聯合利華 (UL) 2012 Q4 法說會逐字稿

(Video playing).

There we go. I'd say a small step for mankind, a big step for Unilever.

That's hot in there.

Yes. Very hot.

I'm telling you, don't become an astronaut. I think we've had 150,000 applications for those 22 lucky people next year to go to the moon. And that was within four days. And so I hope that you put your applications in, but the chances are low that you'll be taken.

Two of them are taken already.

Exactly. There's only 20 left.

I feel like saying ground control to Major Tom, commencing countdown, engines on. Martin, you can probably use that later, later on.

As you can see, we've got Paul and Jean-Marc. Lieutenant Paul and Sergeant Jean-Marc, as they're going to be known this morning. They're going to do the presentation, apparently in their astronaut outfits. So that probably means they're going to lose about 10% of their body weight in sweat during the course.

So the Axe -- tins of Axe that we had outside, we had an ulterior motive for that. You might be needing those by the end of the presentation.

We have a number of the Unilever Executives here with us this morning. Let me just let you know who they are. We've got Pier Luigi Sigismondi, who's our Chief Supply Chain Officer over here. We have Doug Baillie, who you know very well, our Chief HR Officer. We have Genevieve Berger, who is our Chief Science Officer. And next to her we have Tonia Lovell, who is our Chief Legal Officer. So they're here. And if your questions move in that direction, I'm sure Paul or Jean-Marc may ask them to make their particular contributions.

So this morning, Paul is going to share his reflections on the year as a whole. And Jean-Marc will cover the financial highlights. And Paul will then finish by briefly looking at some of the areas where we want to step up our performance as we strive to become fit to win.

As usual, I draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures.

And with that, it's my pleasure to hand you over to Paul for his opening remarks.

Okay. Who thought consumer goods products were dull? Anyway, happy New Year to everybody. And obviously nice to see so many familiar faces in the audience.

You see from the chart our new wonderful Axe campaign that you've been exposed to, where we actually promised, as Jean-Marc said, to take 22 lucky people into outer space. So if any of you fancies to go beyond the earth's atmosphere, you know what you have to do. And you don't have to wear this outfit to qualify. Now judging by some of the stuff that I actually read recently, it actually occurs to me that one or two of you are probably already no strangers to outer space in the first place.

Now, thanks for making time to join us today. And thanks also for those of you who listen in from around the world. I hope by now that the Unilever story is familiar to you. So we'll try to keep it brief this morning and leave more time for questions.

It's worth reminding ourselves of what we set out to achieve. Simply put, it is consistent growth ahead of the market, consistent improvement in core operating margin and cash flow, and then obviously, at the same time, consistently investing for the long-term health of this business. The Unilever Sustainable Living Plan and our vision of doubling our turnover without environmental impact and providing positive social impact obviously guides us.

Now we do this whilst at the same time creating a performance culture, with an acute external orientation and obsession for satisfying the needs of consumers and customers and agile enough to thrive in this [focal] world I talked about many times.

This last year I remarked that 2011 had been one of the most challenging years that I could remember. Well I'm not sure that 2012, frankly, was any easier. We experienced commodity cost inflation once again in excess of EUR1.5b. There was no let up in competitive pressure either in some of our categories, particularly Hair in the US and China, for example, as well as our Laundry in Latin America or Central Africa.

The cumulative impact of austerity measures that you've become accustomed to is really hitting consumer confidence in many parts of the world, particularly in Southern Europe. I was in Greece just one week ago for one day and I saw myself the hardship that people went through when you get an adjustment, to the magnitude of some of 30%, 40% in their ability to live decent lives. Chronically high levels of unemployment and a very low consumer confidence.

We've also seen key emerging markets, such as Brazil, India, South Africa, to name a few, slowing down.

The US narrowly avoided a fiscal cliff. With all the ongoing uncertainty though around the budget negotiations, we'll be in for a rollercoaster ride there as well, in my opinion.

And we continue to see the impact that I've talked about many times of living beyond the natural constraints of this planet.

As we saw the weather patterns, we see more extremes from one to the other. Nearly every month is a surprise. Hurricane Sandy which followed the severe droughts in the Midwest is in our fresh memories and helped, fortunately, put climate change also on the US agenda. Elsewhere in places like the Philippines and Turkey, we saw severe floodings this year. These are just some examples. It's impacting our business and many others.

We are in this volatile world that is here to stay with us. And it requires a different way of running your business, a different way of organizing your company to be successful in navigating this volatility.

The businesses that will prosper in this environment are those which are able to deal with this volatility and uncertainty. They create opportunities. They need to be businesses that are sufficiently aware of their extended surroundings and able to adjust and adapt whilst staying true to their purpose and values. They need to be businesses that are increasingly rewarded by consumers for becoming part of solutions. And consumers are increasingly becoming powerful, as you well know. That is why the Unilever Sustainable Living Plan is so relevant and increasingly an engine for our growth.

The results, again, that we have released this morning confirm that Unilever is fit to compete, as James mentioned, and consistently delivering performance above the efforts of the industry.

Now let me just reflect for a few moments, if I may, on some of the highlights. In a single year, we've actually added EUR5b of turnover, bursting through the EUR50b mark in the process. That's a milestone. Today Unilever is nearly 30% bigger than it was in 2009. And we have passed a major milestone in our journey towards our EUR80b vision.

Underlying sales growth of 6.9% for the year is clearly ahead of our markets. And we see share gains across roughly 60% of our turnover as a result.

We've also seen growth in every cluster and every category, with a very good balance between volume and price. Personal Care and Home Care delivered double-digit growth for the full year, continuing the excellent momentum which you've now seen for six quarters.

Refreshment posted a very strong second half of the year, with close to double-digit growth in the final quarter. Now this has been driven by excellent performance in Ice Cream. But may I also add also Tea to this, which ended the year strongly as our interventions are starting to pay out? It helps sometimes to publically call out an opportunity.

Our Food category underperformed, growing 2% for the year with volumes down around 1%. I expected us to do better. And we continue to remove small non-core part of our portfolio to get fully behind the bigger innovations, like the Knorr jelly bouillon and the baking bags which continue to contribute strongly to growth. This category plays, once more, a very important role, not only as a cash generator by also as growth for this Company. And I see no reason why we should not accept better levels of growth.

We now have 14 brands in the EUR1b club, adding Magnum and welcoming back Sunsilk. This last one reflects the strength of our Hair business. And I agree currencies obviously helped a bit too to push one of these brands through the barrier. But so be it.

The fact that Dove bar on its own is now a EUR1b brand, as is Knorr bouillon, boosted by the success of the jelly platform. So you actually could say we have 16 EUR1b-plus brands.

Now these brands accounted for about 50% of Unilever's growth in 2012. And I'm particularly pleased that the bulk of these brands are showing now stronger equities. That's a testimony to our innovations and support levels.

Our emerging market business continues to be the engine of growth of Unilever with the successive -- second successive year of underlying sales growth north of 11%. In fact, it now accounts for 55% of the turnover of the Group, and more importantly 90% of Unilever's growth.

Underpinning the growth, we continue to step up innovations. Let me just give you a little statistic. In 2012, 90 projects were launched in more than 10 markets. In 2009, the number was barely nine.

The average value per project has increased 75% in the last three years. And the proportion of turnover from our products launched in the last three years is now consistently higher than 30%. That's about the groove, if you mat say that, that we want to be in.

And we continue to drive our brands also into new markets with confidence. In fact, we've again added another 80 new brand positions there during 2012. That's now over 300 more country brand combinations than there were in 2009, increasingly helping us to contribute to the growth.

Now this is all part and parcel of building an even broader footprint of Unilever brands. This will pay dividends over the longer term and hopefully allow us to maintain our solid growth for many years to come.

Now some of these brand extensions have been major investments. Launching Clear and Simple in the US and TRESemme in Brazil are good examples of that. Heavy investments behind the launch of great products and brands do reflect our confidence, not only in our ability to compete but even in our ability to win in these highly developed markets.

TRESemme Brazil has proven to be one of the most successful launches for many years, adding over EUR150m of turnover in the first year alone. In one [cell] in a single year, that represents nearly 15% of the entire retained turnover from the Alberto Culver acquisition.

Portfolio changes was more muted in 2012. But that's obviously, as you well know, the nature of M&A. If it is lumpy, it will not go each time exactly on the timings you want.

The Kalina acquisition is performing very well. The Bertolli frozen food has been disposed of and we have announced the disposal of Skippy peanut butter. We will continue to trim the small, non-core parts of our portfolio and will continue to keep our discipline on acquisitions.

Another crucial aspect of excellence in consumer goods is obviously winning in the marketplace. Here we continue to drive towards becoming an execution powerhouse. As you discover over and over, execution of strategy in consumer goods, discipline is absolutely key. Undoubtedly, we are becoming best in class here under Harish Manwani's leadership. And our winning performance culture is driving this more and more.

Service levels continue to improve, with the shelf availability now 800 basis points higher than in 2008 and now at the level of competition instead of languishing behind. In many markets, we're starting to see this reflected in an increasing number of Supplier of the Year awards. The UK actually is a terrific example, whilst we're here, winning multiple awards, again reflecting the importance we give to helping our customers to win. Although we are not yet number one in all of our customer perception studies in all of the markets, we are rapidly closing the gap as the US [Advantage] study, for example, recently showed.

And on top, we enrolled more than 1m new Perfect Stores, as we call them, in our 2012 program, making the total now about 5m Perfect Stores across the world and well on track to meeting the stretching 2015 target of 10m Perfect Stores.

And I'm very happy to see that some of you are getting the bug as well. I actually got a photo sent to me from one of you that identified one of these perfect stores. So if you can't make it to the moon, enter the competition of identifying these perfect stores.

Now gross margin also improved by 10 basis points in the year, with improved momentum over the second half, as shown by the improvement of 16 basis -- 60 basis points, as we've just mentioned.

The -- one second because the text disappears. This remains an important priority obviously for us, for Jean-Marc and the finance team, to continue to expand the gross margin expansion. And we'll talk about that later.

Now our cost structure is more competitive. Once again, a combination of restructuring, value-improvement projects, better and more global buying, and obviously the synergies that we help generate across the supply chain of well over [EUR1b]. And that has mitigated significantly the inflation and commodity costs that we have seen.

Now what I'm particularly pleased about is that we can achieve this without a major restructuring announcement. We all know that this distracts companies for years to come and sets you back in corporate culture. But costs do have a habit of creeping back, of accumulating in pockets and then spreading again. So we need to contain all costs with discipline and to drive efficiency improvements as a normal way of doing business.

And to be clear, this applies as much to advertising and promotions as it does to factory costs and overheads. We will do that each and every year and avoid the big vast upheaval of periodic massive restructurings moving forward. And these numbers, I hope you agree with me, reflect this.

You've all heard me comment on the importance of the organizational changes we implemented at the end of 2011, when we moved to four big categories and eight market clusters. It takes a while for such a change to get cemented. But increasingly I see more and more benefits. Now we're bringing more elements of R&D under the control of the category presidents, reinforcing once more our determination to become even more a consumer and customer-centric organization.

We've also stepped up capabilities in a number of other areas. We're building talent in Personal Care, with external and internal hires. And we're investing obviously significantly in the training and development of our marketeers.

Our new state-of-the-art training center opens in Singapore in less than six months' time from now. That's a highly regarded leadership development program that has now been extended to include all people within two levels of the leadership executive. And I'm talking over 500 people that participate in these programs. And all of this whilst making the organization more agile and more efficient and lower in costs. So I think you will agree that we are making good progress on a number of fronts.

Let me first pass over to Jean-Marc, who will cover the financial performance in detail, before I'll come back and give you a little bit more on the outlook. Jean-Marc.

Thanks, Paul. And in the interest of time, I wanted to focus today on key aspects of our financial performance. And so for your convenience we've included two appendices to this presentation, which show the development of turnover for the full year and for Q4. And it's not my intention today to go through this as it's clearly set out in the press release. So let's start.

Core operating margin was up by 30 basis points for the full year and by 60 basis points in the second half. 10 basis points comes from gross margin, with a further 20 basis points from overheads. And this reflects lower business restructuring, which came in at 110 basis points. This reduction reflects increasingly tough scrutiny and prioritization of projects. That, I have to say, has been made much easier by the decision to include such costs within overheads and thus part of core operating margin.

Now, as Paul mentioned a few moments ago, companies without a continuous improvement mindset are always looking for ways to remove costs. And so some level of business restructuring spend is required each and every year in order to stay competitive. We think that for Unilever that level is around 100 basis points, perhaps a little less.

For most of the 2000s Unilever's restructuring spend was close to 200 basis points per annum. That's why we gave so much guidance and reported on it in so much detail. But now we're at a time that we're at the level and the consistency where separate disclosure is no more relevant than any other line item in overheads. So from now on we do not intend to break it out. Now rest assured, as you have heard us say many, many times, our determination to remove unwanted cost will just continue undiminished.

Back to gross margin. As you can see in this chart, gross margin continued the sequential improvement that we have seen in the first half of 2011, and it was up by 60 basis points in the second half of the year.

Commodity costs, including importantly the impact of FX, increased by high single digits in 2012; that's over EUR1.5b. In fact, commodity costs have increased by around EUR7b over the course of the last five years.

Although at this stage 2013 looks more benign, it is still early in the year. And, as you know, much can change. As it stands today, we expect commodity cost inflation of low to mid single digit for the year.

We view steady and sustainable gross margin improvement as a key stepping stone in becoming a company that is fit to win. And that was indeed the theme of our investor event in Paris.

Where will it come from? Well, it'll be a combination of continuous cost management, margin-accretive innovation, discipline in pricing, and the maxing the mix initiatives that you've heard us speak about. And Paul will return to this later on.

Advertising and promotions increased by close to EUR0.5b in 2012 despite our continued progress in driving better efficiency in our spending. That also is a big increase, over EUR1.5b in the last four years. And close to two-thirds of that increase has been in the so-called good [cholesterol] of advertising, not promotion.

Digital spend increased by close to 40% in the year as we continue to find new digital expression for the brands that we have. We've been recognized by Advertising Age, as mentioned, one of the so called A-list digital companies for, amongst other things, one, putting 2,000 marketeers through a digital training academy; two, opening media labs in our clusters; and three, the extent of our global partnerships. I was at the CES Show last week with Facebook, Apple, Google, Microsoft and Twitter.

Non-working media, that's the part of the advertising spend which is used to make films, pay agencies and the like, continues to reduce. But we are still some way from benchmark levels and we aim to do better.

Let me say a few words about overheads, as I do each and every quarter. Some of you will remember that we reduced overheads in 2011 by 100 basis points. And that was a surprise to many of you. And we called out that around two-thirds of this was structural and one-third was, let's call it, one-offs tactical.

As a result, I indicated that keeping overheads flat versus 2011 levels would be a good achievement in terms of basis points. Well I actually believe that we did better than that. They've been held flat, and this despite very significant incremental investments in Personal Care, customer management, acceleration of our leadership development program and in our enterprise support organization, ahead of further efficiency programs.

The bottom line. This chart shows the moving parts and the development of our core earnings per share, which were up 10.7% to EUR1.57 per share.

In 2013, as previously we have reported, there will be a negative impact on the finance line as a result of the new IAS 19 pension accounting rules, in which pension asset returns and liabilities have to be calculated using the same discount rate. And as a result of this, we expect pension financing to be around a debit of EUR150m in 2013. And that is versus a debit of EUR7m last year. Now this impacts 2013 earnings by around EUR0.04 per share as we had previously guided.

So this chart just shows the impact of the new IAS accounting on 2012. You can see that here too the impact is to reduce core earnings per share by around EUR0.04. So the restated EPS, core EPS for 2012 which will be used to calculate core EPS growth in 2013 will be EUR1.53.

Let's just turn to free cash flow. For the year this was at EUR4.3b, which is up by EUR1.2b, EUR1.3b on 2011. That's an increase of around 40%. Particularly strong contribution from trade working capital. Average trade working capital has now been negative for 13 successive quarters, but particularly negative towards the end of the year.

Creditors increased in line with overall costs. But we held debtors and stocks at similar absolute levels to those prevailing at the end of 2011, and this despite the growth in the business. So this, together with the late phasing of some CapEx in the year, led to a positive contribution from trade working capital of close to EUR800m.

I personally am particularly pleased at the progress we are making with our operational planning inside Unilever. It is helping us. And as you have heard, it's significantly improving the service levels and, at the same time, we are reducing inventory levels, by a further two days at the end of last year. And we are all, Pier Luigi, myself and the whole of ULE are convinced that there is more to come as we drive and continue to drive further simplification throughout the business.

Net CapEx for the year was EUR2.1b. That's just under 4.2% of turnover. And we expect the levels in 2013 to be anywhere between 4.2% and 4.5%, driven by the rigor and discipline that we're instilling in the business.

At the same time, we are increasingly driving our return on assets as a key performance metric for those categories with lower-than-average margins and a higher-than-average demand for capital. This is helping to ensure that we drive the right kind of growth, the right kind of investment decisions in categories such as Refreshment and Home Care. And that will not come as a surprise to you.

Let me now look briefly at the balance sheet. The strong cash flow helped to reduce net debt, which closed the year at EUR7.4b. And that's down from EUR8.8b at the end of 2011.

The pension deficit at the end of the year was at EUR3.7b, and that's up EUR500m, plus or minus, from the end of 2011. And that reflects largely the impact of lower discount rates.

The cash contribution to the pension funds was just over EUR700m, EUR721m to be specific last year. And we expect this figure to be actually nearer to EUR900m this year, reflecting the overall increase in pension deficits.

So with that, let me pass back to Paul for his closing remarks.

Thanks, Jean-Marc. Appreciate it. The -- let me finish by discussing two areas briefly. First the outlook for 2013 and then areas where I specifically think there is some room for us to further step up performance, as usual.

Now it's not obvious to me, first of all, that the markets are going to be any easier in 2013, as I mentioned to you. And certainly the competitive environment is not going to be more benign either. Governments everywhere are treading a very fine line between their cuts and austerity measures at the one hand, and then the central banks simultaneously providing the quantitative easing on the massive scale that you have seen just to keep our economies from stagnating. And I'm obviously talking here Europe especially, but also the US. And consumers will continue to feel the effect of these austerity measures more and more.

Retailers also are feeling the pinch. They reflect the total economy. And they're fighting for consumers at a [zero sum] game, increasingly looking for exceptional values. Many of our competitors have lost ground for too long and I'm sure they will come back in 2013, increasing, to some extent, the cost to compete. So we are prepared once more for an even more challenging year.

And there's certainly more for us to do as we transition this Company from what we call capable of delivering consistent top- and bottom-line growth, whilst having sufficient juice in the system to absorb the bumps that will come along the road, and at the same time obviously preparing this Company even stronger for an increasingly resource-constrained future. Now where we need to focus on is that it demands for us even better progress on gross margin, not only as a source of operating margin improvement, but just as importantly simply as fuel for growth. I think we're better placed now than ever to deliver on this momentum that we have created.

At a category level, you can actually see that we're starting to make progress. Second-half gross margin expansion was up 60 basis points, as Jean-Marc said. And that would support this.

By category, if you look in Refreshments, as Jean-Marc indicated, we're now driving return on asset as the key metrics. Core operating margins are up by 170 basis points for the year as a whole.

In Home Care, we've not given an inch on the competitive battlefront and never will, rest assured. But we have still managed to improve the core operating margin by 50 basis points.

In Food, we continued to shed the non-core and margin-dilutive parts of the portfolio and will continue to do so.

Moving forward, I also expect that growth rates in Home Care and Personal Care will moderate from the exceptionally high levels of 2012, as I mentioned to you in Paris.

And it's also important for that reason that Food should actually take up some of this slack. This too should have a positive impact on gross margin.

Innovation of course is an important source of gross margin improvement. In fact you'll hear me say over and over that if a new product is not accretive to margin then you have to question if it really is a real innovation. We've had some notable successes across much of our portfolio. Take Dove, the jelly bouillon, the whitening toothpaste, the baking bags, the deodorant Maximum Protection and many, many more. So we know what to do.

And we will further, next to working our innovations, lower costs, another important element to improve our margins, by driving the continuous improvement program in all we do, be it manufacturing rationalization, especially in Europe, or the low-cost business models as we now call them under Pier Luigi's leadership. But it really means actually a deep scrutiny across the extended value chain. And that is now starting to work for us, in Ice Cream in China, in Laundry in India and many other examples.

We need to start capitalizing on the enormous investments in [ESIT] that we've made over the last few years. And we see enormous possibilities there.

And finally, there is still more for us to do to penetrate the more profitable, faster-growing channels if you look at winning in the market. Here channels like ecommerce, drug stores and out-of-home are more profitable channels. But we still see enormous opportunities, EUR3b to EUR5b incremental turnover and gross margins that are higher again, once more, than the Unilever average. So some examples of how we build gross margin.

And there is more for us to do as we seek to improve the quality of our growth. The incremental turnover from our innovation projects, although vastly improved, I believe is not yet high enough. Projects need to still be fewer and bigger. Product quality is now at the stage where we're equal or better to competition in blind testing in about 95% of the time. We've never been in a better position. But here again we can still increase our better-than ratio. So it's an important part of the value we create with our consumers. So whilst we are in a good position, there's a lot more upside.

And the performance culture, obviously we need to continue to sharpen. The risk of complacency needs to be avoided. We need to be even simpler. We need to be less bureaucratic still, and consequently faster and more able to react to the unexpected.

More than ever our agenda in 2013 will require us to go about everything with rigor and discipline and an even higher sensitivity to costs. There is no shortage of great opportunities. And once more we have no excuse outside of this Company that we actually were planning to share with you.

We look forward to another exciting year and certainly appreciate the support that you've been giving us on this journey. As the Axe promotion shows, reach for the stars and you will never end up with mud on your hands.

We will now be more than happy to take some questions. Thanks.

Thank you very much, Paul. So the usual routine here. So if you're in the room and you want to ask a question, just stick your hand up and then if you get selected, please remember to hit that button on your console. Please tell us who you are, who you represent and, if you don't mind, can I restrict you to two questions, please?

We'll also be taking questions on the phone lines. If you have questions that you want to ask, you need to press star one on your keyboard and that will allow you to poll for a question. If the question subsequently has already been asked and you want to cancel it, then press star zero. And if you're on the phone, please when you're asking a question can you make sure you talk into your handset so that the people in the room here can hear what it is that you're asking?

So we're going to start in the room. Martin Deboo, did you have your hand up there?

Do you want to go first, Chris? You go first while Martin's getting himself ready.

Yes. Hi. Chris Wickham from Oriel Securities. Just a quick question on the growth. You talk about Food and acceleration there. Do you think it's likely that the asymmetric pattern of your growth between emerging markets and mature markets will shift so that we will start to see a better balance of the growth between the two?

And as a follow-up to that, does that have clearly positive implications for your ability to convert organic sales growth into EPS growth?

Yes. You're specifically talking of Food, Chris?

I'm talking Food and then the implications of that for the asymmetric nature of the growth between emerging markets and mature markets.

Yes. So, as you know, although we have 55% of our Food -- of our overall business in the emerging markets, just to rehash the statistics once more, on the Food side it's still more the 40%.

Now why we are confident in our Food business obviously is if you first look at it a little bit more granularly, increasingly our Food business is really, if you take Refreshments out because we're not -- that is Food, the Beverage and Ice Cream, but I'm talking about the rest of our business. It's basically now three big core activities. And that's -- we're getting nearly to that point now, which is Margarine, Dressings and then obviously Savory.

And Margarine, as I mentioned before, the markets are down and continue to decline. But we have actually -- in Margarine we are growing our share. We're growing our share in a declining market. And we obviously [pay the] volatility cycle and managed our cash flow. That will be a drag on the growth rates, but it will be a contribution to the overall financial performance of the Company. And we will continue to manage it that way without expansion, so you won't see any footprint shift in margarine in the foreseeable future.

Then the second business is our Dressings business, actually a very healthy business, growing very well, by the way. And we continue to expand that business with a good pipeline of innovations that you're familiar with, and we're very confident there.

And our Savory business is the balance of the business, where again it's about a 40/60 ratio that we have to move to the other side. Our emerging market business is growing well. Our European business, where too much of that is, because we have a relatively small business in the US, our European business gets the double-whammy of being in Europe already with mature shares, if you want to, in markets that are down. And then there's a little drag on the Savory business because of non-strategic brands that we will continue to look at and find solutions for.

I am convinced that -- we have to focus on the Savory business for this discussion, if I may. I am convinced that with our focus now on the emerging markets and our innovation pipeline that we can actually bring the growth rate of that business up. There is no doubt that the category and Antoine de Saint-Affrique is 100% focused on that. As we do that then obviously you get also a positive contribution to earnings per share.

I don't know, Jean-Marc, if you want to add to that on that part.

The only point that I would add is that increasingly, if you look at our business, I'm referring to the last question which was the translation of sales into profitability earnings, is that despite the growth differential in emerging markets versus developed markets, we have a very, very good structural gross margin throughout our business, be it D or D&E, and obviously the margins are then a reflection of where we're spending our A&P.

Yes.

Martin?

Sorry. Two questions, if I may. The first is on the Refreshment business. It looks as if you had very good growth acceleration and accelerating margin expansion in H2 in that business, strikingly good. Can you just give some more commentary on that? But also, is that momentum that you would expect to carry into FY'13 in refreshment?

Second question, Jean-Marc, is on gross margin. You're guiding to high-single-digit input inflation, but obviously the other side of the equation is how you're managing the top line in terms of maxing the mix, etc. So what -- how would you expect the gross margin outlook to be in FY'13?

Okay. Thanks, Martin. The -- on the Refreshment side, we're actually under Kevin Havelock's leadership. We're pretty happy with what is happening there because Ice Cream now is truly becoming a global business. Ice Cream was a little bit where Food was before, was very much geared towards Europe, whilst the US was a bulk in-home business, which frankly isn't very attractive.

We have -- obviously with the launch of Magnum in the US and some other activities that we've done, we are increasing our impulse business, which is more profitable, also out of home, and that strategy is working for us. We've seen the same in Europe, obviously, where out of home is still an enormous opportunity. We think that could be up to EUR1b in incremental business. So changing this footprint from margin-destroying in-home bulk business to the more impulse added-value out of home.

Magnum is obviously an enormous success story. Since I started in the Company, Magnum was EUR550m in turnover and now we've just passed the EUR1b barrier, and that's just in four years' time. It's one of the greatest success stories I think in the history of consumer goods, perhaps not sexy for many, but certainly should be sexy for our investors.

And we increasingly have taken that opportunity and that confidence to launch our ice cream businesses in the emerging markets, which is actually amazing if you think about it because the weather environment there is a whole year ice cream environment. That business doesn't need to be seasonal. And with the launches in Indonesia that you've seen when you were there, which is an enormous success and continues to grow, we have added to that in all of the other places in the Far East. Tremendous successful launches in the Philippines. We've now opened Ben & Jerry's stores in Japan, where people start queuing up. I could go on and on. And the same is true, by the way, for Latin America. So that momentum that you see in Refreshments will also hopefully give us a better business if you look at it on a six-month basis moving forward.

And then tea, which is the second part of that, I think we have -- we've seen very strong growth in some of the important tea markets that were under pressure, like Russia would be an example of that, Saudi would be an example on that, where on the one hand we have corrected the basics and on the other hand we have stepped up the quality of our products and the innovation. As you know, and the US would be an equally good example of that, where frankly we have under-supported the Lipton brand, tea brand there, literally under-supported in quality and product. And that is never a long-term strategy. We've reinvested and continue to reinvest in quality and product, and you start seeing the results. So I am fairly positive that that business, bar a quarter here or there for different reasons, but that business is on the right trajectory.

And then coming to the gross margin.

Yes. As we've discussed a variety of times, gross margin is crucial if you want the virtuous circle of growth to really work in a sustainable way. And I would argue if you looked at our financials over the last three years, we probably had to rely solely on overheads to drive that core operating margin. So we don't give you a view in terms of outlook for 2013, but it's strategic. It has to be positive. And you see the trend between H1 and H2 for 2012.

Okay. James?

It's James Edwardes Jones from RBC. Two questions, if I may. Can you expand a bit more on the reasons for the Americas strength in Q4 and how sustainable that is?

And also just a real nerdy question, but A&P I think you said was EUR6.5b for the year. It was up EUR470m. On my calculation that means a fall of about 30 basis points, but I think there was a chart where you showed it was flat. What's the difference between those two?

Yes. Very quickly, James, on North America, again, as I said, we don't want to really take these discussions on quarterly numbers and once-offs. But we had this impact of this change that we had last year, 2011, that for North America alone is probably about 400 or 500 basis points, by memory. So, if you remember, it's a base question on the quarter. I think the North American market on a macroeconomic level will see an economy that might be growing at around 2% level. It hasn't done that well in the last two years, but it's slightly there, some signs that the US is slightly picking up. And we should be slightly above that with our innovation program, net of divestiture, obviously.

On the A&P, I think what you're probably looking at is apples and pears with the M&A --.

Foreign exchange.

Foreign exchange parts of it. But if you look at the total, it's absolutely flat. So we can take you through the calculation, if I may, later.

I'll do that afterwards.

Yes. Is that okay?

But your point is the right one. Don't extrapolate UVG in Q4 given the point that Paul mentioned on North Africa implementation in the 12 months prior.

Yes.

Jeremy? Sorry. I'll go here next.

Morning. It's Jeremy Fialko at Redburn here. A couple of questions, firstly on the commodity guidance. You're looking for low to mid single-digit increase. Now while that's certainly lower than what we've seen in previous years, some of the commodities that we look at, things like edible oils, which are very big items to you, look as though they're down very significantly year on year. So could you tell us as to why the guidance is not lower than that and what some of the main items where you're seeing cost inflation this year are?

And the second question is just on your overheads in 2013. Clearly you're looking for gross margin to be the main driver of your operating margin progression. Do you think that overheads could end up being up year on year as you choose to reinvest more in your capabilities? Do you think it'll be flat or could that be even an additional kicker to your operating margins? Thanks.

Yes. You want to take the --?

Yes. So thanks for pointing out, because I think someone in the audience said that commodities would be mid single digit. And it's indeed what we're saying is low to mid single digits. And, as you know, our policy in terms of hedging, simple forwards, three to six months. And so that's the P&L view that we have. So again we may be in a position to change our views by the half year. That's where we stand today.

If you look at your screens on Bloomberg, they'll be spot prices. They can be different to the actual contracts in terms of purchasing. Secondly, there are a whole variety of exposures in terms of commodities that we have, some that have gone up, others that have gone down, also depending on the region where you buy those. But also don't forget foreign exchange and other, which we include in terms of our calculation of percentage increase because we're talking about the impact on our P&L.

I tend to think on commodities that we have a good system, good people looking forward, what we hedge, what we don't hedge. This is done very professionally, and increasingly so as we, under Pier Luigi's leadership, have globalized that organization. But the reality of today's market is enormous pressures that can come on you from one end to another. Just a drought of grain in the US wiped out 20% of the US crop there, so that has a tremendous effect on the global market in a very short period of time. Obviously you cover for that.

So what is equally important is that we create a system that is able to deal with these increasing shocks that will be coming, climate change being one of them. And I think we're in a very good position versus our competitive set because we spend a lot of time on how to deal with that. We're also in a very good position with our brands and the market positions that we hold to manage these things in a way that we don't have to take all of that pressure into our own P&L, if I may.

On the indirects, I think that your point on investing in capabilities is absolutely key. We continue to look first and foremost at what capabilities do we need, quality capabilities to fuel the growth. Interestingly, if I go back over the last four years and take a little bit of a macro picture, we have invested enormous amounts of money in training and developing our people, over EUR100m. We've invested an enormous amount of money in bringing our sales capabilities up. We've invested in these state-of-the-art customer innovation centers. We're now investing in the Personal Care capabilities. We've invested in R&D to be able to fuel that growth.

So our investments probably in the last four years in indirects have been higher than any time we probably could find in the previous two or three decades. And that we will continue to do. But that doesn't mean you cannot drive efficiencies if you grow. If you don't grow I think you're in a pickle. But if you grow and you grow with discipline, there is no reason why you cannot drive the indirects further down. An EUR80b business doesn't need two CEOs either versus a EUR40b business, I hope. So the efficiencies we will continue to look at in indirects.

We still have a low decision-making compared to what we think would be ideal. We still have a lot of non-value-added activities in a company like this as well. We still need to do a lot of restructuring in the way we go to market in some parts of the world where we have become too complex, and we will continue to drive them. But you don't want to do that with shocks because it will be dysfunctional to your growth. You will manage them consistently. So I think that our indirects should continue to show the 20-, 30-basis-point improvement.

Shall we go this way? Harold?

Yes. Good morning. Harold Thompson, Deutsche Bank. I've just got two questions. One is a bit of a follow-up on investing in capabilities. You note in your press release that the Personal Care margin is down because of such investments. Can you maybe slightly expand what you're doing, whether it be price positionings of your Personal Care offering or the categories where you're looking to compete in?

My second question is following yesterday's announcement on royalty rates in India, which is on the back of Indonesia, and there's the Pakistan move as well. Can you maybe just a little bit update us on your minority participation view, which seems to be changing versus maybe three or four years ago, and how do you see that over the next five or 10 years? Thank you.

Yes. Harold, thanks for the questions. To be very brief and quick, the views are not changing; the organizational model is changing, and because the organizational model is changing with tasks being performed in different places now. When we were very decentralized we had a lot of activities in the countries. When we have a more interdependent global structure, like ESIT is a good example, our brand groups, our innovation groups, if you want to, we have a different organizational model now, very clearly, than we even had four years ago. And that needs to be reflected in these markets to recover the true costs. And that's all what we're doing, and we will continue to always look at that. It's dynamic and we're happy with that. That is the way that it's done.

By the way, very well audited in those countries because we have minority shareholders that we need to respect, and we would be the first ones to do that, as you can imagine. But if we don't, it's very difficult to defend to other countries. We very much believe in being in each of the countries, counting for these countries the benefits of the added value, but we also have to recuperate cost if it is somewhere else.

On the first question, on the Personal Care capabilities, for example, what you see here is the gross margin in Personal Care actually good, but the investments is A&P. A lot of the investments in A&P went to actually Personal Care because that's where you have seen this great expansion. And the 10%, 12% growth, that obviously is part of that.

And then the second thing, capabilities would be, for example, Dave Lewis, who leads very capably our Personal Care business, is obviously investing in, for example, trend centers. We'll expose you to that in due time, like we did with the customer innovation centers. But this is a fast-moving business, obviously even more so in the emerging markets, where there is no one common denominator. And we are investing very skillfully, I think, with some capabilities that we bring in from the inside and outside, capabilities in packaging and package design.

And these are examples where the four mega categories we've created are actually increasingly working for us because the activity systems -- as I've always been saying. It's not a surprise, but it's more difficult to do it. But the activity systems that we have created around these four categories are slightly different to succeed because different competitive set, different drivers for consumers, and yet we are leveraging smartly the skill where it makes sense. And the activity systems of Personal Care were never really that strong in this Company, if I may honestly say, because we were so fragmented. And any individual business, be it deodorants or hair or skin, could never pay for that. Now that we have this aggregation and nearly are the size of a L'Oreal, just with Personal Care alone, we have these capabilities.

So one more in the room and then we'll go to the telephone lines. Warren?

Morning. It's Warren Ackerman at SocGen. Can I just ask about the balance sheet? The net debt is down. You told us about your priorities in Paris. But with the free cash flow improving it looks like you could be net cash almost within two years. I'm just wondering about your priorities within that. Would you consider a share buyback or are there more Alberto Culver-type deals out there, or would you look at your dividend payout ratio, because the balance sheet is really very, very strong at the moment?

And then just secondly on the Home and Personal Care growth, obviously very pleasing that both Home Care and Personal Care grew double digit in the year. I'm just wondering what you think the overall market growth in both Home Care and Personal Care was.

And then you talked about the 60% where you were taking market share. I was just wondering about the other 40% where you're not taking market share. Is there any areas that you'd point to, the kind of things you're doing to try and improve the situation? Thanks.

Yes. The -- I think the balance sheet -- let me have -- Jean-Marc, if you want to do that.

Yes. Very simply, no change. You saw dividend today, and we usually look at that at Q1 each and every year so that's when we will review, firstly. Secondly, no intention on changes in terms of views on share buybacks. Yes, we're happy with the free cash flow that we've created, but now is not yet the right time to really look at a different funding financing strategy.

In terms of M&A, it continues to be bolt-on M&A, very focused on the EUR1b to EUR2b mark. If it's bigger, that's fine, as long as it's not distracting. But just like Paul said, these things are lumpy. We don't rely on it. It's ordinary course of business just to add to our existing categories.

As you rightfully said, Warren, we probably have one or two years. So ask the question again next year and we'll see. But let's not run too far ahead of ourselves on that one.

The Home Care and Personal Care, actually the Home Care market interestingly is not growing that much. If you look at household cleaners we see obviously the emerging market growth, which is about 5% to 6% there, but there is no growth in Europe or the US. And all the growth is coming from the added value, where brands like Domestos or Cif, with their innovation programs, which are very strong, and the introductions, by the way. We've introduced in 30 countries. Brands like Cif or Domestos are doing very well, so we are very pleased with that business.

And that obviously is more and more for us, since we're not in the US really in a significant way, and in Europe only in a few countries, is an emerging market business. And that's why you get that higher footprint that gives that higher growth rate. We are well beyond the 55% on those businesses.

On laundry, the markets again, if you look at it on a global basis, and for us it's again all emerging markets, on the global basis that market is probably growing 2% to 3%. In the emerging markets again, you'll see the 5% to 6% growth rate. So with the double-digit growth rate that we are showing versus emerging market growth rates of 5% to 6%, if you average that out, we are outgrowing the market and as a result we're building share. I'm obviously very close to that business. And if you look at the 16 cells that I look at, in 14 of those we are growing share, and we're very happy.

Now I've always said that, by the way. I want to make a point that if the competitive -- if you are a market leader and you manage your business very well and you have the trust of the consumer, otherwise you wouldn't be market leader, and competition comes in and you defend your business, you probably get a disproportionate benefit from that. The markets will grow faster because of the activities and it will gravitate towards you. We see the same in oral care, where I think Colgate is not doing a bad job in growing their business in a very competitive environment, and they should be credited with that. So we believe in that. I firmly believe in that. And that's why we don't blink.

In some of these Home Care markets, unfortunately on the Laundry side we are seeing competition still underpricing us by 20%, 30%, and yet we are growing share. But we cannot take prices up as fast as we wanted because of that.

Now your last question is about market share. If 60% grows market share and 40% doesn't grow market share, that's pretty good for consumer goods because there are -- when 40% doesn't grow market share doesn't mean they're all declining at significant rates. Our food business, for example, if I may do our Savory business, has a small share decline. Most of that reflects the market itself. But it's a thing that I think is close to becoming positive. So they're different degrees.

The business that we like to do better, if I may say, on the macro level, is obviously we want to continue to have our beverage part of our Refreshments perform. And that will increasingly be reflected in the share growth as the volume continues to be what it is right now.

Just to clarify, the comment about the moderation in growth in HPC, is that simply a reflection of very tough comps going into 2013 or is it more a reflection of competitive response potentially?

Well, no, it's a -- if I may be honest, the market growth might be 1% less or more. We don't really want to debate that. But if you continue to grow at 10%, 12% already for six quarters now, and that's nearly double the growth of what the markets are seeing, we've obviously had a great momentum. But it's difficult to -- we will try, but it's difficult to maintain that momentum in perpetuity as your business gets bigger and all that and as probably some markets mature more and all the factors. So I have to be very transparent with the organization, and obviously including you guys, that as I expect that it will be more -- the pressures will be more towards the down than towards the up on that, I need the Food business to then perform to give the same outstanding performance that you've become accustomed to.

And so businesses that we want to have -- do better in share terms will be the beverage part will come through. The Savory part, those are big blocks for us already. And then in Personal Care, despite doing very well, we want our skin and especially our face business to do better as well. So we have -- even in Personal Care, which has been a brilliant performing business, we have some businesses that we would say have challenges on the -- and possibilities on the up side. But these are all great opportunities.

If a business would grow 100% share, which we now have in some of the markets, it's never healthy, because if you grow 100% your ego starts to grow. So to have a few parts of the business that are suffering keeps you sharp overall. I like that actually. So that's where we are.

So we're going to go to the people waiting patiently on the telephone lines. Celine, can you hear me and can you ask your questions, please?

Yes. Good morning. I can hear you. I have, well, my two questions. My first one will be on the margin that you did this year with 30 basis points, which was your best performance in the past years. So I was wondering whether this is the new sustainable type of rate that you imply when you talk about being fit to win and a sustainable margin improvement. And am I right in understanding from your comment of the increased cost to compete that we should expect this delivery to be done despite an increase in A&P in 2013?

My second question is on price outlook. It has been a bit interesting in the fourth quarter that we have seen that pricing has reaccelerated in some of the regions, so I was wondering whether we should -- what kind of pricing are we going to have in 2013 that is coming from 2012 actions and whether there is further upside to pricing for 2013.

Celine, we miss you here. It must be tough in France if you can't travel anymore.

Yes. Sorry. I forgot my rocket.

Okay. I hope we see you next time. Listen, on your two very valid questions, the margin improvement this year is a good benchmark of what we are striving for. And that's all I want to say on that one.

On the cost to compete, it's exactly why we need the gross margin to continue to improve, that volatility that is going out there, including the competitive pressures or, if Europe doesn't grow, the retail pressures, etc. You have to assume that that is going to increase. That's the cost to compete. For that we need to create more flexibility. We use these rallying cries and these reality checks with the external environment to be sure that the organization continues to focus on taking cost out of the system, etc. So I think we can manage them, but we are just sharing with you some of the forces that we have to deal with.

And then in terms of your last question --?

Price, price outlook.

Yes, price outlook for next year, we don't know what happens with all the commodities, etc. But as it stands right now, half of the pricing will probably be carried over, more or less, and the other half will be incremental. And the incremental I believe will be more driven by some of the currency changes in the emerging markets. What you already see happening in Europe, for example, is exactly what I said last year.

In an environment like this in Europe it's very difficult to get pricing through. If a consumer has 15% less money or in Greece 40% less money, if you're going to whack them with a 5% or a 10% price increase, you might as well fold your bags. It's very irresponsible. We are out there to help them. And I will work very hard personally and as a business to be sure that the consumer doesn't have to suffer more from some of the things that really were outside of their control. So in Europe we will work very, very hard to be able to take cost out of the system so that we don't have to price. And I'm sure competition will do the same, so don't expect much.

In the others, I think it's again, once more, it's about half-half, like it has been this year, by the way. If you do your calculations, you might find to your surprise that there is some pricing over the second half, more so than the carryover from the years before, something that some of you guys were skeptical about, not the ladies obviously, the guys mainly. But you see now that we consistently we have that pricing power as well where we need it.

Okay. One more on the line, then back into the room, Celine.

Thanks, Celine.

So Alain Oberhuber, could you ask your questions, please?

Yes. Good morning, gentlemen. Thank you very much. I have two questions. The first is about the inventory turnover. What could be the outlook for 2013 given that you were very efficient in 2012?

And then on the portfolio, Paul, you mentioned about the trimming in the portfolio. Could we expect that such kind of a trimming will be more in the food or in HPC? And what are the parameters? Is it about the size of a brand or the future growth rate of that potential market -- brand which could be divested?

Good. Thanks, Alan. So on the first one, just very briefly, if you just do a benchmarking in the broadest sense of our industry we come very quickly to the conclusion that there's still a lot more that we can do in inventories. If you're actually looking at trade working capital, that's probably the place where we can make the most progress. And so that will just continue each and every year. And, as Paul said, it's also just a reflection of our systems, our processes working. And that is the real enabler to get stocks down, but that'll just continue.

Yes. Alain, I don't want to talk too much about what other businesses would be looked at when we have the acquisitions and divestitures, other than we probably have about EUR0.5b to EUR750m still of turnover that needs to be looked at because it's either a distraction or it's not -- it's margin dilutive and top-line dilutive or it also has no capabilities of global expansion. And we can afford, with our current growth rates and momentum, to be a little stricter on that because we have enough opportunities to focus the organization, as you see, behind businesses that are really important to us.

So I'm talking about these smaller businesses that you might find under some of these conditions are not belonging to one of the global franchises, not being globally expendable, being diluted for the top and bottom line. Then you have to have a very good explanation of why it doesn't work. We for a long time held onto our frozen food business in Italy under the excuse that we couldn't sell ice cream otherwise. That turned out to be a fallacy. We sold that business. We did reasonably well in selling it. It allowed us to focus more, and our Italian business, despite the tough environment there, is doing reasonably well.

So you get your returns by doing that. You have to be very selective. And likewise on some of the other minor businesses that you might not even hear about, but the Brazilian tomato business was a commodity business that we ended up having from an historical perspective. We're not going to expand canned tomatoes globally. We have significantly more exciting initiatives, like the baking bag or the jelly bouillons that are high-margin businesses, growing through the franchise like Knorr. So we will be looking at those type of things, carved out, probably a little bit more skewed still in the Food side where there are less -- sorry, where there are more remnants still than in the Personal Care side. But there you have it. And we'll talk to them in due time.

So with that, I don't -- do we have more time? We have one more question here. Thanks, Alain, for the question.

A question in the room and then we'll [give up]. So any last question in the room? Alex has a question.

Sorry. Alex Smith from Espirito Santo. Just maybe if you could jump back to Foods. You've spoken quite a bit about Dressings and Savory, but you didn't really elaborate much on the Spreads business. I think you said it was doing quite well, it was gaining share. If I think back at Q3 I thought the situation was different. I think you said you were losing share and some of your pricing was out of line with your competition. You'd made some adjustments in the US. You were looking to make some adjustments in Europe. It sounds like things have turned round. I just wondered if you could elaborate a bit more on Spreads.

That's a good memory and that's absolutely correct. You've given the answer. We have put the price equation right again. We found ourselves in a very unique situation that the butter prices were cheaper, although obviously a significantly less healthy product. But with the pressures on the economy again, it forces some people perhaps to butter.

Now we have good initiatives coming through, like the liquids, the aerated. The Gold, Becel Gold is a good example. So on the one hand we have good initiatives. As we said, we're winning different in this category. They are coming through. They're actually growing.

And on the other hand it's exactly what you said; we have corrected the price equations where we needed to on the volatilities of these input costs. Some of that has helped. Obviously the lower prices on palm oil that we now see and some other things helps us there.

So we're managing the equation very well. And as a result of that we see increasingly our business growing share there, in a market though, I want to reiterate once more, that is not growing to the extent that some of our other markets are growing. But there you have it.

As I've said many times, I personally think that actually the people managing that category do actually a very good job of managing it, better than I think anybody else can do that I'm aware of. And it plays a crucial role in our total Company. And what you buy into, obviously, is Unilever. And what you see here today again, once more, be it a fight in one of our categories in one part of the world, be it significant cost of expansion of our portfolio in other parts of the world, be it one part of the portfolio that we would always honestly call out with you as being outperforming or not. This is a Company that in its entirety is starting to deliver and is starting to deliver consistently, consistently top-line growth above the market, consistently margin expansion, and I think you've also discovered once more, with an enormous discipline on capital, in this case, the last question from Alan, on working capital.

And we're basically financing that growth internally, just as we said we would. So, once more, a proof point, a six-month proof point that we're well on track to move this Company from fit to compete to fit to win. It would not be possible to do that without your right challenges to continue to set the bar higher, focusing on the right areas where we can improve. And that is exactly why I like this Company, because equally, as we put in these enormous performances in a very tough market, I've not seen it tougher now than any time in my 30-plus years in consumer goods, we also are very energized by the enormous opportunities that we still have in this Company. And that to me is the most exciting thing.

And if you can combine this strong performance with the enormous opportunities in a business model which has responsible capitalism, where you start to solve some of the wealth problems, decouple your growth from environmental impact, help on the issues of food security, significant lower carbon emission by working on abolishing illegal deforestation, driving sanitation and health. When there are still 6m children dying from infectious diseases, half of which you can cut out by simply having the act of hand washing. Those are the type of things that drive us, a very strong purpose, a very strong operating model, from a strong base, with still enough opportunity.

So I thank you, and I certainly look forward to the next opportunities we have to interact. Thanks for your time.