聯合利華 (UL) 2010 Q3 法說會逐字稿

Good morning everybody and thanks for joining us on this third quarter 2010 call for the results. And, as was mentioned before, Jean-Marc is here with me and also James Allison, our Head of Investor Relations, which obviously many of you know. Let me start the conference call by giving a brief perspective on the markets, overall progress of our business to date, and then let me hand over to Jean-Marc to go a little bit more into detail on the recent performance.

As usual, I have to draw your attention to the disclaimer related to the forward-looking statements and the non-GAAP measures that you are well familiar with.

Let's just look at the results for a second and the perspective of that. First of all, the results actually show a very, very strong performance on volume; in fact it's the strongest performance in 25 years, as far as we can see. The results we have reported today are what I would call solid in a challenging environment. It's clear evidence that we're increasingly seeing the benefits from the actions that we've been taking to date. 6% volume growth in the first nine months is Unilever's strongest performance, as I mentioned, for 25 years, with shares continuing to grow across the board. In fact, in over 60% of our business, we are moving shares up. Volume growth continues to be strong, also in quarter three, at above market rates.

Now I'm pleased to see once more that this growth is broad-based, with good performance in each of our 11 major categories and in all three regions. In Western Europe, we are definitely steadying the ship. We are investing consistently in that region and sensibly. And share performance is good in most of our categories and in most countries. In North America, again, wee see strong performance relative to what the market is doing there, and shares are up as well.

In these developed markets, overall growth levels have been held back by the slower growth profile of the market itself and then some of our Food categories. The acquisitions of Alberto Culver and Sara Lee in Personal Care obviously will help us improve this mix that we're trying to do. In the emerging markets, our performance remains very strong, with double-digit volume growth in the year to date and share gains in most countries, despite the increased level of competition.

Shares are once more substantially higher overall. And in the main battle grounds, like Brazil, Indonesia, Turkey, South Africa, and most of all, encouragingly, China, we see very strong volume growth. And our performance, of course, in India, as you've seen with the separate announcement, continues to improve rapidly. It reinforces again, once more, my point that competition is good.

We are more than holding our own. A new, stronger, more competitive Unilever is emerging, one that is faster and more disciplined and more closely connected to the consumer and customers. In other words, a Unilever that is fit to compete.

At the same time, as we've become more competitive on the top line, we've also continued to improve our underlying operating margins. It's up 30 basis points for the year to date, and that despite spending almost EUR500m more on advertising and promotions. It's obviously helped by our strong savings delivery, which continues to be impressive; EUR1b already this year with more to come.

Increased discipline also shows in capital management. Average working capital has now been below zero for four successive quarters. Cash flow is competitive with last year, despite the enormous help from working capital that we got in 2009. And let's not forget that over the first nine months our operating profit is ahead by 21% and earnings per share are up even more, by 29%. We have delivered what we said we would deliver. That's a good habit and we certainly intend to stick with that. And we again are one step closer to what we explained to you as the virtuous cycle of growth.

This performance comes in the context of an environment that indeed continues to be tough. Western Europe and North America remain soft. Unemployment continues to rise and GDP is sluggish. Consumer confidence is low and in most developed markets it actually shows signs of falling further as concerns around job prospects and the impact of austerity measures start taking their toll. As a result, markets in these regions are flat at best.

Emerging markets fortunately remain in a much healthier state, although here there are signs as well of moderate slowdown. Let's keep some perspective around this, however. GDP growth in China is still expected to be around 9.6%, but it's down from the 10.5% levels we've seen.

That markets are difficult in the developed world is now not a surprise to us any more. In fact, I've always said the recovery would be slow and long drawn out. It's something that we have been saying since the beginning of 2009 and, as a result, we fortunately have been planning the business accordingly. But we're also seeing, at the same time, unprecedented levels of competition in many markets, particularly in the HPC category. And so it's against this background of weak developed markets and intense competition that our performance should be judged.

The actions we've taken today -- to date have enabled us to close the gap to competitors in several important areas. We believe that our innovations and product quality are significantly better, the discipline of our in-market execution has step-changed, our costs have become more competitive and, last but not least, our organization has significantly strengthened and is more agile. None of these areas is holding back our performance any longer.

In fact, we are increasingly starting to set our own agenda, building sustainable competitive advantage that will help us win not just for 90 days, not just for 180 days or one year, but consistently for the long term. Our energizing vision, our strength in the emerging markets, our rejuvenated innovation machine and the winning performance mentality we're developing with our culture are all areas where we have done some catching up, and now it's time to start moving ahead.

Of course, there is much still much more to do, and I will always say that. But we have come a long way quickly. Putting the consumer and the customers squarely back in the middle of all we do and creating again a growing, winning culture. Now I will return to this later in the presentation.

But first, let me just hand over to Jean-Marc to take you through the third-quarter performance in a little bit more detail. Jean-Marc?

Paul, thank you very much and good morning to everyone. I'll begin my review of the third quarter by looking at our sales performance.

Underlying volume growth for the quarter was 4.8% with underlying sales growth at 3.6%. The effect of ForEx was strongly positive, at 9.8%, and that was a major element of the 13% increase in turnover, which reached EUR11.5b for Q3. For the first nine months of 2010, turnover was EUR33.4b. That's up 11%, with ForEx again a significant factor. Underlying sales growth was 3.8% with volume growth at 6%, which is, as Paul mentioned, the strongest delivered by Unilever for quite a while.

Particularly pleasing, as we go to the next slide, is the fact that this volume growth is broad-based. Although our emerging market businesses are clearly leading the way, we are also seeing modest volume growth in the developed markets. Given the difficult economic backdrop, this is encouraging performance, growing ahead of the market and doing so consistently. This is clear evidence of the beginnings of the virtuous circle of growth that we talk about for Unilever.

Volume growth is also broad-based across all our categories. In the first nine months of the year, volumes are up in 11 of the key categories, in most cases ahead of the relevant market. In the third quarter, we grew volume in 10 of the 11. Even in the one exception, which is the Spreads category, we continued to build on our long-term trend of gaining volume share, albeit in conditions that are challenging for the category as a whole.

Volume share's strong. It is not only in Spreads that we've been gaining volume market share. On a moving annual total basis our volume share is up by around 40 basis points. Share gains in Foods and HPC are at very similar levels, which is reassuring evidence that the improvements that we're making are rooted throughout the business and not just specific to any one category.

Let me just now pick up two of our key critical growth drivers, namely innovation and brands into new markets.

So, again, turning to the next page, Personal Care innovations. In Face Care, the new Pond's Gold Radiance range with anti-ageing qualities has been launched in Asia. Early performance is encouraging in the launch markets of China, and especially Indonesia, where 2% share has already been achieved. Further launches in many of our geographies will follow in the coming months. Turning to Hair, the recent re-launch of Lux has generated strong momentum, again in places like China, but also in Japan, where market leadership has been regained from our key competitor.

If we then turn to Home Care and Household Cleaning, the new format of Sun is the first phosphate-free all-in-one concentrated gel in the European dish-wash market. We've completed several launches in the last quarter, which includes France as well as the Netherlands. Turning to Fabric Cleaning, our global re-launch of the Dirt is Good brand, with built-in pre-treaters, is being rolled out to 45 countries.

Let's just now turn to Foods, and again picking on China, Lipton Milk Tea has been launched in Q3 and the initial reaction has been very positive. Turning back to Western Europe, we're benefiting from the re-launch of our Hellmann's and Calve brands in Dressings, helping to build the concept of the goodness of mayonnaise.

As well as making good progress in our delivery, again, of bigger, better and faster innovations, we've also driven growth with the launch of more of our great brands into new markets. The momentum that we've established in this respect over the last quarters is being maintained. So let me give some examples.

In the third quarter, we launched Axe shower gel into Japan and Axe deodorants in Bangladesh, and we continue the expansion of Cif in Southeast Asia, with a launch again in Indonesia. If you also go back to Indonesia, we introduced there Dove deodorants, and the successful Magnum brand was further expanded to reach Ecuador in Latin America. The Rexona deodorant brand was launched in Israel, and in China, again, the Dove brand was extended to include the Defi range in Skin, with its unique Nutrium technology. These are just a few examples, but illustrate the pace of bigger, better, faster innovations into new markets.

The pace of activity has clearly stepped up, and our volume performance reflects this. But our results are not just built on volume. Let me now say a couple of words about pricing, again, equally important. There is no doubt that the pricing environment continues to be challenging. There's unusually aggressive promotions and the climate has not improved in a number of important markets. Nevertheless, underlying price growth continues to improve and, again, in-quarter pricing was flat at the Group level.

Commodity cost inflation is now beginning to impact the income statement, as you see with our gross margin, and this was expected. In the long term, we are confident that a mix of pricing as well as important cost savings will fully offset this inflation. In the shorter term, we've already been raising prices, typically in categories where there is significant cost inflation, like tea. This is where we have the clearest step up in price. And, encouragingly, we've not seen any loss in volume share as a result.

We're seeing similar patterns on a regional basis as well. Let me just take Latin America as an example, where we're already seeing positive price whilst, at the same time, continuing to gain our volume market share. Let me just give you a couple more localized, I must admit, examples of recent price increases. And in each case here on this slide, you will see that there has been no detrimental impact on volume shares. But there will and there is no doubt that some of the pricing actions that we still need to take may put some pressure on our volumes. But, nevertheless, we do take confidence from these early signs of success and we continue to expect, importantly, that price will turn positive towards the end of the year.

Let me now turn to gross margins. Gross margins in Q3 was down around 150 basis points. This reflects the sharp increases in key commodity costs. Examples are petrochemicals, edible oils and tea, and still obviously the negative impact from pricing in the quarter. Gross margin for the first nine months, however, was up 60 basis points. A key driver in this improvement has been the success in driving cost savings. As you will remember, our target was achieving EUR1b of savings, and these have already been reached. And we now expect for the full year 2010 around EUR1.3b. We continue to expect that, for the year as a whole, gross margins will be ahead of 2009.

Let me now turn to advertising and promotion, which, despite all the efficiency programs that we're increasingly focusing on, we have substantially increased our investments in 2010, as Paul mentioned, reaching levels which we deem highly competitive.

The volume of our spend continues to be a function of the level of activity in the marketplace, which is logical. Spending in the third quarter was at the same absolute level as the corresponding period last year and this was fully in line with our plans, as we talked about in Q2. The reduction, modest reduction of 60 basis points this represents should be seen against the backdrop of very high support levels in the same period last year, in the second half, as you will remember. In summary, advertising and promotions investment will be substantially up for the year as a whole.

Let me now turn to underlying operating margin, which was up 20 basis points in Q3. A major contributor to this increase in the quarter was the significant reduction in indirects. We believe this reflects continuing strong progress in savings, as I've mentioned previously, but it was also influenced by phasing effects. And some of this, importantly, let me stress, will reverse in the fourth quarter. This will lead to higher indirect spends in the fourth quarter versus the same period last year.

On a year-to-date basis, the improvements in both gross margin and indirects have allowed us to substantially increase advertising and promotions, while, at the same time, increasing underlying operating margin by 30 basis points. This is very much the virtuous circle of growth in motion. We continue to expect that for the year as a whole we will deliver on our objectives of a steady and sustainable improvement in underlying operating margin.

Now down to the bottom line, as we defined in Q1, our fully diluted earnings per share, which, for the first nine months, were up just shy of 30% to EUR1.13, and that includes the approximate 20% increase in the third quarter. Operational performance accounts for 9% of this increase. A further 9% comes from restructuring, as we return to a more normal level following the completion of the One Unilever program. We do continue to expect full-year restructuring costs to be around 120 basis points, in line with the year-to-date levels. The remaining increase came primarily from positive currency effects and lower pension costs.

Turning to trade working capital, which again Paul also mentioned, this performance has again been very encouraging, with the clear long-term improvement trend still very much intact. We've now been running the business with negative working capital for the last four quarters, which is quite exemplary. We're confident that we can continue to push this lower. But please note the incremental benefits may start to become less as we move closer and closer to best practice.

Operating before depreciation and amortization was EUR5.6b for the first nine months. This is up from EUR4.8b in the same period last year. Free cash flow was at EUR2.5b, which is down by EUR500m on the prior-year figure despite this strong underlying performance. Importantly, as we're investing in the business, CapEx is higher as we invest behind capacity expansion in our fast-growing emerging markets in particular. Tax payments slightly higher, EUR300m, and working capital was an outflow in the first nine months compared to an inflow last year.

Let me turn to balance sheet. Net debt fell significantly in the quarter, back to around EUR6.1b from EUR7.6b at H2. The euro strengthening had a huge impact in the quarter and ForEx made the largest contribution to this reduction. Versus the beginning of the year, we were at EUR6.4b and now it's EUR6.1b.

Turning to the pension deficit, this declined in the quarter by around EUR500m to reach EUR3.5b. This is, however, still up on the 2009 year end at EUR2.6b. Although asset returns have been strong, the increase in scheme assets has been outweighed by an increase in liabilities. And this has been triggered by sharply lower corporate double-A bond rates. Our cash contributions to pensions in the first nine months were around EUR500m, down EUR200m versus the same period last year. We expect approximately, for the full year, payments of around EUR700m.

Finally, I can confirm the next quarterly dividend, which will be at EUR0.208, to be paid in the last month of the year. This will bring the total cash paid in dividends to around EUR0.819 and this represents an increase of around 5.1% on the amount paid in 2009.

And, with that, let me now return to Paul.

Thanks Jean-Marc. I appreciate that. As you can see, we have a CFO and a finance department that works with rigor and discipline around all the P&L and balance sheet items. So we think it's good progress in a tough environment and we're responding to this competitive pressure with renewed vigor. Confidence and the winning spirit is back and rightly so. Our model is clear, to grow ahead of the markets whilst delivering steady and sustainable improvement in underlying operating margins and strong cash flow. That's what we're doing and that's what we intend on keeping doing.

I'm confident that in 2010 we will deliver against this model. But of course we need to demonstrate we can do this year in, year out and for that reason there's still more to do. Now let me first pick up the theme of being fit to compete by giving you some examples of our key categories and look at the performance in these categories and the markets where competition has been especially intense. And hopefully that responds to some of you who voiced your opinions about these matters.

The first thing, take the biggest category, Laundry. We're fit to compete in Laundry. The most intense competition we've seen over recent years has been concentrated in Fabric Cleaning. Our response has been single-minded and effective. We are once again growing our volumes ahead of the market and building share. Fabric Cleaning is predominantly an emerging market business for Unilever, by far the biggest player. It is in these markets where the pressure has been most acute, and yet we've seen our volumes up by more than 10% this year and our volume shares strongly ahead, especially in the Asia region. Better than historical performance for a long time, supporting my point of view once more, that competition is good.

Most high profile of all has been the Fabric Cleaning in India, again, attracting a lot of your attention. As you may have heard from Hindustan Unilever's recent results call, after a tough few months, this trend here is clearly improving and improving fast. The country itself now, under Nitin's leadership, shows, for the third consecutive quarter, double-digit volume growth. But looking at Laundry, although we are cautious in quoting share figures in a market where such data is notoriously difficult, we are confident again, once more, that we're growing ahead of the market and outperforming competition.

In other markets where our Laundry business has experienced an increase in competitive pressure, we are seeing similar results. In Turkey and Thailand, for example, we see both volume and value shares strongly ahead. Of course, this determined response requires competitive price investment, and you see the impact in our Home Care margins. But we are fully committed to remaining competitive. We have demonstrated this very clearly in recent quarters and it's the right thing to do for long-term shareholder value creation.

As I've said before, we prefer to grow our business through innovation and investment in building brand equity. But where we come under pressure on price, we will not hesitate to defend or expand our market positions. At the same time, competition on this scale also drives us to become more cost-efficient. In today's environment it is imperative that we drive all cost out of the system that consumers are not prepared to pay for. This is what we've been doing, for example, in India and elsewhere. And the business is stronger as a result. And that's why you see, despite all this activity, a quarter-to-quarter overall improvement in our Fabric Care business.

We're also fit to compete in Deodorants. Competition is indeed intense in some other categories as well, and it's not always price-focused. In Deodorants, for example, some of our competitors are making a determined effort to strengthen their position and reduce the scale of our global category leadership. Here, again, we respond well, sticking to our proven approach of building the equities of our brands, brands such as Axe, Rexona and Dove, introducing them to new markets and innovating tirelessly, but also upping the pace, tapping into the energizing effect that often comes with heightened competition.

Our market shares in Deodorants continue to grow, with all regions strongly ahead, including the key battlegrounds of Western Europe. Just to pick one example, in France, not an easy country to do business, our volume share is up by more than 100 basis points, despite the strikes.

Now, we're also competing effectively in Hair. And let me just take North America as a (inaudible). In Deodorants, we have been strong for some time. But it is fair to say that in Hair our performance has historically been, I would call it, patchy. Here too we are making clear and measurable progress. Global volumes have now been growing for six quarters in a row. In North America we see shares strongly ahead and volume growth in the high single digits, despite strong competitive activity. Same for India and other priority countries, with our key competitor there losing share.

This success has been built on a strong flow of innovation. The Dove Damage Therapy, for example, has set new standards in the care of damaged hair. The TIGI Catwalk range has been launched in three phases, each one distinct and striking in both packaging and product performance. With this strong innovation flow, a rejuvenated Suave brand and great brands, such as TRESemme, to be welcomed to our portfolio, we look forward to competing in Hair with renewed confidence.

We're fit to compete in Ice Cream. We continue to strengthen our leadership in Ice Cream as well. Here in the important market of Western Europe, it is true that we didn't enjoy the warmest of summers. But sorry, no excuses. And yet we have still grown our global Ice Cream volumes by high single digits, with shares ahead in all regions. This is innovation-led performance. Magnum Gold has been a success around the world, Fruttare has been a catalyst for growth throughout Latin America, and Cornetto Enigma has been a success beyond our expectations in Europe. And the list goes on.

And then we're fit to compete in the important and growing emerging markets; after all, we are the emerging market company. Some of the most intense competitive pressure has come in the emerging markets, and yet, this year, our emerging market business has grown their volume at low double-digit levels consistently. With this, remember that the CEE region remains tough, so many of our key emerging markets, China, Turkey and the Philippines, for example, are growing volumes by 15% or more.

But we're not simply riding the wave of rapid economic growth. We're also consistently growing our volume shares, with nearly all emerging markets posting gains over the last year. For example, in China, we have strong double-digit volume growth across both HPC and Foods. Shares are also strong across the portfolio, with major gains in Hair, Skin, Deodorants and Laundry.

We already talked India, but, as you know, we went through some difficult months, but the business is again once more performing well, with 60% of our volume growing share. Volume growth is double-digit, and we are growing ahead of the market.

In Turkey, another important market, volume growth this year is running at more than 20%, fuelled by outstanding performance in Ice Cream and Laundry. Shares are also strongly ahead, especially, again, in Fabric Cleaning, where market leadership has been recaptured, despite premium pricing.

And in Brazil, volume growth is again double-digit, with Dressings and Deodorants both showing strong growth and significant share gains. The Ades Soy beverage business is also an outstanding performer for us, with exceptionally strong volume growth here as well.

So growing strongly and consistently, well ahead of the markets, is what we are doing and what we plan to keep doing. Further evidence of a new Unilever are emerging, fit to compete and starting to win. The next step clearly is to go beyond this, to build on our competitive strength, to increasingly set our own agenda and start to create competitive gaps of our own. Let me just give you a few examples.

Firstly, we now have a hugely energizing vision, one that has resonated enormously throughout the organization and beyond, may I say. The aspiration of doubling the size of our business whilst reducing our overall environmental impact on the environment strongly motivates our people. Not only the doubling, but also decoupling growth from environmental impact. A new model that will drive innovation harder and is increasingly consumer-relevant. Yes, it is stretching, but it feels right and it is something that our people and the consumers want to be part of.

I do believe that the approach we are taking in sustainability will increasingly become a competitive advantage. It's driving our innovation machine harder and giving us the edge that our consumers increasingly will value. You will hear a lot more about our plans in this area of sustainability in the next couple of weeks.

Secondly, as you know, we have been consistently focused on bringing to market bigger innovations, better differentiated and rolling them out faster. We now have plenty of examples of success in this area, a selection of which you have seen, which you've heard from Jean-Marc, and which you can see on this chart.

And I'm pleased to say that these are no longer exceptions. Innovation at this level is becoming a good habit, something that we'll continue to drive and continue to drive higher. Unilever's growth in the future, our innovation funnel is rapidly growing. And we are transforming our relationships in order to support this with the external world, to best-in-class relationships with third-party providers, other suppliers, universities, and with others, that will be key in helping us to fuel this innovation.

Thirdly, as you know, we have more than half of our business in the emerging markets, a higher proportion than any of our peers, with our products present in seven out of 10 homes globally already. This is a core competitive advantage, and one that we are increasingly leveraging for driving deeper and faster businesses, deeper and faster distribution of our brands.

You see the results of this clearly in the numbers I mentioned earlier. But let me briefly mention a couple of specific examples of actions that we're taking that will help us expand our advantages here as well.

Market development is key to our growth in many emerging markets and we have many examples where we're acting responsibly to encourage new or differentiated usage of our products. Our twice-daily brushing campaign in Oral Care, for example, or our growth meter campaign to make essential fats more affordable for low-income consumers, in both cases, for the wellbeing of our consumers and for the growth of our business.

A further example is the perfect store concept that we are rapidly rolling out across Asia. Getting the right assortment in the right place is a simple enough concept, but implementing these perfect stores with speed and rigor takes discipline that requires a lot of effort of any organization, including ours. We will tell you more about this at our investor event in Singapore and some of you will be able to see it for yourselves if you join us on the trip to Indonesia. But you've heard how recent the results in India I've talked about, for example, extending our Shakti to over 200,000 other villages, that's 5m additional households, a key competitive advantage.

Fourthly, it is the building of our performance culture, the right people, the right structure, the right behavior all coming together to create, bit by bit, a winning culture and organizational model. Talent will be absolutely key to fulfill our ambitions. We want the best and brightest. Unilever is increasingly becoming again a company that people want to work for, not just in our traditional strongholds, but also in some of our newer markets where we're not yet so powerful. Take, for example, China and Russia, where we've been recently recognized as the preferred employer despite being the third or fourth consumer goods company in those markets. This comes on top of an already well-established employer credential in markets like India or Indonesia.

Finally, we've also been accelerating our portfolio changes. That is next to the white space introductions that Jean-Marc just talked about. We will complete the acquisition of the personal care portfolio of Sara Lee in the coming weeks and have already completed the sale of our Italian frozen food business. In addition, in the last quarter we have announced bolt-on deals in European ice cream in Greece and Denmark, acquired the rights to the Toni & Guy hair care brand globally and signed an agreement to dispose of our Brazilian tomato business. More importantly, we've signed a merger agreement with Alberto Culver which will bring great people and brands such as TRESemme, Albert VO5 and Simple into the Unilever portfolio.

It's been a busy few months in M&A and I don't envy James and his team, but it's another demonstration that we are changing gear and clear progress in portfolio reshaping is taking place.

So plenty of examples of how Unilever is changing and moving beyond being simply fit to compete. But this is a marathon - in fact, I'll be running New York this weekend - and it's not a sprint. There are plenty of challenges ahead of us and no doubt we'll encounter some of these challenges and perhaps even a few setbacks, but we're well on track. We will continue to set the bar higher and we will remain focused on doing the right thing for the long term.

I will close once more by reiterating our expectations for 2010. We will continue to focus on profitable volume growth whilst delivering steady and sustainable improvements in underlying operating margin and strong cash flow. With that let me open the line for questions.

So we're ready to take questions now. I think we've got Celine on the line.

Okay, thank you. We will now open for questions. (Operator Instructions). Our first question comes from the line of Celine Pannuti from JP Morgan. Please go ahead.

Yes, good morning. I have two questions. The first one is on the savings. If you could a bit explain what this reversal will be and quantify that into the fourth quarter?

And also if you could give a bit of color on where all those savings that you have done in -- or that you are getting to EUR1.3b this year are coming from. That's my first question.

Secondly, in terms of pricing, you're reiterating your guidance and it seems to say, you seem to say that pricing will turn positive by the end of the year. Shall we expect pricing to turn -- to be positive next year too?

And it seems that some of your competitors are clearly indicating that they hope to raise pricing even in some of the more competitive areas, so would you share that view? Thank you.

Thanks Celine. Now I'll have Jean-Marc take you first through the savings and where they come from and then let me talk a little bit about pricing.

So Celine, I think that your question is related to indirect and let me just give you a little bit of color on that. The first point is we are pleased with the progress that we're making in indirect, but it is clear that we're not yet best in class. And if you really want to take continuous improvement seriously we are going to drive indirect each and every year and it's an important part of the virtuous circle of growth. So there is improvement still.

Now there is a variance and that's with respect to the same period last year. And this is driven by accruals and there will be a reversal in the fourth quarter. As a result we do expect indirects to be up in the fourth quarter. But the underlying trend over the year is down.

Could you quantify by how much in the fourth quarter?

The answer is no. We won't give that type of guidance on a quarterly basis. I think the most important, though, if you take a step back and you look at the financial growth model, the virtuous circle of growth, over a period of time it really is providing us with leverage. And I think that the most important is if you look at our Q3 results, the progress is very good, but it probably looks a bit better than it actually is because of this phasing issue that I mentioned.

And if I go into Q3, these benefits that you got from indirect and savings, could you quantify what are the savings and what are the -- well, the cost benefits from the savings and what are the indirects' impact?

Let me just talk about savings more from a supply chain perspective. There again Pierre Luigi and his team have really been driving savings not only last year but also this year and we're above where our initial expectations are. So we are doing a very good job. What you should also know though is that we've also been investing in the business. So advertising and promotion up, as Paul said, nearly EUR500m. We've also been investing in product formulations. So we're reinvesting a lot of those savings. For the year we expect around EUR1.3b.

Let me briefly address, Celine, the pricing issue. What we've said before is that pricing will become positive during quarter four and I'm still confident with the best of our knowledge now that we will deliver on that. And what you've seen again is an improvement. In fact you have seen no negative pricing once more for the third quarter in a row. And obviously as we laps the previous price adjustments you see the pricing component becoming less and helping us with the overall sales staying the same, again in line with what I've been saying before, despite the competitive environment out there, despite a lot of the competitive activity.

In fact there are some categories where our pricing actually is up. Take Hair, take Tea, I can take some other ones. So it's a mix of things. So we feel good about that and again once more we will be positive.

I expect next year to see positive pricing to go through throughout the year, not the least because it is driven by the input cost increases. We are putting price increases out in the markets now as Jean-Marc is saying. Some of them are working, some of them it's a function obviously of if we see competition following or not. But the input-cost pressure I've always said is the best thing to reduce promotional intensity.

The first thing you will see, and I expect that to come through already in quarter four if I may say, as we move prices up the promotional intensity will be decreasing a little bit and we will be spending less on promotion because that's the easier thing to do than the full pricing effects. So you see it first showing up in the promotion component of A&P and then you'll see it showing up in list-price increases.

Now in some markets, I want to be also clear, we will not participate in pricing activity that destroys long-term brand equity. We are here for the long term. And there are some activities in some of the markets by one of our competitors that is not even worth following any more because I think it really gets into levels that you have to wonder if it's in the interests of the shareholders in terms of investment and return.

You take India and Laundry for example, we are selling our Laundry business at premium pricing now and yet we're growing over 20% and actually building share very nicely. So in those cases it doesn't serve anything to lower prices even further and probably affect brand-equity building over time.

In Hair Care we see strange pricing on some of the categories, but that is not -- in some of the countries, but that is not a category where I think the consumer would be that price sensitive. And we are growing our business behind the innovations that we put behind it including the US where we are gaining share, where Alberto Culver is gaining share at the expense of all the others.

So I hope that answers your question but yes, we should see positive price components in 2011.

Alright. Thank you and good luck for Sunday.

Thanks Celine. Thanks. Sponsor me.

Thank you for your question there. Our next question comes from the line of Michael Steib from Morgan Stanley.

Good morning. Can I just follow up on Jean-Marc's answer on the indirect please? Jean-Marc, you're not saying that the whole 110 basis points that benefited the margin this quarter will reverse in Q4, right? You're just saying that the accruals portion within that which you're not quantifying will be a negative impact on the margin next quarter. Is that right?

That's absolutely right.

Yes, okay. And then my second question relates to raw materials, which have swung into becoming a headwind. Is that a level that you would expect to continue for the next couple of quarters as input costs have risen really or is it going to get worse, so to speak?

If I knew more about that I'd probably be in another type of business. Let me just give you and tell you where we are exactly now. It's clear that we had tailwinds in the first half and we are having headwinds in the second half. And you can see that in terms of our gross margin in Q3 and you'll see that for the remainder of the year. And just speaking about the year in a whole, our inflation is still at around 2% we expect for the year and commodity costs would have been slightly higher had we not had positive ForEx impacts through that.

As it stands right now we have a pretty good visibility over the next three to six months. We have forward contracts in place, we have some actively-hedged commodities and then obviously we have our physical stocks of raw materials, finished goods etc. So we have a pretty good view over the next three to six months, but when it comes to 2011 and beyond we'll come back to you at our Q4 results.

It is clear though that over the last months commodities overall have been increasing. And that's something that we need to take into account when talking about pricing, as Paul mentioned, as well as savings because over the long term pricing as well as savings should really drive and fund those commodity costs.

Okay. And then just my last question is on the very strong margin improvement in Western Europe. Was that entirely savings driven?

There are a variety of factors that are taking place there but very importantly are the cost saving programs that are going through Western Europe, much improved rigor, discipline around indirects, but also supply chain and those really have contributed to the performance in Western Europe.

We will be doing, what I've said, as I've said it before again but it's good to remind everybody, in Europe we had to level the ship and we were going down perpetually for a long period of time. So the first thing you have to do if you're in reverse, you have to go into neutral. I think it's fair to say I don't want to oversell Europe, although we are building share in overall, but we have leveled the ship. And we've done that by changing the people, getting the growth people in the place and we've spent a lot of time on that. We have done that by stepping up our innovations, which were appallingly low, and where we innovate it's good. And now we hope that we can achieve that by also driving our mix.

But it's clear that some of the food categories in Europe are not growing that fast and the markets in some case are actually down. So also in these markets we will be adjusting our advertising and promotion spend accordingly. So we will be competing differently in some categories versus others. What you see, for example, is that we will spend more of our advertising and promotion behind the HPC brands and perhaps less behind some of the Food brands, reflecting what is happening in the market. And again you will see that in quarter four perhaps even more clearly, but that is what it is.

I expect Europe to be a contributor to our global growth strategy as we accelerate our growth in the emerging markets. That's increasingly apparent. But I expect them to do that without going down in volumes, as I've said before. Otherwise it's like pushing water uphill. And increasingly you see that. And thank God we are so disciplined on costs and restructuring to ensure that that gets to the bottom line, and that's what you're seeing.

Okay, thank you Paul.

Yes, thanks.

Thank you for your question there. Our next question comes from the line of Jeremy Fialko from Redburn Partners.

Hi, good morning. A couple of questions. Firstly, can you just talk about how your value shares are doing. I remember at Q2 you said they were broadly flat. Is that still the case?

And then secondly, can you give a little bit of perspective on private label? It seems as if the very intense promotion from the brands has kept private label at bay to an extent and I just wonder how do you see that panning out as some of the levels of promotion come off? Thanks.

Yes I think it's -- I want to make it a very quick answer, Jeremy, but it is a very quick answer. The value shares are more or less flat whilst the volume shares are growing and that continues to be the case. It's a slight mix of up and downs in different places, but that's basically what we are looking at and we're happy with that.

In terms of the private label performance, we did some, quite some studies with Nielsen and with IRI, and what is really clear is that the trend of private label, even before and after the recession, hasn't dramatically changed. And in many categories, because of this promotional pressure that we've seen in the market, actually private label growth might have slowed down a little bit. So for us it is a factor that we have to deal with, but it's not something that really is changing anything we're doing from the previous quarters that we've talked about. And there's not one category or another, I'm looking at it right now as I talk to you, where you really see private label performance ticking up.

Okay. Thanks.

Yes.

Thank you for your question there. Our next question comes from the line of Jeff Stent of Exane BNP Paribas.

Good morning. Two questions if I may. The first is could you just quantify the commodity headwind that you've seen in the third quarter?

And the second one is could you just clarify my own memory, but I recall that indirects were negatively impacted in Q4 last year by about EUR50m because of the Slim Fast recall costs? Could you just confirm whether that's correct? Thank you.

Yes, on Slim Fast, I'll ask James to get back to you with specifics, but if I'm not mistaken that was a Q4 happening because I think the product recall took place on December 2. But I'll ask James to come back to you on that specific point. And when we are talking about indirects, let me just remind you I'm talking about the underlying nature of indirects.

When it comes to the actual commodity costs, in Q3 they were up a couple of hundred million euros approximately and as you know in the first half they had been down by approximately that amount. So that's the type of swing that we saw in the third quarter.

Okay, just to maybe -- thank you Marc, Jean-Marc. Just to come back a little on that then, so would you -- the margin development as you've presented for Q3, am I correct in thinking that on that sort of basis you would still be expecting indirects to be up in the fourth quarter, notwithstanding the fact the comparative period has been influenced by the Slim Fast recall?

That's absolutely right Jeff.

Okay, thank you.

The key thing is again an improvement for the total year. I think you need to -- I know you all want to look at quarters sometimes but don't get too much in each of these P&L items on the quarter. What we will do is for the total indirects for the whole year again significant improvements versus previous years. It's not something that I'm proud of; it's something that is needed and obviously giving us the fuel to keep growing. I don't see any reason why we cannot keep doing that next year and the years beyond as well.

So that's where I'm focused on and we have again -- it's a sign of a leaner, more disciplined agile organization that is cutting complexity. I think that's the bigger message here than worrying about what happens in the quarter. But anyway, we are now only one and a half months left so exciting times for you guys to guess what is going to happen.

Okay. Thank you.

Okay.

Thank you for your question there. Our next question comes from the line of Martin Dolan from Execution Noble.

Yes, good morning guys. Just if you can perhaps could give us some clarity on pricing. You say in-quarter pricing was flat yet you've given us a lot of examples of areas where pricing was actually up. Does that mean that in-quarter promotion has got worse again or are we seeing in-quarter price declines? And if so what areas are the price declines coming in?

No, there are some -- there are always a mix of things where you need to be competitive or not. And so there are some areas where we have adjusted some pricing in the quarter upwards, as I mentioned, and there are some areas where we have to stay competitive where you might have a slight adjustment in the quarter. It's not necessarily all by category but it's also by country, if you want to, or by group of things.

I don't want to really go into that specifically by category. But, for example, the Oral Care intensity is picking up in some of the places. And whilst we're growing our Oral Care business and holding our global share on that business we have in the quarter, would be one category where we have a slight decline in UPG. Laundry is challenging, as I've said. I'm telling you in some of the markets we don't have to react to everything in pricing, but Laundry in some places is challenging and we continue to react to that one.

So overall flat. We read that as positive in this environment, not as any area of concern. It's in fact better than I thought it would be with the environment and it shows our strength of the innovations again and the discipline that we have out there.

And one follow-up if I can was slightly different. We seem to be hearing quite conflicting numbers coming out from a number of consumer products companies around Russia and CEE, and obviously your business there is still pretty flattish. Can you give us any indication of what you think might happen going forward?

Yes, the market in Russia has been difficult. You see the GDP, if you just take macroeconomics and I think our competitors are talking to that as well, Russia was down last year, it's only slightly up this year. So it's a difficult market.

But I also think that the future in Russia in this case actually is a little brighter. The population for one thing is growing again. There's a very generous program that the government has put in place to stimulate again and this country was going down and very rapidly that trend has been turned around. If you then look at the mix of resources, it's very good. I do expect Russia to enter the WTO in the not too distant future, which is very positive.

So I don't want to be exuberant about the country and compare it with India or China but I definitely think that despite all the things we're saying about the economy that Russia is actually a slightly different story. As you know, we have good businesses there but we made definitely a mistake by pulling out in the '98 crisis while some others didn't and we are still repairing from that. So we are growing our Russian business quite handsomely and have a year-to-date business in Russia that we are very happy about. It is a double-digit business and again in quarter three our growth is double digit. So we think we're doing well in that market but there's much more potential.

Obviously one of the star performers that we have there is Inmarko. It has propelled us into the leading ice cream business and we continue to grow share on that business. We're very pleased about. And likewise some of our HPC businesses that we have are doing extremely well. So I'm reasonably bullish but measured on Russia versus where we've come from, but it's also true that the last 12 or 18 months in Eastern Europe, including Russia, have been tough. When we talk about emerging markets it includes tough markets like Eastern Europe that have taken a hit or South Africa that have taken a hit and still give you these global numbers that we're showing.

Right. Thanks.

Yes.

Thank you for your question there. Our next question comes from the line of Sara Welford of Citi.

Hi. Can I just push you a little bit further on the indirects? I appreciate that you're not going to give guidance in terms of specifics for the full year, but would the number at the half-year, you had roughly a 30 basis point benefit, is that a decent guide for what's going to happen at the full year?

And then, just in terms of the promotional environment in Europe, have you seen any change at all in the quarter? Thanks.

Sorry Sara, there's some crackling on the line. Repeat the second question if you don't mind.

Sorry, yes. In terms of the promotional environment in Europe, are you seeing -- did you see any change at all in Q3?

The promotional environment in Europe I can do very quickly. As you see our European numbers, there are slight improvements on the previous quarter. Our volume is positive. It's a little bit of a mixed bag. There are some markets where we do see some improvements; other markets where we are still a little bit surprised. We are now -- we have announced price increases in the UK, also on fabric softeners and on Laundry, and we see our competitor trailing there. So there we see promotional intensity. In France we see promotional intensity in that category. But in other parts of Europe we have announced price increases and some of them will be coming through in the fourth quarter and beyond.

So it's a little bit of a mixed bag, but the overall price situation in Europe, as you see, the improvement in the quarter as well in the numbers that we're publishing, we're coming from a quarter two of minus 1.9%, we're now at 0.9%, so I also think that Europe will go into positive territory. And we actually have already a few countries in Europe that belong to that group. So I expect it to move in the right direction, that's all I can tell you right now. But it's a function of others as well and again once more we will keep our brands competitive if that is need to be.

In Turkey I took prices up three times on Laundry and we had to roll it back three times because our competitor wasn't following. And each time we lost share and then we rolled it back, got the strategy, we get again to the right share position and market leadership. Now again we're taking prices up in Turkey. But if we see competition not following it is criminal for the shareholders that we see our business erode. So we -- I thought that the best way and I still think the best way to grow business is on innovations and strengthening our brand equities. But we have some competitors out there that have broadened the definition of innovation and we just have to deal with that for the time being in some of these markets.

On indirects Sara, I can be to the point. Our indirects for the year I would hope to be better than 30 basis points, which you were referring to in terms of our first half.

Great. Thank you.

Good. We'll take one more then, no?

Yes.

Thanks Sara.

Okay. Our next question then comes from the line of Warren Ackerman from Evolution Securities.

Warren, I wondered where you were. Good morning.

Morning Paul. Can I perhaps just change tack and ask a couple of category questions. First one is, there was a very nice pick-up in Savory Dressings and Spreads in the quarter to 1.7%, I think the best quarter since Q1 '09. I'm just wondering whether you can give us a bit of color as to what's happening there. I assume the innovations are kicking in and perhaps the US is a bit better, but your thoughts there would be appreciated.

And then conversely, Personal Care in the third quarter at 4.5% was the weakest quarter since Q1 '09. I think growth in the first half was nearer 8%. And I'm just wondering whether you can talk about the growth rates in your three big categories of Skin, Deos and Hair. Are you still taking share or are you saying that the market growth in Personal Care has materially slowed in the third quarter?

Yes, that is -- and both of your observations are right, Warren, so let me just -- obviously on Savory we're pretty happy with the results that we're putting in on the overall results because Savory category itself, we are showing steady improvements and it's really innovation driven there. This is a category where we are growing share. In Europe I would say it's more or less flat and in Latin America we are growing share. The Savory includes our frozen business and PF Chang in the US is an incredible hit but also our Stock Pot, our jelly bouillon, is a very strong innovation that we're rapidly rolling out in 30 countries or more. So we're benefiting from that enormously in that category obviously.

And the reason why I ask is obviously Nestle were implying that Maggi was doing extremely well in Europe and obviously in big markets like Germany (multiple speakers) against Knorr.

I cannot talk for them obviously, but basically the footprint of that business is still 70% more or less - I'm doing it from memory - but it's 70% Europe and Latin America. We're growing share very well in the Latin American countries and in Europe for us it's flat. We see our competitor year on year, not any more in the last 12 weeks, but year on year growing in Germany because they have an exclusivity in one retailer, one of the discounters that one year you get in and the other year the other one gets in. And then we make all noise that we grow share but it's actually ridiculous to be honest to run the business that way.

I really think it's better for any economy to have these brands freely compete. In the stores that we are both present, also in Germany, we don't see any difference in the share performance. They are good. We are good. I don't have a problem with that.

The main growth driver of that category has to continue to come from the emerging markets and there we see enormously strong growth. First of all our food-solution business is obviously driven by that and we are putting in performances that are very healthy, double digit on food solutions, driven by the emerging markets. And then obviously in places like India where we've launched Soupy Noodles, we grow these brands incredibly strong. In China we are double digit.

So my thing would be don't expect too much growth from Europe any more in that category but expand faster in the emerging markets. And that is obviously what we are doing.

Then on the other part of the whole area of Skin if you want to and Skin and Face etc., I think the overall performance is fine. I'm not looking at quarter by quarter. We are growing share and we have some good things in Skin again. The Dove Men+ Care in skin cleansing is doing extremely well and we continue to roll that out behind our superior technology. The Lifebuoy is now launched as we talk in Turkey, (inaudible), Thailand, Brazil. So on the whole area of cleansing we're doing well. In fact Dove Bar is getting close to EUR1b in turnover. I think that will be the next brand adding that list.

Axe in the US, we saw some incredible competitive activity, buy one get one free, from a competitor that was relaunching. We have put our prices more competitive on Axe and we've taken leadership again. We've launched Axe in Japan. So all that category on skin cleansing, I'm just starting with skin cleansing, is okay.

On Face we are growing very well. Fair and Lovely is growing double digit. Pond's is growing double digit year to date, slightly less in the quarter but that I think is just a little bit of phasing. We've launched this Gold Radiance which is off to a good start on the premium side. So on face as well we are introducing in more countries and building that brand. In China obviously where we have a main competitor we're taking share and closing the gap so we're pleased about that.

So the whole category is good and the slight difference that you see from one quarter to another is there. I'm not denying that, but I don't read anything in there, looking at all the countries, that worries me.

Sure. And Paul, can I just ask you about the Sara Lee deal? Obviously it's been more than a year now since you acquired it.

Yes, I know.

I was just wondering why it's still continuing to say defended.

Yes, it's frustrating.

Is it an issue of definition or --

No. It's frustrating. I have to say it's frustrating and if I ever have more time than running marathons and Unilever I might write a book about it. But at the end of the day we have to be professional and set it through. So I think we will come to a conclusion that we can share with you that you will be satisfied with by the end of this month.

But the process in Europe is very tedious. Obviously very professionally done by all people involved, but it is a very tedious process that I personally believe doesn't help Europe become more competitive. But we have to go through that. We have had some learnings on that as well. But at the end of the day I think that with an increased certainty that we will conclude by the end of the month and that's what we're still working towards.

Okay. That's very helpful. Thank you.

Okay, thanks.

There's probably some other questions on the line and quite a number have come through online. So we're going to bring it to a close now so the IR team will pick up all of those questions. We won't leave any of you hanging on that. So just bear with us. We'll get on to you after this call has finished. Just Paul, for a final few words?

Yes, I just want to thank you again for making the time available to be with us this morning and obviously thank you for your support and friendship. I just want to conclude by saying again that I look at these numbers and I use the word solid, I think that's the closest description. I saw other words popping up in newspapers these days coming out of US elections but this is a very solid progress with volume growth at multi-year highs and we feel good about that.

We also feel honestly that we are delivering what we say we will deliver. And with that let me be clear that we are one step closer to our model of the virtuous circle that we keep talking about of growing ahead of the market while steadily improving the underlying operating margin. So we're fit to compete and increasingly setting our own agenda but we also recognize that there's more to do. But I am confident that you increasingly will see a new Unilever in whatever circumstance it may be tested. I actually like it when these circumstances are tougher because it requires the best of us but it also changes the organization at a faster pace to be the best.

Let me just end, without giving any guidance once more, let me just end once more with what we're trying to do this year. The volume growth, and you're very clear on that one. On the operating margin, improvement. I'm very happy with the guidance I see for the year. So let me be very clear, that, I think, is where we are trying to target for. And then obviously our discipline on the working capital, you see that very well as well.

So I think what we're saying to you for the year we want to reconfirm once more that we feel confident with only one and a half months left that we will deliver on that. And I know that there were some skeptics out there for which the glass was half-empty and I also have told you that we just need to deliver and show you the numbers. And I hope that this is once more a quarter of solid progress towards building that confidence that this Company can win in whatever the circumstances are.

So thanks again once more for your support. Hopefully James and his people will continue any discussions that you want to have during the day and I look forward to seeing you soon in Singapore and some of you as well in Indonesia. Enjoy the rest of the week and have a productive and restful weekend. Thanks.