聯合利華 (UL) 2009 Q2 法說會逐字稿

Welcome to Unilever's second quarter and half year results 2009 conference call. This will be presented by Mr. Paul Polman, Chief Executive Officer, and Mr. Jim Lawrence, Chief Financial Officer, concluding with 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 website. A video webcast and podcast of the teleconference will also be available on Unilever's website, www.unilever.com. I will now hand over to your host, Mr. Polman. Thank you.

Good morning. I hope you didn't have to get up too early. Not too bad. Some water and then we'll kick it off. So good morning everybody. And welcome to our quarter two and half year 2009 results. I am joined here by some other people from Unilever, first of all, Jim, Jim Lawrence, our Chief Financial Officer and James Allison, sitting here, our Head of Investor Relations.

In the audience we also should have Vindi Banga. I don't know if Vindi is here. Vindi is responsible for all of our categories. Welcome, Vindi. Good morning. And Genevieve Berger, here. Genevieve Berger, who is our Chief R&D Officer. We have Mike Polk, President of the Americas. We have Harish Manwani, there's Harish, President of Asia, Africa, Central and Eastern Europe. We have Sandy Ogg, our HR Manager, and I see Steve Williams, our Legal Counsel, sitting next to Sandy as well. So welcome, everybody.

Jim will cover our performance in a minute. And after that I will give you my perspective on the development of the markets, where we stand versus our priorities, and obviously how we measure up against the targets we've set for our business. Before I pass to Jim to go through the details, let me just briefly summarize what I consider to be some of the highlights.

But first, obviously I have to draw your attention to the usual disclaimers relating to the forward-looking statements and the non-GAAP measures.

Let's go to the highlights. We set out to reignite volume growth whilst protecting cash flow and margin. Although early days, I am encouraged by the progress we have made. Organic growth of 4.1% in quarter two was well balanced, with 2.1% coming from price and 2% coming from volume.

The volume growth represents a clear step up from the negative trends we've seen in the previous quarters. Although helped by -- a little bit by strong ice cream sales in June, this turnaround has not come about by accident.

Our growth is solid and of good quality as it is mainly driven by improved execution and stronger innovations, backed by higher A&P spending. Volume growth is widespread, across all categories and countries, with share trends showing a positive momentum in nearly 60% of our turnover. We have closely aligned the business behind our priorities and I believe that it is starting to pay off.

Price remained positive in the quarter, but the year-on-year trend in underlying price growth is down. The bulk of this, as you can imagine, is the carry-over effect from tremendous price increases we did in 2008. But we have also had to correct some prices that I talked about in the last quarterly announcement, particularly in Western Europe.

Specifically in categories such as Spreads and Dressings, commodity prices have reduced significantly from the peaks we've seen in 2008 and, where appropriate, these savings have been passed back to the consumers. As commodity costs escalated in the second half of 2008, we also took some price increases in some of the markets, which were frankly not followed by competition. This weakened our consumer value proposition. And we've now brought our prices back in line and are broadly happy with our relative price positions we hold currently.

A&P spending increased by 50 basis points in the quarter as we stepped up support behind innovation and market development initiatives. Both actually A and P were significantly higher, despite the lower media cost, which, I believe, will strengthen our relative position.

Operating margin before restructuring was down by 60 basis points in the quarter, reflecting the step up in A&P spending of the 50 basis points, and 30 basis points' negative impact of dilution from disposals. Savings continue to be strong, helping to offset the still higher commodity costs we've been facing over the first half.

Cash flow from operating activities improved by EUR1.6b in the first half as we tightened our grip on working capital.

I believe that our priorities are the right ones. And I am satisfied that the focus we are giving to them is helping us to improve performance. But I'd be the first one to say that there is more to be done. Although our share momentum is improving, there are still too many markets where we need to do better. The same holds true for our cost structure, which is not yet sufficiently competitive. I am determined that we will continue to make progress in these areas.

So with these few opening words, I will now pass it on to Jim to take you through the details of our performance. Jim?

Good morning, everyone. Thank you, Paul. Let me start by reviewing our top line performance.

Turnover in quarter two was EUR10.5b. That is 0.8% ahead of last year. There was no currency impact in the quarter. Net of acquisitions, disposals, net of acquisitions, reduced turnover by 3.2%. And this left underlying sales growth of 4.1%. As Paul said, volume was up 2% and price was up 2.1%. Volume growth was restored in all of our three regions. Turnover for the half year was EUR20b, which is similar to last year.

Now, turning to the regional highlights, we'll start with our largest region, Asia, Africa, CEE. Underlying sales growth was 8.2% in the quarter, with 3.3% volume, driven by innovation and market development initiatives. Our strong portfolio of brands typically covers the entire range of price points in the major segments of our key markets.

Our price growth came down to 4.8% in the quarter, as we lapped the price increases which were taken during last year. Volume performance improved in most countries across the region. India returned to positive volume growth, while Indonesia, Russia and Vietnam continued to deliver strong double-digit sales growth, underpinned by strong volume growth. We have not yet seen much improvement though in our markets in Central Europe.

Underlying operating margin improved by 130 basis points in the quarter, with cost savings, carry-over pricing, and the operational leverage from higher volume more than offsetting the adverse impact of higher commodity costs.

Underlying sales growth in the Americas was 4.9% in quarter two, with volumes up 1.6%, and price growth of 3.2%. In the United States, we have adapted quickly to changing consumer needs. For example, we have increased investments in campaigns emphasizing consumer value, and addressing increased demand for in-home eating. This has led to the second consecutive quarter of positive volume growth in our US Consumer business. Sales in Foodservice were down, partly from the exit of unbranded business, but also, frankly, because fewer people are eating out of home in these troubling economic times.

In Canada, which is now managed as part of our North American multi-country organization, MCO, our performance has improved strongly, which was driven by innovation as well as by better execution.

Latin America grew by 9%, with higher volumes mainly driven by good performance in Brazil, Argentina and Chile. Economies in Central America, a bit like Central Europe, economies in Central America remained particularly weak and our sales were actually down, although not as much as in quarter one. Underlying operating margin improved by 10 basis points, and I should note that this is despite a negative 80-basis-point impact in this region from disposal dilution.

I'm pleased to report that Western Europe returned to positive volume growth, with volumes up 1% in quarter two, and that is after five consecutive quarters of decline, including quarter one, which was down 3.7% in volume. That now sequentially turns to 1% positive volume in quarter two. And that volume growth was broad based.

Ice Cream sales in the first half of the summer season have been strong, but even without those volumes, in our Consumer business, we would have been slightly up. In addition, all key countries showed an improving volume trend.

Underlying sales were down 1.1%, with price growth 2% lower as we adjusted prices to reflect the anticipated easing in commodity costs, and we corrected prices where we have been uncompetitive.

Our pan-European SAP system, our ERP system for Europe, has been fully in place since January 1 of this year, and it allows us to share and utilize information more efficiently and is a key enabler for our continued progress in customer service.

Underlying operating margin in the quarter was down by 340 basis points, which reflects higher commodity costs, the depreciation of sterling, and a step up in investment to reignite volume growth.

Let me now go through our performance by category. Savoury, Dressings and Spreads sales were flat in the quarter. They were up 1.4% in the first half. In Spreads, we have lowered the prices of our products in a number of markets, which reflects the easing of edible oil prices and to close gaps -- close competitive gaps where that was necessary. We have also reinforced the nutritional value of our Family Goodness brands, such as Rama, with the further rollout of our Goodness of Margarine campaign. In Central Africa, we've introduced more affordable margarine tubs to our Blue Band range.

In Dressings, we have seen a good growth from the rollout of new Hellmann's Light 'double whisked' mayonnaise which utilizes a proprietary citrus fiber technology. In Savoury, we have introduced our new Knorr Stock Pots in several more markets in Western Europe. And here consumption is building, and repeat purchase rates are particularly encouraging. We have also launched a new range of Knorr rice seasoning mixes and soups into Latin America.

Turning to Ice Cream and Beverages, here we grew by almost 5% in the quarter, 4.5% for the first half. Ice Cream sales picked up in the second quarter and were aided by the good weather that we enjoyed, at least through June, but also we had new communication campaigns for innovations such as Magnum Temptation, which is now also available in multi-packs for in-home consumption.

Inmarko, our recently acquired Russian ice-cream company, delivered a strong double-digit performance and is nicely ahead of our acquisition plan. In Latin America, we continued to build on the successful re-launch of Magnum, and we're extending the range with new variants.

Tea is one of our fastest-growing categories. And innovations here include new Lipton green teas which were launched in the US, and we've had a further rollout of our Lipton Linea slimming teas into Russia and China.

Home Care grew by 9.2% in the second quarter, and it was 9.9% across the first half, with strong performances both in Laundry and Household Care. Surf has delivered another strong performance, driven by its clean and fresh offering and it is a great value price for consumers.

In Asia, we continue to roll out new improved formulations of our Dirt is Good brand into a number of markets, including, now, China. And in Fabric Conditioners, our Comfort Naturals have been launched, with ingredients which are kind to the skin.

Finally, in Household Care, Domestos 24-hour protection and CIF Actifizz delivered strong growth, and we've recently rolled out CIF creams into India.

Personal Care. Personal Care grew by 5.4% in the quarter, 4.6% in the first half of this year. Deodorants continue to perform strongly across both developed and developing markets. New variants include Axe Instinct with the Scent of Leather, Rexona No White Marks Invisible Ice, and Dove hair-minimizing deodorants have also been rolled out into North America, and that's after a successful launch in Europe and Latin America in the first quarter of this year.

Hair Care is performing better. TiGi sales are ahead of last year and Clear has now been rolled out to Argentina and Colombia. And the new mix is also now available in India.

We have added Nutrium Moisture technology to our Dove shower gels in North America. This is a new proprietary technology which significantly improves moisturization by penetrating into the skin and repairing damage. Our Lifebuoy range of anti-bacterial hand wash and soaps have performed well across Asia, with specific marketing campaigns addressing consumers' heightened hygiene concerns.

Now, before I review the drivers of operating profit, may I say a few words about commodity costs, savings and pricing? Commodity costs were higher in quarter two than they were in the same period of last year, this time by around EUR400m. Currency accounted for two thirds of the cost increase. This EUR400m follows a EUR600m year-on-year increase which we saw in the first quarter.

While the benefit of lower edible oil prices and lower crude oil prices will flow through the income statement in the coming quarters, we will continue to have an offset through the impact of currency devaluation in a number of our key markets. Inflationary pressures, though, are also evident in a number of commodity types, such as tea, fruit and vegetables and certain food ingredients. So in the second half of the year, we now expect commodity costs to be a tailwind. For the year as a whole, we expect commodity costs, including currency, to be up by a few hundred million euros.

Savings for quarter two were more than EUR300m and now stand at EUR600m for the first half. And half of these savings are coming from better buying, one third are coming from restructuring savings, and the remainder from local efficiency savings programs. We expect our overall saving programs to deliver in excess of EUR1b for the year as a whole.

Restructuring costs for the first half of 2009 now stand at just over EUR350m. We continue to expect restructuring charges for the year as a whole to be nearer EUR1b.

May I now say a few words about pricing, building on what Paul mentioned at the beginning of the presentation? The carry-over impact of price increases taken last year contributes between 2% and 3% to price growth for 2009 as a whole. Between 6% and 7% fell in Q1, and that will drop off to close to zero by quarter four. And, in addition, as we mentioned, we have adjusted prices where we've not been competitive, and prices have come down in some of the categories which have been most affected by the reduction in commodity costs.

The impact of carry-over pricing and these adjustments will mean that price growth in the second half of this year will be flat, or perhaps even negative, slightly. This is a natural consequence of the change in commodity costs, up last year, down this year.

So now, let's turn to operating profit. This chart shows the up and down elevators of operating profit for the second quarter. It's expressed in constant currency, and we compare the same period last year, second quarter.

You can see that the benefits of volume and mix are partly offset by the lost contribution from disposed businesses. Price increases and savings largely, but not completely, cancel out the increase in commodity and other costs. You can see the step up in investment in advertising and promotions. And this left operating profit before RDIs down EUR90m at constant exchange rates, year on year.

The underlying operating margin was down 60 basis points in quarter two. Gross margin, although 20 basis points lower than in the same period a year ago, showed a marked improvement versus the previous quarters. And this trend will continue in the second half as the lower commodity costs flow through the income statement.

Advertising and promotional expenditure was 50 basis points higher than in the same period last year. Overhead came down by some 10 basis points. And this is after absorbing around 30 basis points of so-called un-sheddable costs from disposals. And this reflects the benefits of our ongoing restructuring program.

The underlying operating margin for the first half of 2009 was 50 basis points down. And the details are included in the appendix to this presentation, as is that up and down elevator chart for operating profit. You have that in the back of the pack.

Now, having covered the operational performance for the second quarter, I'd now like to review earnings and cash flow for the first half. Earnings per share for the half were EUR0.53. Before the impact of restructuring, disposals and impairments, the earnings per share reduced year on year 13%. The key drivers of the reduction are 3% from disposals, 6% from the increase in pensions finance charge, and 3% from a higher tax rate in the first half of this year versus last year.

The underlying tax rate in the first half was 28.5%. We expect this to be lower in the second half. And for the tax rate before RDIs, for the full year, we now expect that to be 27% which is slightly above our longer-term guidance of 26% which does, in fact, remain our longer-term guidance.

Cash flow from operating activities was EUR2.5b in the first half. This was a EUR1.6b higher than last year, and was largely driven by improvements in working capital. I have to say, this is versus an easy comparator. But nevertheless, our cash conversion cycle has improved by 15 days versus the same period last year, and of that, 13 days came from reduced inventory.

Net debt was EUR8.9b at the end of June. That is EUR1.3b lower than at the same time last year and EUR900m higher than at the start of the year. We continued to issue new bonds to refinance our debt, and we did so at very competitive rates. In June, we added two new bonds, an 8-year GBP400m bond at the rate of 4.75% and a 4-year EUR450m bond at a 3.125% interest rate.

The net pension deficit increased in the first half by EUR300m to EUR3.7b. This mainly reflects an increase in pension liabilities which are due to lower discount rates. Our estimate of the cash cost of pensions for the full year 2009 remains unchanged, at around EUR1b.

Our financial strategy and strong cash flow generation are a source of competitive advantage. Our cash flow and strong single A credit rating support competitive financing costs and a highly attractive dividend policy, while providing ready financing for possible bolt-on acquisitions. For example, the acquisition of Baltimor, the leading ketchup manufacturer in Russia, was completed at the beginning of July. We also completed the acquisition of TiGi in the quarter and we bought out the minority interest of our Vietnam operation.

And with that, I'm going to now hand back over to Paul.

Okay. Before I give you the overall brief impressions that I have on the results, let me just say a few words about the economic environment that we're actually operating in.

Although many keep quoting the increased amount of green shoots that are coming up, we'd just like to continue to be realistic, hopefully proven wrong, but I'd like to plan the business accordingly. This is, without any doubt, the longest and deepest recession we've seen during the post-world-war period. And, whilst it might have bottomed out, we do not believe that there are any signs of a fast recovery. In fact, we expect that many parts of the world, such as Western Europe, Eastern Europe, will still soften before they bottom out.

The World Bank has continued to lower its forecast of global GDP growth, which now is standing at minus 2.8%. And even if the outlook for 2010 is slightly more positive, which is by no means guaranteed, we are still well behind the levels we have seen in 2008 and before.

For us, the most important indicators are consumer confidence and unemployment. Consumer confidence remains low. A recent Nielsen survey showed that 48 out of the 49 countries experienced a further drop in consumer confidence over the first half of 2009 versus the previous half of last year.

Unemployment has risen fast, and will continue to rise, especially in the US and Europe. And it will take a long time before, here again, we go back to the historical levels. Whilst major ticket items will undoubtedly be affected first, we also see grocery spend drop by about 10% when unemployment hits. Fortunately our categories are less affected and we believe that this will continue to be the case as we move forward.

However, the rate of growth in our category volumes has clearly slowed from the periods prior to the recession, and we expect it to stay at these levels for a while. Volume growth in the developed world has stopped altogether or, in the case of Europe, it might even be negative. In the D&E markets, volume growth continues to be robust, at 3%, but this is still down from the higher levels experienced in prior years.

In this new world there is definitely a recalibration of the value equation, and we expect a tougher competitive environment from both private labels, who are benefiting short term, as well as from branded competition. Whilst we believe that there are ample opportunities in this environment for any of us, one size does not fit all. The way we respond to consumer needs will differ within different categories, between different countries, etc. A prerequisite for all of this, to do this, is a very deep understanding of the consumer needs and behaviors that I've talked before.

If we take an example, we looked at research in the UK and Germany, and that shows that it's not always private label that benefits. While some consumers undoubtedly are trading down, they're not necessarily fleeing to discounters. Rather they're looking for value without frills. But, in those countries, an equally large section of the population is moving up, looking for premium-positioned market leaders that are well supported, differentiated and have strong innovations. So the average might look fine, but the business is not happening at the average any more. It is this deep understanding of the consumer that, over time, will separate, I believe, the winners from the losers.

Driving innovation behind our leading brands, strongly supported with A&P, continuously shaping the value equation, whilst rigorously maintaining focus on cost, continues to be our key objective. In this context, we are making sure and steady progress. If you look at the quality of our results, there has been a good improvement in the volume share trends with, as I said, nearly 60% of the business now contributing positive momentum. Growth is widespread across categories and countries, underpinned by more A&P support and, as Jim explained, better innovation. And the fundamentals of our cost structure continue to improve as well.

We're pleased with the progress in developing and emerging markets, with volumes growing over 3% after two consecutive quarters of decline. CEE, however, Eastern Europe continues to show negative volume, but even here we saw some improved performance in quarter two. Russia and China, our priority markets for the Company, continue to perform well.

In the developed markets, volumes grew by close to 1% after five quarters of consecutive decline. North America is performing well. And despite the growth of private label, we believe we've actually increased share somewhat.

Western Europe, without any doubt, remains a difficult market. But we have shown in places like the UK that we can do well, even in tough conditions. Our shares in Western Europe continue to improve, although they are certainly not yet at the level that I would find satisfactory.

Our volume performance in the second quarter was better, especially where we had strong innovation rollouts, such as the Dove hair minimizer, which is a deodorant product, Magnum Temptations, you can't keep your hands off, and Small and Mighty liquid detergents which provide a better performance than our competitor set. But we need to do more before we feel comfortable that we have turned the corner in Europe. So we're pleased and encouraged by the progress. But we have to set the bar higher for the long-term results.

Let's now take a closer look at the four key drivers of improvement in our business performance. First, and most importantly, strengthening our brands and categories.

We are improving the innovation success rates by focusing on fewer projects, and then backing them up by stronger advertising and claims. For example, the complete removal of the trans fats from our soft spread margarines in the US positions us well, both in terms of market-leading nutrition and taste, and certainly provides the best margarine choices now for consumers on the market.

Our Ponds anti-aging range of skin creams, which provides younger-looking skin in seven days, are preferred by consumers versus other leading prestige brands across Asia.

Our Small and Mighty range of detergents provides consumers with better performance whilst being kinder to the environment. It actually also provides our customers with a better profitability proposition than our competitor set.

And our range of New Dove Liquids with Nutrium technology is proven to be the most effective natural nourishment that we've ever delivered in a body wash.

We will also continue to roll out innovations to more markets, more quickly. Clear is now sold in 33 markets, which is 13 more than we had at the end of 2008. And Dove Hair Minimizing Deodorants are now in 37 markets, with seven added in the last quarter alone.

We need to work on our product quality. Product quality is being improved in many markets. For the French amongst us, you will be pleased to know that Amora Dressings has improved its quality. For Americans, we've put more chocolate in Klondike Ice Cream bars. And our Dirt is Good formulations in Asia have been strengthened. All examples, but there are many others.

We also have to play better the full pricing piano. The price piano is being played better. We spoke before about the initiatives we've taken in South Africa, including the extension of our laundry range to more attractive price points. In Russia we have launched a range of herbal infusion teas under the Beseda name, specifically positioned in the value segment. And, as we have said already, we have corrected prices where needed, in order to restore or improve our competitiveness. And this has largely been in Western Europe.

But let's not kid ourselves. Challenges remain. There are still too many markets, category combinations, or cells, as we call them, which are not performing. And our brand equities need to be stronger. So there is still a lot of work to do.

Let's just look at another key driver, which is the in-market amplification we've talked about. It's great to have great innovations and brands, but you also have to be able to make them come alive in the market. It's, in essence, ensuring that discipline in the sales fundamentals and helping our customers grow, that I'm talking about, helping them grow more quickly by agreeing with them in jointly beneficial business plans.

We have been focused on driving increased customer service and on-shelf availability, and we're starting to see results coming through. Within our customers, of our top 10 customers, eight are actually growing faster than the company average as we work even more collaboratively on our plans together to grow their business and ours.

In the US, we are leveraging our newly opened Customer Insight and Innovation Center. And many of you hopefully will have the opportunity to be there later this year at our investor conference that we will be holding in Englewood Cliffs in New Jersey. We're pleased with the results of this Innovation Center, and we will expand this concept of our Customer Insight and Innovation Center to Europe and Asia as well, over the balance of the year.

So again, I'd say good progress, but we have more to do on the basics, especially on in-store availability. We also need to be acutely aware of the challenges which will come from increasingly more aggressive low-cost and local competitors that are local or regional, and from increased private label penetration.

The third important driver of business improvement is cash and costs. I always say cash up and costs down is the way to easily remember it. You've seen already the improvement we've been making in working capital management that Jim talked about. We are accelerating our already ambitious restructuring programs, most particularly in the areas of overhead, where we are going to achieve the overall headcount target this year which we had previously set for end of 2010. And, as Jim has explained, commodity costs, a severe headwind for the last six quarters, will hopefully become a tailwind in the second half of 2009.

Our cost savings programs are functioning well and are ahead of plan at the half point in the year. So again, good progress, but the reality is that we're not still fully competitive.

The final part of the jigsaw puzzle is the organization. There are three areas where we are continuing to drive important changes. The first is to build further accountability and responsibility throughout the organization. In the last six months we have appointed one third of our top managers to new roles, with more changes still to come, and we have simplified and aligned the way in which we track and reward performance.

The second change we are making to the organization is to further instill a bias for action and to build speed in all that we do. To help to do this, we actually have to continuously reduce complexity wherever it does not add value. And that's not just complexity in formulations, packaging and SKUs, but also complexity in the way we run the business. We have implemented the 30-day action plans, with clearly defined owners. And this is helping us to take decisive actions quickly in the marketplace.

The third organizational imperative is to continue to drive consumer and customer thinking to the heart of our business, and to further align the organization on growth and driving out all activities which, frankly, will not add value for consumers and customers.

We will also increase the focus on our core brands further, and we will further strengthen the links between brand building and brand development to ensure that we continue to increase our seamless operations and drive that to higher levels. We are doing better in each of these areas, but cultural changes will take time and we don't want to build the organization on quicksand either. So it's better to do it well for the long run than to go after quick short-term runs.

After six months as the CEO, I should say that I'm thoroughly enjoying the opportunity of leading this great Company. It's certainly demanding, but I relish the challenge and feel strength and growing. All in all, I am pleased with the speed with which the organization is responding to the directions we have all set together as a leadership team.

However, as a Dutch saying goes, and I've been corrected many times by English because apparently they have a different saying, but I am Dutch, so in Holland we said an early bird doesn't make a summer. We don't talk about worms or swallows; an early bird doesn't make a summer.

So we've been here before that we saw good results, but what we need is consistency, consistency of delivery of these results. And what matters here is not the fancy words, but it's the results themselves.

With the continued hard work and dedication of everybody, I have no doubt that we can become a consistent winning organization. Our principal focus continues to be the restoration of volume growth whilst protecting cash flow and margin for the year as a whole.

With that, we'll just open it up to questions now. Thanks for your attention.

Thank you Paul. Now let me just spend a minute on the process for questions. If you are in the room and you wish to ask a question it isn't complicated, you raise your hand. And if we select you then please press the big button in your console that will activate the microphone.

Please tell us or remind us who you are and who you represent, and please if you would after you've finished asking the question if you could then hit that big button again. (Operator Instructions).

We are also taking questions online. Already there are a couple that have come through, and if we have the opportunity then we'll also take those. So I propose that we start in the room, so Martin, why don't you ask the first question.

Thank you. Question for Paul and Jim, just drilling into the volume growth issue, what do you think is the weighted average volume growth of the customers you are playing in globally, and what do you think is happening to your volume market share in those categories, just trying to understand it on a structural level.

Sure. Obviously there is always a little bit of trailing in the data, but I think the market growth in Europe in the categories that we are competing in is probably about minus 1%, in the US it's probably around 1%, and in the rest of the developing world it's probably about 3%.

So if you take that average you might get to 2% in the weight that we have our business, slightly less than that, which does mean that we think that we are slightly building share in the US, that we, in Europe, are losing less share I would say, but that we still have to do things. I am talking about value share here, volume share is slightly better now in Europe.

And then in the developing markets, overall, you'd say building share but obviously overall doesn't exist. You have to look at each country in itself. So we have areas where we need to do better and areas where we are growing our business.

Simon at the back.

Yes, Simon Marshall-Lockyer from Jefferies. Just in terms of this second quarter volume of 2% and that very big recovery from the first quarter, we've seen in the reporting season so far that maybe the abatement from some of the destocking effects in the first quarter were actually having a larger role in the second quarter. Is that something that you've perceived and sensed particularly in your more mature market franchise, Europe in particular?

Well the numbers have to be a little bit measured. We've had a good ice-cream season in June actually. You wouldn't believe that now if you look outside and for the last few weeks that at least I've lived on this part of the planet.

But we've had probably continuous destocking, but we don't talk about that. We have more people eating at home, and we have our food solutions business probably underperforming for that reason. We don't talk about that.

We'd just rather focus on how we build the business, which is if we do the continuously good innovations and spend behind it, stay close to the consumer, we can build businesses in the toughest environments.

We are building good business in Russia right now, others are reporting on that differently. We have good business growth in places like Indonesia and Brazil. So where we do the right things for what we get paid for we get the results, and I don't really want to go into all these other trends that will happen anyway.

This is an industry that, I think, has been relatively relaxed on the total working capital tied up in the supply chain, on the total inventory. You see what we are doing on working capital, how we have made a step change, albeit from a low base. We were frankly bad last year, but still, having said that, the organization has improved and should take a lot of credit for that.

This is an industry that has 65 days in the supply chain. Some of our best suppliers are running it with 10. You will not get to 10 days; that's impossible, as a total, you understand that. But there will be continuous improvement. And that's good.

If you are a food business it means fresher products. If you are an innovative business it means getting these innovations faster to the consumer. So we have to continue to build in with something, as not all of you might have already known, but continue to build in more efficiency in the supply chain.

And obviously when there is more focus on cash flow in this environment, as you well understand, then that process is probably accelerated a little bit. But we deal with that in stride, as we do with all the other things.

Celine?

Yes. Thank you, Celine Pannuti from JPMorgan. I have two questions. The first is input cost. Why is it that I think the guidance is higher from what it was before.

And I think your -- one of your -- a big competitor of yours has had a 2b negative headwind last year, it's getting to 1b. Can you give us a tailwind for the next fiscal year? Can you give us an idea of what it could be for you in 2010?

And my second question is emerging markets. Growth remains quite good overall in those markets. To which extent is this better ground for most of the [efficiency] could mean much higher competitive environment, and whether pricing would really be an issue, i.e. negative pricing, in order to win over those emerging market consumer? Thank you.

Yes, that's good, so the two questions on commodity costs and the emerging markets. I'll Jim expand on the commodity cost side. But the one thing that we do here is on our commodity costs we've always been prudently conservative. Some people have always run ahead of themselves, and we've always said that we don't think commodity costs to go back to levels we've seen in 2007 or before.

On the food side the trends are not there, the dynamics are simply not there. If you look at climate change, alternative demand, population growth, the dynamics are a trend on the upwards. And we continue to see that. We've never seen tea prices going down, for example.

So you have to be careful when you look at companies like that to look at not only just their milk prices, because we just don't have that much of it.

The other thing is the currency effects in the developing markets. When we import dollar-based materials and the real goes from 1.80 to 2.40 you have 30% currency effect that we put into our commodity costs. So over the year we've seen nearly $1b of currency effect that we estimate that we have to deal with.

But, as Jim has mentioned before, commodity costs are coming down over the second half and we expect a tailwind from that. I don't know if you want to add to that.

Yes. The -- what I am not going to do is give guidance for 2010. The -- as it was at the end of Q1 we thought that the increase of the first half would be equaled by a decrease in the second half, and that's turned out to be wrong. And as it is today we have gotten through a half year and we've had about $0.5b of increase in commodity costs. But we've also had $0.5b of ForEx impact.

And so taking the ForEx where it stands today and taking the commodity costs where they stand today, we look forward into the back half and we see about $0.5b of improvement year on year, but that nets out obviously to a full year increase, which is not what we thought. So that's how we see it as of now. We are not going to try to speculate about 2010 at this point.

Developing markets continue to be strong. We have 10% growth the first quarter roughly, if I remember, and we produced more or less 9% growth, overall sales growth, now so -- and a 50% plus of our business. So, we continue to be strong, and at the same time we see it's built on solid foundations if you look at the operating margin improvement as well.

Undoubtedly that's where the next 1b population is going to be in the next 15 years, and competition is seeing the attractiveness on that as well. That's good for the consumers and they need it more than anybody else. If we will get increased choice and competitiveness the consumer usually benefits from that.

We just need to be very close to the consumer and do a little better job than our competitors. We are starting from a very strong position. But we need to continue to work on that.

The main challenge we have there probably is not even our global competitors but it's our local and regional competitors often at the low end of the market that we need to deal with. And that's not a new phenomenon for us, and we will continue to have to strive to do better to compete against those people.

Okay, we'll take two more from the floor and then we'll go to the phones. Warren, your hand has been going up very quickly.

Hi, it's Warren Ackerman from Evolution. Paul, can I ask a general question on Europe? Obviously volume's better in the second quarter, margin's still down. You want to set the bar higher in Europe, but where do you want to get that business to on a sort of three year view in terms of growth, market share, margins? And what milestones should we be looking for from your European business?

And the second one is in terms of your assessment of the innovation and R&D capability of the Company. What's been done? What still needs to be done to get Unilever to best in class?

Yes, thanks, Warren. On Europe it's actually interesting because you look at Temptations, in Magnum Temptations we are doing very well there. If you look at the Pyramid Bags that we've just introduced on our tea products they are doing extremely well. You are looking at Small and Mighty detergents in Europe doing well. Stock Pot we've now rolled out across Europe, which is a liquid bouillon, more natural, doing very well.

So, Europeans are also human beings. And as we innovate and spend behind that we can grow as well. We've had a lot of restructuring in Europe that we need to finish now. We should benefit from that. We've set up a different structure in Europe to run it more efficiently including a supply structure, and that is coming to an end, that set-up, so we should start to benefit from that.

And we are investing behind these innovations to get the growth back. It is not surprising that the growth, if you peel the onion of Europe the numbers look better or the trend is better but it's not where you want it to be. But if you look at where the growth is it's where you have the innovations that make sense and you spend behind it.

So, in Europe there are ample examples of success. But the market continues to be tough. The European population is shrinking. The economy is not certainly in the healthiest state compared to the rest of the world. So we have some tougher things to deal with.

But I think if we can get Europe just into a situation of continuous growth, it would be unrealistic to expect that to be mid-single digits or upper-single digits because the dynamics are not there. But if we just get it into a consistent growth so that we don't have to go into perpetual restructuring, because that's not just the way to build shareholder value. It isn't.

Europe also, even with the investment that we are now making partly correcting high pricing that we've done in 2008, partly behind the investments to grow, still has very decent margins. I am sure you've taken your pencil and looked at the margins by three regions, and our European business is very structurally sound. So it's not that we are betting the bank either. But I think we should be getting to consistent growth.

On your second question on R&D, we've obviously made significant step changes in the organization already over 2008 that we are now benefiting from. We've appointed Genevieve, the first time we have an R&D Director at Board level, that combines total food and HPC. It's tremendous, and we are starting to see the benefits from that already in terms of the innovations.

Vindi, who is responsible for all of our categories is driving fewer and bigger innovations across the markets, and I think you see there's a little bit more confidence that we are getting things out there that really differentiate our products increasingly versus our competitive set. So also there I feel that we are making progress.

Yes, there is more to do and I can -- that's a separate topic that will take a lot of time. But we will continue to look at going for fewer innovations, bigger ones, rolling them out faster, increasingly more [this continuous]. And that should happen over time, and more important in today's market than it probably was in the past.

Jeremy.

Jeremy Fialko at Redburn Partners. Just following up on the question about the cost base, a couple of times in your presentation you mentioned that you had an uncompetitive cost base. To what extent do you think this is going to be something resolved by the restructuring program you've got currently in progress?

And beyond that how do you think the best way of dealing with it will be? Will it be further restructuring charges or is this going to be more of a kind of continuous improvement sort of basis?

And then just a second aspect to this, when you look at the uncompetitiveness of your cost base, is it more on the kind of manufacturing and supply chain side or is it more on the administrative side? Thank you.

It's a moving average, because the other guys, if I read their results, they are also talking about it. And the consumer is asking for it. And so if we want to continue to win the hearts and minds of consumers I think I'll always be talking about it, just to be very clear about that.

But the way to get there is not this continuous restructuring. I think we are starting to get to an industrial footprint now that is competitive. We have set up the supply chain structures. We are just completing under Harish's leadership the supply chain structure set up in Singapore for Harish's whole area. Mike is working on his.

So I think we are getting to a competitive structure that I hope we can run the business by always looking at improving efficiencies, but not anymore with big restructuring announcements and really it make it part of the ongoing operations.

Now, how do you become more competitive? The answer is discipline. If we grow our business within our ambitions and continuously capture that growth with discipline in the cost items of the P&L we will become over time more competitive.

We have some work to do still in our indirects, which is our own overheads, whatever you want to call them, where we need to be better. We have some product categories that we can be more competitive as we want to compete increasingly at the different parts of the price piano.

So we will be looking at all these elements as we move forward, but make them part of ongoing operations and have it built in with discipline in the system. So that as you grow at whatever rate that may be, you capture the benefits of that growth in terms of efficiencies that you can then share with the consumer either in better products or in better value. And that's the consumer goods model that works best over time.

I might just add to Paul's comments that the current restructuring program that is in place we expect to come to an end by the end of 2010, and in terms of substantial restructuring charges, come to an end by this year. We will have restructuring charges in 2010. You'll always have restructuring charges, but more in the sort of 50 to 100 basis points rather than a 2.5% or the sort of rate that we've had in the last couple of years.

Yes.

Going to take a couple of calls from the lines now, we've got Marco Gulpers on the line from ING, Marco?

Yes, good morning to you all there in London. This is Marco from Amsterdam. I've got two questions if I may. The first is on the step-up in the competitive landscape which you alluded to.

How do you actually see that panning out in the remainder of the year, and how do you, as I read across from the P&G comments yesterday, see that occurring in your price and volumes?

The second question I have is on Hair Care. In my view you are having some good successes there with Suave in the US. Maybe you want to elaborate on that, but also elaborate a bit more on perhaps some weak spots in Europe in Hair Care. Thank you.

Yes. Thanks, Marco. One second, I am just writing down your questions that I answer them fully. The competitive landscape, we obviously look at that. If you look at competitive results and obviously ours then I am glad to see that where we've done well in these results it's been driven by innovation and by spending behind that, and that's the best way of doing it.

We feel broadly competitive with our pricing, and if I read the competitive results they are probably always individual sales or countries that they look about, but I got the impression that they are also broadly wanting to drive the business behind innovation and that's a good thing for all of us. I honestly believe that.

It doesn't mean it's a serious home game. A lot of innovations will hopefully expand the brands for us -- or the markets, sorry. For us the biggest opportunity with our business especially in the developing markets, but believe it or not also in many other places of the world is market development, expanding the pipe. And that's obviously a lot of our focus and I think it will be the same for our competitors.

There is no doubt that in the tough economic environment that we live in everybody has to adjust its strategies accordingly and we'll be looking closely at our competitors as we sharpen our own strategies.

In terms of Europe and Hair Care and the US Hair Care it is true that Mike Polk and his team in the US have done a great job on Suave, and hopefully continue to do a great job on Suave, since Mike is in audience.

And -- but Suave is very well positioned as a brand. The American consumer more than ever knows what value for money is. And Suave is a very good value for money brand. In fact it's the best brand in the US in terms of performance and value. And the consumers as well as the retailers are rewarding us for that, and I hope we will continue to get the benefit from that.

In Europe with a few exceptions in a few countries we've had a relatively weak portfolio in Hair Care as we probably managed it more for its financial return only and not for its growth. We now have some very good innovations coming in that we feel increasingly confident that we can invest in. So we have to look at what that means for Europe as well. Do that in a way that is financially responsible for our shareholders.

I am not saying that we will all of a sudden have Europe in Hair Care the best performing region, but we have to, as we see an increase success of hair care that you alluded to Marco across the world, we will also have to look at what some of the these technologies mean for Europe as we want to build our business globally.

Now we have Robert Jan Vos on the line from Fortis. Robert are you there?

Hello?

Robert, go ahead.

You are not expecting to introduce a value offering in Hair Care like you have in the US with Suave in Europe. Thank you.

Well we do. In Holland for example, which is your country that we do extremely well with the brand called Andrelon as you well know, which is a value offering. And pretty much what we do on Suave would also apply to a brand like Andrelon, which is very well -- Timotei in some other countries, Harish is rightly reminding me, those are brands that are well positioned on the bottom end of the categories.

But I want to be clear and Hair Care is not only a bottom end story, we've just acquired TiGi and Mike has the responsibility for that right now, and we are producing good results there. We are by all means pleased with how that business is performing since the acquisition.

And the family who is still actively involved is doing a tremendous job helping with the transition. But not only helping but also continuing to come out with innovations to keep driving that business. And we are seeing positive growth there as well.

The Hair Care market is probably a little bit driven to the top end in retail as people come in from professional, and the bottom end where people seek better value propositions. And that's where we just need to be sure that we have offerings for the consumer.

Thanks very much.

Okay. Let's come back into the room for two or three more final questions, Alex.

Thanks its Alex Smith from Nomura. I had a question on your plans for reinvestment in the second half of the year. I think it sounds to me like you've got 200 to 300 basis points of input costs benefit in the second half. You are suggesting pricing is flattish maybe slightly down. So it seems to me your gross margin should recover quite nicely.

And if I look at your operating margin guidance or protecting operating margins suggest that's up 50 basis points. It seems to me that there is a lot of room there to accelerate further marketing spend ahead of the 60 basis points increase we saw in Q2. Would that be fair or --?

Well I don't know what's fair in life. I cannot do the calculations for you. But what is clear is we've said is that we will reignite volume growth without compromising operating margin and cash flow.

Operating margin over the first half is down 50 basis points. So that's still compromising operating margin. Good second quarter, because it's A&P driven, and the disposal effect, gross margins moving up, so we are doing the right thing.

So part of the tailwind that we get in the second quarter -- second half, excuse me, should go to delivering on what we clearly give as guidance to the market, and that should be -- cannot be clear.

And secondly we will continue to invest behind our brands in A&P to continue to bring these innovations to life. And that's how we run the business.

Okay. Two more. Xavier's hand up is at the back.

Xavier Croquez, Exane. Two questions, the first one is between Q2 and Q1 there is around 350 bps of positive volume swing. Can you shed some light on what the picture is by categories?

And the second thing in terms of brands if you do a review of H1 for the -- my top five top brands, I am happy to hear a different top five, for Dove, Lipton, Knorr, Hellman's and Dirt is good. Thank you.

You want to do volume part?

The volume drive in the first half was obviously the innovations which we've cited through the course of Paul's presentation and mine. We did in fact support strongly with A&P. There is a big change from A&P down as a percent of sales in the first quarter to up as a percent of sales in the second quarter. And of course, that doesn't even account for the fact that media rates are down at least 5%, down even more elsewhere. So we've put a lot behind those innovations.

We said at the first quarter that the phasing of innovations was going to come a little bit later this year than it has in the past. So look for more of them in the second quarter and look for more support and that's exactly what we did.

I think that particularly in Western Europe we had a correction of prices where we were uncompetitive. And I think that undoubtedly helped. We were helped by the weather in Ice-cream so that has to figure in there for part of it.

But the final thing which I mentioned, which I think is very, very important is disciplined sales execution. You saw in one of Paul's charts how our in-store performance is improving. And I think that discipline which has been improving quarter by quarter manifest itself in the combination, multiplicative effect of good innovation at the right price, backed by A&P, executed well to the delta from the first and second quarter.

Which category drove the biggest positive swings through to Q1?

Well obviously Ice-cream which was up. Tea is up nicely. Personal Care up, and then Household a very, very strong growth in the second quarter.

On the brand side, Xavier, just to be very quick we saw some very good results behind the Small & Mighty. That is a good brand that obviously drives that. But also the Surf brand in the UK for the people in the UK here it's a very well performing brand, again on a better value proposition than other alternatives out there now.

Our Lipton brand continues to grow well both for ourselves and for our partnership that we have with Pepsi. Our [DO] business as you can imagine we've had the good initiative from the hair minimizer. And now going in, I can't believe it myself, but this is the Smell of Leather. So, someone told me very attractive, so I am going to use that from now on.

So all these things are on the key, and you are free to use the samples of it, the -- all these things are driving our brands. So I am pleased to see that if we look at the top 15 brands that we look at the top 13 brands of EUR1b more in turnover that we actually have 10 of them growing faster than the company itself. So that is a good thing and that's how we want to keep it.

We'll take one more.

Yes. Final question, Harold.

Thank you. Harold Thompson Deutsche Bank. I've just got two questions one is a slight pick up or follow up question on the opportunity for long term growth. Do you think if you had to kind of size the opportunity of winning market share and effectively using your numerous category and regional leadership position to drive category growth, how would you rank the two?

And the second one is you've talked about the portfolio before. You've done some small acquisitions. Just the broader topic of M&A, could you maybe somewhat explain, clarify your ambitions there?

Yes. I apologize because for the first part of the question I didn't understand your two, category growth, market development?

Market development versus gaining market share.

I.e. if you (multiple speakers).

Yes. I am sorry.

If you are trying to grow long term is it more market share gains driving the growth or is it more the driving the pie bigger.

Yes I am sorry. I understand now. The -- I think the bigger opportunities longer term is market development for most of the categories that we are in, very few exceptions where it isn't the case. So it is enlarging the pie if you want to.

I would expect in doing that the leaders who lead the market development would also benefit from that which is usually the case in share. But the biggest opportunity that we will have for a long time to come is the development of the market.

If you look at the penetration of many of our products that are here in front of you, be it the deodorants, be it the hair care, be it oral care products, be it a lot of the food products actually all of our savory products. All that in the developing market which is 70%, 80% of the world are markets that are actually fairly small if you compare that with the US or Europe. And so the biggest opportunity we have.

But that's also true actually for many of our products in Europe. Many opportunities still to drive deodorant uses higher or etc. So that's definitely the -- there is no comparison.

And then on the M&A opportunities, I think Jim talked about it already. The core -- the key priority for us to build shareholder value is to strengthen the brands that we have. So the organization needs to focus on continuing to strengthen the business in the tough environment. So that's quite a task. It's easy for me to stand here and talk about that, but there is a lot of work that needs to be done.

And then we look at selective bolt-on acquisitions to compliment the portfolio, and you've heard many of those today, and we look at that very strategically now. It's not -- we might look at a lot of things because as a Dutchman I always say it doesn't cost anything to look. But we are very careful in where we invest to strengthen our positions, so that's how we run our M&A thinking.

And obviously behind that is a very strong financial position which is important in today's environment that Jim has talked about as well.

With this, I think we'll have to close. I apologize. I am sure on the road shows we have more time to go a little bit more in detail as you digest the numbers, as we digest the numbers, and engage in a deeper discussion.

I just want to thank you for your time this morning to be with us. But above all I want to thank the people in Unilever who produced these results, because you can get -- you cannot get these results, which are good results overall, without the hard work and dedication of all 175,000 people that work for us day in, day out, often beyond the call of duty.

The markets are tough. The markets will continue to be tough. The competitive environment will continue to change. The private label environment will put further pressure on that. So, again, I'd end with my Dad saying an early bird doesn't make a summer.

Bear with us and it's the numbers that we will hopefully will let speak for you for the quarters to come more than anything else. But, thanks for your support again once more and safe journey home. Thank you.