聯合利華 (UL) 2009 Q3 法說會逐字稿

Welcome to Unilever's third quarter 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). We will now hand you over to Mr. Polman.

Okay. Thank you. Good morning everybody and welcome to Unilever's quarter three results call. I am here this morning again, as usual, with Jim Lawrence our CFO and James Allison the Head of Investor Relations.

Let me first use a few minutes to try to cover what we have achieved so far and obviously the progress we are making. And then Jim will take over and talk about the specific aspects of our performance in the quarter. And then we will have plenty of time for some Q&A.

I obviously have to start by drawing your attention to the Safe Harbor statement you are well familiar with by now.

Now let me remind you that the objectives we set was to really get back to long-term sustainable top and bottom-line growth for both long-term shareholder value. We will do this with products which make people feel good, look good, so they can get more out of life. That's our passion, and increasingly so as we touch the lives over 2b consumers every day.

We continue to believe that reigniting volume growth, whilst steadily improving operating margin is the surest way to create long-term shareholder value, although we also realize that it takes a little bit more than a few good sets of quarterly results, as I've always been saying. Now we're pleased with our progress and certainly the confidence is coming back.

This is yet another quarter of balanced growth, with top line up 3.4% behind 3.6% volume growth. Underlying operating margins are also up 70 basis points. And as you have seen, a further strong improvement in working capital which is actually down 17 days in the quarter.

Now this balanced growth comes at a time when we still see very sluggish market conditions. Employment and consumer confidence are the key drivers of long-term market growth, and unfortunately unemployment continues to increase in many places and consumer confidence is still low. In fact we just got the US numbers, you might have seen them in the Financial Times last week, down to an eight-month low again.

With the amount of de-leveraging still to be done in the global economy and stimulus packages running out of steam, I still expect a long, protracted recovery and we should plan our business accordingly. It's very important here that we are careful and certainly not run ahead of ourselves.

Global markets in which we operate show volume growth of about 1% to 2%, with Western Europe and North America basically flat. Volume growth in the balance of the world is probably around 3%, which is lower than the pre-recession levels. Against this background, our steady improvement in volume growth is encouraging.

It is broad based, across all regions, all categories as well as major brands. We are growing volume shares again in 55% of our business. That's up from 35% at the beginning of the year. And our value share trend is equally improving. Now we are achieving this by instilling again a passion for growth and action, but above all, a passion for meeting the needs of the consumers and customers across the world.

We are pleased with our strong brand and category leadership positions. Although increasingly the emerging countries will be the engine for our growth, we do expect consistent growth from Europe and North America as well.

You know I don't like excuses, and although we had more shipping days this quarter than average because of the calendar effects in Europe, and although we were pre-shipping against IT systems which we were transferring, especially in North America, the results are what they are. But I do want to use this opportunity to thank a lot of people.

The last three months have seen a tremendous amount of challenges, with tsunamis, torrential flooding, typhoons, hurricanes, earthquakes, especially in the Far East and particularly the Philippines, Indonesia and Vietnam. And I am sure many of you have been following this in the news. Fortunately we did not lose any of our own people, although the damage was extensive. I am humbled by the heroic efforts of many of our people to help our consumers regain their lives, customers regain their businesses and families their existence.

I am certainly proud to work for an organization that truly understands that the long-term benefit of the countries in which we work and operate is closely linked to the long-term benefit of our business. And I want to use this opportunity to thank our employees for that.

Now let's turn to the four strategic thrusts that underpin our performance improvement over the last nine months. I will give you a couple of examples of where I believe we have made progress. That is encouraging. But I also recognize that we certainly have much more work to do.

Let's first start with the drivers of growth, which is brands and innovation. They continue to be the key drivers for long-term success. We'll continue to invest both in brands and in R&D, as I have mentioned at the previous calls. I've said before that our innovations were, in many places, still too small and fragmented, this despite innovation capabilities which I believe are at par or certainly at par or better than many of our key competitors.

Under the leadership of Vindi Banga and Genevieve Berger, we are increasingly focused on bigger and better innovations and rolling them out faster across the globe. Take, for example, Clear Shampoo. It's now in 35 countries. That's twice as many as the beginning of the year. The Dove Minimiser Deodorant we talked has now been launched in 37 countries, just in the space of nine months. White Now, our wonderful new toothpaste, is in 21 markets. And the recently launched mouthwash variant is already in 11 countries.

Even in the more fragmented categories, like Savory, we have rolled out Knorr Jelly Bouillon from China to a number of countries in Europe. Not surprisingly that the turnover is increasing. As flagged to you, we are also supporting our brands and innovations with advertising and promotional spend which, again, despite the lower media rates and efficiencies, are up for the second quarter in succession in absolute. And these heavy launch investments, including the many trial activities, are also getting reflected in the easing of pricing. And Jim will talk about that later.

Despite the share growth driven by these innovations, building consumption and encouraging new consumers to use our products, what we call market development, will continue to be the biggest source of growth for Unilever in the years to come, especially obviously in the emerging countries. The Cif Cream launch in India, the conversion of bath soaps to liquids in LatAm, the launch of a hygiene range of hand soaps in Turkey, and the accelerated usage of shampoos or deodorants in Indonesia are just a few examples.

Now not surprisingly, competitors are also increasingly focused on these fast-growing emerging markets as well. We welcome this, not only because competition will ultimately benefit the consumer, but because we know that competition helps to accelerate market development. And leading brands, in many cases as ours, are well placed to benefit from that.

With competitive intensity picking up, it is also key that we continue to increase the ability of the organization to react fast. We have discussed on many occasions the 30-day plan that you are now familiar with. But lowering our working capital and especially our inventory level will also contribute to our ability to respond fast in the marketplace. And I am pleased to say that two thirds of those cells that we are now obviously focused on in running the total organization are showing positive share momentum.

One of the cells that I discussed before is the Indian skin cleansing business where we are under pressure from low-priced regional competitors. Whilst overall volumes are edging up, we are not growing as fast as the market, and the results are still not where I want them to be. But we've strengthened the national brand, but also reenergized the local jewels. We now have clear and well-differentiated consumer value propositions across the entire spectrum of price points. And we expect from Nitin, our CEO and his team, to see share progress in the coming quarters.

It is not rocket science. It really is hard work and focus. The combination of great brands, well-supported innovations, rolled out quickly, and operating across attractive price points are key drivers of the recovery of our volume growth. At the same time, we are encouraged to see that the equities of our core brands are also being strengthened across the board. That's absolutely key. We expect our pace of innovation to further increase during the course of 2010.

The second thrust is winning in the marketplace, especially with our customers. And here, again, good progress. With Pier-Luigi Sigismondi now on board as Chief Supply Chain Officer, we have rolled out a sharpened supply chain strategy and we are seeing the needle move, not only on customer service but also on the in-store availability.

Some of you will also have the opportunity, I hope, to see the Customer Innovation Centre that we have built in Englewood Cliffs in the US, under Mike Polk's leadership. And it is instrumental in driving the winning at the point of purchase to higher levels. Nevertheless, we still have some way to go to get to best-in-class levels. I am encouraged by that. I am encouraged by the improvement opportunities we still have, especially in this area, to further continue to fuel our growth.

The third area is cash and costs. Cash flow continued strongly in the quarter, boosted by continuing strong working capital performance. Cash flow from operating activities in the first nine months of 2009 is actually EUR1.6b ahead of last year.

As mentioned before, working capital remains an area of focus and we welcome the collaboration obviously with the retailers, but also with our suppliers across the whole extended supply chain because this will help us to reduce further the waste, improve our efficiencies, and generally provide better products at better value to our consumers.

Cost savings continue to be ahead of schedule, and we have nearly EUR1b of savings achieved over the first nine months of the year. This quarter, again, we have restructured manufacturing operations in the Czech Republic, France and the US. We have also further streamlined R&D and continue to drive efficiencies in our head office. And we are also beginning leverage increasingly, the global procurement.

At the same time, we are preparing for growth with new plants, such as the deodorant plant we are currently building in Mexico, and ice cream plant in Russia, and another one in North America. Our capital spend is starting to increase as a result of these initiatives. And that's obviously needed to fuel our growth. You would expect this in light of the tight control of expenditures that will continue nevertheless.

If you look at the gross margins for a second, we are also pleased to see the gross margins are up by 290 basis points in the most recent quarter. This reflects, obviously, the savings efforts I just talked about, as well as lower commodity costs. Although progress has been good, I believe we are still too complex in many places and there are certainly further opportunities to smartly leverage our scale in the area of raw and packing materials, global procurement and shared services. And we have started initiatives in these areas to accelerate.

Despite the high A&P investments once more, we've been able to fuel the growth and step-change underlying operating margins, which are up 70 basis points in the recent quarter, firmly on track towards our target of protecting the margins for the year as a whole.

The final thrust, and the most important one, is our people and our organization. As talked before, the new structure put in place under my predecessor, Patrick Cescau, is actually starting to work for us. The interfaces between brand building and brand development are getting better. Skill sets are being strengthened, especially in the areas of customer development, R&D, with things like clinical, as well as customer service. The organization is definitely getting faster and more externally focused.

Now we are determined obviously to drive further the external focus. We still need more consumer and customer-centric approaches from the top to the bottom of the organization. We will continue to build a stronger performance culture, with a greater bias for action. And also we will continue to invest in strengthening the organization and our capabilities to support the growth ambitions we have.

But we also invest at the same time to prepare ourselves for the long-term structural soundness of the business. And examples of that that we saw this quarter was the announcement of the acquisition of the personal care business from Sara Lee, licensing of the PF Chang brand in the US, and the closure of the purchase of the Baltimor ketchup business in Russia.

Now Sara Lee will strengthen our competitive positions, particularly in skin cleansing and deodorants in Western Europe, with brands like Sanex, Radox and Duschdas, which are perfectly complementary to our own. We are in good positions here. And obviously we equally have interesting positions behind this acquisition in Singapore, Indonesia and South Africa.

The integration will be led by Doug Baillie, our President for Europe, and we expect to progress on that somewhere around the spring or summer next year. We have also opened a new major R&D centre in Shanghai and, at the same time, divested non-strategic businesses, such as our oil plantation in the Congo and the participation we still have in Johnson-Diversey.

Well let me now hand over to Jim for a second to go in more detail through the quarterly performance. Jim?

Thank you, Paul. Good morning everybody on the call. What I'm going to do is focus on the highlights rather than repeating a lot of the detail which is already in the results announcement. And actually you will find further details in the appendices to this presentation.

So to begin, turnover. Turnover in the quarter was EUR10.2b. That is down 2.2% against the same period in 2008. The net effect of acquisitions less disposals reduced turnover by 2.4%, that is more than the total that we were down. Currency had a further adverse impact of 3.1%. And that reflects the strength of the euro, which is our reporting currency, and based on current levels of exchange. As of today we expect currency to have an adverse effect on turnover of around minus 2% for the year as a whole. Underlying sales growth for the quarter was 3.4%.

Before I look at the drivers of growth in the quarter, may I say just a few words about the development of volume and price and how that will be impacting quarter four? Volume growth accelerated in the quarter, to 3.6%. And, as Paul has noted, that was broad based. Performance in Western Europe was boosted by an extra trading day. And North America benefited from volume brought forward because of systems implementation which was about to take effect at the beginning of Q4. At the Unilever level these factors benefited that volume by 50 basis points.

In Q4 we will have two trading days less in Western Europe and will have the reversal of those Canadian volumes which were pulled forward in to Q3. So we would expect the reported UVG in quarter four to be reduced about 100 basis points. And that will obviously distort the reported progress in the real underlying performance of our business.

Now turning to price. Last year we increased prices by an average of 7.2% across the whole of Unilever for the year, and by over 9% in the fourth quarter. This was well above the levels of our competitors, unprecedented, and driven by the biggest increase in commodity costs that we have ever seen. Now some of those commodities, although, it must be said, not others, some have reduced considerably in price. And it's natural that consumer prices adjust to reflect this.

In the third quarter we reduced prices by about 1% sequentially from Q2 into Q4 -- sorry, from Q2 into Q3, broadly in line with the market, and specifically in categories where commodity costs have fallen furthest, such as spreads and homecare. For the year as a whole we would now expect UPG of about 1.5%, with Q4 itself between minus 2% and minus 3%. And that is the simple consequence of the lapping of last year's price increases and the price adjustments already taken during this year. As things stand today, we expect reported underlying price growth to turn positive around the middle of 2010, after the impact of this year's price reductions have been lapped.

Our growth has been underpinned by continued strong innovation, backed up by strong advertising and promotional support in all categories and in all regions. A few of the most recently introduced bigger, better innovations which have been rolled out faster, include Sunsilk, which was re-launched in Brazil, Argentina, India and Turkey, with formulations and packaging designs co-created with leading hair experts.

Vaseline Sheer Infusion hand and body lotions were launched in the US, with new glycerin technology which provides superior moisturization and an unmatched skin feel. A range of Dove for Men skin cleansing and deodorizing products have been launched across Italy, France, Spain and Benelux. The global re-launch of the Catwalk brand with Your Highness Volume Collection, is the first collaboration between TiGi and Unilever. New Catwalk, inspired by fashion, designed by hairdressers is the essence of the re-launch.

The goodness of margarine campaign has been enhanced by the launch of whisked spreads, with a new aerated texture in Latin America, as well as Hellmann's double whisked light mayonnaise which has been launched in America and Europe. Ben and Jerry's Ice Cream grew by more than 20% in Europe as we introduced new variants, such as Chocolate Macadamia, a flavor with a mission.

We have invested a further 130 basis points on advertising and promotions in quarter three compared to last year. Compared to last year, advertising spend has increased by 14%. This is at the same time as the media rates have fallen, thus increasing media impressions significantly and boosting our share of voice. We will continue to invest strongly behind our brands in the fourth quarter.

Now let's turn to cash and costs. Commodity cost benefits are beginning to flow through the P&L and we expect to see tailwinds in the second half of 2009 of around EUR500m. EUR500m better than last year. This is in line with our previous guidance. We expect to see commodity cost tailwinds, albeit at a much lower level, in the first half of 2010, and for commodity costs in total to be up in the second half of next year.

Our savings programs have continued to deliver strongly, and now stand at EUR1b for the first nine months of the year, ahead of schedule, with EUR200m to EUR300m more savings to come in the final quarter. Our restructuring costs were EUR250m in quarter three and EUR610m year to date. We continue to expect full year restructuring charges around EUR1b.

Gross margins, up by 290 basis points in the quarter, are now back to where they were before the commodity cost escalation of 2008. Overheads were up by 90 basis points in quarter three, reflecting the phasing of accruals as well as a low prior year comparator rather than any underlying increase. For the year as a whole, we expect overheads to be down. With advertising and promotional expenditure up by 130 basis points, this left underlying operating margin up by 70 basis points.

Earnings per share before RDIs are up 5% in the quarter, down by 6% in the first nine months, with earnings from operational performance in the nine months plus 3%, offset by disposal dilution of 3% and a significant swing in the financing costs of pensions. The latter on its own impacts EPS by minus [5 percentage] basis points in this year.

Cash flow in quarter three was maintained at the very high levels of the previous year, with cash from operating profit boosted by continued good working capital management. As Paul indicated earlier, cash flow from operating activities so far this year now stands at EUR4.8b, which is EUR1.6b higher than in the first nine months of last year.

Our working capital balance was down to 17 days in the quarter, an improvement of 22 days versus the same period last year. As you can see from the chart, there were particularly significant reductions in inventories and in debtors. It's apparent that service levels have been rising at the same time as the inventory levels have been reducing, and we believe that this virtuous circle has some way left to run.

Turning to the balance sheet, the gross pension deficit has been reduced to EUR3.3b at the end of September, that's down EUR400m from the end of quarter two. And this is despite a substantial reduction in corporate AA discount rates, which measure our liabilities and reflects the very good asset returns in the quarter. Local pension deficits of the national plans will have reduced by more because government bond rates, used to discount liabilities, have been relatively stable in the quarter.

In quarter four, it is our intention to accelerate contributions to some of our pension funds to have an efficient use of our cash. This will take overall cash contribution to pension funds up to EUR1.3b in 2009, and that is greater than the EUR1b which we had previously advised.

The underlying tax rate was 23% in the third quarter, benefiting from favorable resolution of a number of one-off items. The underlying tax rate for the nine months to the end September is now 26%. And we expect to achieve this level for the year as a whole, which is a small variation from earlier guidance.

Net debt now stands at EUR6.9b, which is down from EUR8b at the beginning of the year, thanks largely to cash flow from operating activities. And we have today announced an interim dividend to be paid in December of EUR0.2695 per NV share, representing an increase of 3.7% compared to the interim last year. I remind you that from 2010 onwards, as per previous guidance and as in the release, we will be moving to quarterly dividends.

During the quarter we completed the acquisition of Baltimor, as Paul mentioned, the leading ketchup brand in Russia. And in August we entered into a licensing agreement to develop a line of frozen Asian-style entrees for the United States under the PF Chang brand.

Earlier this month we announced the sale of our remaining stake in the Johnson Diversey professional cleaning business. We expect this sale to be completed before the end of the year, delivering disposal profits of around $400m in the fourth quarter.

At the end of September, again, as we mentioned, we announced an agreement to acquire the personal care brands of Sara Lee. The transaction will not complete until various works council consultation processes have been observed and regulatory clearance has been given. This is unlikely to be earlier than mid 2010. We do expect there to be good opportunities for synergies and that will require additional restructuring in 2010, perhaps in 2011. And that restructuring spending will come over and above our guidance of 50 to 100 basis points of RDIs in 2010.

And, with that, I'll hand back to Paul.

Thanks, Jim. Let me just wrap it up briefly and then open it up for everybody.

In summary I think we are encouraged, and I hope you are, by the progress we are making. But also we are far from being complacent. Our markets are tough. We know that competition is also getting tougher, so we'll continue to set the bar higher, rest assured of that. We will continue to strive for bigger innovations, roll them out faster, and step up support behind our brands. And we will also have to work even harder to improve our executions in market because I believe still there is much to be gained from doing the basics right.

Let's also not run ahead of ourselves. It's a long journey and there will not be any quick fixes. You've heard from Jim that our quarter four growth numbers will be impacted by trading days and other one-offs, and that pricing will be lower as we come down from the highs of the quarter four 2008 levels when underlying price growth was over 9%.

Keep in mind that commodity cost increases and price growth in Unilever were at levels well in excess of our competitive set. In this context, underlying price growth of minus 2% or 3% in quarter four will leave prices still up 6% versus the previous year. These factors will take a bit of the shine off our organic growth in the final quarter, but rest assured that we will keep our focus on the underlying business performance and on driving profitable volume growth.

With tight control on our costs and working capital, I'm confident that we will deliver again against the priorities which we set for 2009 with, if I may remind you, will remain restoring volume growth whilst, at the same time, protecting cash flow and margins for the full year. The same time, I'm increasingly certain that we will do this whilst setting the right course for Unilever for the long term.

With this, we'll be happy to take questions. Thank you.

(Operator Instructions). Our first question is from the line of Celine Pannuti from JP Morgan.

Good morning, everybody. Well my two questions, first, you mentioned several times that competition intensity is picking up. Can you elaborate a bit more on that in terms of regions or category, and whether that would lead to a higher spend on promotion? That's number one.

Number two, in terms of your cost savings, you clearly delivered well and ahead of your expectation. Can you give us a bit of a flavor of what sort of savings we should expect post 2009 in terms of initiatives, and as well the magnitude of savings? Thank you.

Thanks, Celine. Those are good points. On the competitive intensity, you've seen obviously most of the competitors have published results with mixed interpretations. I'll leave that over to you. But you've also seen everybody announcing that they will continue to accelerate the innovations. Some of our competitors are saying it will be 30% up, it will be 35% of our turnover next year, whatever statements they put behind it.

I just want to be sure that we all understand, all of our people as well in Unilever, that in order to win in this environment the market continues to be tough. So the pie is not growing as fast as we were in the past, that we need to continue to accelerate with our strategy. This is a moving effort. So we do see, for example, in the growth markets where we are very well placed with our market positions, and the markets where you see the next billion consumers over the next 20 years, not surprisingly, it's also getting increasing attention from our competitors.

And, as I mentioned in my brief introductory remarks, that's a good thing because the consumers will benefit from that. And what we see as that competitive intensity increases in these markets, market development actually is much faster. Take Indonesia now, where one of our competitors is introducing deodorant and are trying to introduce deodorant and one or two other activities, we are obviously very aggressively defending our business, but not only that, we're actually growing share as we do this, and the market development is accelerating.

We see competitive activity. We are not any more in Laundry in the US, but one of our competitors made the announcement that they significantly adjusted prices in that part of the world. We see the same happening in one or two spots, be it Chile or be it Turkey. So we deal with that on a very surgical level to stay competitive. But, overall, I think you have to be clear. And that's why I keep saying don't run ahead of yourselves. Just be -- sometimes it's good in the foray of all this activity and the share gains that we see, take a step back for second.

And markets are not going to grow faster in the current economic environment. Competition also wants to get better results then they've produced. We just need to set the bar, and continue to set the bar higher in Unilever as well, if we want to maintain these levels of performance.

On the costs side, I'll hand it over to Jim for a second.

Thanks Paul. And, Celine, thanks for the question because this is one of the four planks of our platform, cost and cash. And as to cost savings, obviously, first off, we've benefited from the reversal on the commodities. Commodities were, year on year, worse by EUR1b in the first half. And, as we said last quarter, we expected them to be a positive by about EUR0.5b in the second half. And we're beginning to see some of that in the third quarter, although we'll see more in the fourth.

What we have been able to do ourselves was to deliver about EUR400m of cost savings in Q3. And that makes for year to date EUR1b of cost savings and, frankly, that's ahead of what we were looking for. And I'll give you a breakdown. We got about EUR0.5b year to date buying savings. We got about EUR200m in local efficiency and then EUR300m from restructuring.

Now that EUR300m of restructuring is part of a program which was started some years ago. And we said that, in total, our restructuring program would deliver EUR1.5b annual savings by the end of 2010. Accumulatively, we've achieved EUR1b of that, so we still have EUR500m to go between now and the end of 2010. So you see some of that kick in in Q4 and then the balance in 2010.

As to the buying savings and efficiencies, we should see them continue in the years ahead. And we certainly don't want to see them go down. Specifically for this year, we expect to see savings of about EUR1.2b to EUR1.3b for the year.

Thank you.

Thanks, Celine.

Thank you, Celine.

Moving onto our next question, it's from the line of Alex Smith from Nomura. Please go ahead.

Hi, good morning. I just had a little follow-up, I guess, on Celine's question in terms of the competitive environment. Price pricing down 1% in the quarter, it just seems to me that's a little bit more than just the rollover impact. I just wanted to clarify that. Have you taken, I guess, new list price cuts in Q3? And then going into Q4, or H2, the guidance seems to be that pricing will be down a little bit more than what you said at Q2. Is that again just a reflection of the competitive environment out there?

And then just secondly, on the raw material input cost benefit for the second half, EUR500m. Can you give us the Q3/Q4 split for that, please?

Again, on the raw materials, let me hand it over to Jim. Coming back to the competitive environment, Alex, and the quarter four prices, let me just go back once more. The main growths that we are seeing, and continue to see very clearly, is behind our innovations. And we have now 55% of our business growing share. And what I look at, obviously myself, is the volume share and value share and they're all moving in the right direction. So we're not moving one away from the other. We stay competitive with our brands and are growing across the line value and volume share. And where the biggest drivers of volume are is a direct correlation with all these innovations that we are now having bigger and rolling them out faster.

The second thing is that where we grow and where we adjust the prices, we are, at the same time, improving our growth margins and our bottom line. So it's a top and bottom-line growth, so it's a good thing, I think, for our long-term structural competitiveness of the business.

There are two cells where we, frankly, went out of line, and I've commented on that before. If you just take 2008 again, our 9% price increase in 2008, if you really put that on paper next to what all of our competitors did, we just went ahead of ourselves in the last quarter. Now we took that as a bold position under the assumption that ingredient costs would go up and said it's better to be right price and then deal with it than the other way around. But the market came down on costs and we were left exposed.

The two categories were actually Spreads and Laundry. On Spreads, in 2008 we had priced up 18% from beginning to end point. And the same is true in Laundry. So we were way ahead of the market, in my opinion. And we have progressively on Spreads, as butter prices came down, and that's what you see reflected in the European numbers. We had to become more competitive again. And in some cells on Laundry we had to do the same thing.

Interestingly, on Laundry, we did not have that pressure from branded competitors, if you want to, on a global level, but local or regional competitors. I've talked about South Africa, India, where our competitor is a local competitor on Laundry and we're under pressure. And the same was true in Indonesia. So we have had price adjustments on part of our portfolio in those countries to stay competitive, and we will continue to do that. So, on a surgical level, we will see that.

Now if you had 9% pricing in the last quarter of 2008, and just the carry-over effect of this year, we have adjusted between 2% and 3%, as Jim was saying. And that will be fully reflected in the last quarter. I broadly feel that where we are now, and I continue to feel that where we are now our prices are more or less competitive. But, again, it's a cell-by-cell analysis and it's a function of what competition is doing. So we are up against a moving average. I cannot tell you if this is ever done or not. The job is not done. It is a function of what happens out there.

So I hope that is clear, Alex, from where we are. And then we'll move to your second point.

Yes, and just real quickly, EUR500m down year on year in the back half, more in the fourth quarter than in the third quarter.

Thank you very much. That's very clear.

Okay, thank you. Thanks.

Thank you. Moving onto our next question, it's from the line of Paul Hofman from Cheuvreux. Please go ahead.

Yes, hi. Good morning. Paul Hofman, Cheuvreux in Amsterdam.

Paul, good morning.

Good morning. On gross margins you said that in the third quarter you are back on the level when it all started, these price hikes in inputs. Yet do you also mean or do you also believe you can get it back at annualized level? This is only one quarter, but are you on pace to get back to, let's say, the normal gross margin levels before all these price hikes?

And just to get it clear, a second question. In the second quarter you made some adjustments of around 1%, I believe, in Europe, to get a better price positioning. That continued, if I understood it well. Was it about at the same level then, around 1%? Thank you.

Yes, the gross margins obviously, Paul, as you have seen, the gross margins have steadily improved. It's not just last quarter. It's actually an improvement over several quarters. And there's no reason that that will continue, that we've shown a gross margin improvement of 290 basis points in quarter three, and it's now up 30 basis points for the year as a whole.

I've said we will -- at least we will reignite volume growth once more whilst protecting operating margins and cash flow. It's very clear that on cash flow we're doing better with the numbers that we're showing you, even ahead of our own expectations. On operating margins, I want to reiterate, our strategy is to reignite volume growth whilst protecting operating margin. Now we will do that by reinvesting A&P again behind our brands. It is up last quarter, and it's up this quarter and it will be up in quarter four. I've said that consistently. So that has to come out of gross margin which, by deduction, means that gross margins will continue to show improvements.

And I've given some sense, Paul, from the answer to Celine's question about cost savings as well.

Yes, because it's a function of -- on our buying savings, we are well on track, our supply chain restructuring. We see many opportunities. But I'm pleased with that. And then obviously what Jim was talking about, the local initiatives.

The main thing for gross margin expansion, it comes back to the model of the purchase circle that we're trying to create. This Company probably was, right or wrongfully, accused for a long time of gross margin erosion. And when you get the volume growth back and you work that with discipline, you will see the volume, the gross margins improve over time. And that is a guaranteed way of growing top line and bottom line for long-term shareholder value creation. And that's the model we're trying to create.

Now I want to be very clear, and people might not see that yet because we've only had a few quarters under our belt, but it will not be done every quarter. And it will be not be a fix that you get in the first six or 12 months and be a hero. We want to have this in a sustainable level long term, and that's what we're striving to do.

Paul, you had a second question?

I only picked up the one.

Yes, I did. On price positioning, in second quarter there was some additional price cuts to improve your price positioning. From the previous question I understood that that has continued. But if you look at that, for example, in Europe, 2% minus. What division can you give between, let's say, price adjustments in itself to get the pure --?

Paul, that's what we just said to Alex as well. Some of that is carry-over that we see reflected in these numbers. And some of that are individual activities that happened in some countries. For example, my Indian example on Personal Cleansing, we had local competitors. We need to be more competitive. Or in India, on the Laundry, we had to adjust prices there. And you've also seen that separately in the Indian results we've announced, to get our business to grow again. So those are surgical interventions.

In South Africa, where there's now 25% unemployment, we have to be sure that the part of our portfolio on the bottom end stays competitive. In Europe, what continues to be the key driver there continues to be margin, where we keep our prices competitive. But interestingly, whilst doing that on margin, we are growing our volume shares now. We are growing our operating margin. So the structural thing actually is better, reflecting these savings and input costs. And some of that we have to give to the consumer to stay competitive. It's a very normal thing to do.

Yes. Thank you.

Yes, thanks Paul. Thanks.

Thank you. Next question is from the line of Martin Deboo from Investec. Please go ahead.

Hi. Morning, gentlemen. Two questions. One on buying savings, one on Europe. On buying savings, given it's now so important to the story, can I just understand how you're defining a buying saving separate from just the underlying fall in commodity prices? It's just a technical question around what do you bank as a buying saving, a genuine buying saving?

Second question is on Europe. Clearly what would help is a return to positive margin progression in Europe. The trend in margin compression is obviously getting better in Q3, but you're still negative in Europe. Can you offer me any sort of narrative of how you expect to see your European margins develop? I'm not looking for basis points guidance here, I'm really looking for a -- your view on what you think the margin model is in Europe going forward. Those are the two questions.

Yes. Yes, they're fine, Paul. I'll have -- we'll go in again to the buying for a second -- Martin, sorry. But let me just take Europe again.

We're very pleased because, in Europe, perpetual restructuring does not lead to a long-term margin growth. And our margins in Europe were ahead of the rest of the world because we were, frankly, managing it more for profit and at best maintenance, if you want to put a brave face on that, than for growth. We have definitely said before there's no reason why we cannot grow in Europe, not every quarter perhaps but we should get Europe back to growth.

I jokingly said Europeans are consumers as well, but it had a little bit more of a meaning than just trying to be funny. But you see in Western Europe now we have positive organic growth in quarter three once more. And looking at competitive results, I think Doug Baillie and his team should be complimented on that. And obviously if you look at the growth again, it's broad-based and it's driven again once more by the innovations that we have. But we've made some adjustments to some of the prices to stay competitive. As I said, once more on the [margin] and the Laundry ones would be the ones that stick out more. And some of our competitors have referred to that as well.

But there's no doubt that competitive situations in Europe remain more challenging. This is not going to be a very fast growth market. But I think that there is no reason why Europe should not grow. And I think there is no reason why Europe should, behind that growth, not have continuous margin and margin expansion in line with the rest of the countries. And even now with the adjustments, I don't have the numbers in front of me right now so quickly, but the European margins, as you can see, are ahead of the other regions by quite something.

So as long as we can deliver the overall margin growth for the Company, and keep the European margin delivery and progress in line with the overall Company over time, I'm happy with that, I tell you honestly. But right now we've said that we have to invest a little bit in Europe to get that growth again. And it will be a good thing for our shareholders once more.

Just to answer your first question about buying savings, we do make a distinction between the market price development of commodity costs, which we've said was up EUR1b. And, by the way, that is measured into euros because most of the commodities are priced in dollars. So you have both the dollar change and then you have the translation into euros, a change which was quite substantial in terms of that negative EUR1b in the first half. And then, on that basis, it was favorable, or will be favorable by EUR500m in the back half of 2009. That is the market price of commodities.

And what we'd attempt to calculate is, in terms of our own purchasing, what savings are we making versus those market prices, either because we buy more efficiently, because we buy in larger quantities on a global basis. We've initiated a global purchasing office, so instead of buying things on a country basis or a region basis we buy on a global basis, and as well as the savings that come from buying below the market price. Have I gotten that right?

Yes. These are, looking at it from my own experience, these are tough measures that have been put upon the people here in the Company for a long time already. It's nothing to do with this year alone. But the savings that are being reported are not opportunity cost savings or any funny things. They are real savings and they give us a significantly stronger structural long-term position.

The beauty of it is that the numbers are fine and help us grow the business and invest back in our products and behind these innovations. But even more beautiful is that we have a long way to go still to be truly competitive. So there's a lot more that we need to work on.

Thanks, Martin. We'll move to the next.

Thank you.

Yes, thank you.

Thank you. We'll move on to our next question. It's from the line of Michael Steib from Morgan Stanley. Please go ahead.

Good morning. Paul, could I ask you to elaborate a bit more on the concept of the virtuous cycle that you mentioned a few minutes ago in terms of driving both volume as well as bottom-line growth? What do you see as the main drivers? And what I'm trying to get is when should we start to see that come through? Is it a function of waiting for lower restructuring charges or a normalization of the commodity cost effect? Or what are the main drivers for that virtuous cycle to kick off? Thank you.

Yes, Michael, it's important. The main driver is always going to be innovation and being able to differentiate our products over time. What I continue to say is if you reduce your volumes with, and we can go over and over and over that, not only in our Company but in other companies, we can look at that by regions, when you have reduced your volumes you get into a perpetual restructuring and you cannot, honestly, you cannot save your way to prosperity.

So what we're trying to do here is have the volume grow, and you see that happening now for the third quarter in a row. And there is no reason why that cannot continue. And then instill far more discipline in the Company in terms of costs and get these costs out of the system, which will be passed onto the consumer so that the fueling of growth again becomes stronger because you give the consumer better value.

And then you say where does margin growth come from? How do we increase the bottom line because also there in Unilever we have strong opportunity there, so -- and that's really driven by innovations that are accretive. So innovations at higher margins, and that's really, for me one of the conditions of innovation, and by managing our mix. But if you have this volume growth, and if you capture with discipline the efficiencies of the volume growth, that you reinvest and give it back to the consumer and strengthen the value equation, you'll get into a much better position of continuous growth.

I've all -- and then the mix and innovations help you with the margin development. That's basically the model in a nutshell. It needs a little bit more detail to explain, but that's basically the model. It's very few companies that are able to do that. I think within the next two or three years, as I've said before, I don't live my life by quarters and we're not going to celebrate every number and make a straight line projection and say it's going to be better, because that is silly. We're not going to be just from 90-day basis because it leads to dysfunctional behavior. That is not good for getting the robustness of the operational model.

I have no problem telling you that quarter four will be less in overall turnover, but the volume component will be healthy. That's okay with me. What we need to look at on a yearly basis is that we get that overall strength back to this Company. And, frankly, we haven't had it for the last 10, 15 years. I'm trying to go back to charts and refresh our own memories to see when we really were doing that. And as a result you don't get shareholder value. Now we have some good quarters, but I don't want us to run ahead of ourselves either. And that would be silly. This you need to build on pillars, not on quicksand. And that's what we're trying to do.

So I hope that answers it, Michael?

Okay. Thank you.

Thank you.

Thank you. Moving onto our next question, it's from the line of Jeremy Fialko from Redburn Partners.

Good morning. I've got a couple of questions for you. The first one is on your levels of A&P spending. Obviously that was up very sharply in Q3. You're expecting another increase in Q4. Can you talk about where you think that's going to start leveling off and whether the A&P increases are going to be perhaps a little bit more incremental?

And then the second question, just following up on what you said before, is on mix. Can you talk about how much of a contributor that was to the volume mix growth, and again how you expect that to pan out over the coming quarters? Thank you.

The second question, Jeremy, was mix. I didn't get it.

Yes, it was how much that contributed and how much you would expect it to contribute over the coming quarters?

Yes. The A&P spending will be up again in quarter four. We have said that. And then if you look at the total year it will be up despite having these savings and the efficiencies coming through because of the world crisis of [media], if you want, tailing off. I hope that we would be able to report to you again an increase in A&P levels next year. So, just to be very concrete, I do expect, if we are able to, if we want to continue to fuel our volume and behind the increased stream of innovations coming up next year, I would expect our A&P levels to increase further next year in the absolute as well. And that's what we're planning our business on.

Our premium brands behind our innovations that we have launched are actually the ones that are growing the fastest. But in order to do that, and in order to get the long-term benefits from that, you need to spend your A&P. So that's where most of that goes. And we see the benefits from that in --.

And the net mix was part of it in there?

And the net mix, as a result, was positive.

In terms of new brand launches, we haven't quantified that and we don't want to celebrate that either because it doesn't solve anything for me. But in the last six months alone we've introduced more new brands in different countries, like I said, in 20 countries, about new brands, like a Clear Formula, or the Stock Pot or our mouthwash in the 10, 11 countries. I just picked a few, but I could have picked many other ones. We've introduced more new brands where we think we have an advantage. And now we're in a growth mentality again. We've reenergized the Company that it's not about defending our business but growing our business.

So launching more brands than ever, you have to go back again many years to find that same quantity of launches, needs to support to be able to be successful. And that cannot be short-term support, it has to be long-term support. You cannot just turn on and off the A&P tap to make your profit. And, as a result, there might be quarters, like we've seen in the first quarter or second quarter, that we compromise our operating margin, but we run it on a 12-month basis. And on a 12-months basis we continue to say that we can grow our volume, and this is for 2009, whilst protecting our operating margin. It's a very good thing.

So let's make this the -- one last, well, we've come to nine o'clock, one last question. If you have others we'll have the IR team standing by. But one last question from the conference call, please.

Okay. Next question is from the line of Marco Gulpers from ING. Please go ahead.

Yes. Sorry to bother you again on the pricing element, but I had a specific question on Central and Eastern Europe, which ran into the year more slowly and I was wondering how that is progressing.

The second is I've picked up from the wires that you've been quoted that Sara Lee needs additional restructuring going forward. Maybe you want to comment on that. And is it too early for you to have a comment on current consensus expectations of about 7% to 8% of sales on synergies? I'm still asking the question. Thanks a lot.

That's fine. Jim will take the Sara Lee.

Yes, I'll take second one real quick, since I -- it's me who was quoted. What I said was that some time next year we will close Sara Lee and we do expect to see good synergies from that acquisition. But we also expect that we will have to have a restructuring. We've not quantified it, don't care to quantify it now. We don't care to quantify what we expect the synergies to be. But we did want to warn that whereas we have been saying 50 to 100 basis points of RDIs in 2010, we will have additional RDIs due to restructuring of Sara Lee. We expect on the presumption that it's closed in mid-2010. And we'll have to take that on top.

Now you had the second -- the first question on Eastern European pricing. Paul?

Yes, on the Eastern European part, we -- obviously we don't have as well as our business, some of our competitors there, so it's not for us the most important thing. But we actually have, in Russia, we have -- we continue to have good growth which we are pleasantly surprised about. The market is soft in volume, but we are able to still grow with a combination of volume and pricing.

Eastern Europe itself is soft. We -- it was soft last quarter as well. It's soft as well now and volumes are slightly negative if I look at that part of the world. But I'm actually, in that sense, pleased that it's not yet the size of the business that we want it to be. So amongst parts of the world that are soft, this would be one of them. And then you have individual spots that we haven't talked about across some other parts of the world. We mentioned briefly India, but broadly that is where we are on Eastern Europe. And I hope for those people that the economy there is starting to pick up again in the near future because it's really more of a function of the economy than of any of the competitive sets.

So, with that, I really appreciate your -- the time that you've spent with us this morning, and your interest obviously in the continuous progress of the Company. We're very encouraged and we continue to be encouraged by the progress we're making. Expect, if you like it or not, more of the same in quarter four. We're very pleased with the way that our strategy is rolling out, the strategy of bigger and better innovations, obviously rolling them out faster. I hope you got that feeling from our call this morning. We will continue to step up our support levels behind these innovations. It's absolutely key.

We have to continue to drive improvements in execution in the marketplace, in costs. And Jim has given some excellent examples of the opportunities that we will have still. I continue to insist on very tight controls of cash and working capital, linked to compensation of everybody. And you've seen the benefits from that. And there's more to come.

And then obviously if you look at quarter four, don't run ahead of yourselves once more. We have an impact of the trading days. We have the impact of the lower pricing with the full year effect that Jim talked about. And I'm reading some analyst reports and I see some of you just being a little too [euphorious] versus what the realities of the markets would suggest. So I'm just, in my usual candor and openness between all of us, just don't run ahead of yourselves because it doesn't serve anything.

So we're pleased with the way it's going and continue to appreciate your support. And hopefully see you soon, either on the roadshows or in New Jersey. Thanks for your time.

Thank you all very much for being on the call.

Thank you. Ladies and gentlemen, this conference has been recorded. Details of the replay number and access codes can be found on Unilever's website. An audio archive webcast will also be available on Unilever's website, www.unilever.com. Thank you for joining.