聯合利華 (UL) 2017 Q2 法說會逐字稿

We're about to hand the call over to Unilever to begin the conference call. (Operator Instructions)

We will now hand over to Andrew Stephen.

And welcome to Unilever's Half Year Results Presentation, which will be given in the usual way by Paul and Graeme. Paul will give the headlines of the first half performance and talk about connected -- how Connected 4 Growth is building more agility and resilience into our business. Graeme will cover the results in a bit more detail, and Paul will wrap up. We'll leave plenty of time for Q&A.

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

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

Well, thank you, Andrew, and good morning, everybody. The first half results demonstrate again good progress against the objectives we have set out. We are building on the past 8 years of consistent and competitive growth in both top and bottom line and the investments we've made over this time consistently.

The Connected 4 Growth program, which we announced last year, is now accelerating this performance. It is making Unilever simpler, more agile and more connected. It means we can bring better innovations to market faster, both globally and indeed at local level. This is driving continued growth ahead of our markets, which we see as the best way of delivering long-term shareholder value.

At the same time, the savings programs, which are an integral part of Connected 4 Growth, enable us to accelerate our margin expansion. The savings programs are delivering faster than planned, allowing for a higher level of reinvestment going forward.

In essence, our business model is one of investment-led growth ahead of the market. It is a model of delivering compounded returns on investment for shareholders. This is evidenced by sustainable, attractive and growing dividends over the long term.

Before we look at the results for the first half, let's start with the market context. And as you will expect, it's a mixed picture. For the time being, our markets are still subdued, growing at only above 2% in total. Looking ahead, there are some positive signals at the macroeconomic level. Whilst there are a few notable exceptions like Turkey or Egypt, currencies in emerging markets have mostly been stable or even, in some cases, strengthening.

In the short term, we are seeing the benefit of this in the positive currency effect on our first half results. More importantly, though, over this time, we should relieve some of the pressure on the billions of people who have had disposable income squeezed by these higher costs. It will take a while for this to work through to the improved demand for our categories, but in due course, we should see the return to healthy growth rates in emerging markets, which, as you will agree with me, is now well overdue.

In the short term, there have been some significant disruptions in a number of markets. Political uncertainty is high in several countries, which is hampering their recoveries. This is particularly so in Brazil, where the trade has reacted to a contracting demand by reducing stock. In India, the welcomed introduction of the new goods and services tax prompted distributors and wholesalers to cut back their stock during the transition period. And in Indonesia, we've seen changes in the festive calendar that led to a few less shipping days.

Volatility such as this are likely to be the norm for the time being. This is exactly why Connected 4 Growth is landing not a day too soon. It makes our business more resilient and better able to continue to deliver profitable growth despite these challenging market conditions.

With that context, let's first turn to the results for the first half of the year. Underlying sales growth grew 3%, which was again ahead of our markets. All of our categories and all of our subcategories, except for spreads, showed growth. Excluding spreads, underlying sales growth was 3.4%.

Our savings programs are running ahead of plan as we have accelerated key initiatives of what we call now 5-S in the supply chain, ZBB and the Connected 4 Growth organizational changes. Together, they're actually delivering more than EUR 1 billion of savings in the first half of the year alone.

Underlying operating margin was up by 180 basis points after a reinvestment of about half of the gross savings generated. The accelerated delivery of savings will allow a higher level of reinvestment, particularly in brands and marketing in the second half of the year. This will support an innovation plan, which is somewhat back-weighted this year, particularly in Personal Care.

If you look at underlying earnings per share, they grew at a strong 14%. Free cash flow at EUR 1.4 billion was EUR 600 million higher than in the first half of last year, even after a one-off injection of EUR 600 million into our pension fund.

Sustained, competitive growth obviously depends on the quality of our brands and innovations. The Connected 4 Growth program once more is a key enabler here. The new country category business teams, or CCBTs as we now call them, are all fully up and running. They are cross-functional teams charged with the delivery of business results. They take the innovations from the global team and land them in the marketplace. But they are also now empowered and provided with resources to develop local innovations with speed without going through the lengthy process of internal approvals from global teams.

In a nutshell, this means that we can both be more global and more local. This gives us more frontline focus, with more of our resources and activities closer to the market where customers live and where trends all develop from. Where these trends have regional or global relevance, the global category teams develop interfaces, but in a more focused way so that we can scale them faster. So far this year, we've actually reduced the number of global projects by around 10%, but at the same time increased the average size of those projects by over 20%. Meanwhile, the local teams, empowered and provided with resources to develop local innovations with speed, have increased the number of local launches by 25% already this year alone.

We have just completed detailed reviews with each of our categories and clusters as part of our strategy reviews, and it is clear that our innovation plans have never been stronger. Our global innovations have more differentiated technologies. We're also starting to step up again our expansions into white spaces, and we are now more agile and better able to meet the local trends more quickly.

Let's just look at a few examples of what is already landing in the marketplace. I don't think it's an exaggeration to say that our new Persil Powergems represents the kind of innovation that comes once in a decade. It's the first laundry detergent made with 100% active ingredients that makes it twice as concentrated as a powder with less chemicals to get the triple power of stain removal, care and freshness.

Signal Enamel Repair toothpaste takes our unique new mineral technology, which we originally introduced at a superpremium price point in a product called REGENERATE, and it applies it now for the first time to one of our mass brands at a very affordable price.

And then you have Magnum Double, I know we all like that one, using double-dipping technology to create a sensuous double layer that now includes new raspberry and coconut flavors.

All of our categories are planning significant whitespace expansions, too. Whilst I won't share the details of our future plans, as you can understand, you can see here a few examples of launches which are actually happening now. The Hijab Fresh is an example of an entirely new brand. Now launched in Indonesia, it provides a solution to the specific needs of Muslim consumers brought to life in a very local way.

You have Baby Dove; it's an example of entering a new segment. It was first introduced in Brazil 3 years ago and is now in 19 markets, with the U.S. and the U.K. amongst the most recent launches.

We're also just now introducing Omo into Iran, an example of taking one of our established brands into a new country.

And we continue to extend acquired brands as well. Examples would be TRESemmé that has just entered 25 new markets since we acquired it 7 years ago and actually is now entering China. Dermalogica would be another one that is entering China. We're also introducing Grom ice cream into the in-home market for the first time, an example, in this case, of entering a new channel.

Here, you can see a few examples of the many initiatives in the markets that show you the greater local agility for the Connected 4 Growth program and what that is really bringing to us. Take Lux Botanifique, developed by the local team. It takes Lux into the premium natural segment in Japan, already available online and the full launch is next month. Or take Breyers Delight in the U.S., low in calories, high in proteins and priced as a superpremium brand, launched at an accelerated pace to hit the summer season in the U.S.

In Thailand, the country ended a year-long mourning period following the death of their beloved king. And within 2 months, our local CCBTs had launched a new laundry detergent to help people wash the black clothes that they are now wearing.

In Italy, the local foods team introduced a natural liquids bouillon under the Knorr brand, taking the idea to launch in just 4 months, working with third parties to develop and manufacture it.

In another example, from Italy, the Home Care CCBT launched a combined spray and mousse under the Cif brand, responding rapidly to local competitive developments, working closely with the global team on the digital advertising.

And finally, Dove Sakura, a seasonal limited edition in China, taken from idea to launch in just 5 months. This is a different Unilever. And as I say, these are just a few examples.

Alongside innovation, we've been developing our portfolio through M&A as well. Acquisition can often be faster and more secure routes to developing a new segment or channel than doing it organically. Recent acquisitions like Dollar Shave Club, Seventh Generation, Blue Air, Sir Kensington's, Living Proof and Hourglass are all examples of this.

The other kind of acquisition consolidates strengths and scale in our core categories and unlocks access to substantial cost and revenue synergies. A good example is the acquisition of Quala's home and personal care brands in North Latin America, which we announced in May.

We will continue to target both kinds of acquisitions, those that extend our presence in new categories, segments or channels and those that bring scale and synergy. And we will continue to do so across our portfolio in Personal Care, Home Care and Food and Refreshments.

As well as having a good strategic fit, acquisitions must meet our strict financial criteria, and I think we have a good discipline and, certainly, track record of delivery. A review of the acquisitions we made between 2009 and 2015 showed that well over 80% of the investments we've made is either in line with or ahead of the original business case. Furthermore, recent acquisitions, those made during the last 12 months, it's obviously too early to make a full financial assessment, but I'm also encouraged to see them grow and grow in the aggregate at more than 20% in the first half year. These will start to contribute to underlying sales growth as we, obviously, anniversary them.

The final aspect of Connected 4 Growth that I want to talk about is how we are building our presence in new channels. Some of this is through acquisition, as I've just described, and some of it is organic. It's an important change because we see disruptions everywhere around us, be it in the rapidly growing e-commerce channel or the simultaneous growth of both discounters and premium drugstores or in how and where our people choose to spend their money on treating themselves with more impulse purchases.

In e-commerce, we now have over 600 people developing our capabilities across the many different models, grocery.com, pure play or direct-to-consumer. And we're introducing more products and formats that are specifically designed for the online sales channel.

Our sales through drugstores have been growing at twice the rate of our Personal Care business over the last few years. This has been helped by partnerships with key retailers, channel-specific innovations like [IUs] and our net revenue management program to get the right assortment and price points.

Our entrance into Prestige has also helped us to build scale and specialized beauty stores like Sephora or ULTA Beauty. We now have 1,300 stores for our ice cream and tea brands, and they are growing around 15% to 20% per annum and helping to build our brands' equities and so underpin our growth of our refreshment unit.

With that, let me hand over to Graeme to take us through the results in more detail for the first half of the year. Graeme?

Thank you, Paul. Good morning, everyone. Let's start with the first half year performance by category.

All the categories grew, and all of them delivered a significant step up in margin. Personal Care grew 2.6%, with volumes flat. This was against the relatively strong comparator of 5.7% in the first half of last year, which was largely from volume. Our 3 biggest Personal Care brands: Dove, Rexona and Lux; and our largest brand in Prestige, which is Dermalogica, all grew in mid-single digits. However, the trade disruptions taking place in Brazil, India and Indonesia have particularly affected volumes in Personal Care. And it's also in Personal Care that we see the innovation and marketing plan for the year to be most back-weighted. We therefore expect a significant step up in brand and marketing investment in the second half and an acceleration of volumes.

Home Care grew by 3.3%, with volume up by just under 1%. Comfort fabric conditioners continue to grow strongly. And in Brazil, our value brand, Brilhante, is benefiting from consumer down-trading. Foods grew by 0.6%, with volume down 1.7%. Excluding spreads, which declined by 3.7%, underlying sales for Foods were up by 2%. Knorr, our largest brand, grew at 4%, driven by strong growth for cooking products in the emerging markets. This was partly offset by a decline in some of our noncore brands, such as pot noodles in Europe.

Refreshment grew by 6.1%. Ice cream was up 7%, driven by innovation behind brands like Ben & Jerry's and Magnum. We've had another strong start to the season in Europe after a good season last year. Tea grew by 5%, driven by the specialty teas, which we've been building within our portfolio. There was a drag to the overall Refreshment growth from the decline in Ades, but this will come out in the numbers in the second half as we completed the disposal at the end of the first quarter.

Looking now at our underlying sales growth for the first half year by region. Asia/AMET/RUB grew at 5.5%, with volumes up 0.8%. Very unusually for this region, volumes in the second quarter were actually down by 0.6%. Now, this was heavily influenced by the fewer shipping days in Indonesia and the trade destocking in the transition to the new goods and services tax in India. Our experienced Indian team have managed through the GST transition very effectively indeed, and we expect to recover that volume shortfall in the second half.

China returned to good growth in the first half year, driven by rapid expansion in the e-commerce channel.

Our businesses in Latin America again demonstrated their resilience, with growth of 5% and volumes down by only 1% despite the sharp market contraction and trade destocking in Brazil. Mexico, in particular, delivered a very strong volume-driven performance.

In North America, we grew by 0.3%, with volume down 0.2%. Excluding spreads, the region grew by 0.9%, and volume was up 0.3%. Here, also, growth was led by the fast-emerging e-commerce channel where our sales were up by 50%.

In Europe, underlying sales were down 0.8% and volume down by 0.6%. Excluding spreads, both underlying sales and volumes were slightly positive. Consumer demand is still weak in Europe, and the retail environment is challenging in much of the region, but we are seeing good momentum in Central and Eastern Europe and in Spain.

Overall then, underlying sales growth was 3% for the first half all from price. And over the remainder of the year, we expect an acceleration of our volume growth. At the same time, we expect price growth to moderate. There are 2 reasons for this. First of all, a little less pressure from commodity cost increases in the second half; and secondly, tax benefits from the introduction of GST in India will be passed on to consumers with an impact at the global Unilever level of around 20 to 30 basis points on price in the second half.

M&A increased turnover by 0.8%, largely through the acquisitions of Dollar Shave Club, Blue Air and Seventh Generation, and partly offset by the disposal of Ades at the end of the first quarter.

Currency translation increased turnover by 1.7%. This comes from stronger currencies in a number of emerging markets. A positive effect from the stronger U.S. dollar was almost exactly balanced by the weaker pound sterling. If exchange rates were to stay as they are today, we would expect a full-year benefit of around 1% on turnover and around 2% on EPS.

Now let's look at the drivers of the improvement in underlying operating margin, starting with an update on our savings programs, which are delivering faster than planned and realized more than EUR 1 billion already in the first half year. This is a strong start towards our total target of EUR 6 billion over the 3 years to 2019.

In the supply chain, we delivered more than EUR 500 million of savings in the first half year. This includes the 5-S program, which we first launched in Home Care where it has delivered excellent results. We are now rolling the program out across the other categories.

5-S looks at the business more broadly than traditional savings programs. In addition to the usual areas, it brings, for example, savings through simplification. In laundry, we reduced the number of powder formulations by 65% and the number of liquids formulations by 35%. Working closely with strategic partners contributes to both innovation and cost reduction. New developments in packaging technologies, alternative active ingredients or the move to new weight-efficient materials have significantly reduced costs, all of that without compromising our focus on winning products.

We are now making greater use of e-auctions for many of our purchases, and this is beginning to generate a lot of value. And the forensic look at the cost incurred versus the value that the consumer is willing to pay for demonstrates to us further opportunities for cost reduction, while continuing to win with consumers.

In brand and marketing investment, we have delivered more than EUR 300 million of savings through Zero Based Budgeting. ZBB is helping us to reduce wasted investment, to drive efficiencies and to improve effectiveness. Let me give you just a few examples. Our analysis shows that we were producing too many new pieces of advertising. More than 95% of our advertising films were being replaced before they had reached their maximum effectiveness. Now this created a lot of wasted work, both internally and for our agencies. And by managing this better and running films for longer, we -- our spend is down in agencies by about 17% in the first half. At the same time, by looking more closely and creatively at the costs associated with producing a new asset, we find savings opportunities, so we're now using a wider set of production houses and some lower-cost locations. This has helped us to reduce average cost per film by 14%.

We've also tightened our disciplines around media planning. Let me give you just one example from Southeast Asia where we had a tendency to overexpose people to our advertising beyond the point of diminishing returns. Here, we've been able to reduce our media spend by 12% by focusing on the quality of our advertising reach.

Across our ZBB program, we have set clear operational KPIs, not just to track delivery of the savings themselves, but also to ensure that we are delivering the underlying operating improvements in a healthy way, which is compatible with continued competitive growth.

In overheads, where the savings are around EUR 200 million, we also see the benefit of ZBB. To take just one small example, the number of airline flights is down by 30%, and the average cost per flight is down by 24%. In addition, the new Connected 4 Growth organization has enabled us to reduce middle and senior management headcount by 13%. And integration of Foods and Refreshment into a single team will allow us to unlock substantial further savings.

So let's see how this is reflected in our margin development. Underlying operating margin increased by 180 basis points. Gross margin was up by 40 basis points. The supply chain savings of more than EUR 500 million have largely been reinvested as the price increase of 3% was below the pricing that would have been needed to offset commodity cost increases in the first half. These increased by mid- to high single digits in local currencies. As we've communicated before, we expect a lower level of commodity cost inflation in the second half when we'll be looking to retain more of our savings as well as taking less pricing.

Brand and marketing investment was lower than last year by 130 basis points. There are 2 main reasons for this. Firstly, the strong and fast delivery of savings and productivity gains from ZBB; and secondly, a back half-weighted innovation plan this year, particularly in Personal Care, as we focused on getting the new CCBTs fully up and running in the first half. With the planned step-up in the second half, we expect brand and marketing investment in absolute terms to be maintained at or around last year's levels.

Our overheads improved by 10 basis points. The benefits from the savings programs have been largely offset, but the higher overheads mix associated with the new business models we're developing and acquiring to strengthen our position in direct-to-consumer e-commerce and with retail-led brands, for example.

Underlying earnings per share increased by 14.4%. Operational performance, which is the combination of growth and margin, contributed 16.9%. We lapped a one-off gain last year on our investment in some products, which more than offset increased income from our Pepsi Lipton joint venture to give a drag of 1.7%.

Our underlying tax rate was higher this year at 27.9%, compared with 26.1% last year. We expect the rate for the full year to be in line with our medium-term guidance of around 27%. There was a small gain from share buybacks, representing the impact since the program began in May. And currency movements had a favorable impact of 2.6%.

Free cash flow was EUR 1.4 billion. That's an increase of EUR 600 million on the first half of last year. This result was achieved despite a one-off injection of EUR 600 million into our pension funds, which we flagged with the first quarter's trading update. We continue to apply rigor and discipline to our management of working capital, and our moving annual average stocks have reduced by a further 2 days over last year. Capital expenditure continues to trend down following the earlier phase of reinvestment, and we expect it to be around 3% of sales for the full year, in line with our longer-term guidance.

Our net debt increased from EUR 12.6 billion at the end of last year to EUR 13.8 billion. This includes the effect of EUR 1.4 billion of share buybacks completed between the start of May and the end of June. We're well on track to complete the EUR 5 billion share buyback program by the end of the year. And finally, our net pension deficit halved to EUR 1.6 billion as a result of both the cash injection and strong investment returns.

And with that, let me hand back to Paul.

Well, thanks, Graeme. So let's wrap up for the interest of time. As you have seen, the accelerated Connected 4 Growth program, which started in the fall of 2016, is actually working well for us. As Graeme has just shown you, we are running faster than planned with our savings programs as well as our margin delivery. But fundamentally, Connected 4 Growth is about securing long-term profitable growth through impactful innovations and local agility.

With the new organization now fully up and running, including the local CCBTs and more focused global category teams, we have a strong innovation plan for the second half of the year. You can just see a few examples of that on this chart that I won't go into for the interest of time. We will be supporting these with a significant step up in brand and marketing investment in the remainder of the year, and expect to see an acceleration of our volumes.

We continue to expect underlying sales growth in the 3% to 5% range for 2017. We now also expect underlying operating margin to be up by at least 100 basis points, an upgrade to our previous guidance. And we expect another year of strong cash flow.

And with that, let me open it up, Andrew, if I may, to questions.

Thank you, Paul. (Operator Instructions) So I see our first question is from Warren Ackerman of Societe Generale. Warren, please go ahead.

It's Warren Ackerman here at SocGen. Two questions actually, both on volume. The first one is a bigger picture question for Paul on volume. Paul, I remember when you first started back in 2009, you talked about getting volume growth up to global GDP growth. That was one of your key priorities. I mean, it seems to me that that hasn't really come through in recent years. If I look at last year, global GDP growth was north of 3%, but your volumes were less than 1%. I know there are reasons, but my question, really, big picture, is are you kind of disappointed by your volume performance? And should we be concerned about the impact of lower media spend on volumes going forward? And then specifically for Graeme, second question on volume. Can you isolate, Graeme, the impact from less trading days in Indonesia? Maybe also kind of tell us what volumes did in Brazil in Q2. I think Q1 Brazilian volumes were down 10%.

Thanks, Warren. I appreciate both questions. The -- obviously, our model continues to be an investment-led growth model. You've seen our significant increase in brand spend over the last 9 years. I think, cumulatively, we've added about EUR 12 billion to our brand spend to strengthen our brands. So those are significant investments, and we continue to do that. What you see over the first 6 months is a small adjustment in brand spend really related to phasings, our savings programs and maintaining a competitiveness in a market where we see lots of our competitors slightly coming down. We again flagged that, for the total year, our BMI will be flat. So I don't see that we are underspending in media, I don't get any indication on that one. On the volume side, specifically, there is a component, obviously, of spreads I can take out. And you see some of the volume coming through. We expect the second half of the year to have a positive volume component. But there is no doubt in my mind that longer term, we need to have more volume in this market as we grow our -- as we continue to grow our business. And as I said, I have no doubt either that that actually will be coming with the plans that we have put in place over the second half already, and you'll see that. There are some components that Graeme will go a little bit more in detail in the first half that have cost us the volume a little bit more, and I'll let him answer that. But let me take a little bit of our longer-term view and give you the macro picture. What we unfortunately have had to deal with, despite growing our business from EUR 38 billion to now about EUR 55 billion, despite continuing to grow at twice the market rate and ahead of our competitors, we have had one headwind that has consistently stuck with us, which is really in the emerging markets, where, since the financial crisis, interest rates, currencies, et cetera, we've had a prolonged period of about 8, 9 years now where we have seen significant weakening of emerging market currencies, for which, unfortunately, we have to price as many of that is being imported. And as we price for that, we have seen in these countries that rates-related increases or productivity-related increases were actually trailing the pricing that we had to do on our products, and the markets have been subdued. So despite seeing in this 6 months, for example, a 5.5% increase in the emerging markets, you actually see the volume components of these emerging markets continuing to be very, very low, whilst historically, it was all volume-driven growth. I am convinced that, that is coming back now. We're starting to see these currencies stabilizing. We're starting to see the effects of our pricing that is needed being more tempered now, and we're starting to see already in some markets the volume components coming back. That's obviously a very big part of the total that we're producing as overall numbers. So I'll let Graeme give a little bit more granularity on Indonesia because I just came from there, and perhaps India as well, you might just do the 2.

I will, Paul, yes. I mean, just to pick up from where you left off there. Warren, the -- as Paul said, our volumes have actually been improving sequentially over the last 3 or 4 quarters. And I know they're flat in this quarter, but there's no volume growth in the market, but there is a sequential improvement. And that's despite the 3 markets that we've called out specifically, and it's worth drilling into them a little bit. That's India, Indonesia and Brazil. Because in aggregate, the impacts on those markets, we think that, that has had about an 80 basis point impact on volume at an aggregate level. And you see it more in the Asia/AMET/RUB geographic results; we think it had about a 150 basis point impact there. And particularly in Personal Care, those 3 markets are 25% of our Personal Care business in just those 3 markets. We think they're about a 130 basis point impact. Just on your question on Indonesia, in total, there were 9 fewer shipping days in the first half in Indonesia. That was the timing of the Lebaran holidays, and an unexpected 2-day ban on transportation, which was news to us. And as a consequence, the Indonesian volumes were down by high single digits in the second quarter. As you mentioned, in Brazil, our volumes were down 10% in the first quarter, but they've improved to only being down mid-single digits in the second quarter. We've got strong contraction in market volume, of course, there with the economic difficulty in Brazil, but -- and also a bit of a credit crunch, interest rates of 13% or so versus inflation of 4%. It's led to a lot of customer destocking as money goes into bank deposits. And just to round out the picture, Warren, in India, as I said in the presentation, I think we've managed the GS (sic) [GST] implementation very well there. Congratulations to the team on the ground have done a really good job. But we would expect to recover most of that volume lost in the second quarter over the balance of the second half.

And our next question is from Martin Deboo of Jefferies.

Martin Deboo at Jefferies. It's a question probably for Graeme, I think, on what I would call the moving parts of margin in H2. And I don't want it to appear churlish given how good H1 has been, but the axiom of your guidance is that you're only going to see something like 20 bps of margin improvement in H2. My back of the envelope on A&P would suggest that full year A&P is going to be down about 70 bps, therefore, flat in H2. So I guess the question is why are you being so conservative on full year margin guidance? Surely, if cost savings continue to flow in H2, there's no implication from restructuring cost if we're looking at underlying margins. So I'm just curious as to why you don't feel even more confident on your margin guidance full year than you are being.

Martin, I can't just argue with your mathematics there, but let me just try and deconstruct it a little bit for you. You're right, we now expect to deliver at least 100 basis points, and that's quite a slowdown in the momentum rate from the 180 that we delivered in the first half of the year. But I think the critical thing is just to go directly to the mix of that delivery in the first half of the year with 130 basis points from brand and marketing investment. Our absolute level of spend were down about EUR 200 million in the first half. We think we were very competitive through that period. When we look at share of voice, share of market, for example, it's clear that we are still above 100 over the first half year for that. We're very clear that we're competitive with our spend and that the benefits are coming through productivity. But it's clear from that and the step-down that we had that the market rate of investment is actually coming down a little bit. That's the first thing. The second thing is that, as Paul said in the presentation, we really do have a second-half-weighted innovation program. And we do expect, therefore, to step up the brand and marketing investment. As we've said before, we want to make sure that we're investing to keep the growth momentum going. We're still growing 1% or so ahead of our markets. We think it's very important to land that innovation well and invest behind it. And I think you'll see that in the second half of the year. That means that we expect to come out the full year with a higher-level investment in BMI, and the second half will be at or around, I think, absolute spend levels that we saw last year. And net-net, with a further contribution from gross margin, which should step up in its delivery because of the phasing of commodity cost increases and the delivery of savings programs, which the commodity costs ease off a little bit in the second half, our savings programs continue to deliver, that means we'll see a shift in the mix of margin delivery, more gross margin, less in aggregate from brand and marketing investment. And we think, overall, that, that will give us at least 100 basis points for the full year. So you're right, we're not banking the momentum we've got and extrapolating it. We think we need to continue to invest behind the business. We've got a good program to do that, and we need to remain competitive. So that's really the sort of anchor point of that guidance.

Martin, it's really in the BMI to ensure continued growth. This is a long-term, compounding growth model based on reinvestment. And we have major innovations coming up that we will put our BMI against. So life is not exactly measured in the 6 months, nor do we run our business that way. And you'll see the swing in the BMI component; that will be clear at the end of the year.

And we have our next question from Jonathan Feeney of Consumer Edge.

A couple of questions, please. First, just a detailed question. Graeme, you mentioned that pricing in the first half wasn't enough to cover commodities, expect them to back off in the second half. Could you give us a sense exactly how much you would have needed and would need in the second half to cover commodities? Is that something you're prepared to disclose? And also, in your commentary, and, Paul, certainly, we'd love your comment on this, too, you mentioned -- Graeme mentioned a forensic look at what the consumer is prepared to pay for, and I thought that was an interesting comment. If you look at the volume you delivered this first half, in the context of all the cost savings you have globally, 5 years ago, 10 years ago, given all the changes that have happened with the consumer, would you have been spending back more of these savings to drive volume right now and that maybe this forensic look is driving you to price a little bit more versus -- and wait for the volume to come more naturally? Or is that fanciful thinking on my part?

I'll start with the second one, that might be best -- good for a second. It is clear that we have seen with competitive benchmarking and our own feedback from the markets that our 5-S program, as we call it, gives us an opportunity to be even sharper in designing for value. What it really means is that what are price points -- and often, it's currency-related because of our developing market issues, what are price points that consumers can afford and design our product cost structure around that. We gave you last time, I think on the call, the example of the deodorant cans where one deodorant might be 10% cheaper to the consumer, but the can itself in price would be higher. We don't want that anymore. So we are putting enormous energy in the system with our design people, formula-wise, packaging-wise, to be able to reflect product cost structures that mirror more the price points. And that's a huge idea, and we see huge possibilities there. Your question, if you look back over the last 5 or 10 years, the reality is we've grown at twice the market rate. We've outgrown our competitors significantly. I can take -- especially in Home and Personal Care, at double the rate. And we've been accused that sometimes that perhaps putting more into growing and moderating that a little bit more with growth in the bottom line. So there's always a fine balance how you trade off these 2 things. I think after having invested EUR 12 billion in the total BMI component and significantly strengthening our business, we certainly feel that we are competitive now. And many of the volume growth components that will come as we move forward will actually come from a much stronger innovation program than anything else, and that's where we're focused on now. And I think you're starting to see the first effects of that. If you ask me a question, would you have invested more of your savings to grow, I think we might have gotten more pressure from the market that we are not progressing as much on the bottom line. So I have a fine balance here, a balance where I need to continuously to deliver on performance to have this compounded long-term growth model work and to continue to invest in the long term. And that's always a balancing act that, in hindsight, you would do some things differently. But I think, broadly, we're getting that balance right. And as I said before, you'll see the volume components coming in moving forward. Interestingly, once more, more driven by another step-up again in an innovation program that many of you have commented on, it's getting stronger and stronger at Unilever.

Jonathan, just to pick up your first point on commodities and pricing. It's really -- it's impossible in the time, really, to give you a very granular answer, principally, because of the interplay between the movements in commodities and hard currencies that we sort of -- we talk about. When we say high single digits and mid-single digits, that's hard currency pricing. But how that actually lands in markets, as you know, is hugely impacted by currency movements, foreign exchange movements against that. But just broadly, the -- our pricing of 3%, if you think about high -- mid- to high single-digits increases on the base of commodities that we have in the first half, that would give you a number that's well in excess of the pricing applied to our turnover number. And that shows you the extent to which we've had to work good work in the supply chain to deliver the savings just to remain competitive. And when we've got those 2 deltas, that's when we say that we've been investing in pricing and investing our savings back into those programs. As I said in the presentation, we do expect the commodities to -- inflation to ease off, so that we'll be mid-single digits for the full year. And we expect more of those to be invested back into brand and marketing investment for the second half.

Our next question is from James Edwardes Jones of RBC.

Can I go back to Martin Deboo's question quickly? I'm still struggling with that second half margin. If marketing is going to be broadly flat as a percentage of sales in the second half, gross margins are improving and you've got cost cuts cutting through, why are you only pointing to something of the order of 20 basis points margin growth in the second half?

Let me just stop this, otherwise we get the same question over and over again. We got 130 basis points pickup in the first half on BMI. In the second half, we'll have a slightly negative margin contribution of BMI. If you then look at that swing, that gets into the bottom line. So guys, just run your own numbers there, but that is what we keep telling you. So in the second half, we will spend more BMI behind the increased pace of innovations. And as a result, our contribution from BMI will be negative in the sense that it will lower the margin over the second half. So...

You could expect the contribution of gross margin in BMI maybe to be roughly 50-50 in terms of the overall margin.

So that's really -- it's the swing I -- yes?

Sorry, say that again, Graeme?

In terms of the overall bottom line margin improvement for the year, you could expect the contribution from gross margin and the contribution from BMI to be roughly equal.

Okay. But then -- and then you should have cost cuts on top of that. It still -- still seems you're being relatively cautious.

No, we're not. We're going up in gross margin from this quarter to next quarter. We'll probably get a little bit more out of gross margin. We will be spending more in BMI, and we will continue to drive the efficiencies in indirects. As a result of that, between first and second half, you'll see that the second half margin progress will be less than the first half. Overall, we'll be around 100 basis points, slightly plus, perhaps, when we come out at the end of the year, but it will be around that 100 basis points. That's really what we're telling you.

So 2 more questions on the line. First, Reg Watson from ING.

Sorry, Paul, I appreciate your frustration with the questions on margins and the explanation you've just given. But looking at the slides on the update on savings programs, you had greater than EUR 300 million from brand and marketing savings. That's 110 basis points, so you could look at the 130 basis points from BMI in the first half, as 110 basis points from savings, only 20 basis points from the phasing of BMI spend. Why is that not the right way to look at this? And therefore, the delta between first half and second half, the swing, if you like, is going to be 40 basis points.

No, no, that is no problem looking at that. But what you don't take into this equation that we keep saying is that we reinvest some of these savings. We are reinvesting. So we might report savings, but it doesn't mean they all go to the bottom line. We reinvest some of these savings.

No, I appreciate that. So some of that's already been reinvested in the first half?

In this case, in the first half -- yes, in this in the first half was BMI, because BMI, you cannot -- you can save quicker by, for example, running advertising longer on air, sweating your production of -- production costs better, you can save quicker. But your media, for example, is booked. So there are savings that we can turn on. But to spend more might have a little bit longer lead time. So the way that your absolute savings work and the way that your reinvestments work might not be 100% aligned on a 6-month basis.

Can I just -- maybe just to illustrate that a little bit. So, yes, EUR 300 million of BMI gross savings, about EUR 200 million of that -- about EUR 100 million of that gets reinvested, and EUR 200 million was the movement in the absolute. But within that, there's a phasing impact as well of the innovation between the first half and the second half. It's the same with the EUR 6 billion of overall savings that we anticipate over the course of the next 3 years. We expect that around 2/3 of that will be reinvested and about 1/3 of it will drop into the bottom line. So when we're talking savings, Reg, we're always talking gross numbers, not necessarily tracking through to the exact movement in the P&L.

Yes, I appreciate that. It's always been something as you have a gross of 6 and a net of 2 in the guidance.

That's right. That's right.

Final question for you, gents. So moving off the margin, you'll be pleased to hear and somewhat more philosophical, when you look at the multiple pay for Reckitt's food business, what do you think the implications are for Unilever on that?

Well, I don't know. We don't comment on the competitors and what they buy. So -- but...

Well, there's more that -- it's more what they sold and at the staggering (inaudible) multiple.

Yes. So I think looking at the comments this morning in the press, I think a lot of people are surprised at the multiple. But this is a quality asset, no doubt. But I think staying with Unilever, you've seen a very disciplined approach to M&A from Unilever. We have an active M&A program. 80% of that is running in line or ahead of our payout of the actives, and we'll continue to have that discipline. And that's probably why we didn't end up with that asset. It's a high multiple for an asset like this according to many people that have written around it -- about it, so that's really what it is.

And our final question is from Toby McCullagh from Macquarie.

Just a couple from me, sort of following on slightly on the M&A side, and then I'm afraid back to margins as well. In terms of the M&A, putting together the Prestige Personal Care business, there was originally a target to get that to around about EUR 1 billion of sales. I just wonder if you could give us an update of roughly how big that is now and what the underlying sales growth of that sort of aggregate business is in the quarter or year-to-date. And whether you can share anything on the margin of that business, either the number itself or whether it's accretive/dilutive to Personal Care more broadly or the group. And then also on, I suppose, relatively recent M&A, an update on Dollar Shave Club. It's interesting to know that Harry's has launched fairly aggressively in the U.K. recently. I just wonder what the plans are at Dollar Shave Club. And then just 2 very quick sort of clarifications on overall margin. I wonder, in the underlying operating margin in the first half, was there an FX impact in that plus 180 basis points? And then a final clarification. You've given us -- helpful on the impact of GST being about a 20 or 30 basis points hit at the group level coming through pricing. Just looking at the HUL presentation, is there an offsetting positive margin implication that we should expect within that? And if so, is it material? So a handful there.

Yes, thanks. Toby, if I just go to Prestige for a second, first. Obviously, we're very happy with the Prestige business that we're building. We've just added Living Proof and Hourglass with that. So if I now look at the total Prestige unit that we've put together, it's about EUR 0.5 billion, just to keep it simple, and they're doing relatively well. We have brands like Living Proof or Hourglass anywhere between 15% and 25%, 30% growth, and we're happy about that. The bigger brand in all of this is Dermalogica, where we have spent the first year bringing the sales back to the channels that we want to sell in and get rid of the gray market. But having done that, we now see the growth rates and the higher single-digit numbers. We're just launching the brand in China, as I mentioned before. So we feel we have now a portfolio that is good. The Hourglass acquisition, by the way, was very well received by the retailers because it really completed a little bit more our Prestige company level. Within all of that, I think most of the brands are actually amongst the fastest growing brands. Unilever Prestige in skin care grew about 14% and would be one of the top 10 players actually in double-digit growth in that segment. In Prestige Hair, although we only have Living Proof, as I mentioned, also one of the strongest growing brands. So we are pleased with how that business is going, increasingly getting an e-commerce component to that, for example, in the case of Dermalogica. So as we're putting this together, very good people running it like [facility] and others, looking at some selective further acquisitions to strengthen that unit. But bit by bit, we are exactly creating what we anticipated to create, and we're getting stronger with retailers, obviously. Some of the major retailers behind us like ULTA or brand.com or Sephora. We're becoming a major player to them and that's a good thing. It will take a little bit. When I talked about the EUR 1 billion, which is certainly true, which is a number that I feel we need more or less to have a critical mass within this company, I've never said that we would do that overnight. The EUR 1 billion for me is sort of a 2020-type thing that we keep in mind, with the combination of organic growth and M&A. This is a highly fragmented market where the brands are smaller, but where you need a portfolio of brands. But so far, our acquisitions work out well. The margin side is slightly margin-dilutive as we build these brands, but I think that will pretty quickly come in line with the total company. But for now, we are still slightly margin-dilutive, but growth-accretive, and that's obviously what we had communicated before as well. The -- So, so much on Prestige. Just 1 or 2 words on margin?

Dollar Shave.

Oh, Dollar Shave Club. Dollar Shave Club is obviously doing very well. We continue to grow well into the double digits and expanding the brand. There's no doubt that there is a reaction in the marketplace from the biggest competitor and from Harry's that we are obviously responding to as well. It gets reflected a little bit in the cost of acquisition, but we continue to acquire at a very high pace the consumer base. And like Harry's, we're looking also at expansion beyond the U.S. So we continue to feel very confident that we made the right acquisition there. And it's starting also to permeate into other parts of our business where we're leveraging the benefits of that into consumer and increasingly starting to leverage that as well.

Just on your question on margin, Toby, I'll actually pass over to Andrew for the detail, but the P&L impact of foreign exchange on margin was pretty small in the first half. It was around about 10 basis points, but, Andrew?.

Yes, that's correct. You have 2 parts of your question. I think one was on the FX impact, which Graeme's just addressed. The other was one on India and GST. There were 2 factors that HUL called out when they reported their results the other day. The first was a pure accounting impact of where credits on excise are booked. We don't see any impact of that in the Unilever consolidated numbers because under IFRS, turnover was already consolidated net of excise, so no impact from that. The other impact is the fact that there is less tax paid and there are full credits for the taxes that are paid, as that will get passed on to consumers in the second half. That means less cost, less price as well and a minimal impact on our margin.

So with that, that finishes the questions, and we'll bring the close to the call there. Paul, would you like to wrap up with any closing remarks?

No, I just want to thank everybody because it's in the midst of the summer, and I don't know if you're calling in from your holidays or if you still have your holidays, but all I want to end with is thank you for your support.

We think they're, overall, solid results. We do believe that we will see an acceleration of the top line in -- over the second half. We will also see a stronger volume component over the second half. It is mainly driven by a strengthened innovation program, which then also needs the appropriate BMI support, and that's really what we've tried to communicate to you. Overall, good results from our side.

We believe the Connected 4 Growth program is working. It's increasingly visible in the company as I go around. It's creating a lot of energy and excitement here. So what we've put in place since the fall of 2016, as we've mentioned to you, is starting to come through in the numbers.

I appreciate your support. I wish you some time off with your loved ones. Enjoy the holiday season, and hopefully, see you soon again. Thank you very much.

Thanks, everyone.

This conference has been recorded. Details of the replay can be found on the Unilever website and will be available shortly. Thank you.