聯合利華 (UL) 2013 Q3 法說會逐字稿

We are about to hand over to Unilever to begin the conference call. (Operator Instructions). We will now hand over to Mr. James Allison.

Good morning, and welcome to our third quarter results presentation. This morning, Paul will begin with some introductory remarks, before Jean-Marc will review the sales performance in the third quarter. Paul will conclude by looking forward. We will then move onto Q&A, in the usual fashion.

But first, let me draw your attention to the usual disclaimer relating to forward-looking statements and non-GAAP measures.

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

Thank you, James, and good morning, everybody. As you can imagine, I was keen to communicate directly with you all in light of the short trading update we made a few weeks ago; call it character building. But let me reassure you that we were as disappointed as you were.

Now some things came together that explained the results for the quarter, but let me first stress the bigger picture that for the year as a whole, we continue to expect to grow well ahead of the market and to improve once more the operating margin. No difference here.

So why was the quarter soft and is this the start of a trend? These are obviously the right questions.

Now first, as you know, we've been warning for a slowdown in emerging markets for a while. And, as some of you mentioned, if you say it often enough, it will eventually come.

The truth is that the World Bank and the IMF have reported emerging market growth rates going from 7.5% in 2010 to 6.2% in 2011, to 4.9% in 2012, with the latest one below 4.5%. Unlike some of our competitors, we've been able to grow ahead of this, despite a not very high base, by developing these markets. That's a core competency of Unilever.

We knew that we could not maintain the double-digit growth rates over the -- that we have shown over the last nine quarters. But unfortunately, the recent currency movements have not helped; and the lack of sufficient structural economic reform during the good times in all these markets is actually now holding them back. And obviously, in many of these markets, we have big businesses.

Now what makes the quarter especially soft for us is that we don't yet have sufficient pickup in our food business to compensate, nor do we yet see the improvements in especially North America, and to a lesser extent Europe, that we were counting on.

North America softness deserves some more detailed mentioning, for a change, as we saw the coming together of soft markets, especially in food; heavy competitive activity, particularly in personal care and ice cream, to which we obviously did not fully respond; and the delisting of some less profitable SKUs as part of our maxing the mix program. So not entirely others to blame, and where needed, corrections have been made.

What is important is that the global business in total continues to grow ahead of our markets, even if this is below the particularly strong levels that we've seen over the last couple of years.

We've looked at every country and category to review our relative competitiveness, and it's good. Over the last 12 months, we have continued to gain share in more than half of our business, and we expect to finish the year with that as well.

Of course, there are always places where our competiveness is tested, or where we are testing competition. US personal care is an example, as promotional intensity is now extremely high in categories like hair and deodorants. Despite this, we are still growing share in our personal care business in North America, albeit at a reduced rate; hence, our reluctance to overreact.

We see the same still in some of the laundry hot pockets like Brazil, Europe or South Africa, where there is a big gap between competition talking the talk and walking the walk. In fact, both our global personal care and home care businesses are growing at close to 8% this year, and around 6% in the quarter, which we feel is very competitive.

Whilst overall market growth has definitely slowed down by 1 percentage point or more, we continue to believe that our footprint in emerging markets, together with our scale and strategy, position us well for the long term, which obviously remains our focus.

We are continuing to step up support behind our brands, and I am confident in our innovation capabilities across our categories, starting from an already strong base. We have now integrated a lot of the R&D organization into the specific category structures, and this is starting to pay off.

We also begin to see benefits of greater strategic alignment, sharper choices, focus and speed. We have a robust program of high impact launches, either in or hitting the market. You will hear about some of these from Jean-Marc in a minute.

Looking further ahead, our innovation funnel for next year and beyond is even stronger with twice as many large-scale projects as we did at this time last year.

Frankly, in this increasing volatile world, we should also expect some more volatility in the quarters. We didn't get excited when we grew 8% in quarter 4 last year, and we're not going to waiver from our strategy if we have a 3% quarter.

But this quarter's results are a good warning sign. We will have to respond to reduced market growth and to a higher level of competitive intensity. We will talk in more detail about our sharpening plans in the December meeting when we are together for the Investor Day.

We will be doing more to the make the Unilever organization even more agile and adaptable. And we are accelerating our efforts to rebase our costs to fund the investments behind the brands, behind the additional innovations, as well as the new growth factors.

I will return to this later after the review of the third quarter performance, which Jean-Marc will take us through now.

Thank you very much Paul. Let me begin with a bit more detail on the business environment and just give you some context.

By the second quarter, we were already starting to see downward revisions of GDP growth in a number of emerging market countries. Following the comments by the US Fed in May, and slowing domestic demand in China and India, many of the emerging market currencies began a slide which lasted through approximately 'til August. Governments in places like Brazil, India, Indonesia and Turkey have been forced into tightening monetary policy.

Now all of this has pushed up the cost of living for consumers, particularly in countries that are more reliant on imports at a time when food inflation, as you know, was already increasing. And this impact is particularly felt at the lower end of the income spectrum. So it is not, in summary, surprising that growth in consumer demand has slowed in these countries.

If you just turn to the developed markets, there's been little change from the second quarter into the third. Some of the macroeconomic data points to a better future, but for the time being, let's be realistic. Life for the great majority has not improved.

Take the UK where wage inflation is at a record low, and the eurozone, where the rate of unemployment is steady at around 12%. And in the US, again, as we all know, life does continue to be tough for many ordinary people, with nearly 50 million receiving food stamps.

So our own markets, they're flat in North America and Northern Europe, but they're still well down in Southern Europe.

So with growth which is hard to come by it is no surprise that competitive intensity is high, be it promotional offers to tempt hard-pressed shoppers in Europe, or global competition; or local or regional players trying to expand in the emerging markets. So the business context is a difficult one, as you've been hearing from many in the industry.

And with that background, let's have a look at our own performance.

Underlying sales growth was 4.4% in the first nine months, 3.2% in the third quarter; 1.9% coming from volume, 1.3% from price. Price growth, UPG, has progressively reduced through the year as we're lapping last year's increases through the commodities.

For the first nine months, our emerging market growth is 8.8%. In Q3, it was significantly lower at 5.9%. And if I just take Latin America, this was particularly low at 5.4%. Now these growth rates partly reflect the slowing markets, but there are also a couple of specifics in the quarter.

There was sales pull forward in Brazil ahead of the SAP implementation that we flagged at Q2. And there was also the impact of a recall that took place in Brazil with our AdeS soy-based drinks business, which is within refreshments.

Now without these, and we're not going to go down the road of one-offs, our growth rate would have been in Latin America closer to 10%.

In the developed world, we've seen a progressive improvement through the year from an underlying sales decline of nearly minus 2% in the first quarter, to minus 3 -- 1.3%, excuse me, in the second quarter, and a decline of only minus 0.3% in Q3; still by no means satisfactory and from a low base, but moving gently in the right direction.

We saw good growth in Q3 in North European countries, and this was indeed helped by better weather. But this was partly offset by lower sales that took place in Southern Europe.

North America declined by 1.9% in the quarter. There was growth, as Paul said, in personal care, but ice cream and foods were down in weak markets, and I'll return to this in a moment.

Let's just look at the development of total turnover in the third quarter. The main theme here is currencies.

Currency movements reduced turnover by 8.5% in the quarter, and by 5% in the first nine months. The devaluation in emerging markets has been widespread, the largest impacts coming from Brazil, India, South Africa, Indonesia, Argentina and Turkey. And these are all countries where we have big businesses.

More recently, many of these currencies have stabilized, or even partly recovered; but who knows?

In addition to this, the euro has strengthened by more than 5% against the dollar compared with the third quarter of last year.

Today, if rates were to stay at this level for the rest of the year, we would expect a drag for the full year to be about 6% on turnover versus the 4.5% that we thought at Q2 at that point in time, and slightly more on earnings.

Disposals reduced turnover by 1% in the third quarter. This is primarily due to the sale of our US frozen foods business and Skippy. The disposal of the Unipro edible oils business in Turkey, small but important, was completed towards the end of the quarter, and this does eliminate the drag effect of this underperforming business in the future.

So all of these disposals are in line with our strategy of existing -- sorry, exiting slower growing, non-core food businesses.

Now let me talk through some of the highlights of our category performance in the third quarter.

Personal care, strong momentum continues. Our personal care business grew 5.8% in the quarter, ahead of our markets, despite a high level of competitive intensity, growth, mainly coming from increased volumes, broad-based, both geographically and across the portfolio. Skin, hair, deodorants and oral all grew volumes in mid single digits.

This healthy growth is supported by a steady stream of successful innovation. More and more of these are offering new benefits which command high prices and so add to gross margin.

Let me give you some examples of personal care innovations. Example one; we've now launched the new Dove Repair Expertise hair care range across Europe, the US, Latin America, South Asia and Japan, and all this in just six months.

In the fourth quarter, we'll be introducing a range of premium retail hair care products into the US under the Toni & Guy brand.

Then there's Lifebuoy Clini-Care 10, the most advanced germ-kill soap, which is doing particularly well in South Africa, as well as India. The Vaseline body sprays which are already driving the brand in North America are now being launched in Europe. And we're also introducing sprays to both Vaseline Men and the St. Ives ranges in the US.

And then there are the new compressed deodorants that we talked about in Q1 in the UK which have already been tried by more than 3 million people and are showing good repeat rates. So consumers clearly see the benefit here of this more sustainable format.

Turning to oral care, the Expert Protection range with microgranules for cleaning in between the teeth, and zinc for fresh breath and healthy gums, brings new health benefits. And then the latest Zhong Hua toothpaste in China, which gives a porcelain white finish, sells at an attractive price premium of around 30%, and this has started well.

Turning to foods; performance held back by spreads. Foods with a stable performance in the quarter continues to be held back by spreads. Here we have seen some improvement, but it is gradual. As we said at Q1, it's going to take time to get spreads back to growth.

As well as continuing to improve taste profiles, we are now starting the job of improving consumer perceptions around naturalness. For example, Flora in the UK received a full makeover in September with a new pack and a new advertising behind the goodness of sunflowers. We will build on this with strong investment in the remainder of the year and similar campaigns in other countries.

Our savory business continues to grow, though at a lower rate this quarter. Knorr, a brand that now has a history of 175 years this year, has good growth from the core bouillon ranges, particularly in emerging markets, and from baking bags growing in double digits. Hellmann's also this year celebrating its 100th anniversary year, has grown steadily.

Let's have a look at some of the innovations in foods. In the US, we have introduced new Simply Delicious Country Crock, with no artificial colors and preservatives, and simple ingredients like canola cedar oil and creamy yogurt. You may have heard of us talk about clean labeling before, but this is an example of how we will be starting to change the way consumers think about the category.

In Germany, we've launched a blend of vegetable oils with butter under the Rama brand. And in savory, we're extending the jelly bouillon's technology to a range of meal makers for local dishes in Russia, while new variants of baking bags are driving good growth in Latin America.

And Hellmann's, as you can see on the chart, has new olive oil and balsamic variants, and a new campaign to encourage more usage of meal leftovers.

Turning to home care; healthy growth driven by volume. In home care, we grew by 6% in the third quarter. While there's less pricing in the quarters, we lacked last year's commodity-led increases, it is encouraging to see continued strong volume growth.

We have strong momentum from market development and premiumization, be it with innovative formats like liquids, or by building usage of fabric conditioners, or with our household care products that meet the needs of an increasingly urban population in emerging markets.

Let's turn to some innovations. The upgraded Dirt is Good detergents with wash boosters gives a great clean in less time, and we've been rolling these out around the world at great speed. South Africa and Indonesia are the latest countries to see this benefit.

Our new concentrated liquid detergents, which we launched here in the UK but also France, have an improved formulation, and a unique pack that includes a combined pre-treatment and dosing device. They will be in six countries by the year end.

Comfort Aromatherapy fabric conditioners with essential oils attract consumers looking for new and, yes, more exciting fragrances.

Turning to Cif and Domestos, these are brands in household cleaning, as you know that are really demonstrating their potential to reach up, down and wide. Cif's superior kitchen and bathroom sprays in Russia and Turkey reach up by appealing to higher income consumers with a better and more convenient clean than traditional gels.

At the same time, you get Domestos, which is reaching down to meet the needs of lower income consumers in places like Indonesia with new pouch packs.

And we are reaching wide by entering white spaces. Example of this is the recent launch of both these brands in Brazil.

Now refreshment; overall a stable performance. Growth at 0.7%. The comparator was a tough one at nearly 7%, but even so, this was a disappointing result and included some quite contrasting performances.

But let me be clear, we remain absolutely confident in the fundamentals of our global ice cream business. We have substantially more scale than anybody else, so important in this category, leading edge technology, and an innovation capability with a very, very strong set of global brands.

In Northern Europe, we actually had very strong growth. This was helped by the good weather that some of you may have felt in July and August.

But in Southern Europe, for those less fortunate, and particularly in Italy which is our largest European ice cream business, we had a poor season. Markets were well down, and this was through a combination of consumers cutting their spend in this largely discretionary category, and just simply the poorer weather than last year.

In the US, we've been reshaping our portfolio; we talked about that in Q2; shedding less profitable, lower-margin businesses, and in the process, we've been losing some share in a very competitive market.

This is the first full year of the turnaround plan for our tea business, and we're pleased to say that we've seen good progress, with a return to solid growth, which continued in Q3.

Lipton Yellow Label is being strengthened by the rollout of the tea essence technology, and there was a good performance by Brooke Bond in South Asia, specifically in India.

And there have been some pretty good innovations. We've launched new variants, including Earl Grey and green tea in Russia. In the US, we introduced Lipton K-Cups, early beginnings, to fill the gap in our portfolio in the rapidly growing machine segment.

As we look ahead, we'll be leading the development of the fast emerging green tea segment in India, and we'll be launching Lipton [Pure and Light] green tea in the Middle East, with Lipton [Clear Green].

We've also had a good set of ice cream innovations this year with revamped Cornetto, Magnum [Pints], 5 Kisses, and [Pink] and [Black] variants, and the launch of Fruttare in the US.

Then there have been some great examples of digital activation in this category. If you take Cornetto micro movies that we mentioned, again last quarter, we've now had around 400 million views, more than 40 million downloads. And we also did a small acquisition, it's called T2, a premium tea business in Australia.

So that completes the third quarter sales review. I'll now hand back to Paul for some perspectives going forward.

Thanks, Jean-Marc, for a comprehensive review. As you see, strong innovations, especially the new ones coming in in the last quarter as well.

Now let's briefly finish by looking forwards. And again, once more, we'll go into more details in the December investor seminar.

First, you've heard me say many times that I'm not a pessimist but a realistic optimist, and realism is needed in this environment. The reality is that the global economy is not in as good a shape as some people would like to make it out.

Short term, we will have to live with some volatility, and perhaps more than we are used to. I also believe that we will have to calibrate our expectations a little bit more as we navigate these choppy waters. I said five years ago that Europe would be in for a long and slow recovery, and that's still the case today.

There is still a widespread fear out there about a whole host of issues. The US domestic tensions surrounding the debt ceiling debate, and the latest fiscal impasse we've seen between the White House and the Republican arm of the Congress; and of course, concerns that the US will not pick up as quickly as expected.

In this country, we bought some time short term, but have not solved the substantial issues there. There's also fear that the Europe's calm that we are seeing is being held together with frankly sticking plastic which could fall off any minute.

And although we again see short-term money inflow in the emerging markets, there is still concern in the emerging world of the consequences of a tapering of US quantitative easing.

Taking a longer-term perspective, the numbers will, however, remain attractive. Global GDP growth rates will return to the 3% to 4% from the current low 2% levels. And that over the next 10 years alone will add 2 billion more consumers to the pool of consumers that have access to our products.

Add to this the opportunities we have to accelerate our presence in white space and adjacencies, and there is no reason why we cannot achieve very attractive long-term growth rates.

In an uncertain world and with increased competitive intensity, we will continue to do the right things for the long term, and not just manage the quarters. We will continue to invest consistently and seek out new growth opportunities. We will invest in capabilities and in the asset bases where needed.

We will continue to invest in our brands to support our strong innovations and where needed to stay competitive against stepped-up promotional activity from our competitors. In fact, we spent an additional EUR200 million in brand support for the first half, and will again over the second half increase our spendings.

Our innovation funnel has never been more robust, with some of this coming to the market, as Jean-Marc explained, in the fourth quarter.

There are also still plenty of growth pockets for us to invest in, be it underdeveloped geographies like Africa, or white space brand introductions, faster-growing channels like e-commerce and drug stores, or selected M&A opportunities. We've done some of this, but have still, frankly, spent too much time defending our territories versus playing an offensive game.

We will also review our strengthened food plans in more detail in December now that we have nearly streamlined our portfolio there. But is clear to me that the slower than expected top line growth and changing external environment also call for some adjustments as we continue to transform this Company.

Believe me that we are taking this as a good warning sign for all of us to stay sharp. Whilst overall share growth is still healthy and we're winning many of the competitive battles, there are also areas where we need to sharpen our plans.

Short term, we will ensure that all our brands stay competitive and that we balance properly the maxing the mix efforts to build gross margin, with keeping the mix affordable in the first place. We have strengthened plans in Europe and the US where needed to achieve this.

We also need to become even faster and more nimble. Our growth over the last few years has partly been driven by us being faster, but we still have more complexity than we need, and frankly than we can afford. And this is slowing us down in this more volatile environment.

We have initiated a program we call Project Half to simplify more of our major processes in the Company. The new enterprise and technology solutions organization, which Jean-Marc is leading, and which is led by Mark Smith, allows us to do this now. We will share in December the details, but it covers many of the major processes from innovation planning, to order to cash, to the SKU rationalization.

And we've also had to accelerate efforts to take further costs out of the system to finance many of these activities. Project Half will help, but further efficiencies need to be sought. It will require in some areas to further upgrade our capabilities as we drive the organization to the next level of performance; whilst in other areas, we can simply reduce layers and duplication of our efforts. Again, December is the time to talk this in more detail.

For now, let me just simply finish by reiterating that we remain on track to meet our objectives. How emerging market conditions will develop remains uncertain, but we do have a lot of experience here. We have been in these markets for many years, as you know, and have seen worse currency devaluations and inflation than we see now.

We know how to run our business in these situations, we know what activities to push, and we know what to do to boost the long-term health of our brands and competitive positions.

With many of the currencies that had devaluated now having stabilized, or even partially recovered, we are expecting more stability in emerging market growth rates; but our experience suggests that it can take a few quarters for the effects of devaluation to work through, and for growth rates to pick up again.

Of course, it remains to be seen what happens this time, and we should be able to give more of a view at the start of next year.

We will be looking for the resumption of modest market growth in developed markets as economies start to [discover], but expect this also to be slow and gradual. We continue to plan on the assumption that competitive intensity will remain high as well.

However in a tough environment, we will continue to deliver against the priorities we set for 2013 at the start of the year. These are profitable growth ahead of our markets, steady and sustainable core operating margin improvement, and strong cash flow.

With that, let's open it up for some questions. Thank you very much.

Okay. So the normal routine applies here. I see we've already got a number of callers on the line. (Operator Instructions). I would just like to ask each of you to make sure that you don't ask more than two, or we simply won't get through all of the callers. And please announce who you are and who you represent when you're called for a question.

Iain Simpson.

Just a few questions from me. Firstly, when you talk about the impact in third quarter, what would be great would be if you could give us some sort of indication as to what percentage of your shortfall versus expectations came from increased competitor action, and what percentage came from weaker EM.

And then a second question, which is the AdeS recall in Brazil. It would be great if you could just give a little bit of color around that and what your expectations for that business are for the fourth quarter, and indeed 2014.

Thank you very much.

Thanks, Iain. It's really one question. But if you look at the -- very briefly without being too granular here, the emerging markets have slowed down by about 2 percentage points, as far as we can see.

If you look at the 9% growth rates more or less that we were on for the 9 months and the 6% growth rates that we see now, you see that reflected. The macroeconomic numbers, by the way, would support that as well.

Our 6%/5.9% growth rates in the emerging markets compares to an IMF estimate at 4.3% to 4.5%; just put that into perspective. And that is, certainly for the shortfall that we're seeing, quite a lot.

The second thing is obviously that these US markets and the European markets, especially the US market, is not picking up as fast as we would have expected, unfortunately. We've had poor performance there, and half of that certainly is due to the market not picking up; food market being down, for example. And probably half of that is due to us taking a little bit longer assessment of the competitive intensity to fully react to that.

The Brazil AdeS information, Jean-Marc actually talked about that. I don't want to go into that much more in detail. You got the numbers from Jean-Marc.

But Brazil, and as a result Latin America because Brazil is such a big part of that, actually suffered in this quarter from both the effects of the AdeS recall, which we obviously regret and apologize for, but also about the swing of the implementation of our global IT systems that we're still rolling out. That obviously resulted in a little bit pre-loading the previous quarter and now less shipments in this quarter.

Those are the three effects that we suffer from. What is exceptional and what is not exceptional, we don't want to go into that granularity. These are the numbers that we have, and that's what we have to live with.

Thank you very much.

Thanks, Iain. Eileen Khoo.

Two questions. The first one is actually on food disposals. You had previously guided to disposals of up to EUR500 million to EUR750 million sales over the medium term, I believe. But this year alone, you've divested about EUR500 million worth. So does this mean you're pretty much where you want to be now in terms of your food portfolio, or can we expect continued ongoing divestments going forward?

And the second thing is just on the Fair & Lovely re-launch in India. It seems that that has not perhaps gone as well as you thought. Perhaps you could give us a bit of color on that.

Thanks very much.

I'll start with the Fair & Lovely little color, because that's a very appropriate Freudian slip on your part.

India, I'll actually be there as of Saturday. I'm flying out there. What has not gone well is not the re-launch. The re-launch is actually going well. What has not gone well was the previous adjustment we made on the product which frankly caused confusion to too many consumers because it also entailed a difference in appearance. Whilst the product was better and tested well, in many of the rural communities, people have not access to the media environment that you are used to in the urban environment.

So when we launched the new Fair & Lovely now a year ago or so, it started increasingly to build confusion amongst that part of the population and we've gone back to a product that more resembles the original Fair & Lovely. That re-launch is currently being rolled out.

I won't go into the results, if I may. I have to apologize for that because India will announce its results I think October 26, by memory. So you will see a lot of the information coming through them. But we're in the midst of that re-launch now, and all I can say is that initial indications are very good.

As you know, we continue to rationalize our food portfolio to make it more attractive and really focus on our five core categories, which are our margarine business, which is starting to pick up bit by bit, and Jean-Marc talked about that; which is our tea business where we see improvements, and now adding T2 to get into the premium side, which is our ice cream business where we are making that more global; and getting into [Impulse], which is our savory business, which you know was basically the core brand being Knorr, and then which is our dressings business with products like Hellmann's.

All these businesses are starting because of that increased focus, and we're talking about EUR20 billion here more or less, are getting increased performance because of that increased focus.

What we continue to look at, and why we say it's about the EUR500 million to EUR700 million that you mentioned, is the peripheral businesses that are not strategic. That's why in the US we divested Wish-Bone, Skippy and the frozen business, and that's why we continue to look at some of these other minor businesses now to get that portfolio totally right.

This quarter, just at the end of this quarter, we actually divested a quite sizeable business called Unipro in Turkey, for example, which was basically a fats business. So there is a little bit of that left still that I keep calling around the EUR500 million, but in a company well over EUR50 billion, that is a fairly reasonable pruning of the portfolio that we don't really need to go through in detail.

And obviously, it's better to announce the sale than to preannounce the intentions because we would severely limit our opportunities to maximize our return for the shareholders if we would do that.

So these are your two questions. Thanks, Eileen.

Pablo Zuanic.

Two questions. (Technical difficulty) margin for the second half (technical difficulty) margin expansion. What does it mean for the second half?

And the second question which is related (technical difficulty).

Okay. Pablo, the second question was very bad. We couldn't understand that. But I'll try to see what you are trying to say there and you'll just have to be satisfied with that.

The first question we did understand, which is margin expansion over the first half versus the second half. Let me first hand that to Jean-Marc and then I'll come back.

Sure. No comment first half versus second half, but as Paul said, our priorities remain sustainable core operating margin improvement for the year.

You should take note of the fact that we have been pruning less margin business within ice cream in North America, as an example. You should be aware that a high priority this year has been maxing the mix that we discussed at our investor conference in Paris last year. And there's been an important drive to increased discipline throughout the year.

And so we're confident in our plans of growth, profitable growth, and making sure that our core operating margin improves in a sustainable basis, including this year.

On the second point, which is I believe the emerging markets, let me first tell you that the business obviously is very much skewed towards home and personal care. And what you've seen in both home and personal care in the results that we published, again, very strong volume growth; home care 5.5%, personal care 4.3% just for the quarter and nearly 6% year to date.

So indeed, what you see is pricing coming off or lapsing year-ago pricing. This performance, by the way, versus all our competitors that we see, is very healthy, and that's why we continue to see our share growth there.

The pricing effect in emerging markets has a little bit of a lag. We saw, for the first time at least in my history being associated with the emerging markets, which is only 30 years, we saw enormous drops in exchange rates in about six or seven markets at the same time, from the real to the rupiah, to the rupee to the rem, and so forth, all at the same time.

Whilst we normally can deal with one or another and compensate that globally, this really came as a shock to the global economy in total. And it really followed the short-term comments at that time by Bernanke in the US.

The second thing is as these markets have adjusted, we obviously have a little bit of a lag effect. But at the same time, some of these emerging markets suffered from governments taking some actions that put further pressure on the consumer.

I take for example Indonesia, which is an important market for us, where the Government abolished significant subsidies and moved fuel prices up. That's an enormous shock. In India, we saw an enormous food price inflation with onions, which is a main staple there, going up 250%.

So currency effects, import price pressures, government adjustment pressures all at the same time, and we're obviously working our way through that. As we work our way through this, we also feel more confident for the quarter ahead of us, because the question is always if this quarter was less than you expected, how do you know that next quarter is better?

Part of that is the innovation program that we have, which is strong over the last quarter; and part of that is the one-offs. But part of it is also the actions that we can take which have a little bit of a lag effect in these emerging markets.

I hope, Pablo, that that was your second question because we could barely hear it. We'll take the next one.

Celine Pannuti.

(Technical difficulty) come back to emerging markets. I understand (technical difficulty). [I just repeated the price by] (technical difficulty) [in some of your competitors] so far. And then the point you are talking about the lag effect, (technical difficulty). But how should we look at price increase in emerging markets to recover [effect] at a time when (technical difficulty) in the past quarters when your pricing was weaker too.

So if you could explain how we should look at the ramp up in pricing there.

My second question is North America. Clearly, surprising, or let's say a disappointment. Can you talk about how the weak situation in North America, and it has [come here] in the fourth quarter, will play out in the fourth quarter as you are talking about a [rebound] for the Group.

Thank you.

Yes. We're not going into the details by region for the fourth quarter because that would be totally inappropriate for a third quarter call, so I apologize for that.

But you are right to come back to the emerging markets, because that happens to be in 30 years' time about 80% of the world's population, and we are treating this still as one little afterthought. So I'm glad that we focus a little bit more on that.

What is happening in these emerging markets is that the speed with which these currencies came down once more is enormous. And at the same time, these government actions that took place in some of these markets was actually quite enormous as well. These are all markets where we have -- basically, we represent the markets.

And much of our growth over the last few years, which has been well above competition, has been because of our ability to develop these markets in a broad range of categories. We're not in just one category or another.

Our oral care for example business actually is very strong and picked up, but we are a total portfolio, so we reflect what happens in these markets across a total portfolio, unlike some of our competitors.

Even if you don't look at our performance now versus our competitors, we don't see that much of a difference, except if you get very excited about 90 days, which we clearly do less than some of you.

The second thing is the North America. In North America, again, we are growing our personal care business. We're actually growing share in personal care, but that share growth has been slowed down by heavy competitive activity.

Because we are growing share, we have taken an approach to see if this irrational activity to some extent would last or not. Otherwise, you take again an enormous amount of value out of the market. But one of the competitors is determined to rebuild their shares in the US at an enormous cost, and that has to be seen long term if that cost is worth it from a shareholder value creation point of view.

We've taken a prudent approach, and as a result on personal care, our growth in the quarter has been less than we originally anticipated as we did not anticipate this enormous activity, especially in categories like hair and deo. Otherwise, you don't see these share movements so quickly.

On the food side, frankly the market in the US in food has been down, and that has not helped us. The market is down, I think from memory, a little bit like 2% or 2.5%, but I don't have the data right in front of me. But that's about what it is down.

And then on top of that, we have delisted some of our SKUs as we focus on maxing the mix. Especially in ice cream this was the case where we stopped the Starbucks selling. We were, as you probably remember, doing the licensing of Starbucks ice cream. We stopped the novelties on Breyers, and we stopped some of the other SKUs which frankly were not contributing to the overall wellbeing of the brand, and that all came together in the quarter.

So the US has to go through this, has to face the blues. They've done that over the 90-day period, and now obviously they're putting the right things in place as we get into the last quarter of the year.

The second part of Celine's emerging market question was about pricing to cover the ForEx weakness and how that would play through.

So just a couple of points. As you know, in terms of hedging, we have a three to six-month policy. Why is it that length? That's basically the time that it takes to either increase or decrease, but mostly increase prices. And so that's the type of time all other things being equal it would actually take to be able to take pricing.

We're not going to make any comments except for the fact that our UPG, as we said in the past, is going to be less in the second half than in the first half.

There are places where we're taking pricing, Celine, in emerging markets. We're doing it in a judicious manner, because again, we have to be sensitive of consumers. But be it Indonesia, Russia, Brazil, in selective places, we're taking pricing. And the pricing in developed markets obviously muted.

When it comes to 2014 we'll give an update in January.

Am I right to believe that the Q4 pickup you are talking about is because there will be a pickup in pricing, or is it rather volume driven?

We don't split the quarter right now. We'll talk that, as Jean-Marc says, early next year.

Thank you.

Robert Jan Vos.

I give you two questions as well. Is it possible to shed some light on (technical difficulty) growth in the quarter? (Technical difficulty) was September weaker than July, or is this growth being spread?

And second question, you already commented in your previous question, but could you like for currencies give some indication of prices (technical difficulty) for the year assuming, base rises?

Thank you.

Yes. The first question, we already have a hard time explaining to you 90 days without the weekends is 76 days. I'm coming on the call because I feel bad as well about the miss that we had versus what we want, so I want to face the blues.

But I'm not going to be even more granular by breaking down the 90 days into 30-day periods, which again without the weekends, is probably even less so. So that is totally useless and I think you shouldn't focus on that.

The second one is on the pricing and the effect of currencies. Jean-Marc if you want to --

I'm not sure if I understood exactly your question, but if it was about a foreign exchange, it's just a good opportunity to reiterate that the impact on top line of foreign exchange this year, as it stands today, minus 6% top line, a little more on the bottom line.

If your question is about the pricing, and the answer that we gave Celine is the answer on pricing. In a quarter, there are a lot of moving parts behind pricing. It could be around promotional activity, it could be actual price increases.

Let me give an example. While commodities for the year low to mid single digit, if you take tea as an example, this is a commodity that is just increasing, and so there we're taking some important price increases in places like North America.

So quite a few moving parts when it comes to the pricing, but I go back to the point in January we'll describe the components of our growth volume versus price.

All right. Thanks.

Martin.

Martin Deboo here. Two questions. First one comes from what Jean-Marc has just said. I just want to reconfirm, Jean-Marc, that your (technical difficulty) to mid single digit, as you just said, which I read as no change for Q2. Could you just confirm that?

And second one, Paul, you made an interesting comment in the intro where I think you said the slowing top line continues to require adjustment [for] business. And I'm just interested in the word adjustment. Is that a reference to the portfolio, the inflation pipeline cost base? Could you clarify?

So on the first point, I can be very short. No change, low to mid single digit. And while you see a very benign commodity environment, when we're talking about increases, we include foreign exchange which obviously had its impact, as well as import tariffs which just continue.

So you take that all into account, low to mid single digit; no change.

You see three things happening that you're obviously trying to juggle with, and here we are just talking a quarter again that you're trying to juggle with in this environment. And the three things are coming together, which makes it a little bit more difficult to navigate exactly on 90-day basis.

But one is slower growth that has come quite quickly in these emerging markets, and we've talked about that. And the other one, as the growth is slower, and by the way not picking up as fast as people had hoped for in these developed markets, the competitive intensity also increases. So you're dealing with slower growth, more competitive intensity and higher volatility.

And as you deal with these factors that are in the -- call it the external environment, you have to continuously look at your business model so you can see where you can sharpen it.

If you look at Unilever over the last few years, obviously, we've become much stronger. Otherwise, we wouldn't put in a quarter again that is a good quarter for us as where the market growth is, or a year that is ahead of the market growth, whilst at the same time doing operating margin improvements.

Our innovations are stronger, the Company is more agile, we are winning more [medals] than not; all these other things. But at the same time, you have to be looking ahead a little bit.

So where we need to continue to make the adjustments, as indeed in our operating model, not abandoning the compass, not abandoning the Unilever sustainable living plan, not continuously challenging ourselves to put the innovations higher. We are putting more emphasis now on margin accretiveness of these innovations.

Obviously, that compromises a little bit the top line versus just going for volumes. We're looking again significantly at our cost base and simplicity in the organization to move faster and become more agile. And we will always look at our portfolio to see what makes sense and what doesn't make sense.

More details of what we are planning to do, moving forward as the next step to lift this Company to the next level, we really will talk in the December investor seminar. So we don't want to really use the time, the precious time that we now have for that.

Thank you, Martin. Harold Thompson.

I've got two questions. The first one is on hair. You clearly flag in the release that that business unit has been performing strongly. Last year, we got some big successes in terms of the TRESemme launches into Brazil, the [Folaprin] in North America. You say that Clear is going pretty well.

So can you maybe just give us some update on how the hair business is performing in the markets where you had already launched this time last year? So it's not just launch and [incitement], there is actually a good follow through in terms of success.

The second question is on, again, emerging markets. Paul, you say 30 years in the industry there. How do local players which remain very large in emerging markets tend to behave in periods of flux, like ahead of some price increases because of input related currency devaluations? How has that played out in the past, and how do you think about them when you're trying to implement your own strategy?

Thank you.

Thanks, Harold. Both questions are appreciated.

On hair, we're actually very pleased. One of our best performing brands is obviously Dove, not to go into the details. But we have the Dove repair expertise, for example, as a line. We have a very strong competitive base, obviously. One competitor keeps trying to come back with re-launch after re-launch, and that is closer position to Dove.

But Dove as a brand keeps growing. This is a category that grows more than the single digits consistently and is building a share globally nicely.

So we are on a good momentum in hair; a credit to all the people in the hair category. The Toni & Guy expansion now also in some other places, the US being one of them. The expansions of -- upgrades of some of our other products in our hair care line are performing well. So this category is actually hitting the marks, I think, in most places.

In the US, again, coming in from a position that was number 2 or number 3 only four or five years ago. And to hold on to category leadership, despite enormous competitive attacks shows you the robustness of that portfolio.

Clear, one of the other brands very important to us, is one of our fastest growing brands in the Unilever portfolio, and continues to be.

So we think there are some challenges, but we think that the category is doing well. I just came back from Japan, Harold, and the re-launch that we've done there on Lux is really impressive. And I know that's a very volatile environment if you talk about volatility behind innovations, but we're getting good pickup. And Michel and his team that run hair should get a lot of kudos. They get it from me, but there's nothing wrong with acknowledging that publicly as well.

In the emerging markets, which is indeed also always the challenge, we talk about currencies and dealing with currencies, but you also have local competitors. They are often less foreign currency based than we are, and before we do these pricing things, just like drunken sailors, we also have to be sure that our brands stay competitive. So there is always pressure on the bottom end of the market.

Take India, for example, also, which is a good example, you've also seen one of our American based competitors that reported, reporting enormous losses. So enormous spendings are coming in. And pricing, we looked, and some local competitors are something we always deal with.

That's why it's important when we do these price increases in these markets that we put things in place that are smart, and that takes a little bit of time. For example, we might be moving to a refill bag, or we might be moving to a slightly smaller dosing in pouches, in the small pouches.

Often in these countries, they have currencies that limit them, coins that limit price increases. You cannot go from INR1 to INR1.2 because they don't exist. So pricing needs to be done in these countries by reducing slightly the milliliters that are in one of these little sachets.

So all these things take time and you work your way through that. Not new from what we know from our long history on how to do, but if that happens in seven/eight of our key markets at the same time, there's a little bit of a bigger effect on our numbers than there normally would be. And that's what we're trying to explain to everybody patiently.

So thanks, Harold, for giving us the opportunity to explain that once more.

Jeff Stent.

Jeff Stent, Exane. Just a quick question on the maxing the mix initiative. You highlighted at H1 that you were going to better balance top line growth with gross margin. And I'm just wondering, obviously, the market slowdown is a big factor here, but is there a bit of a tension between these two? Are people maybe being not quite as clever on pricing as they should be because they are trying to hit gross margin targets, etc? Any thoughts on that would be appreciated.

Thanks.

No. But just a big macro thought on this is that as you try to max the mix, first of all, I want to stress again that that is extremely important. We already started showing at the end of last year when we reported, and all the reporting that we've done until now was the numbers that you have seen on our P&L reporting, that we are moving the maxing the mix forward. That is a reflection of the strength of our innovations, which ideally should be carrying the maxing the mix, and some smart choices about channels or SKUs.

It's very important that we do this, and you should actually insist that we do this, because that provides the longer-term fuel to get to the consistency of operating margin expansion that we're starting to show now.

This is actually the first time. And I can say this year we will try to do this again, but we will talk when the year is finished. This will be the fifth year in a row of consistency of top and bottom line growth. That to us is far more important.

So obviously, as you balance a little bit in markets the maxing the mix, there is more pressure on top line growth. You cannot by focusing on maxing the mix expect that you accelerate the top line growth as well. You have to be realistic.

And a good example is what we pointed out is the discontinuation of some of these SKUs in the US. Now we could have not done it this quarter and shown a little bit better numbers and have less to explain, but that's why we keep saying we don't run it on a quarterly basis. And it's better to do these things right and get the long term benefits from that than getting very excited about 90-day periods.

But this is what our organization always tries to balance. There's no doubt about this. And we don't get it always right. I want to be very clear there. But broadly, on our maxing the mix efforts, I am very pleased, and the numbers support that. And hopefully, we can share with you more numbers when we talk the full-year results.

Thank you. Just one brief one. Are people being targeted on gross margin?

Right now, on our compensation system, no, because we haven't changed that, if I may be 100% honest. They are, obviously, on core operating margin. But there is one thing that we do, Jeff, which is the quality of results.

For example, in our system, which was in the past the case, and you rightfully accused us of that, of using A&P as a balancing item. I think we're now firmly out of those discussions, that A&P is not a balancing item any more. But it's not in people's results. It's because we look at the quality of results. So the system now understands you can't just cut A&P to make your results work.

So although they get compensated for core operating margin, the key engine to arrive at these results is to improve your gross margin.

Thank you.

I think we're starting to draw towards the end, but maybe time for another couple of questions, if the guys have got the time.

[Marco Hooper].

A follow-up question basically on the refreshments category. Can you update us on how tea actually within the category is doing? Is that already turning more positive?

And sorry to ask another question on emerging markets and related to the currency impact. Can we say that Unilever in the past has more or less been trying to protect margins first in order to protect volumes second? Is that still the case, or has that changed over time?

Thank you.

Why don't we have Jean-Marc start with the second? You want to start with that?

Sure. I can take both or either. Let me start then with refreshments. Your question is specifically on tea.

We are seeing good performance on tea. I mentioned Brooke Bond as just one example in India, but we also have some pretty good innovations taking place.

Now let me just iterate that some of the innovations are early days. An example of that is K-Cup in the US. But we are really starting to get on to our front foot in terms of innovations launching in the marketplace.

We have in emerging markets some very good performances in places like Egypt, Nigeria and Turkey. So around Lipton specifically, things are going actually quite well.

So the growth continues in the third quarter like it was in Q1/Q2. And as you know, there is a little bit of a turnaround story in our tea business. But there is more that we can do within tea.

If you just go back to currencies, your second question in terms of margin and volume, let me if I may just start off with what we're going to do is what's right for the consumer in the local marketplace.

So as Paul was mentioning in terms of pricing, we take the overall consumer health into account. We take into account the local players in the marketplace, as well as the global players, because at the end of the day, we're going to make the right decisions to be competitive in the marketplace.

So it's not just a question about margin or volume. There are many different levers that are important.

Now volume is obviously very important for us. It represents the health of our business growing, and we do not want to price ourselves out of the market. And volume is profitable as you drive scale and the like, and then you can get margin.

And again, that's where maxing the mix plays an important role. So if you get good volume, you do pricing which is disciplined in the local marketplace, drive maxing the mix, you can get the volume as well as the margin.

It's a bit the point that Jeff is actually raising. What we're trying to do this year is grow, grow profitably, and demonstrate a good performance on the top and bottom line.

Thank you. Very clear.

One last from Jon Cox, and then the rest we'll take in the IR team afterwards, so apologies to those who we haven't got to.

Jon Cox, Kepler Cheuvreux. Just a couple of follow-up questions. Just on the overall portfolio, Paul, just to put it into context, you've been in the job now five years. You've done a lot of streamlining of the portfolio in terms of the food angle while boosting the HPC side of things. And I'm wondering what you're talking about there about you'd rather announce sales rather than pre-announce intentions.

And again, maybe looking at the overall portfolio, should we expect some sort of major transformational change in the portfolio given the fact that you've spent four years or five years trying to turn around that food business?

That's my first question.

Just on the second question, just about North America. I'm just wondering what you think in terms of the recovery there, because minus 2% organic in Q3 looks a bit worrying. I can see there's some one-offs. Should we expect that to stabilize around zero in Q4, or do you think it's going to go on for a couple more quarters?

Thank you.

Yes, thanks, Jon. So very briefly, we indeed have done a major portfolio management over the last five years, and [it has served] as well. And we were just going through that with the Board, and without bothering you with the statistics, our M&A activities have paid out very well; and, obviously, our divestitures have also served us well. We continue to look at that.

Our food business is accelerating its footprint in the emerging markets and we see a pickup as a result of that, especially our core savory business. And our performance actually is very competitive with what we see as our key competitor there.

And he same thing on our refreshment business. Our tea business is picking up period after period. We don't look at it at 90 days, but if you take six months' trends, you clearly see that as well, and we are very confident there.

Obviously, the total business, food and refreshments, including home and personal care, has given us good results. We always talk about the spreads business, which is now 7% of our total portfolio. Yes, that's a business we inherited and we're trying to make it work.

We look at all options all the time, and the most attractive option is to continue to make it work. It gives an enormous amount of cash flow to us that has allowed us to get these enormous results in these emerging markets, and we'll continue to do so.

But we have to continuously look at all of our businesses, and we are doing that. Don't be worried that that is not the case. I think the portfolio is getting healthier, but we do require from all of our brands in the portfolio to put the performance in. And sometimes it takes a little bit longer than what we would have liked to see, but the alternative to run away from everything is a losing company that ends up with nothing.

So on some of these things, we will fight, and we will fight a little bit longer to turn these things around, and people are well aware of that.

So I feel very good about how we move this forward. And be not too theoretical; this is the portfolio that we have, and that's what we need to make work, and it has ample opportunity to that.

In the US, indeed, a little bit disappointing. I think it's disappointing how the US is working on a macro economical level right now. And, frankly, that depresses some of these markets.

If you really look at -- the food market was minus 2.5% in the US and retailers are complaining about that as well. In fact, it was minus 2.9%. I look at that. So this market itself has been very, very disappointing to all of us, and I have not seen the US with a minus 3% market.

And then within the market, there are also some dynamics. And whilst our PC business is growing, whilst the PC market is slightly up, it's a very healthy business for us, the food market is disappointing. And we are obviously looking at all of it and how we can re-inject some growth into that market again.

I think we're hitting the dip in quarter 3 is my best estimate, but I am unfortunately not as intelligent to be exactly able to predict to you what the fourth quarter is. Otherwise I wouldn't be sitting here either explaining a slightly disappointing third quarter.

So I have to be realistic there, but I think and I hope that we've seen the dip in the third quarter. So let's see if that is true when we report the full-year results.

So with that -- so, Jon, I appreciate that.

Thank you.

With this, let me just conclude. Again, thanks again for joining us. There is definitely some slower growth that we have to deal with, and we've explained that. There are also some one-offs that we have explained. And then there is some competitive activity that we deal with.

I think overall it's still healthy. If we look at our like-for-like growth in our categories versus our competitors, we still think that we are competitive with our growth. It's also translated in our shares where we see the bulk of our shares still in the positive territory.

But we are also taking this slowdown very, very seriously; rest on assured on that. We look at all the options that we have to continue to move this business to higher levels, just like we've done in the last five years. And this is actually a very good result in that sense that it provides more energy in the Company to accelerate some of the things even faster than they otherwise would have done. So we take this as it is and try to leverage that to the maximum.

I certainly look forward to explaining to you a little bit more in detail what that actually means in December. I understand your anxiety. I understand you want now to see the shipments by month and some of you by week and some of you by day. The suggestion I have for those people is see if you should apply for Unilever because that's the only way that you can get those data. But other than that, you have to deal with the bigger picture.

I appreciate your support and I look forward to our next conversations in December.

Thank you very much.

Ladies and gentlemen, this conference has been recorded. Details of the replay may be found and access code can be found on Unilever's website. An audio webcast will also be available on Unilever's website, www.unilever.com, and on the investor relations app.