somewhat more than we had expected. And then, there has been a softening in consumer volume, especially in developed markets.

There are a number of reasons why our business has continued to perform well in this environment. First, we have stuck to a very clear and simple strategy based around directing resources to our most attractive opportunities, including D&E, Personal Care, and initiatives which support Unilever's mission of adding vitality to life. So in the first half, for example, we've seen growth in D&E countries ahead of the market, with a good mix of price and volume. Growth was broad-based, with good contributions from Latin American and CEE.

We have also grown ahead of our market in Personal Care, with more than half the incremental A&P spending going behind our Personal Care brand. In total, we supported our brands with some EUR100m additional in-market advertising spend, maintaining our share of voice.

And in the last six months we have made progress in reshaping the portfolio for long-term growth, firstly with the previously announced disposal of Lawry's and Boursin, both at attractive prices. And then, in the last two weeks, we have announced the disposal of Bertolli and our North American laundry business, both in line with strategy and both representing good value for our shareholders.

At the same time, we have demonstrated with Inmarko in Russia that we'll add bolt-on acquisitions which support our strategic priority.

The second reason why our performance has been good in the first half is that we have benefited significantly from the transformation of the business, a process you may recall that we promised to accelerate when we reported to you this time last year. Unilever today is a much more agile and responsive business than ever.

And agile, it's agility that has been very valuable in responding quickly to changing economic circumstances and we see that reflected in a number of aspects of the first half performance. And hence we have continued to drive productivity improvement, with saving in the quarter of 250 basis points, up from 200 basis points in quarter one, and firmly on track to deliver EUR1b in the year. And these have helped us to mitigate some of the impact of input cost inflation and to remain price competitive.

We have been able to move decisively in taking pricing action to recover input cost inflation. Our brands are strong and we have often led the way. Moreover, our price increases are sticking.

And we have also seen continued benefit from our capability-building program, whether in marketing, where we have won 18 lions at the prestigious Cannes Advertising Awards, four of them gold, or in our Win with Customers program or in a greater emphasis we are giving to science and technology. This is something that has always underpinned our innovation program, but this will now further strengthen with the appointment of Genevieve Berger as Chief R&D Officer.

The third reason why we have been able to remain competitive is that we have adjusted our go to market tactics to accommodate the external environment. Examples include moving pack sizes down to maintain critical price points, at the same time offering larger economy packs with lower price per usage. Price tiering, providing products across a wide range of consumer income levels, driving the price journey. Driving new product forms that consumers prefer but at the same time contain less oil or packaging material. Hellmann's Light Mayonnaise and our range of Small & Mighty concentrated detergents are excellent examples. And last, tailoring our activities to capture broader channel opportunities.

That said, whilst the performance overall has been good, there are some areas where we have not progressed as much as we wanted. In Europe, volumes were down 2.9% in the second quarter. And this is partly explained by Ice Cream, where volumes are sharply lower, despite share gain. There is no doubt that markets are softer. Price increases required to cover input cost inflation have been implemented in all categories. And the price increases have been particularly acute in spreads and this is where the volume reduction has been higher, excluding Ice Cream.

Our cash flow performance is behind last year and this is working capital related. Jim will come back to this later in his presentation.

So, in summary, we are focused on our priorities and we continue to progress our strategy and transformation program. Our business is leaner and more agile than before, better able to respond to markets which are more difficult to predict. We have had a good first half and we are on track to meet our guidance for the year.

With these opening remarks, I will now hand over to Jim to take you through the details.

Thank you, Patrick, and good morning, everyone. Let me start by reviewing top line performance. Underlying sales growth in quarter two was 6.8%, driven by price increase of 7.4%. Our reported underlying volume growth was down 50 basis points, but was marginally positive when adjusted for sales that were pulled forward in the US prior to major systems implementation in July of last year.

Pricing has continued to rise steadily, as we've taken steps to recover commodity cost increases. There's been some volume impact in some markets, specifically North America and Europe.

Underlying sales growth in our D&E countries picked up to 15% in quarter two, with more than 4% coming from volume. Growth has been broad-based across all categories. Every category grew in excess of 5% in the first half.

Turnover in Q2 was EUR10.4b and that is 1.4% behind last year. There was an adverse currency effect of some 7.1%, as well as a 0.6% increase from acquisitions, which was more than offset by a 1.3% reduction from the disposal proceeds of the earlier year.

The adverse currency effect reflects the continuing strengthening of the euro, our reporting currency, against a wide range of currencies, including the US dollar and sterling, each down 15% year on year. This left turnover for the half-year at EUR19.9b or 0.5% below the same period last year.

I'll now review the regions and I'll begin with Europe. Underlying sales growth was 2.3% in both the quarter and the half-year, and this is slightly behind the growth of our markets. But it's a tale of two parts.

Central and Eastern Europe continued to grow strongly. Half-year organic growth was 10%, equally split between volume 5% and price 5%. Our priority market, Russia, continues to perform strongly and it reported underlying sales growth of over 17%.

In Western Europe, our growth was 1.4% in the quarter and 1.3% in the first half, with volume down 3.7% in the quarter and down 2.5% for the half-year. It should be noted that volumes in the second quarter were affected by the poor start of the Ice Cream season, as well as the 50 basis points impact of sales which were pulled forward into Q1, which we called out at last quarter's conference call.

And as Patrick has already mentioned, substantial price increases and the prevailing impact on consumer incomes have also led to lower volumes.

In Foods we have seen an acceleration in market growth, driven by pricing. Here we have lost some share to private label in countries such as France and Spain, but not in others such as the United Kingdom here. In Home Care and Personal Care markets they are down but our share has been maintained. We'll continue to take pricing action where necessary, but not to the extent that we lose competitiveness in markets and categories which are strategically important.

And we're beginning to see the benefits of the transformation program coming through in margin. Underlying operating margin in Europe before the impact of restructuring and disposals was 130 basis points higher in Q2 and 100 basis points higher for the half-year. With our change program making good progress and with the newly appointed President, Doug Baillie, taking responsibility specifically for Western Europe, we are ready to step up our efforts to drive top line growth.

Now, we'll turn to the Americas. Underlying sales growth was 4.9% in the quarter and 5.7% in the half-year. This is against a prior-year comparator, as I mentioned, which was inflated by additional sales in June 2007, ahead of the system implementation in the United States.

This impacts the Americas sales performance by around 2% in the quarter and 1% for the half-year. The impact on the US performance specifically was over 3% in the quarter and around 1.5% for the half-year. Adjusting for this effect, which will reverse in July, organic sales growth in the US would have been around 4% for Q2 and for the half-year, again driven by price.

Our own growth has been slightly ahead of the market. Market volumes are weak but we have not seen any significant down-trading across our categories.

Sales growth in Latin America was 13% in the quarter and 11% for the half-year, good performance in all the major countries, including Brazil, and particularly strong volume growth in Mexico.

In terms of profitability, there was an underlying reduction in operating margin of 60 basis points for the half-year. Whilst the combination of pricing and savings have covered commodity cost increases in absolute terms, this was not sufficient to maintain margins.

Now we move to the Asia Africa region. And here, underlying sales growth was 15.1% in Q2 and 14.7% for the first half. Volume growth remained strong, at 5.7% for the half-year and 4.1% for the quarter. And the strong performance is broad-based. You see India, China, Indonesia, Turkey each posting growth of around 20% for the first half. South Africa grew 15%, all price, as volumes were held back because of supply chain constraints in that country. Performance in Japan and Australia was soft. Underlying operating margin for the first half of the year in this region is up 80 basis points, reflecting the impact of scale, with pricing and savings covering cost increases.

Let me now turn to our categories and a review of some of our innovations that we delivered in the first half.

Savory, Dressings and Spreads grew by 8.7% in the first half of 2008. And that is up from 3.8% in the first half of 2007 and reflects substantial price increases across Dressings and Spreads.

A combination of vitality-focused product launches and global health campaigns has driven growth. Examples here include our family spreads brands such as Rama and Blue Band. They grew strongly, supported by the "goodness of margarine" campaign, where we educate consumers on the important role of essential oils in the diet.

Hellmann's Light Mayonnaise continues to perform very well, utilizing new technology which provides great taste at lower oil content. In Europe, we've launched Hellmann's Mayonnaise with free range eggs and this is part of "It's time for real food" campaign with Hellmann's brand.

In the United States, the new Mediterranean flavors for Bertolli frozen offer consumers authentic, restaurant-quality Italian meals right at home and they're proving to be a great success. And you should note that in selling our olive oil business we have not sold the Bertolli brand, but rather licensed it for specific use by the buyer.

Ice Cream and Beverages grew at over 5% in the first half of 2008, in spite of the lower ice cream sales that we mentioned here in Europe. In the same period last year, our ice cream sales in Europe were up 6%, by contrast.

Looking first at Beverages, we've seen strong, broad-based double-digit growth of the Lipton brand. New launches include the rollout of Clear Green teas to further markets, Lipton premium pyramid bags in Central and Eastern Europe. And the Lipton range bearing the Rainforest Alliance seal is now available in over 12 countries.

Ice Cream. In Ice Cream we continue to gain market share in Europe, supported by exciting new launches including Magnum Minis and Magnum Temptations. In Asia we've launched the new Cornetto Disc variant and this is driving considerable growth in that region. And we're expanding the repertoire of Ben and Jerry's in Europe with Fro-Yo. This is a new frozen yogurt range and it's under the banner of "More Love, Less Handle".

Home Care. Home Care had a strong first half with growth of 8%, up over 2 percentage points versus the same period last year. Small & Mighty super-concentrated liquid detergents have been rolled out across Europe and that is under the "Dirt is Good" brand and we've grown share. The global "Every child has the Right" campaign was successfully launched. It takes up the cause of diminished childhood in the modern world. And this campaign also supports the Dirt is Good brand. In household cleaners we introduced new CIF with effervescent technology and Domestos Grotbuster, which destroys grot everywhere that it lurks.

Our laundry business in the D&E world has grown by 15% in the first half of 2008. Here, our brands straddle the price pyramid, catering to consumers at specific different income levels. For example, in India our brands are Wheel, Rin and Surf and they all delivered double-digit growth. In Brazil, our brands at the higher price point, Omo, and at the entry price point, Surf, have grown at double-digit rates, more than compensating for flat sales of the mid tier, Brilhante, delivering strong overall sales growth.

Now, to Personal Care. In Personal Care, our underlying sales growth of 5.7% in the first half of 2008 outpaced the competition. It did not match last year's 7.9% USG because of weaker market conditions in both North America and Europe.

Deodorants grew strongly through technology-driven innovation. We have upside-down Rexona and upside-down Dove deodorant roll-ons. We have new Rexona for Men deodorants, which are unbeaten in dryness. And we have the new variant Axe Chocolate, which is shaping up to be the most successful variant that Axe has launched. We have just launched our number one deodorant brand, Rexona, in China. More than 85% of Chinese women are already predisposed to adopt the deo habit and we're confident that we'll turn this market into another Unilever deo stronghold.

Dove Go Fresh continues to perform well globally. We have also launched, in the US and in the UK, Vaseline for Men face and body care range, specifically formulated to fortify men's skin to keep it looking and feeling healthy.

Lifebuoy grew double digit with a range of affordable shower gels, hand wash and bars, providing users with a gold standard in germ kill without compromising on fragrance.

In Asia, the Ponds brand had been transformed around the core essence of Ponds, with leading anti-ageing and skin lightening technology. Supported at the point of sale in store, we have highly trained sales personnel.

And Clear continues to grow strongly in the key markets where we've launched.

In summary, a strong innovation program, focused on our key strengths - health and wellness, superior technology and the ability to rapidly deploy across new markets.

Now, that covers the drivers of top line performance. Let me now turn to other aspects of financial performance, starting with operating margin. The second quarter operating margin, at 13.2%, was 50 basis points lower than last year. Restructuring charges were higher this year and with no significant impact from disposal profits there was an underlying improvement in operating margin of some 50 basis points.

Advertising spend increased in the quarter by about EUR35m at constant exchange rates, and I'll remind you it was up EUR100m for the half as a whole. Promotional spending was lower. This is the result of two things. First, intense promotional activity is not sensible at a time when price increases are being implemented in the market. And second, we are driving promotional effectiveness, leveraging global programs and improving the return on our investment.

With the added benefit of the higher sales, advertising as a percent of sales was 20 basis points lower than last year. Promotional spending was down by 50 basis points, making it 70 basis points in total. Savings programs accelerated in the second quarter and contributed 250 basis points to the operating margin. These mostly offset the shortfall between price, mix and costs.

So far, we've been reviewing the component parts of operating margin in percentage terms. Now let's take a look at what's happening in absolute terms.

Here are the drivers of underlying profit change in the quarter, measured in constant exchange rates. The contribution from a better mix was fully offset by the impact of lower volumes. Price increases contributed around EUR750m. Commodity costs increased by around EUR600m and I'll give you some more detail on that in just a moment. And other cost increases, such as energy in factories, salary inflation and so on, they added a further EUR250m.

So, as you can see, price increases recovered about 90% of the cost increases in absolute terms, which would have left a shortfall of about EUR100m. However, savings programs accelerated in the quarter, delivering close to EUR300m, to make up all of the gap and more. And the advertising increase of EUR35m was partly offset by the lower promotions. And this left underlying increase in operating profit of about EUR170m, or about 11%, in the second quarter of '08 versus the second quarter of '07.

So, now let me take you through the half-year performance. Operating margin development for the first half-year shows a similar pattern to the second quarter. First, we look at it in percentage terms. Underlying improvement of 40 basis points, savings matching the shortfall between cost, price and mix. And we'll take a look at the drivers in absolute terms again.

Volume growth and mix, up about EUR100m. Price increases contributed EUR1.2b for the half. Commodity costs increased about EUR1b in the half. Other cost increases another EUR400m. Savings programs across the half delivered nearly EUR500m. And the advertising increase of close to EUR100m was only partly offset by the reduction in promotion, a small reduction. This leaves an underlying increase in operating profit for the half-year of some EUR300m, or about 10% up versus 2007.

Now, as I mentioned, commodity costs obviously stand out. So, let's take a look at what's happening there in a bit more detail. There has been a further acceleration in input costs in our categories in the quarter. Commodity increases of close to 20% resulted in an impact of about 550 basis points in the quarter and that -- taking the first half impact to 480.

There are two main drivers for this year-on-year increase - the price of mineral oil, which particularly affects plastics, petrochemicals and transport, and then secondly edible oils, as we started in the second quarter to consumer materials which had been purchased on higher priced forward covers. The size of the increase in the second quarter was a bit more than we expected.

So let's take a look at the mineral oils, first of all. Here you can see the spot price for mineral oils in the market. Mineral oil has been at or around the $130 to $140 per barrel cost for most of the second quarter. That is some 40% higher than it was only three months earlier and it is double the level that it was for the quarter last year. A number of other mineral oil-related materials saw even sharper rises. Mineral oil, therefore, is going to impact our cost development for some time to come, notwithstanding the recent easing.

Turning to edible oils, as you can see from the chart, the spot prices for edible oils seem to have stabilized in recent months, albeit at a high absolute level. If current trends continue, this should provide some stability to our input costs going into 2009. In the second half of 2008, consumption prices will continue to rise for us, as we work through our covers towards the [spot].

Turning to the overall outlook. We now expect commodity cost increases of about 600 basis points for the second half, which will result in an increase of around 550 basis points for the full year. The development of mineral oil price will of course influence where we end up for the year, as well as setting the level of price increases which we need for ourselves and the rest of the industry, for that matter.

Let's now turn to earnings per share. Our earnings per share grew by 6% to EUR0.79 in the first half. The graph here summarizes the various key drivers, the ins and outs, for that EPS growth.

First, the operational drivers. Underlying sales growth, underlying margin improvement, together they contributed 10% to our EPS growth. There was a positive 8% contribution from RDIs and that more than offset by the 6% negative impact of currency and a similar sized impact from the much lower prior-year tax comparator.

We continue to have a strong balance sheet. We were recently reaffirmed by A1 by credit agency Moody's and A plus by S&P. And we continue to return cash to shareholders. To the end of June, we have paid out EUR1.2b in dividends and we have repurchased EUR1.1b of shares, or in total some EUR2.3b returned to shareholders.

Our net pension liability at the end of June reduced slightly, to EUR1b. This is because of reductions in asset values being offset by the beneficial effect of higher corporate bond yields, which are used to discount liabilities.

Our net debt stood at EUR10.2b at the end of June. Cash flow from operating activities in the half-year was EUR900m, which is down EUR800m from 2007 as a result of higher working capital. Patrick alluded to this earlier in his presentation.

Now, whilst some of this can be explained by input cost inflation and higher selling prices, stock builds to support the change program, calendar effects such as the close of our fiscal quarter ahead of the calendar month end, nonetheless working capital levels are higher than we would have liked. We know how to fix this and you can expect to see improvements in the second half of 2008.

We have a strong track record in terms of managing and reducing our working capital. Over the last 10 years our working capital as a percent of sales has a continuously downward trend, from about 9% of sales to close to 2%. And it's my intention to see this downward trend continue in the back half of the year.

Now, let me turn to a review of our progress in accelerating the transformation of Unilever. This program was announced one year ago, at this mid-year conference. We said that we were setting out to accelerate change in three ways.

First, to innovate more effectively, simplifying and leveraging our global scale. Second, to shape the portfolio, including disposals of businesses which constituted more than EUR2b of turnover. And third, to accelerate margin improvement, reducing our cost base by some EUR1.5b by exit 2010, and that's against a 2006 base.

So, let's see how we're progressing against this program. Now, I've already shown some of the innovations that we've brought to market recently. Patrick described what's being done to further advance innovation capability. Those of you who will be joining us at our investor event in November will have the opportunity to see much more then.

So, for today, let me cover the other two parts of the program. First, shaping the portfolio. Over 75% of the disposal program, as announced, has now been completed. You've obviously seen the announcements as they've come out. We have disposed of businesses with a combined turnover of EUR1.5b. We did that at an average sales multiple of 1.8 times sales. There's likely to be some margin dilution from these disposals in 2009, due to residual uncovered overheads, but this will be of a short-term nature.

And we have acquired the Inmarko ice cream business in Russia and we will be acquiring a West African soap business as part of our portfolio realignment in the Ivory Coast. So, we're buying as well as selling.

Our restructuring programs are firmly on track. We have announced or completed 23 factory closures globally and we have announced the streamlining of 28 more factories. EUR450m of cost savings have already been delivered. We have EUR1.2b in restructuring charges which we've taken so far in the program. We have fewer interfaces and touch points. We now have a one-category organization which serves 29 multi-country organizations.

We are satisfied with the progress that we have made. We are happy that we started when we did. We are determined to deliver what we promised and more.

Now, before I return to Patrick, may I say just a few words about how we intend to utilize the cash from disposals. By the end of this week, we will have bought back shares to the value of EUR1.5b. At the same time, we reiterate our commitment to our strong single A credit rating. Our priorities for the use of cash are, first, capital expenditures and restructuring, which enable us to grow the business and/or to improve our margins. Second, any value-adding bolt-on acquisitions. And third, returning capital to shareholders in the form of dividends and share buybacks.

Yesterday, regulatory approval in the United States was given for McCormick's to acquire our Lawry's business. We plan to close this transaction later today and do it in line with our expectations.

In the last two weeks, we've announced the disposal of our Bertolli olive oil business, as I mentioned, and our North American laundry business. So, additional cash will be generated upon the completion of these deals. We're unlikely to see most of this until quarter four. We'll be updating you on how we intend to use the additional cash from these disposals in due course.

So, with that, I'll pass you back to Patrick for his closing remarks.

So, let me summarize. Our strategy is working and working in a tougher economic environment. Our priorities are clear. First, to maintain our competitiveness in the marketplace and deliver consistent top line growth. Second, to improve sustainably operating margin, keeping us on track to deliver our longer-term financial goals. And third, to gain market share where the opportunity arises and where the return on investment is attractive.

It is likely that today's challenging environment will persist for some time but we believe we are well-placed. We have strong brands, with nearly half of our top 25 brands posting double-digit growth. We have a broad geographic footprint. We have products which meet the everyday needs of consumers and which straddle a wide variety of price points. And we have a more nimble, more agile, more focused company which is able to respond more quickly and act more decisively than ever before.

We have experience of managing big businesses through very volatile periods. Since 1990, the average annual growth of our business in D&E has been around 9%, with volume growth positive in every single year. And this has been through many difficult and turbulent times in different countries - Indonesia, Russia, Mexico, Brazil, Argentina, to name just a few.

We are fully aware of the challenge and we'll be vigilant in our response.

So, all in all, a good first half, clear priorities going forward and we reconfirm previous guidance for full year 2008. Underlying sales growth in excess of our 3% to 5% target range, with an underlying improvement in operating margin.

And with that, ladies and gentlemen, I will conclude my remarks and open the floor and the wires to Q&A.

(Technical difficulty) you switch off your mobile phones or your BlackBerries, because that does interfere with the reception and we'd like you to do that. First of all, it is -- let me say how we take questions from the floor. It is a little technical. You stick up your hand and we'll give you a microphone. Please, although it sounds silly, wait until the microphone arrives before you start speaking because, again, it makes a difference in terms of the reception for other people. Could you begin by telling us your name and who you represent and then ask your question. (OPERATOR INSTRUCTIONS). At the same time, we are taking questions online and if we have time then we will raise one or two of those questions in the next few minutes.

So with that, Patrick, if I could pass to you to take the first question.

Morning. It's Polly Barclay from Cazenove. Just, given what we've seen in terms of negative volume in the developed markets, can you talk us through whether these prices will stick and what you'll do with pursuing perhaps less or more aggressive pricing strategy going forward and where that will leave you versus input cost pressures?

And also, could you just tell us whether we'll see now several quarters of negative volume growth with ongoing pricing? Can you just walk us through all that?

Well, first, just correct that underlying the North America or the Americas and North America were positive in volume. We have a -- as we indicated in the call, a 3% to 4% impact of the change. (Technical difficulty).

(OPERATOR INSTRUCTIONS).

Lower ice cream sales. We had some change in -- against system, which we have signaled, in the tune of 50 basis points. And then the biggest impact that we see in terms of volume is a number of categories where we have effectively increased price substantially and led price increase, dressings and spreads. And we talked about high double-digit price increases, with gross margin reduced. Developing markets, we continue to see good volume growth.

So, what's in the future? We see less pressure on foods. We see some more pricing and pressure to come on home and personal care, simply because all derivatives.

Now, we're not making any comment on what's going to happen in terms of volume and price going forward. There will be certainly a substantial contribution from price in our top line coming. But what I would like be very clear is that our number one priority is to maintain our competitiveness. Our number two priority is about sustainable margin improvement. That's the number two priority.

So I'm absolutely clear, and so is my management team, that we will not let our competitiveness and our overall share position deteriorate. I hope that clarifies the perspective that we have as regards to pricing and volume. Does it answer your question?

Good morning. It's Warren Ackerman at Dresdner. Can you actually tell us what's happening to the market growth in both Europe and the developing and emerging markets? Sorry, that's the first one.

And just secondly, on the actual share position within Europe, it seems to be more of a foods issue than HPC. Can you actually clarify the extent of the share loss?

And then, just finally, one for Patrick. There's obviously a lot of speculation that you will retire next year. I'm sure everybody here would be interested in you clarifying your intentions.

So am I. Yes, the market growth. In North America we see growth around 3% and we are growing ahead of this market. In Europe we see growth also around 3%. We are not growing at 3%, so we are under share pressure in specific categories. I'm going to come back to that. In developing markets, we growth on average -- we see growth on average in our markets of 10% to 11% and we are growing ahead of that, so gaining share.

Overall, we have seen, in terms of balance, volume and mix, we see more pricing in all the markets where we're operating. We see some very soft markets, interestingly, markets where we are gaining share, laundry in Europe would be an example and ice cream.

As far as the shares are concerned in Europe, we indeed have lost share in a couple of categories. And of course, interestingly, these are categories where we have increased price substantially, spreads and dressings, a bit in savory. We have been gaining in tea. We have been gaining in ice cream, as I mentioned. We've maintained our share in laundry. We have maintained our share in the rest of personal care. We have lost a bit of share in hair care. Altogether in Europe, we have lost a bit of share, definitely.

Yes? And the third question. Yes. [I forgot this one]. Look, good companies have good processes. Bad companies have bad processes. So it's very appropriate, it's very normal for Unilever to start a process of succession. And as far as I'm concerned, having achieved a lot of what I've wanted to achieve, it's not unreasonable to contemplate the future. And therefore, I'm not gone and the news of my death are greatly exaggerated. I can reassure one thing, that I'm not focused on the future. I'm focused on continuing to drive this business to deliver and that's the only thing that is in my mind.

Xavier Croquez, Exane BNP Paribas. I'd like to put myself in the shoes of a middle-ranking manager in Western Europe. And for the last two or three years, it hasn't been easy. The game of gaining share and growing is much more fun than cutting costs and getting One Unilever on my back and all that mess. When is the end of the tunnel? When will these guys have fun again? And when will the agenda be growth again? Thanks.

Well, of course, Xavier, you won't be surprised if I disagree with everything that you say. First and foremost, our agenda is a growth agenda. It's a growth agenda in Europe, with minus 3% three years ago. We are plus 1.3% Western Europe. I promise you, if you're a manager, middle manager in Western Europe, you feel better with 1.3% than minus 3%. And you feel so much better because at the same time that you have got to 1.3%, you have been going through a very extensive transformation program.

And what you understand is that this transformation program is not the strategy. It's a transformation program in support of the strategy. It's about simplification. It's about cutting bureaucracy. We're going to cut more than 50% of the regional headquarter people overseeing the region. It's about getting wider territory. That's our multi-country organization. That's about outsourcing everything which is not core. That's also about increased innovation and, more importantly, that's about investing in our core capabilities.

So your middle manager of course will feel the pain, with 12,000 people leaving, friends, colleagues, you can't be ecstatic. But you understand that the agenda is a growth agenda. You see some of the benefit and you see the investment in capability. And you see examples. Netherlands grew 6% in the quarter. Now, that's the sort of number which people will look with enthusiasm. And why's it important? Because Netherlands has been trailblazing all the activities. They were the first to complete One Unilever. They are the first to go to the [MCOs]. And that's where they're going to move.

So it's not a bad job to be a middle manager. It's tough. But we do see a lot of (inaudible). And if you're interested in a job, Xavier. It's called [sectorization].

No. But can I move on my -- we have been training for the last four years. It's just what you explained. Now, the Olympic Games starts when? It's another way of putting the same question. Because you explain all the potential and I buy your answer, but when will the cost structure be fixed again (multiple speakers)?

And a small one is clarification. The 9% organic sales growth since 1990, how much was volume in the emerging markets? Thanks.

I'll turn the last part over to James. I know there was volume in every one of them. I can't say what the total was across the time. We announced a program of accelerating the transformation at this meeting a year ago, prior, actually, to my arrival. And we targeted 2010. And I gave you an update on the factories closed. So we are well on the way. And I would say that 2010 -- there's always going to be restructuring and retuning and refining. So it's not you come to 2010 and it ends, but we've got a very clear goal of 2010. I think the comments I've made earlier today give a good sense of how far along we are in that program.

We'll have done by then most of what I call the heavy lifting, because the structure -- when you look at Europe in 2004 and Europe in 2010, you had three or four companies in every country. You had large regional headquarters. You had several go-to-markets. You had each country and in some cases each company had its support system.

In 2010 we will have a [new] number of multi-country organizations. Most of the transactional processes will have been outsourced. Our supply chain has become a regional supply chain, on the way to become a global. And what we are focusing on is go-to-market. There's not going to be a lot more there. We track like hawks our competitive cost versus the best in class. And we're getting there. And we have plans that will bring us in terms of indirect and structural cost close to the best. So we'll continue productivity but there's not much space for heavy lifting the structure in a country.

We have a question in the front row. But before we get that, we have to answer.

(Technical difficulty) of the long-term 9% that we quote for the developing and emerging markets. I can't tell you precisely what the volume number is. But what I can tell you is that there hasn't been a single year when the volume has been negative in our D&E markets.

Well, you'll give him a call later on once he has the number. Thank you.

Morning, Patrick and Jim. Hi. It's Martin Deboo at Investec. This question, I think, just comes out of what you just said, Patrick. It's really about your margin model and how it's going to evolve in relation to probably conditions which two years ago you would probably have seen as completely unprecedented in terms of structural cost inflation and inputs.

Jim, your waterfall charts just speak very eloquently to that, in my view. And it looks to me like you're recovering more than commodity costs in pricing which, in my view, is a very commendable performance. But you're dissipating almost the entirety of your restructuring and procurement savings in what is called other cost inflation. Now, Jim, you hint that some of that is energy, which is beyond your control. But we know there's a lot of overhead in there.

So I guess my question, in the context of Cadbury yesterday increasing their commitment to cost optimization in the light of what's already a very aggressive margin progression model, don't you feel you can do more to control your other cost via things like outsourcing, offshoring, etc? I'd just value your comments on that.

Well, Jim will talk about that what we are doing. I just want to be absolutely clear because that's important, just in case anyone would believe that it's all [pass the costs through visited], I've been absolutely crystal clear as to the number one priority, which is maintain our overall competitiveness. And that's about the strength of our brand, as well as ability to fund investment in our brand; that's about innovation. That's about ensuring that we build our core capability. That's the number one objective.

The number two is margin. So we don't have a different ranking. And this is why I've always been absolutely clear that we'll not let margin numbers 2006, '07, '08, '09 or '10 distract from this agenda.

Now, second question, are we doing everything we can on costs, outsourcing, offshoring, Jim?

Martin, first thing I'd say is you're absolutely right that when the original program was put together several years ago, when the accelerate the transformation program was announced one year ago, the management team did not anticipate the sort of commodity cost increases that we have seen.

Second, I think it is impressive the way we have reacted to those commodity cost increases and taken pricing. We saw some of the costs come in earlier in foods. We took the prices earlier in foods. The oil prices, as I said, went up 40% sequential quarter. And we are taking those prices in home and personal care. And it's great that we have such strong brands that the prices are sticking.

We are not surprised, by the way, that when you take that kind of price you have a temporary volume impact, but we expect to see that gone over a quarter or two. But that's all in plan. That's what we expect to do.

Now, as to cost reduction, the fortunate thing for Unilever is some time ago we said we're going to work on cost. We're going to do it in terms of supply chain. We're going to do it in terms of overheads. We're going to do it in terms of purchasing. And what I would say is that we have had as our goal for some time getting to lowest cost by category, by country, versus the best in class. And we'll continue to do that.

We have a whole indirect cost structure program which we're working on and which is showing results. And you've seen it in the quarter, indirect cost. We're going to continue that and push that. I -- it would actually be untrue to say we're going to do it harder because we're going at this as hard as we can. We're going to continue. So I'm just glad we started this some time ago because a lot of these things take some time to be in effect. So it's a good thing that we started some time ago.

If we may, at this point, I think we would go to the telephones because people have been waiting very, very patiently there.

Just let me answer the volume question that you asked a little while ago. The answer is the long-term volume growth in D&E is 5% of the 9%.

So 5% volume, 4% price, 9% in total since 1990.

So the question from the wire?

Thank you. Our first question comes from the line of Marco Gulpers from ING. Please go ahead.

Yes. Good morning, all. I've got three questions, if I may. The first question is a bit more shorter term. I sense an underlying change of tone on the use of future cash in your comments, focusing more on capital expenditure and bolt-on acquisitions versus dividends and share buybacks. Is that something that I'm reading through this correct or am I mistaken here?

Second point is on a bit more of the longer term. Internally, your guidance is for 3.5% to 5.5% sales growth. Now, with the disposals more than 75% completed, adding 0.4% to your internal growth rate, which is 3.5% to 5.5%, should we be adding this, let's say, from '08 onwards in our expectations for external communications to Unilever, i.e. the 4% to 6% growth rate?

And the final question is could you update us on the Knorr Vie performance year to date? Thank you.

What was the last one?

Knorr Vie.

Okay.

Patrick, if I may, I'll take the first one. Marco, there is no change in what we have been doing. We're explicit that obviously the first use of cash is for necessary capital investment, to provide for the innovations that come out of the categories, to provide capacity as we grow and to lower cost. And we've announced the accelerate the transformation program and the cost that that would take, so obviously that's the first call on cash.

We only do acquisitions if they're value-creating for shareholders relative to the business as it would be otherwise, only if they fit within our strategy. And then we have said that while we intend to maintain a strong A balance sheet, what cash is left over goes back to the shareholders. And there's a question of does it go back by dividends or share repurchases, but it goes back to the shareholders.

So I don't think it's a change in what we have been doing or how we've said it. If it's made more clear by what we've said today, then that's a good thing.

As to the second question on growth?

Yes. We've certainly not changed our guidance. Everything you say is absolutely correct, that the loss of the disposal is closer than saying something like 40 basis points. We have simply confirmed our guidance for 2008, which is growing in excess of 3% to 5% range. And we simply review the guidance for the year subsequent to 2008, when we announced our results at the end of the year. But technically, you are absolutely right. This is a benefit.

Patrick, can I just clarify because Marco, I think, said 3.5% to 5.5%. Our guidance is 3% to 5%.

In excess of (multiple speakers).

No. This year, it's in excess of 5%. But our long-term guidance is 3% to 5%.

I think Marco was giving us some credit for the effective -- the excellent work that we did on the disposals.

I know. But he'd taken 3.5% and [5.5%]. So just so there's no misunderstandings.

Okay. As to Knorr Vie, Marco, it's been very valuable per country. And the key is access to and competitiveness in the cold chain and the fresh dairy cabinet, if you want.

Meaning?

Meaning that we have a very good performance in places like the Netherlands and a lousy performance in places like Spain or France.

And overall?

Average. A bit below my expectation, to be honest.

Okay. Thanks.

Okay. But, Marco, we have a lot of other innovations you have not asked about doing extremely well.

There's one more call coming through now.

Thank you. Our next question comes from the line of Paul Hofman from Cheuvreux. Please go ahead.

Yes. Hi. Good morning. It's Paul Hofman from Cheuvreux in Amsterdam. Two questions, the first one about the visibility of your input costs. What can you say about the hedging? Now for the last couple of quarters you have increased you guidance. What's the chance that you have to do it again in, let's say, the third quarter?

And the second question is on the pricing in Asia Africa. It's now exceeding 10%. Do you still see room to lift that further without hurting volume growth? Asia Africa is predominantly HPC. It's also primarily driven by oil prices. What room is there to go further with your pricing? Thanks.

Good morning. As to the guidance on input costs, I'm for sure not going to say that we will never change our guidance. We've been through unprecedented times and we could have more unprecedented times, so I'm certainly not going to say that.

What I will say is that at the half-year mark you've got pretty good sight on what the cost will be through the balance of the year. The big variable for us is mineral oil, because we do not hedge mineral oil. We have some long-term contracts for inputs which are affected by mineral oil but many of those contracts have price escalators based -- and for that matter, price decelerators, based on oil price.

At the moment, we've given you our best guidance for the second half, which is 600 basis points, for the year, therefore, 550. And we feel that's the best guidance we can give for the remainder of the year.

As to the pricing in D&E, or Asia Africa and volume, first, we have had what I consider good volume growth, in excess of 4% in the quarter. And in fact, if I would go one level below in terms of granularity, most of our tea markets have shown growth well in excess of that. We have one or two countries like South Africa, which is important to us, where that's [home grown], the growth came mostly from pricing. By and large, we've produced numbers like more than 20% in China in volume, have good growth in Indonesia, volume growth. Good growth in Turkey, volume growth. Good growth in India, volume growth. So by and large, we've seen that we were able to grow both the volume and price.

And one of the reasons, in fact, has to do, as we mentioned, and we gave two examples, one in Brazil and one in India, we see good growth at the top end of the market and the bottom end of the market, less so in the middle, as you saw in Brazil. And as we can both drive the strategy of getting the price increase and mostly benefiting for the most affluent part of the population, at the same time remain very competitive at the low end of the market, and be able to drive volume.

So, at this stage, whilst we recognize there's been some reduction in the overall volume growth, in fact, we're at a very good place. And that has to do with the strength of our brand and the strength of our portfolio.

There's also something interesting, that in times of tougher economic conditions, consumers are less experimental. And brands very often offer them much more safety and security on their choice.

Okay. Thank you. One final, if I may.

We've got questions coming in online and we will answer all of them during the course of the day. But I thought maybe we could take a couple of them.

This one is from [Alistair Anderson] of [Ivy], who asks the question why are you seeing savings in A&P when volumes are under pressure?

First of all, we have had EUR100m increase in advertising. And if you look at the percentage, it's basically more or less in line with what I said, we have reduced promotion, because when you increase your prices 15%, 20% you have to take a very, very strong position and certainly not start bidding back and bonusing back your price increases. And our promotional intensity has reduced.

Now, there's two ways also to appreciate what we have done. One is to look at the overall market share situation. As I've said, it is growing in aggregate with our market, losing market share in Western Europe, but gaining in the US and gaining in developing and emerging markets, by and large. And our share of voice, share of market you've seen is very healthy. So I've no intention to save on advertising or in promotion. On the contrary, I see an opportunity.

And even in Europe, we have increased by 5 percentage points our investment behind advertising and promotion in personal care. We have a very clear strategy where to invest and not to invest. The thing I want to reassure you, and after 13 quarters I hope that I have some credibility in saying that, A&P is not a balancing item. And there is no boom-and-bust devil that is further now coming up out of the box. And last but not least, my number one objective, and I have not changed, is top line competitiveness, not top line competitiveness and maintain the margin and gaining market share. We have a clear strategy and a clear ERP. So, no savings.

Another question (multiple speakers). Next question from [Andrea Bergamaschi] of Intermonte. And she's saying -- she's talking about volumes. Or he, sorry, I'm not sure whether that's a he or a she. What has been the role of de-stocking after the price increases that we have been taking? And what are the actions that we will be taking in order to deal with this quarterly volume weakness?

For the time being, we've not seen de-stocking. One of the reasons is that we've been extremely careful, especially in D&E, to ensure that there was no stocking in advance of price increase. And we monitor the situation, especially with our distributor, mostly then under our control, very, very carefully. We have not seen a de-stocking. There may be some announced in some geographies, US where we go through a regular path of de-stocking. But at this stage, obviously de-stocking has not been a factor in our number.

As to volume, I've been very clear that we'll not let our volume competitiveness be eroded by price increase. And at this stage, we're certainly not there in developing and emerging markets. I think we are comfortable in North America. I think we need to be reassured that some of the increases, especially in places like dressing and spreads, are not affecting our competitiveness. And this is complicated because butter prices are going down.

So we have an increase in prices against, let's say, a market which is reducing. This being said, as far as dressing is concerned, we saw in the second quarter improvement in volume versus the first quarter. So it's something we're going to monitor very, very closely. At this stage, it's not about throwing money at the consumer, certainly not in order to buy that back. We want to leverage our brand, our innovation, our capabilities, building brands in the marketplace to come back in terms of volume.

I might just add to that, Patrick, the level of commodity cost increases in total around the world is unprecedented. And the need to raise prices around the world at the level we have is unprecedented. And in particular, categories there is extraordinary pricing. However, we have lots and lots of experience in the D&E world, in particular countries, when there was substantial input inflation at the same kind of levels that we're having in terms of input cost generally around the world.

And so we have lots of experience of what to do in that kind of environment in terms of raising prices in order to hold your business model together, accepting that there's going to be a bit of a volume fall off after you do that. Consumers get used to the new prices, come back. You've held your business model and you move on. So while it's unprecedented on the global basis that we're seeing, it is not unprecedented for us in particular countries. We've got a lot of experience. We've done it before. We've done it successfully. We're going to do it successfully now.

Okay. I think we've got time for two more questions from the floor.

Julian Hardwick at ABN Amro. I've got three quick questions that might be for Jim. Could you just ballpark for us what the EPS dilution next year from the disposals is likely to be?

Secondly, could you give us some sort of sense in the current market environment about what you regard as being the appropriate range for net debt for the Group, looking ahead?

And thirdly, I noticed your finance costs in Q2 were down quite significantly, despite the fact that debt went up at a time when borrowing costs are generally going up, which is a tremendous achievement. I just wondered how you did it.

Let me answer the third one first. I'm afraid that the average debt was lower than the quarter end debt. I mentioned -- so that's one aspect.

And then second, I should say that the mix of debt, we were dollar -- heavily dollar-denominated in this quarter versus a year ago. So that helped.

And then third, we actually had a flattering comparator versus last year. There were some things which were in and out last year which made the comparator easier. So it's not -- we have a great treasury group here, not that good.

As to the second one about the appropriate debt level, in my view, we believe having an A plus, A1 balance sheet is very important. We've conserved it extraordinary well over the past 12 months, since this meeting a year ago. And our intention is to have a debt level which is consistent with that. We're going to be having proceeds coming in from the sale of the various businesses.

We have a plan which, I said before, EUR1.5b plus in terms of share repurchases. We'll have an interim dividend to do at the end of the year. I really would not care to speculate the exact level of debt that we'll have because it's a function of a lot of things going in and out. But what I can confirm is the A plus, A1 target for the balance sheet and the commitment to return surplus cash to shareholders, but also in the context of sensible value-creating acquisitions. All that goes into the mix.

As to the first question, how much the dilution will be, I don't know the answer to that. I know there will be a little bit. I'll just see if either John or James can answer that.

Well, I'm not going to give a number because it will depend on the exact timing. But just each of the big ones has a small short-term dilutive effect. In the case of North American laundry particularly, we will have a transition of services agreement, which will take a few months to help the new owners and depending exactly on how long they take that on for and how that will affect the exact numbers next year. But each of them has a small one and then cumulatively there will be an effect.

John, when are you going to update people on that?

Well, we'll be clearer when we know what the final timings are and what those transactions -- so we can do that certainly in the third quarter, yes.

Last question, Martin.

I hope the question I'm going to be able to pass to one of the colleagues. (Multiple speakers) about that.

Yes. Thanks. Martin Dolan from Execution. It was my understanding that Unilever basically takes trade promotion and dealing back off revenue. So when we talk about promotion declines, we're talking about consumer promotion. And I would have thought you increased consumer promotion at a time when you increase prices, rather than decrease it.

That's for Vindi. He's there.

At a time that we are trying to increase prices and actually succeeding, the most important thing is to first position that price, to land it and make it stick. And that's not the moment to offer any form of alternative incentive to the trade, or indeed to the consumer. Once the price table has against stabilized, that opportunity comes back, as it will for us.

Okay. Let me sum up. We believe that our strategy is working and delivering in a tough environment. Our D&E focus and our D&E story continues to be strong and make very good contribution to the business. We've certainly seen some weakening in volume in developed markets, more so in Europe than we've seen in the US.

Our priority remains to be competitive, to maintain our overall market position, and that's our number one objective. And we'll certainly make sure that we are not going to let our competitiveness deteriorate and hence we're watching very closely the volume line.

As to A&P, it's not a balancing factor. We're very focused in taking advantage of the downturn to strengthen our market position, especially in developing market, and not even close anything like the so-called boom and bust which we have not had for the past 13 years -- 13 quarters, and we'll certainly not have as long as I am Chief Executive and beyond.

So, with that, thank you very much. And I hope we have helped you to better understand this set of results. Thank you.

Thank you. This conference has been recorded. Details of the replay number and access code can be found on Unilever's website. An audio archived webcast will also be available on Unilever's website, www.unilever.com.