聯合利華 (UL) 2010 Q2 法說會逐字稿

Welcome to Unilever's second quarter and half year 2010 results presentation conference call. This will be presented by Mr. Paul Polman, Chief Executive Officer, and Mr. Jean-Marc Huet, Chief Financial Officer, concluding with a question and answer session. (Operator Instructions). We will now hand over to Mr. Polman who will be with you shortly.

Okay, we get going. Good morning everybody and obviously welcome and thanks for the time you take to be with us here today and for the ones listening in as well, thanks for taking the time out. And obviously I hope for the ones that had a holiday that it was a good period to rest and recharge the batteries, and for the ones that still need to go I wish you obviously a happy holiday. I'm certainly grateful for the time that you take out to be with us and once more for the interest you take in our business.

I'm joined here today for the call with Jean-Marc who will talk in a minute. Jean-Marc is obviously the Chief Financial Officer, and James Allison here, the Head of Investor Relations and M&A. Now in the audience we also have some of the Board members that are here with us today. Dave Lewis, so Dave he is the President of the Americas, Sandy Ogg, our Chief HR Officer, Keith, Keith Weed, our new Chief Marketing and Communications Officer, and then Mike, Mike Polk, previously running the Americas and now responsible for all of our categories, and then Tonia was here, Tonia Lovell, our currently recently appointed General Counsel. So thanks for joining us as well.

The rest of the Unilever executive team is not present today. I have to excuse them because they are busy leading the business in different places. It doesn't mean these guys are not busy leading the business but they're doing other things at the moment.

Now I will start off with a few words about the highlights of the year that we've had so far and then I'll hand over to Jean-Marc who will take you through some of the recent performances we've had in more detail. I will then conclude with my perspective on the performance of the business, the business environment we're operating in, the improvements we've been making in some of these areas and also talk on some of the areas where I think that we still have more work to be done. I will close with some brief comments on the outlook for the rest of the year and then we can open the floor for questions.

As usual here is the Safe Harbor statement and we'll move straight into the priorities for 2010. Let me first confirm that for 2010 the priorities are very clear and you see that here. I will wait for a second so that you can read it. The first one is to drive profitable volume growth ahead of our markets. The second one is to increase underlying operating margins steadily and sustainably. And the third one is to generate strong cash flow and lower, as part of that, our efforts at trade working capital. These are the things I've shared with you last year, I've shared with you at the beginning of this year and I want to reiterate that they have not changed.

At this halfway point of the year I'm actually pleased to report that we're well on track to deliver once more against these priorities. I'll begin with a few words about two very important drivers of change in Unilever.

The first one is our innovation program. It's the central part for our growth ambition. And it's picking up and I believe we're starting to get close to competitive level. Our innovations are getting bigger. We're reaching more markets faster and we're better meeting the needs of our consumers around the world. At the same time we're also introducing more of our great brands into new markets than ever before. We've significantly accelerated that rate as well. And here we obviously are helped as a Company by being the Company with the deepest reach of any consumables company in terms of reaching the number of consumers across the world.

Now next to the innovations that you'll see more about, the second area is the culture, equally important. They need to work hand-in-hand. And the culture in Unilever, starting from a strong base, is changing as well. The organization is getting stronger and we're beginning to operate with far more discipline. As I travel the business and I go around the world I'm seeing step-ups in the pace and intensity of our actions that is new for Unilever. I'm encouraged by this. We undoubtedly have further to go, I will always set the bar higher here, but the progress is clear and it's measurable, particularly in development of the volumes that you see again behind these results that we're announcing today.

Now interestingly, but not surprisingly to me, where we face the toughest battles we are competing well. Overall our volume shares are up about 50 basis points with share gains across the board including the emerging markets where frankly the competitive intensity is the greatest. And I know it's on many of your minds. I've always said it's good to have that intensity and I think these numbers point that out. Here our scale, our strong market position and the deep roots that we have established over many, many years help us to withstand this pressure.

But not only to withstand this pressure, it also helps us to increase our market leadership in the number of these key countries where these competitive battles are taking place. As you look at the tougher markets of Western Europe and North America, the fight for volume is equally difficult but market conditions remain intense there as well. But even there we have gained volume share for the third quarter in a row.

Now just as important, we've been driving responsible growth. Despite the significant step-up in competitive pressure, our pricing situation has not deteriorated. Cost savings have accelerated and A&P levels have again stepped up considerably. All this demonstrates the discipline in the management of our operating margin and cash flow.

So promising signs of a business that is delivering against its priorities and steadily and surely building momentum. This gives us the confidence as we face challenging conditions in the second half of the year that we will be able to deliver our objectives. Building on the deep values which are part of our heritage, a new stronger Unilever is emerging, one capable of competing and winning, even when and where markets are tough and competition is intense.

Let me pass you to Jean-Marc for a second who will take you through the details of the performance of the second quarter and then the first half as a whole. Jean-Marc, go ahead.

Thank you Paul and good morning to everybody. Underlying volume growth in the quarter was again strong at 5.7% with underlying sales growth of 3.6%. Turnover was at EUR11.8b in the quarter, up 12.4% on the same period last year, with the unusually weak euro contributing a positive ForEx effect of 8.7%. For the half-year turnover was just shy of EUR22b, up 9.7% with underlying sales growth of 3.8%. In the context of weak market conditions in Western Europe, Central East Europe and North America, this is a good performance.

Turning to improved pricing. Underlying price growth in the quarter improved to minus 2%. In quarter pricing at the Group level has been stable for the last two quarters, despite intense competition, especially in the emerging markets as Paul mentioned. Prices are up in some categories where there is clear cost inflation but down in others where we've had to react to competitive pressures. For the first half underlying price growth was minus 2.6%. We continue to expect underlying price growth to turn positive for more to the end of the year.

Underlying volume growth of 5.7% in the second quarter brings the UVG for the first half to 6.6%. This is the highest recorded by Unilever in over 20 years, albeit against a rather weak first half of 2009 when volume was flat. Equally positive is the fact that volume growth is broad-based, whether we look by category, by brand or by geography. There are exceptions of course but the vast majority of the business is growing, reflecting the robustness of our strategy. In case you are wondering, the pictures at the bottom of this slide are not random pieces of real estate. They are three of our new One Unilever MCO head offices in Western Europe.

Going to the next chart. Focusing a little more on the regions, we see firstly the continuing strong performance in our emerging markets. The Asia, Africa, Central East European region where competition is most intense continues to be a powerhouse of growth. But our businesses in Latin America have also performed very strongly. North American volumes were also positive with performance in the US holding up well in a difficult environment.

Even in Western Europe, where conditions are most challenging, we saw encouraging performance ahead of the market. Excluding Greece where the market as a whole suffered sharp volume decline, Western Europe overall grew in volume terms. Although this was modest for the second quarter, for the first half overall it was more than 2% in a market which was at best flat.

Volume shares, they have been steadily improving since the beginning of 2009 and have shown consistent gains of between 50 and 60 basis points since the fourth quarter of last year. We need to go back a long way to see performance like this for Unilever as a whole.

Especially pleasing is our share performance in some of the most competitive markets. In Turkey, for example, despite aggressive price competition we have stretched our lead in Home Care. In Indonesia, as well as closing the gap to the market leaders in Home Care, we've increased our leadership in the much larger Personal Care sector. And lastly in Brazil we've responded strongly to concerted attacks and managed to increase even further our substantial share leadership in Home Care.

Also worthy of special mention is China where as you know the market is already significantly bigger than places like India. Here we are making substantial progress in the face of robust competition. Whether in Savory, Home Care or Personal Care, we are increasingly narrowing the gaps to the market leaders.

So, in summary, good volume performance across the board, strongly driven by acceleration in innovation and launches of new brands into new markets. Despite lowering media rates we have steadily increased advertising and promotions in recent quarters to levels which are very competitive with share of spend strongly ahead. We've been investing for the long term. As such in the remainder of the year we expect A&P expenditure to be broadly flat in absolute terms against the very, very high levels of investment which we made in the second half of 2009. We continue to expect our A&P investment to be comfortably up for the year as a whole.

Turning now to our margins, we continue to see good delivery from our stepped-up savings programs where we are benefiting from the restructuring activity that was pulled forward into 2009. Savings in the first half were around EUR700m, just over half of which came from buying. With our efficiency programs more biased to the first half of the year than the second we expect full-year savings to be just a little ahead of the EUR1b level that we originally targeted.

Continued gross margin improvements. Gross margins in the quarter were again up by 120 basis points, bringing the overall first-half improvement to 180 basis points. This came in a developed-world environment where levels of price promotion were high. The commodity-cost inflation which we see in the market has not yet impacted our P&L. Commodity costs were broadly flat in Q2. However, we continue to expect commodity-cost inflation for the year as a whole to be around 2%, meaning that we will face headwinds in the second half of the year. Petrochemicals are the most significant contributor, although dairy products, plastics, paper and board, edible oils and tea have also increased in price.

The development of commodity costs, tougher with the unusually high comparatives from 2009, will mean second-half gross margins will be lower although pricing will drive some improvement in the fourth quarter. For the year as a whole we continue to expect gross margins to be ahead of 2009.

Underlying operating margin was up 10 basis points in the quarter and by 30 basis points in the first half. As you saw earlier, advertising and promotion spend was again up in the quarter and has increased by 180 basis points in the first half. This incremental cost was more than offset by an improvement in gross margin of 180 basis points and lower indirects of 30 basis points. This led to an underlying operating margin of 14.9% for the first half of the year. We continue to expect that for the year as a whole we will deliver on our objective of one steady and sustainable underlying operating margin improvement. This robust performance underlines the benefits of the virtuous circle of growth.

Now turning to earnings per share. Earnings per share in the first half were strongly ahead, admittedly against a low base from 2009. Fully diluted EPS of EUR0.70 represents an increase of 36%, of which 10% came from operational performance. The one-off profit on disposal of the Brunch business boosted EPS by 5% in the second quarter and by 3% in the first half. The large headline increase is of course driven by a series of financial items, all of which have been positive so far this year. The movement in pensions, financing costs will continue to enhance earnings throughout the year 2010.

Lower restructuring costs have boosted EPS by 8% as we move to a more normalized level of restructuring following the completion of the One Unilever program. We expect restructuring costs for the year to be around 120 basis points, similar to the level in the first half of 2010.

In the second half of 2009 the tax charge was unusually low, balancing a higher than average charge in the first half of that year. This is likely to mean that tax will have a negative impact on EPS growth in the second half of 2010 and most particularly in the next quarter. We expect that the impact of tax on earnings for the year as a whole will be broadly neutral.

Currency boosted EPS by 7% in the first half of 2010.

Now turning to trade working capital. This was negative for the third successive quarter. The long-term improvement trend is clear from the chart where we can see that the moving annual total is now also negative. It is discipline in all aspects of trade working capital that has driven this positive trend. There remains more to be done however and we can certainly push this improvement further as we go.

Now turning to free cash flow. This quarter we've introduced a measure of free cash flow defined as shown on the chart as net cash flow from operating activity less net interest and net capital expenditure. Many of you already use this measure in this way and we have made this change following your broad input in the interests of simplifying our reporting and better aligning with the business with its typical market metric for cash.

Net cash flow from operating activities for the first half was up by around EUR0.2b. This was driven by improved operating profit, lower pension contributions, offset by higher tax payments and an absolute increase in working capital for this period. Net CapEx in the first half was also up by around EUR0.2b on last year. This reflects increased investment behind accelerating volume growth as we come to the end of the intense One Unilever restructuring program. Our investments are particularly focused on capacity expansion in several of our key emerging markets. With net interest stable this resulted in free cash flow for the first half being broadly unchanged at around EUR1.3b.

Let me now turn to the balance sheet. Net debt was EUR7.5b at the first half, up from EUR6.4b at the end of 2009. The main driver of the increase was a significant weakening of the euro, especially against the US dollar in which the majority of our debt is denominated. Overall, euro weakness increased debt levels by around EUR1.4b over the course of the first half.

The pension deficit increased to EUR4b at the half-year against EUR2.6b at the end of last year. The main contributor to this has been the lower corporate AA bond rates which have driven an increase in pension liabilities of around EUR1b. Currency moves accounted for most of the remaining increase. Team assets have remained broadly flat with higher returns in the first quarter offset by equity market weakness in the second quarter. Cash contributions to pensions in the first half were around EUR350m, down by around EUR100m on 2009. We still expect full-year payments to be around EUR750m, well below the EUR1.3b contribution made last year.

Finally, I can confirm that the next quarterly dividend will be EUR0.208 which will be paid in September. And with that let me now return to Paul.

Thanks Jean-Marc. You can see that Jean-Marc has hit the ground running. Nothing better to focus the mind of a CFO when he has to present results. So thanks for doing that.

Let me just begin with some reflections over the last six months with a few words about the business environment that I know is on many of your minds. Now we continue to expect the recovery in our markets to be long and drawn out. We see clear evidence of this all around us, most acutely here in Western Europe but also in North America where markets frankly remain sluggish. Nothing new. I've been saying that many times before. Our views on deleveraging in these developing markets -- developed markets, on fragile consumer confidence and on the slow pace of economic recovery has not changed. And it's going to be a long drawn out recovery.

In the emerging markets, however, growth is more robust, although there are some signs of slight slowdown in some of these countries as well. India, for example, undoubtedly you've seen increased interest rates to 5.75% just two or three days ago. With opportunities for growth at a premium, it should not surprise anybody that competitive intensity shows no sign of abating. Certain high-profile players dominate the headlines. But we are experiencing tough battles throughout our business as much with lean, aggressive local players as it is with these global peers.

So we continue to plan the business on the basis of a long and slow recovery in very competitive markets. Overall our progress is good, in fact a little ahead of our plans. But of course there is no room for complacency. We're working with the long term in mind and there is still much to be done to get consistent top- and bottom-line growth. The good thing is that we still have all these opportunities open to us.

Now I continue to hold the view that we can best create shareholder value by strongly growing the top line whilst at the same time investing in the long-term health of the business and delivering modest but consistent margin improvement. That's what we've been doing and that is what we will continue to do. Our intention is to invest heavily for the long term, whether it will be in consistent and competitive levels of A&P or capability building, especially supply chain, customer development or marketing, or the time and energy we're putting into changing our organization and culture. And just as importantly for this new Unilever, we're making these investments with rigid discipline.

Let me say a few words about the strategic framework, the compass, and three of the thrusts that underpin this and guide our focus. The first one is winning with brands and innovation, the second one is winning in the marketplace and the third one is winning with people.

First, winning with brands and innovation. As you know, we see innovation as the key driver of Unilever's growth and I'm encouraged by the progress we are making after many years of frankly under-investing in our brand. In the many markets I have visited this year I have seen plenty of evidence of how our innovation program is getting bigger, better and faster. Our innovation funnel is healthier than ever before.

This is clear from the metrics that we are looking at. Individual projects are getting bigger and the portfolio as a whole is delivering more. The proportion of our turnover coming from products launched in the last three years is now up to a new high of 33%. Far lower were the levels in 2008 that I shared with you then when our innovations were also less impactful.

And one of the most important drivers of our improved innovation performance has been the speed of rollout to many more markets than in the past. This chart gives you some examples. Dove Men+Care, Magnum Gold, Knorr Stockpot or Dove Hair Damage Expert. These are all big ticket projects with substantial investments that will have a significant impact on our growth. We're rolling out innovations such as these rapidly into multiple markets, mainly because of the discipline we're instilling in our business. Gone are the days of long debates on tweaking mixes for country X or Y. We know that with discipline and rigor comes speed. That's a vital part of the winning formula.

And we've also been innovating across the category portfolio rather than just in selective brands which do not move the needle enough at the category level. That's equally important. For example in Hair, we've been successfully re-launching Timotei and Sunsilk at the lower and mid-price points of the market. But we've also rolled out Dove Damage Repair in the more premium segment. With additional launch activities behind Clear Anti-Dandruff as well which is doing very well for us and TIGI Catwalk we are active across an entire range of the hair care brand, driving volume growth well ahead of the market.

As we move from a category perspective, let's take a quick look at the country angle for example. I recently was in Nigeria a few weeks ago, a country with more than 150m people, and home to a Unilever business with a long and successful history. This is a business operating in a very demanding environment, for the ones that have been there. And you might think that attending to the basics was challenging enough. Yet the scale of innovation and market development we're driving, under Thabo Mabe's leadership who runs our business there, is truly impressive.

In fabric cleaning market leadership has been captured with the launch of Sunlight and the re-launch of Omo. In oral a twice-daily brushing campaign to develop usage has led to market growth and major share gains for Close Up, a brand that actually already enjoys 80% market share there. In Savory, rollout of new variants and the power of mealtime campaign for Knorr have fueled share gains there as well. We've also launched a new spread for -- in margarine on the Blue Band with a formula that has a more affordable price point. As well as driving growth this enables more consumers to have access to nutritional benefits, in this case on the margarine. It's an inspiring example of just one country but it's not an isolated one. I could have picked many, many more.

As well as innovating faster, we're actually also taking more brands into more new markets, as I mentioned before. In the second quarter alone for example we extended Lifebuoy into Brazil, Bolivia, Peru but also Australia, flexing the brand into the developed world as well. We launched Tigi Catwalk in India and Brazil. We successfully introduced the Fruttare brand, which is ice cream, into Thailand, Malaysia, Singapore. We expanded Cif into Vietnam, launched ice cream there by the way. Rapidly launched Pepsodent in the Philippines to counter competitive threat. And the list goes on. These are just a few examples but the list happily is longer than it has ever been.

Whilst we've been rapidly introducing our brands into new markets, the white space opportunity is still substantial, don't underestimate that. We've always said the main opportunity for growth is market development but this is another opportunity we should not underestimate. This chart is a very simple chart but it shows the coverage of our key brands. I think you'd agree with me that clearly we have ample opportunity for growth.

Now today I have not focused on market development but as we have said before more consumers, more able to afford our products will be the main source of growth for Unilever for many years to come.

Now equally important as growing our brands and rolling out our innovations to more new markets, we're also reshaping the portfolio continuously. Just in the quarter alone we continue to work towards the completion of the Sara Lee Personal Care deal. We expect that to happen in quarter four. But we also announced the disposal of our Italian frozen food business. We've reached an agreement to dispose of our palm oil plantations in Ghana, the last country where we had such plantations, and we completed the disposal of Brunch in Germany and started the licensing-out of the Du Darfst brand in the same country.

And let me now turn to the second strategic thrust I briefly mentioned which is winning in the marketplace. Here we're making good progress as well towards our goal of winning with winning customers and becoming an execution powerhouse. On-shelf availability has been the key area of focus so the consumers can find our products in the store when and where they want it. And we have seen excellent results with a 290 basis point improvement over the last year alone.

Now I believe personally that this is a significant contributor to the improved volume momentum that we are developing. In the last quarter we've also opened another of our groundbreaking customer insight and innovation centers that some of you might have seen. This time it's in Paris and we're about to open one in China as well. And as the chart shows, the robust rollout of these successful centers will continue. Although we don't yet see ourselves as best in class we're being increasingly recognized by our customers. Tesco for example recently named us Supplier of the Year, Global Supplier of the Year. And Walmart did the same. We're happy about that but we cannot stop there.

Finally let me say a few words about winning with people and in particular the changes that we have made to the culture and the organization. Changing the culture of an organization as large and complex as Unilever is a journey that takes several years, especially if you want the changes to be ingrained. Our progress so far is good. There's still much to do but I can sense the electricity starting to flow through the wire and I'm greatly encouraged by the speed with which this is happening.

Internally we feel that we are making progress and externally these changes are increasingly beginning to be recognized. We're busy building capabilities throughout the business as well. In the supply chain we have made great progress under Pier Luigi's leadership with much of our success in savings that you've seen, that Jean-Marc talked about, driven by the new organization that we've put in place. In Europe we're fully up and running and in other regions we are following not far behind.

In customer development, another area we focused on, we're also driving change with the energetic new leadership of Claudio Colzani. Now we are more focused on improving marketing under the leadership of Keith Weed. Keith inherits a great tradition of marketing excellence in Unilever, no doubt about that. Our award as Advertiser of the Year in Cannes is a recent example of this. Despite this recognition Keith has a full agenda ahead of him to ensure that all aspects of our brand management are truly world class.

Capability-building is just as important in our back office and under the leadership of Pascal Visee Unilever Enterprise Support is now up and running. It will bring a variety of business services together in one organization, driving lower costs but also improved performance. It is a key part of becoming a truly customer and consumer-focused organization.

Culture change inevitably takes longer than capability-building but here again we're making progress. Our leaders are becoming more action-oriented and externally focused. I expect our new reward system that our shareholders improved to have a real impact, with more differentiation, greater accountability, clearer expectations and again tighter discipline. Speed, clarity, discipline and accountability are all essential components of a business which can win and which needs to win in today's environment. The improvements we continue to make have underpinned our competitiveness and are helping to build the new Unilever.

And let me briefly close my comments with a few words on the outlook for the rest of 2010. And there are no differences I hate to say of what I've said before. There can be no doubt that together with our competitors we face a tougher second half. In addition to a cautious consumer in Western Europe and North America, we face difficult comparatives from last year as well as the added burden of rising commodity costs. We're all competing hard and there is no reason to believe that this is about to change. Once more we welcome this competition. And as you've heard and seen today in the results that we put in front of you, we believe that the new Unilever is well placed to compete in this environment.

Although life is not made of a discrete 13-week period, this was yet another good quarter to confirm what we're doing. Despite this challenging environment we are confident. We are building momentum. The virtuous circle of volume growth is working for us and there is renewed energy and spirit in the business. Therefore our focus and our priorities remain unchanged. We will continue to focus on profitable volume growth whilst delivering steady and sustainable year-on-year improvement in the underlying operating margin and strong cash flow. We stay focused on doing the right thing for the long term.

And on that note I would like to open the floor for questions. Thanks.

Okay, ladies and gentlemen, the usual format. If you're in the room and you want to ask a question then you stick your hand up, if we select you then please just press the button in your console, please tell us who you are and who you represent and please, because there's probably a lot of questions, restrict yourself to no more than two questions.

If you were listening on the teleconference and you wish to poll for a question then we have the number all ready, then press 'star, one' on your telephone. If later on your question has already been asked and you decide you want to cancel your question then press 'star, two'. And we'll also be taking questions from those who are watching the broadcast online. So why don't we start in the room? So if you want to put your hand up. Alex, you had your hand up first. Why don't you start?

Hi, good morning. It's Alex Smith from Nomura. I just had a question on pricing, where you say you're hoping for it to turn positive towards the back end of the year. I was just wondering, given your comments on the consumer, on the competitive environment, what gives you the confidence that you hope to see pricing turn positive? And have you seen some evidence in the second quarter, for example, in certain categories or geographies where pricing is beginning to improve?

And just secondly on if you could talk a little bit more about Western Europe. Organic sales growth was down in -- volumes softened a bit. I know Greece, I think, was part of that, but maybe you could talk about some of the other moving parts behind that.

And also in the cost line in Western Europe, sales were down, but you saw some very strong margin improvement there. I was just wondering if you could talk a little bit about moving parts in the cost base on Western Europe. Thank you.

Yes. Thanks Alex, I appreciate that. On pricing you've actually seen an improvement. In-quarter pricing has not deteriorated and you've seen an improvement in the pricing component across all three regions, a little different by region, but across all three regions. And that despite, and you've seen the competitive results announced as well, increased intensity of competition. So we're improving our pricing and just the carry-forward effect of this we think will already help us get to positive pricing by the end of the year.

On top of that we are seeing some positive signs of pricing in selective parts and in selective markets. We have obviously pressure in the solution wash or laundry segment, which we are responding very well to and gaining share responsibly. But in some of the other segments we're actually seeing price increases already. And even in solution wash, there are a few countries that we've announced price increases. One of them here in the UK itself and some other places across the world, Chile, another example, and several other ones, where we see the prices moving in the right direction.

I think, and I've said this before, the fact that we have input cost inflation coming back again is healthy to the environment where you have a probably lower level that we've seen in the past, where we have a low level of price increase. And we still think that's realistic as an assumption, but it's also a function of a lot of moving parts, including the competitive set.

But you've seen that on that front even, the price investments that are being made in the market, we can counter those successfully with investments in product quality, with investments in innovation, and with quality investments in A&P. So what you're getting here is quality growth. That's what is good about these results.

On Western Europe, it's a difficult environment in Western Europe. There's no doubt about it and everybody talks about it so I don't want to dwell on that. But despite that, we think the results are fairly reasonable. We have Greece and also, to some extent, Spain where the markets are down, and Italy is frankly also soft. But we're growing in the Benelux, we're growing in France, we're growing in the UK, so there are many things that where we are growing is where we have the innovations. I've said that before.

We've had a lousy ice-cream season. It's actually a 15-year low in terms of temperature. And -- but we don't want to go into this and that and without this and including that and this, but in total, Europe market's flat. Our share slightly up. I'd call them flat, but they're slightly up. And the growth is coming from where we have the innovation.

So we're dialing it up. Europe historically has had a low innovation rate for us and was more managed for profit. Now the good thing that you see here is we're able to grow 1.7% volume growth over the first six months. We're able to invest in A&P. But, as you rightfully say, we're also able to significantly improve the margin. And the margin improvement comes partly because we've seen some input costs going down, this time more in Europe, like on the margarine. The reason it went up, we gave you the reason for that. Now we have a little bit of a benefit. But you also see the cost discipline coming through. This is the reason why all the restructuring is happening.

And you've often asked, where do we see the benefit? Here you see the benefit. We've moved some of that forward last year, if you remember, because we needed it and we're starting to see those benefits from it. So Europe is a very responsible growth but it continues to be a tough environment.

Celine?

Thank you. Celine Pannuti from JP Morgan. I have two questions. My first question is on your A&P guidance for the second half. You made innovation as a key part of your strategy. And how do you square that with A&P potentially down as a percentage of sales in the second half? How can we be sure that you continue to invest to drive your volume? That's my first question.

The second question on your market share improvement, the volume chart that you put, can you give us a bit of color on where this 50 to 40 basis points volume share, how does this fit by region, and what value share would look like if we were to do the same chart?

Thanks Celine. On A&P, what you have seen last year in the total consumer space environment, you've seen a significant step-up in our A&P investment. And as we've said then and as I repeat now, two-thirds of that is A and one-third is about P. So it's quality and that has reignited our growth. And I believe it has brought us to competitive levels that we need to grow our business, and we are showing that in the growth that we are reporting to you.

But a significant step-up at the same time as the media rates were coming down. Others were reducing their A&P. Unilever for a long time has been accused of having their A&P up and down and not investing enough in our brands. I think we've shown you the difference. Over the first half of this year we have continued that also very clearly. What we are saying for the second half is not to reduce A&P. What we're saying for the second half is we keep these same high levels as what we have over the last six months of last year. And you can see what they are. So they are very competitive levels for us.

And obviously with the innovations that we are announcing that are hitting the market now, with more innovations coming at this competitive level, we feel confident that we are able to compete.

On the market shares itself, we don't really break that out by region. We look at it by categories. And a global market share is actually a silly number, if I may use the punch line here. But the growth in the emerging markets is obviously very strong. You can see that. You can do your calculations yourself.

In [our RECIS] region we're growing 10%, 11% consistently. And that market is growing by about 5%. North America is actually down in the categories that we measure, in our food and HBC mix. I know competitors get slightly different numbers, but it comes from the product mix. But food actually in the US is down. HBC is down slightly and yet we are showing volume growth there. And Europe is flat and in the flat market we have a 1.7% volume growth. But volume share is slightly up in Europe. So those are the share numbers.

Our value shares are more or less flat in this environment. And that's because you see the competitive and our pricing situation as well. But we're pleased about that. And we're focused obviously on that leverage that we're getting from growing our business with discipline to give you the margin progress that we're showing.

Yes?

He's had his hand up from the beginning. [Jeff]?

Just a quick question on the steady and sustainable improvement in operating margin. Does that extend to the second half? Thanks.

Yes. I think I've been, Jeff, I think I've been clear on what we plan to deliver for the year. So you can see that. We have a first half which has been a good first half, at 6.6 volume growth and 30 basis points' operating margin. We have gross margin expansion. We have invested in A&P, we're very clear. And we think we can end the year with strong volume growth, operating margin improvement and strong cash flow. I cannot be clearer without saying we don't give guidance.

Julian?

Julian Hardwick from RBS. Two questions. One, can you give us a bit of an update on India from both in terms of your progress and improving that performance there?

Secondly, could I just go back to your white space chart? Is there anything you can say to us to frame the scale of the opportunity represented by that? And in particular I'd be interested in what you think the realistic opportunity is. And looking at some of those brands, I can't imagine Signal is going to be going to all the markets that it doesn't operate in at the moment, and up against Colgate and Crest. So realistically what is the scale of that opportunity?

Okay. I won't tell you what we're able to do or not do until we do it, and then I'll share with you how we do it. That's probably better when it gets to new brand introductions. But where we introduce it, we're doing pretty well on doing that. But I'll get back to that.

On India, India as a total, we have a majority stake. But as a total company turnover would be about 6% of total Unilever, to put it in perspective. In the Indian market, you've seen the results because they're publicly traded, we're growing 11% in the results that we showed and we have gross margin expansion. But we're investing in A&P. And this is the story.

We have basically re-launched the whole portfolio in India under Nitin's leadership over the last nine months. This company has worked its tail off, has gone into overdrive. I've never seen such an entrepreneurial spirit. And, not surprisingly, be it personal cleansing, be it hair, we're growing share. It's about 60% of our business we're growing share. Even in laundry we are well in the double digits with the re-launches we've done behind Rin and behind Wheel and our portfolio is very competitive. In fact, we have capacity problems on some of our brands there right now. But there's no doubt about that, that when you have a competitor that puts a price back in the market and just puts a 40% lower price on there, you have to react on that.

And what we're doing is we stay competitive and we grow the business, and again, doing that responsibly, I think. It's a longer-term battle there. There's no surprise there. But again I think with the numbers that we're showing in India as well, that our investments are the right ones to make to be sure that we stay long-term competitive. And we will continue to do that. So I'm very pleased to see at the way that the organization has responded, the pace at which we are bringing in the new innovations into the marketplace.

And it's not only innovations. Our cost structure is getting better. You've seen that in the results. We have broader plans from already what we think is a competitive advantage in the distribution of our products across India, with the Shakti Ladies and our own sales force. We're extending that even further. So I think we're increasingly taking charge of the situation, if I may say.

Now it's not only against our branded global competitors, which are successful to a certain extent in some categories from a very low base but in others not. In hair care, we're gaining share and some of these major competitors are losing share, but it's an important category. But we also are becoming more competitive against where the real challenges are, which is the local competitors. And you've seen some of these local competitors reporting results that were down. We've reignited on personal cleansing, for example, our total portfolio. And even our regional brands we're supporting again. We've adjusted our price points there. But we're getting the returns that we're looking for. So I'm confident on that.

And India, as I said, and as Jean-Marc alluded to, the market in India and the development in India unfortunately is significantly lower than China. China's consumer goods market is already 400b. And in China we're growing across all of our categories, bar one. And we're taking share across all of our categories from a major competitor. That's a much bigger impact. So I'd also like to keep that in perspective a little bit because somehow there's an obsession with India that's going beyond the normal, but we're happy to address that.

In terms of white space opportunities, we look at our core categories. We know what we're doing well. You see Personal Care products are doing extremely well. They're putting in growth ahead of our competitive set. And where we've launched products in that space, you saw now the Lifebuoy expansions. We've launched Cif in some of the countries. We are launching detergents. We've launched in five or six places detergents. We launched new detergent in Indonesia, [Fitro] against the low end of the market. We've launched the Sunlight in Thailand. We've launched Sunlight in Nigeria. I was just there.

So we're seeing that the confidence is high enough and the results support that to launch and strengthen our portfolios. And we will be selective because we have only limited capabilities and limited funds as well. We will be selective when and where we do that, and not spreading ourselves thinly by introducing a lot of things in many countries and making noise about it. We'd better have results. And that requires some focus and that's what we're doing.

If we take one more in the room and then we're going to go to the telephones. Sara, would you like to ask your question?

Yes, hi. It's Sara Welford from Citi. Just two questions. In terms of innovation, you have the slide talking about 33% of sales now coming from new products. With this Project Genesis etc. coming up in the next few years, do you have a target for where you want that to get to?

And secondly, in terms of Western Europe, obviously that remains tough. Is it a question of waiting for the consumer to de-leverage and fighting it out while that happens, or is there something more positive that can happen in the medium term?

On the -- thanks, Sara. On the innovation pace, I've always said if we can get to 30% plus levels, we are competitive. And what is more important is now to look at the quality of these innovations and make them bigger and better. And the bigger and better they are, the faster we can roll them out across countries as well. On our White Now toothpaste is a discontinued innovation, introducing it everywhere, building share. Knorr Stock Pot, discontinued innovation, everywhere. Dove Men+Care, building share everywhere, including the US in a very competitive environment.

So bigger innovations, better. And when Genesis comes in it helps us, under Mike and Genevieve's leadership, it helps us to get to these bigger innovations better. But I think that staying stronger in the 30% to 35% level is a competitive level for our industry.

And then Europe itself had an innovation level of around 10% when we first started looking at it, because we were managing Europe more for money, and then it became a perpetual restructuring story. What we've clearly said is there's reason we're going to invest in Europe, which gets to your second point. The reason is you have to be realistic about the environment. There is no doubt that the growth for this Company and many others is going to come from the emerging market. We're very blessed by having over 50% of our business there and very strong positions.

So you have to be realistic that for a long time to come, in my opinion, Europe is going to show very low growth. And that's not -- that's just a reality. I'm not so worried about it. And I'm talking about Western Europe, because we only report Western Europe, unlike our competitors. In our numbers is not the growth of Eastern Europe. So when we show 1.7% growth, it's Western Europe. Be careful when you compare these things.

Now I think there's modest growth. I just don't want Europe to drag us down and be negative like we've had for a long time. But it's only 350m people. The world is heading to 8.5b. And although many of us are Europeans and we love this region dearly, it's shrinking and there's less population. So you have to be realistic.

But where we innovate and where we do that very well, we grow. We also grow in Europe. We grow our deodorant business. We grow our body wash business. We grow our tea business. We grow our ice cream business shares. The market has been soft because of the climate. But we grow these businesses because we innovate again. But there's no reason, which I always keep saying, to grow in Europe but at a modest level, and do it in a way that you see here, that doesn't compromise your margins. And then the main stimulus of shareholder value building over time will come from the emerging markets.

I think we're going to go to the telephone now, actually, Paul, and we'll turn to Warren when we've done that. So I think we've got Marco on the line.

We do indeed. Please go ahead.

Yes. Good morning all, gentlemen. I've got two questions. The first is on the retail environment. Maybe you can update us on what you're seeing both in the US and in Europe, because some of your peers have seen some promotional spending easing in the US whilst in Europe it remains very promotional. And just some clarification of what you guys are seeing in the retail environment. And maybe include emerging markets in there as well.

The second question is could you help us out a bit more on the first half on gross margins? And to get a bit more into the granularity of that development, could you help us out on what the moving factors are roughly in qualitative or quantitative terms in input costs versus operating leverage? Thanks a lot.

Yes. Thanks Marco. I'll have Jean-Marc take the second part. On the retail environment, I think we won't spend too much time on the emerging markets because the retail environment hasn't really changed that dramatically so we don't want to spend time on that, if you don't mind. But it's clear that in Europe and the US, when these markets aren't growing, people look for growth to be successful. There's an environment that is a tougher environment. But it's also clear that when you have input-cost pressure that the first thing you see is probably a reduction of promotional activity before you see the pricing. So you are right to have spotted that the promotional intensity is starting to decrease a little bit in some of the markets.

We have focused with our retailers very clearly on continuing to add value. The reason that we opened these innovation tenders with our retailers and the success that we're seeing behind that is very important in this environment, that they increasingly want to work with us on other currency than just the price alone. We spend a lot of effort and still more to be done on being sure that the supply chain is efficient for us and for the retailers, and that our on-shelf availability is higher, for us a good thing, but also for them into the loyalty. And retailers like us for that. We're bringing value.

We're spending a lot of time on driving innovations and bringing unique innovations to the retailers so that where we are in our categories, we grow with them, and in some places we grow the categories. And retailers like that with us.

We've also made a clear commitment to these retailers that we're not going into e-store-type activities and competing with them. We are working with them to do that. And, not surprisingly, the Walmarts of this world, the Tescos and many others are increasingly recognizing that for us. We just did a Cannondale study again in the US and we've seen that we've rapidly improved our position in terms of being an innovative supplier that they want to work with, being a supplier that adds value to drive efficiencies in the supply chain that they want to benefit from as well.

So it's that partnership that drives that with us, and it takes it away from the simple discussions of pricing, which nobody is interested in. So I think although the environment remains tough, that our strategy is a strategy that is also in the interest of the retailers. And that is the feedback that we're getting from them as well.

Let's go to the first quarter, if you want to --

Just on gross margins, a couple of points, Marco. The first point is that gross margins did increase across the board, be it in America, Asia or Europe in the second quarter. And, as you know, that has been taking place over the last several quarters. What you will also know, alluding to the points that we made in the presentation, is that this is the last quarter where we will benefit from the level of commodity costs.

There are three drivers behind our gross margin Q2 year to date. There is the point that you alluded to, which is volume leverage. And I think that that just underscores our focus on profitable volume growth. And that is really coming through, and so it should if you see the types of volume growth that we posted in Q1 and in Q2.

The second point that I would make is that the savings year to date have been approximately EUR700m. And through some of the restructuring that we brought forward, which is the reason why our restructuring is at 120 basis points and we shifted that at Q1, as you'll remember, from the high end of 50 to 100 basis points, savings have been coming through. And again, that was the reason why Western Europe margins were up, although we have been investing in that region. And so leverage, savings and input costs are the three drivers behind our gross margin.

We've got Bob, [Bob Walt-Schmitz] on the line.

Please go ahead.

Morning gentlemen. Two questions, if I may. One, you're talking about some of the portfolio changes you've made to date. I'd ask you if there are specific areas where you feel you need to make more changes still. And would those be focused on organic changes via CapEx or otherwise, or more focused on acquisitions?

And the second question, when you mentioned about the supply chain and the improvements you're getting there, is it possible for you to give some more color about quantifying the potential opportunities that you see there in future? Thank you.

Yes, Bob, we think there is, and I continue to say that, especially in this environment that we face in the US and Europe, there is absolutely no mercy for costs in the system that consumers are not willing to pay for. But you cannot all get to that at the same time. But I think there is enough in our system still to drive efficiencies and to use that to fuel growth. And we will continue to look at that. Last year we took about 1,000 people out of our indirect. We've started the project which we call the Unilever Enterprise Service with Pascal I was alluding to. We've launched that. That doesn't mean we've implemented that. We can still make our organization more consumer- and customer-focused.

Pier Luigi has made tremendous progress in the supply chain. But we are now restructuring our organization to regional and global supply chains and see increasing possibilities to leverage. On the restructuring front, although we think the restructuring charges will not go up, and frankly should come down a little bit, it doesn't mean that there is not enough to be done still to continue our restructuring and get benefit on that.

So there are many areas in the Company that we still see opportunities. We also see opportunities to drive efficiencies of our spending. As an industry, we all spend a lot of money in A&P if you look at it, if you look at any of our competitors. So continuing to drive efficiencies in the way you spend there so that you don't have to increase the absolute level are equally important. And again, once more, I want to say there is enough juice in the system I believe to do that.

On the CapEx, you see the CapEx going up. Although our cash flow is progressing nicely and it should in terms of what Jean-Marc has shown, net cash flow up by EUR200m, we also have increased our capital spend by EUR200m. I think it's the best news to tell you because we are again building factories to fuel the growth. And we have many plans to continue to do that, to bring our capital spending to reasonable levels. Not as high as some of our competitors, but a little higher than we have done in the past for sure to fuel that growth. And we're putting the capabilities in place to do that.

In terms of acquisitions, honestly, the main part of our growth that we are delivering is with -- is organically and will stay organically. I think acquisitions will be the bolt-on types I've talked about. And I've given the range of EUR2b a year. I'm not deviating from that range. And we are always looking at these smaller opportunities to do that and so far we're on track. And it also means at the same time still some weeding and feeding of the garden that you have to divest of something, sometimes of the same magnitude, sometimes a little bit less. But the main core focus for us will be building our brands, very important in today's environment.

Yes. Let's come to Warren, back in the room now with Warren.

Morning. It's Warren Ackerman at Evolution. Couple of questions for Jean-Marc. The first one is on currency, and apologies for the question on FX, but currency was a 9% boost to revenues in Q2, which was well ahead of consensus. I'm just interested in what the impact on FX was for the gross margin or the EBIT margin or the EPS. What I'm trying to get to is what was the constant currency EBIT growth in Q2? And what do you think it will be for the full year, assuming spot FX rates persist? That's the first question.

And just a second one on tax. Can you just clarify what you said on tax for Q3 and the full year? Thanks.

Sure. So let me take them in no necessary order. If you take FX rates, where they are today, the positive impact on FX for the full year should be around 7% plus or minus. If you take the impact of FX in our first half or second quarter and you see the impact on our top line, roughly it's had the same impact on our bottom line. We don't disclose on an EBIT margin level right now, but it'll be plus or minus some basis points. But if you look top line versus bottom line, the impact is approximately equal.

You'll have seen that in the EPS growth chart, if you look at the impact of currencies there and then you look at the top line, plus or minus it all comes down to the bottom line.

The third point on tax, let me just be a little bit clearer here. Our guidance has and continues to be approximately 26%. The point that I was trying to mention is that if you're looking at EPS on a growth level, you will see that in the third quarter it'll take into account the lower tax rate of last year. So just in general, if you're looking at tax rates, then maybe I should be clearer and not talk about that within EPS growth, but just the tax rate, you should consider 26% plus or minus.

Simon?

It's Simon Marshall-Lockyer, Jefferies. Couple of questions. The first on your chart on on-shelf availability, there was quite extensive presentation on that topic in the States at your seminar. And the 290 basis points that you've improved over the last year, can you give us some color as to where most of that improvement is coming from? Is it more in Europe? That's the impression.

And can you -- there was some indication of overall actual numbers. I think the number in Europe that you'd worked off, the base was something like 83% or 84%, you'd start moving up. Can you give us an absolute number maybe of what that on-shelf availability is?

And then my second question is about your run rate of cost savings, and this is more for you, Jean-Marc. If your run rate is EUR700m in the first half and your full year is EUR1b, that means your run rate in the second half is estimated to be about half what it was in the first, give or take. Is that an indication of the level of savings going into 2011, i.e. the second half? Thank you.

Okay. Start with the second one so that I can adjust my on-shelf availability numbers that is too high.

Another way of giving some more time to give you an answer on that. No, the -- let me not give you a view on next year. I think that you make a very valid point, and it's one that we should be very clear on this. What we have said is that savings for the year will be above EUR1b, but not that much above EUR1b. So do not take the EUR700m of the first year and multiply by two because then you'll be too high up. Some of this is to do with just the phasing of activities. But again, for the overall year, we're in excess of EUR1b but not by that much.

When it comes to 2011, going back to Paul's point, we want to repeat this type of effort but we'll give you more clarity when we get there.

Yes. The first half is seven months. On on-shelf availability, the numbers that you can measure best obviously are in North America and Western Europe because of the coverage that we have and the controlled trade, if you want to. And I've said before and I continue to believe that the work that the people are doing in the market, it easily accounts for 1% of our growth. And that on-shelf availability improvement that you were exposed to when you were in the US investor seminar is starting to pay off for us and is a clear indicator on that.

This industry has on-shelf availability in the low 90s at best. In some categories you have to look at it by brand, by category, by retailer, in the low 90s. If we can drive that up to the 95s that we are not ourselves here and the first thing you have to do is work your supply chain to be much more flexible, much more responsive, consumer-driven. These are all the nice work. There is some hard work to do that.

And Pier Luigi is driving these things, so that what we call [CC stock], which is basically the on-time delivery to our retailers which, in many cases in this world means an hour's specific slot even, of what the retailer wants and where they want it, has to be perfect. You have to get and drive that up to the 98, 99 level. And then you have to walk the last 100 yards, which often is in the control of the retailer itself to ensure that your product is on the shelf.

So not surprisingly the industry operates under the low 90s on on-shelf availability. And that is one of the biggest opportunities that we are all driving together. We just want to be by the best in class and we're approaching that level. I think we can still see an opportunity of the same magnitude as we're sharing with you.

In the emerging markets, in the emerging markets, it's a little bit of a different story in terms of what we measure. So there we go -- we have a program which we call Perfect Store, where we are rolling out the perfect stores in terms of range and availability. It's much more a decentralized trade than is obviously in the western parts of the world. And increase our store coverage of perfect stores. And again, we're driving that up by another 500,000 as we talk. That's one of the elements I was alluding to briefly in India in terms of getting competitive advantages in the way we go to market. The main objective at the end of the day is to be sure that more consumers are able to reach our products, but requiring a different execution.

We'll take the last question then, Paul. So Deborah, you had your hand up.

Thanks. I'd just like to ask a little bit about the differential like you're seeing on savory dressing and spreads, with 0.5% growth there. In particular, what do you see are the positives there and what do you feel you need to address?

Yes. That's a good question. What you've seen on savory is a continuous improvement. If you look at the last three or four quarters, I don't have the numbers here in front of me, but if you look at the last three or four quarters you actually see a continuous improvement. And the 0.5% that we're now showing is better than the first quarter and better than the last quarter last year. But James can give you the details on that. But we see that trend.

And what is good about it is that our innovations that we're driving is hitting more markets. You take the jelly bouillon that I talked about, the proprietary technology that we have, and it's rapidly gaining traction in the market. It's in 18 countries already. So from what is a very decentralized business, we're able to get this continuous of innovations, like the Genesis discussion, so that we can now for the first time roll these out to many countries. We weren't able to do that before and we have much more to go.

We are just introducing PF Chang in the US. The US market has been under pressure. The food market is actually down. We are just launching now the PF Chang brand and we are actually out of capacity. So that is going to drive that category.

And then on the Hellmann's brand, obviously which is a great brand that we have and growing market share fairly consistently, we are now launching the free range eggs in the US as well. So the innovation program in that category is getting better.

The main growth in the future, once more, again in that category, which is very skewed towards Europe, a little bit lesser extent the US, and is not really very well developed yet in the emerging markets, we need to accelerate. My critique to myself, we need to accelerate the presence of that business in the emerging markets. So that's why, for example, we launched in India now the Super Noodles, which is off to a tremendous start. We launched it in the south of India in a controlled region, and we're now expanding that. But we need the capacity and we need to build, and we're doing that very rapidly. That is going to be a big product and big idea.

And we're seeing increasing opportunities in the rest of the world as well. Our savory business in China is growing quite rapidly. Our food solutions business, which is heavily skewed towards savory, likewise. So we need to increase our presence in that part of the world if we want to show consistent, strong growth in that category. So there's more there.

And then dressings, we have a good initiative in the US. Our dressings business is basically Wish-Bone in the US, salad dressing. This is a good business, but it's a very tough and competitive market. But we're launching there also some initiatives around consumer health which I think are good initiatives that we are not yet seeing reflected in these numbers, but I hope we will.

Yes, thanks for asking that. I appreciate the time once more that you've taken. I appreciate the questions, the quality of the questions and the opportunity to discuss them with you. We stay focused on delivering the second half, as we've said. There's much to be done. The environment is exciting. Fortunately I'm watching very closely my internal Board, and most of them have taken holidays. So rest assured, we will spend the next six months focusing on the business and delivering the results.

For the ones here who haven't taken any holidays yet, enjoy it. Have fun. And hopefully see you all soon again. Thanks for your time.