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Edited Transcript of ULVR.L earnings conference call or presentation 25-Jul-19 7:30am GMT

Half Year 2019 Unilever PLC Earnings Call

London Aug 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Unilever PLC earnings conference call or presentation Thursday, July 25, 2019 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan W. Jope

Unilever PLC - CEO & Executive Director

* Graeme David Pitkethly

Unilever PLC - CFO & Executive Director

* Richard Williams

Unilever PLC - IR Officer

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Conference Call Participants

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* Alain-Sebastian Oberhuber

MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD

* Alicia Ann Forry

Investec Bank plc, Research Division - Consumer Analyst

* Celine A.H. Pannuti

JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst

* Jonathan Patrick Feeney

Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner

* Pinar Ergun

UBS Investment Bank, Research Division - Executive Director & Lead Research Analyst for Household, Personal Care and Manufacturing

* Richard Taylor

Morgan Stanley, Research Division - Equity Analyst

* Warren Lester Ackerman

Barclays Bank PLC, Research Division - Head of European Consumer Equity Research

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Presentation

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Operator [1]

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

We will now hand over to Richard Williams.

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Richard Williams, Unilever PLC - IR Officer [2]

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Good morning and welcome to Unilever's half year results.

Alan will begin with an overview of the results and performance in each of our 3 divisions before passing to Graeme to cover the regions and results in more details and wrap up with our outlook for the year. We know it's a big day for results. Therefore, we will keep the prepared remarks within 30 minutes, leaving plenty of time for Q&A.

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

With that, I hand over to Alan.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [3]

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Yes. Thanks, Richard. And good morning, everybody.

It's nice to be back again talking about Unilever results. I've been in the role for 6 months. And I'm pleased to report that again, this quarter, we have delivered growth within our guided range. And of course, meanwhile, we keep working on the transformation of Unilever into a fully purpose-led and future-fit organization. At a high level, we are pleased with some of the strong performances that we've seen in our emerging markets, especially across Asia and in the Africa and Middle East region; also the fact we're seeing 30% growth in e-commerce, which is definitely our most important growth channel. Having said that, there are some hotspots. And those are typically in developed markets, for example, hair and dressings in North America where growth has come in short of our aspirations. With all that said, we do remain on track for a full year delivery of 3% to 4% growth; and remain committed to continuing to accelerate that top line by, as I've said many times, evolving our portfolio, continuing our progress in developing the faster-growing channels and by fully leveraging our unique geographic presence.

So let me go into a little bit more detail, if we can go to the next chart, please.

So we delivered 3.3% underlying sales growth in the first half, balanced between price and volume. And this was very much led by emerging markets which grew 6.2% in the half, accelerating to 7.4% in the quarter. We increased our underlying operating margin by 50 basis points, including some good gross margin improvement, and that combination of top line and margin progression has translated into an underlying EPS increase of 5%. Our underlying free cash flow performance was EUR 1.5 billion, which is EUR 0.5 billion down versus prior year. All of that is simply a result of the spreads disposal.

So digging in a bit more on growth. We delivered 3.5% in quarter 2 with a volume of 1.2% and price of 2.3%. Asia and the region that we call AMET/RUB delivered a strong 6.3% in quarter 2. And we saw China, India, South East Asia and Turkey all growing strongly. Price growth picked up across many parts of the world, and basically that's because we continued to take price where commodity inflation or currency devaluation requires it.

When we look through these headline numbers to the underlying growth, it is a more complex picture, and I think I should call out a couple of items in particular. First, you know we are lapping a weak quarter 2 in 2018 where we had the truckers' strike in Brazil. And our best estimate is that the positive impact of that year-on-year in quarter 2 2019 is around 100 basis points. And secondly, many of you living in Europe will know that we did not have a repeat of the long heatwave of 2018, in quarter 2. So weather impacted market growth, especially for ice cream, and that resulted in about 50 bps lower USG for Unilever in the quarter. And it has not escaped me the slight irony to be talking to you about poor weather in Europe on what is predicted to be the hottest day ever recorded in the U.K. And then even more opacifying is the effect of Argentina pricing, where we've removed 80 basis points of price, and Graeme will explain that in more depth later on.

I think the best news in our results is the continuing strengthening of emerging markets both in the quarter and in the half. India saw good growth of 7.6% in the half, though the Indian market growth has moderated a little as we flagged earlier. In Indonesia, our strengthening execution and also some good innovation in Beauty & Personal Care and ice cream has led to another strong quarter of growth. And in China we definitely are growing ahead of the market, delivering strong offline and online growth. In Latin America, the environment in Brazil continues to normalize, and even when we strip out the truckers' strike, our business has improved on an underlying basis.

So before we look at the divisions, let's take a quick look at some of the market conditions that we are operating in. We do continue to see unusual volatility country to country and period to period. We estimate that globally growth has been around 3% in the markets that we operate in, but for example, in the last 12 weeks, this has definitely dropped back. And Europe drove a good chunk of this slowdown with value growth in the last 12 weeks actually turning negative. And while weather is part of it, Europe does remain challenging with continued price deflation. Looking ahead, Oxford Economics predicts that GDP growth in the next 12 months in emerging markets will accelerate slightly, while markets like the U.S. are likely to slow down. So definitely continued volatility. On the other hand, when we look at currencies, they have been rather benign. The U.S. dollar to euro has been pretty stable after a weak first half in 2018. And as you can see on the right-hand side of this chart, the currencies of our other major markets have also been more benign actually than usual over the last year, but of course, there are some hotspots, Pakistan, Argentina and Turkey I would call out as being the most difficult right now.

So moving on to our 3 divisions.

Beauty & Personal Care grew by 3.3% in the half, balanced almost equally between price and volume. Within that, deodorants and skin care have delivered good growth driven by things like the launch of new clinical deodorants, really with great new technology in Latin America. That's going well. Growth in skin care has been well supported by the marketing shift that we've talked about to a more data-driven marketing approach also being used in China where we're seeing strong growth of Pond's, Dove and Vaseline, all of our core brands. Skin is also benefiting from some good local innovations such as a new brand that you can see here called Nameera, a skin care brand tapping into modern Muslim sensibility in Indonesia.

The growth of premium personal care and the ongoing importance of naturals is simply a secular trend. We continue to shift our portfolio towards naturals and towards the premium segments. And for example, you can see this Lux botanicals range. It started in Brazil. It's now been rolled out across Asia. I think these are the Chinese packs. It's been a very successful innovation. And again, the brand communication has been led by very deliberate and data-driven audience segmentation and precise targeting and a programmatic approach to our media buying. Worth mentioning that our prestige unit has again grown double digit with Dermalogica, Living Proof and Hourglass are the brands that are really leading the charge. We've recently acquired Garancia and Tatcha. Those, we think, will complete during Q3. And we'll add 2 more strong purpose-led, fast-growth brands to our prestige portfolio that, of course, are not yet being reported in our USG.

However, as I mentioned in the introduction, our performance in hair care has been disappointing, especially in North America. And we will be scaling up the innovation and stepping up investment in this most important category for our Beauty & Personal Care business.

Well, I must say Home Care is turning to be a bit of a star. It's put in a great performance growing by 7.4%, with 4.5% price. The growth was very broad-based across the 3 Home Care categories of fabric solutions, fabric sensations and home and hygiene. In fabric solutions our market development activity is working well.

Of course, in our core powders business but actually also with capsules and liquids growing very well in both South and North Asia, we've had a strong first half and are gaining significant share. The strong growth of liquids in India with products like this Surf Excel easy wash is a good demonstration that, as consumers move to urban areas and their disposable income improves, we are able to trade them up from the lower-margin powders and bars. And our hand dishwash brand Sunlight is turning out to be a key driver of growth in home and hygiene. Actually, this brand is also leading the way for Unilever in the space of recycled plastic. It's now using 100% recycled resin in its bottles as well as building premium ranges. And in the U.K. we've just launched this Cif ecorefill. It's 10x concentrated refill that allows shoppers to mix it at home with water to reuse their existing Cif spray bottles. It results in 75% less plastic use. It's, of course, extremely convenient to shop and carry home and, we hope, will drive good consumer appeal. And not pictured here but worth to mention is our clean and green Home Care brand Seventh Generation, which saw continued excellent growth in North America and is now being rolled out across Europe.

So moving now to Foods & Refreshment. Foods & Refreshment did deliver growth, 1.3%, 1.4% of that coming from price. And after, as I've mentioned, 2 very much above-average years, we saw a significant slowdown in the ice cream market in Europe in -- particularly in the first 2 months of the quarter, April and May; and a slowdown in North America in May. Despite the relatively poor weather, our ice cream business grew globally at 2%. And that was really driven by innovations like the one shown here, Solero, where we've actually completely eliminated the plastic wrapping. Magnum continues its strong run of growth with things like a new white chocolate and cookies product and a whole new chocolate innovation with ruby chocolate.

It's fair to say that savory delivered more modest growth. Interestingly, bouillons, which has been picked up by the trend towards scratch cooking; and snack meals catering to the convenience trend, those really highlighted how important it is to continue to get more of our foods business into on-trend segments. And it's one of the reasons why Germany remains a tough market for our savory foods business, as -- there are a number of reasons there.

Our acquired businesses, like Sir Kensington's and Pukka, continued to deliver very well, though the core North American's dressings market and things like developed market black tea have remained challenging. We are shifting in North America dressings to a strategy that focuses more on consumer innovation and brand investment rather than damaging promotional pricing.

I'm going to take a second to show you a couple of examples of how purpose at the center of our brands is helping to drive growth, one from each division. We've got hundreds of examples. We've just picked 3 here. So on the left, you can see an example from the Philippines where, as part of our commitment to reduce plastic, we ran a pilot refillery where consumers have the opportunity to buy their favorite Unilever shampoo and conditioner, refilling the packs that they already have and without packaging waste. So we're working with local industry and government and taking these learnings to other pilot markets. And although this is just a pilot program, interestingly, our Philippines hair care business is growing double digit in the first half. Then in Indonesia, where I've just returned from, I learned about this program where we're using our Home Care brands for the third year running in a very extensive program during Ramadan to clean mosques. We were supported by thousands of volunteers and managed to cover fully 2,000 mosques in 13 cities all in the same day. And I don't think it's a coincidence that our Indonesian home and hygiene business is up high single digits in the first half. And of course, one of our most-loved brands, Ben & Jerry's, continue with various social justice campaigns, creating dialogue around those issues that have followed following the legalization of marijuana in the U.S. Specifically, they're campaigning for criminal justice reform and addressing racial bias, where along with our partners we aim to build safe and thriving communities and divert people away from incarceration.

So if purpose is part of our agenda as being a purpose-led business, so is future fit, and an example of that is what we're doing on data-driven marketing. And we now have 24 digital hubs up and running, with more to come this year. And these hubs are responsible for delivering our data-driven marketing campaigns. We've now got well over 600, and that will grow quickly. Increasingly, the audience segments that we're identifying in our digital efforts are turning out to be relevant across multiple categories and brands. So we've now got 1.5 billion consumer connections, and we're identifying some super segments such as vegans or fashionistas that we can leverage across all 3 of our divisions. In the middle, am happy to show our Axe music partnership with Martin Garrix. It's creating content where the brand interrupts less and converses more with our young audience. The digital campaign that surrounds the music videos has massively amplified viewership for the videos. We just released the second Axe music Martin Garrix video for Europe and The Americas this week. And I know I won't have to tell this audience that Martin Garrix, of course, is the world's #1 DJ. And then another example from Indonesia, where we're supporting the biggest Indonesian food festival; growing our first-party consumer data by engaging and collecting information through targeted ads, in this case, in this example, using our iconic soy sauce brand Bango, which happens to be growing 7% year-to-date.

Before I wrap up and hand over to Graeme. We were very pleased to see that in Kantar's most recent global Brand Footprint report, which was published in May, Unilever has fully 3 brands in the top 10 most chosen global consumer brands. Actually, we have 13 in the top 50, really reflecting the breadth and depth of our global footprint. And the closest competitor is just 6 in the top 50. Furthermore, Unilever has 2 of only 4 brands that have grown consumer reach points every year since the first edition of this Brand Footprint report in 2013. Those 2 brands are Dove and Vim. So really making the point that big, purpose-led brands can stay relevant and continue to grow penetration, share and sales.

On that note, Graeme, over to you.

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [4]

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Thanks, Alan. Good morning, everybody.

Let me start by giving you a little bit of color on what's happening in the geographies.

Performance in Asia/AMET/RUB was strong. We had 6.2% underlying sales growth in the half. China, India, the countries of South East Asia and Turkey all grew strongly, with Africa also improving in the second quarter despite being impacted by some economic and political uncertainty in Nigeria. Pricing increased as we passed on cost increases. As expected, in India we saw some moderation in market growth that was led by a slowdown in the rural consumer. Overall, however, our growth remained strong for the first half. In China, Home Care and Foods & Refreshment led the growth, with e-commerce the main driver of both. The step-up in Indonesia continues in the first half with more pricing and more volume versus prior year. And Turkey continues to grow in volume despite inflation there remaining very high.

Turning to Latin America. We saw sales growth of 4.9% in the half. Mostly that was led by price. Looking at the quarter's, you can see clearly here the impact of the truckers' strike in the second quarter of 2018 and the rebound in the latest quarter. Now we estimate that, excluding this, we delivered 1.6 percentage points of growth in Latin America in Q2, which is the strongest growth result in some time. There are reasons for optimism in Latin America even though the low GDP growth in Brazil is still depressing overall growth in the region. For example, the launch of Omo concentrates in Brazil is driving very strong growth in fabric solutions. In Argentina, where the ongoing crisis continues, although the currency has been a little more stable in the latest period, we are continuing to shift our portfolio to ensure that we're able to offer products to consumers at all of the price tiers. And we're really confident that we're gaining share in what remains a tricky economy. Here is our usual Argentina chart: You'll recall that, from Q3 2018, we've taken, frankly, the most prudent approach and removed all Argentinian price from our headline USG number due to the hyperinflationary status of the country and from a GAAP perspective. Pricing remained significant in Argentina, and its removal from our USG has reduced Unilever's underlying price growth by 80 basis points in the half. With normalized levels of Argentina pricing, which is about 2% per month, we would add back 30 basis points to the half 1 USG results. With a full year of Argentina hyperinflationary accounting now in place and, frankly, little sign of that changing in the mid-term outlook, we do plan to review the treatment of Argentinian price within our underlying sales growth calculation. The volume decline in Argentina is improving a little. It was just at minus 7% compared to markets which are declining by close to 20%, so we're very clear that we're gaining a lot of ground competitively in Argentina. And of course, the negative volume remains a drag on the reported group UVG of about 10 basis points in the quarter and about the same in the half.

Turning to North America. We grew by just 0.1% with price growth of 0.7% and volume of minus 0.5%. This is in the context of a weakening market in the last 12 weeks and an expected GDP slowdown amidst trade tensions. Mass ice cream was impacted by the market decline, in part due to the weather. Despite this, our premium brand Talenti continues to do well, with the Talenti Layers innovation surpassing our expectations. As Alan mentioned, the hair category in North America has been very competitive in the first half both in terms of pricing and in terms of media. We are the #1 in daily hair care in North America, so this is a key hotspot for us and a turnaround sell. Good growth in deodorants was driven by Dove and Schmidt's Naturals, which continues to expand the retail footprint. Skin cleansing performed well, led by the new Dove liquid handwash range and the Dove for men's sports range.

In foods we saw a stronger performance in savory led by sides and bouillon growth, whilst dressings have been impacted by a promotionally heavy market again. In the premium dressings market, Sir Kensington continues to perform very well supported by on-trend innovation.

In Europe, in aggregate we declined by 0.6% with quite a very broad performance across each of our European markets. The primary driver was ice cream, whereas Alan explained we did not benefit from the same hot weather pattern as last year. And as a consequence, the overall European market was negative in the last 12 weeks. Home Care in Europe delivered growth with strong performances across CEE, Southern Europe and Benelux. CEE, Italy and Spain started the year strongly on ice cream, led by innovation. And in the Netherlands our innovations in the space of snack meals are driving good growth. The retail challenge in Germany persists, and that has resulted in a decline in the first half. E-commerce and the discounter channels grew strongly as our divisional strategies become ever-more channel focused.

Overall, our turnover for the first half was EUR 26 billion. Underlying sales growth added 3.3%. Acquisitions and disposals decreased turnover by 5% following the disposal of spreads in July 2018. And currencies have been more benign so far this year, increasing turnover by 1.1 percentage points. This is mainly due to the strength of the U.S. dollar versus the first half of last year. And based on the latest spot rates, we continue to expect a positive currency impact of around 2% on turnover and a little more on EPS for the year.

Turning to our margins. We delivered an increase of 50 basis points in underlying operating margin to 19.3%. Gross margin increased by 30 basis points, helped by efficiencies from our 5-S program and pricing. Brand and marketing investment decreased by 30 basis points as we continue to make efficiency savings throughout the organization. This came as a result of applying new disciplines on digital advertising and real-time spend optimization. Additionally, to be sure that our investment is effective, we have strong safeguards to mitigate any risks associated with fraudulent media activities. And looking at industry benchmarks, we strongly believe that we are ahead in managing and mitigating this risk across our markets.

Most of our savings are reinvested in brand campaigns, as you know, and in innovations around the world. And examples of that are Omo in China and Lakmé 9 to 5 in India. Our overheads increased by 10 basis points, as we continue to invest in the ongoing digital transformation of Unilever. Our organizational change programs are addressing the impact of the stranded costs following the disposal of our spreads business.

Underlying earnings per share increased by 5% in current rates and 3% in constant rates. Operational performance, which is the combination of growth and margin, contributed 5.2% to earnings. The earnings dilution from the spreads disposal was mitigated by the 2018 share buyback which has a 4.3% impact on H1 EPS. We expect the full year impact of the 2018 buyback to be 2.8 percentage points. Finance costs impacted EPS by minus 0.1% (sic) [minus 1.0%] as a result of a EUR 40 million impact from the revaluation of trapped cash balances in Zimbabwe following the devaluation of the new Zimbabwe dollar.

We expect the interest rate on net debt to be around 3% in 2019, which is aligned with previous guidance that we've given you. Our underlying tax rate was 26.2%. We expect our tax rate over the medium term to continue to be around 26%. Currency movements increased EPS by 2%.

Turning to the balance sheet. We delivered free cash flow of EUR 1.5 billion. The decrease versus last year is down to the sale of spreads. Our net debt sits at 2.1x EBITDA, which is flat to the beginning of the year, and we expect to continue to maintain our leverage around 2x. Our pension deficit is reduced by EUR 0.4 billion to EUR 0.5 billion as a result of rising equity markets.

And finally, let me reconfirm the guidance for 2019.

We expect underlying sales growth to be in the lower half of our multiyear 3% to 5% range. We will continue our progress on the underlying operating margin through a focus on waste and inefficiencies and through restructuring investment to take out costs. We'll also continue to ensure we -- that we competitively support our brands both in BMI and in building new capabilities. And we will target another year of strong cash flow while maintaining roughly our current level of gearing.

Our outlook on all the other items remains the same.

Thanks very much for your attention. That's the end of our prepared remarks. And I think, Richard, we're now going to take some questions.

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Richard Williams, Unilever PLC - IR Officer [5]

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Yes. Thank you, Alan and Graeme. (Operator Instructions)

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Questions and Answers

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Richard Williams, Unilever PLC - IR Officer [1]

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So just looking, I think our first question is from Richard Taylor at Morgan Stanley.

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Richard Taylor, Morgan Stanley, Research Division - Equity Analyst [2]

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So one question really for me. When I look at the original 2020 margin targets given by division back in April 2017 versus where you are now, you're well ahead on personal care versus target. Then on Home Care it's a decent gap still but very good momentum. And then foods and then refreshments is probably the one with possibly the least momentum and the biggest gap. Some of that is, of course, due to the sale of spreads with the dilution and dissynergy there. However, for that division specifically, are you opting to spend more to support the business in a -- what is a -- probably a very tough environment? And how should we think about the mix between the divisions from here?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [3]

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Graeme, you want me to take a crack at that?

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [4]

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Sure have a go, yes.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [5]

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Yes. Thanks, Richard. So the first thing I would say is we absolutely are prioritizing growth and, when the growth comes, continuing to make progress towards the 2020 margin target. I shouldn't understate it, but it's relatively straightforward. The stretch that we put into Home Care and foods was quite remarkable. When we made the commitments in 2017, they really were eye-popping, stretch ambitions in foods and in Home Care. And we always knew that we had a little bit of hedge in the Beauty & Personal Care margin. And so we will dynamically allocate resource across the divisions through the year, but that will be much more driven by pursuing optimal growth across the portfolio than necessarily being laser-focused on a margin target by division. And so that's kind of -- that's how it is, where we had a bit of sleeve in Beauty & Personal Care and tremendous stretch in the other divisions. They're making good progress. They're not quite on track for where we said they would be by division in 2017. We will keep dynamically allocating, but the overall priority will be growth.

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [6]

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I'll just build on that Alan...

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Alan W. Jope, Unilever PLC - CEO & Executive Director [7]

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Sure.

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [8]

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The -- just on food and refreshment in particular, Richard. Back in 2017, when we set the sort of broad vision of how the margin progression will break down across the divisions, we also announced we were setting up food and refreshment, bringing those 2 big category organizations together and basing them in the Netherlands. I think it's fair to say that the footprint that we have in food and refreshment has a higher proportion in the European region. And just the time to appropriately restructure both our big supply chain footprint in Europe, which disproportionately impacts the F&R portfolio, we've got to make sure we do it the right way. We've got to make sure we do it effectively and responsibly. And whilst we've got lots of plans and proposals and good activity taking place within our change program, I think it is taking a little bit longer than we envisaged back in 2017. So there's maybe a bit of a time shift there specifically when it comes to the food and refreshment margin. And just to remind everybody that, when we set the original vision, it was based on EUR 6 billion of savings. And we're well into that now. We've got another EUR 2 billion that will come in 2019. That EUR 6 billion delivered 1,100 basis points of margin benefit to us. We only needed 360 basis points to get to the 20% number. And so we knew we had 2/3 that we could choose to invest back in the business, and that's what we've been doing very consistently, so at a macro level very much on track and very pleased with the savings delivery and the reinvestment of those savings.

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Richard Williams, Unilever PLC - IR Officer [9]

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Thanks, Graeme. All right, we've got a lot of questions coming in, but we'll try and get through them. The next one is from Jonathan Feeney at Consumer Edge.

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Jonathan Patrick Feeney, Consumer Edge Research, LLC - Senior Analyst of Food & HPC, Director of research and Managing Partner [10]

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In your release you mentioned e-commerce and discounters grew strongly in the Europe region versus a challenged broader retail environment. And I think, Graeme, you covered that in your remarks. How would you say your growth in each of those channels, discounters and e-commerce, compares to your peers? In other words, would you say you're winning or losing relatively in those channels in Europe? What inherently does that change in mix due to margin, if anything? And if I may, broadly speaking, can you make a migration to faster-growing e-commerce that -- without a negative impact on margins? Is that a plus, minus or neutral, broadly speaking, as you think across regions?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [11]

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Yes, thanks, Jonathan. Let me be quite direct in answering those questions. So first of all, there are some channels that are showing just consistent high growth. And it is things like e-commerce, out-of-home eating, actually proximity stores in emerging markets, beauty stores and discounters. What we know specific to your question on e-commerce and discounters is that we have a slightly lower-than-fair share in both, that we are growing faster than the market in both. And particularly in the case of e-commerce, the faster we grow our e-commerce business, the better it is for our margins. We have accretive margins in e-commerce. I think that answers your questions directly, right?

We'll assume silence as...

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Richard Williams, Unilever PLC - IR Officer [12]

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Okay. I think that assumes -- let's move on now. Actually we have a lot of interest. Next question is from Alicia Forry at Investec.

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Alicia Ann Forry, Investec Bank plc, Research Division - Consumer Analyst [13]

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I'm detecting slightly more urgency in the tone around the underperforming areas of the business, so are you considering further disposals beyond spreads if you're unable to improve the performance of certain brands or categories? And secondly, related to this, are you happy for food to remain more skewed to its mass-market price positions in developed markets? Or should we look for you to spend more to bring food up the price ladder as you have already done with the household and personal care side of the business?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [14]

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Okay. Graeme, you think about the foods question, and I'm going to address this underperformance question. So first of all, thanks, Alicia. Your interpretation of our tone is exactly right. Yes, I am, we are dissatisfied and impatient on big parts of the business where they underperform. However, the solution is almost always not disposal or exit. For those types of decisions, we look at the long-term attractiveness of categories, something like hair care. We're super committed to hair care, so there's not a thought of disposing from something like our North American hair care business. Our efforts there will go into turning-around that particular hotspot. So as you think about disposals and -- think about things like spreads where we just viewed that the long-term growth prospects were not great. Whilst we could talk about the areas we've called out like developed market and black tea, North American mass ice cream, hair U.S., those are the hotspots that we're definitely going to be addressing. I've got in front of me a long list of extremely high-performing sells, but actually I'm not going to bore you and drag you through all of those. I think I've answered the question about how we think about resolving the underperforming hotspots through intervention rather than disposal when they’re in a core market. Graeme, do you want to talk about foods?

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [15]

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Yes. Alicia, the -- I think, before coming at it from the context of the European landscape, worth just mentioning the makeup geographically overall of our F&R portfolio, as a reminder that the business is about 40% of our food and refreshment business is in the emerging markets. I wish we didn't call them the emerging markets, to be honest, but that broad suite of markets where the sort of opportunity for packaged foods, for snacking, for ice cream occasions, et cetera is still just at the starting part of the growth curves and the hierarchy of preference, et cetera. So that makes it very exciting overall from a foods portfolio perspective, but to your question, I mean, yes, I think, is the answer. We have been actively trying to make sure that we're addressing the more premium parts of foods. Foods categories are growing. Foods is a fast-growing area around the world, but it is fragmented. Local taste and preferences really matter. And there's really strong opportunity to premiumize if you have a portfolio that can address that. We've been trying to do that, for example, in ice cream. Specifically, just to come back to Europe, Grom in gelato is an example of that; within the tea category, the acquisition of Pukka; within dressings in North America, now rolling out into other geographies, Sir Kensington's, in our dressing business. graze in snacking is another example. And even within existing categories, within Knorr we're having a lot of success with wet soups et cetera, which are quite premium. So the answer is yes. The challenge we have is getting scale to those parts of the categories that we're in and getting it to show up in our overall reported growth number in our European foods results because it's there but it's still a relatively small part of the overall portfolio that we have.

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Richard Williams, Unilever PLC - IR Officer [16]

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Okay. Straight to our next question, which is from Warren Ackerman at Barclays.

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Warren Lester Ackerman, Barclays Bank PLC, Research Division - Head of European Consumer Equity Research [17]

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It's Warren Ackerman here of Barclays. Two for me as well. First one is, I guess, for Graeme. You didn't mention, Graeme, global market share this quarter. I think you said in Q1 it was 50%; 40% in Food; I think, 60% in HPC, more on the value -- or volume side, not value. What was it in Q2? And then related to that, do you actually think into 60% sustainably share gains and growing 200 bps ahead of your markets is realistic longer term? And then secondly, just on Home Care, obviously you shut the lights out in Q2, 8.9% underlying sales growth. And obviously, half of that is price. Half of it is volume. Can you maybe kind of just split out what Home Care did by region? I'm trying to get an understanding of where you saw the big outperformance and what you kind of think the run rate is in the back half. Because I don't expect you're going to say that 9% is a sustainable growth rate. So just interested to hear why it's done so well and what you think about the back half.

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [18]

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Warren, let me pick up the question indirectly on share. I might spend a bit of time on this because I think it's important to just ground a few things. So ways of looking at competitiveness in aggregate for any big business now. It's getting increasingly difficult over time because more and more of the volume is moving into unmeasured channels, out of home, e-commerce, the discounters, cash-and-carries, et cetera. It tends to be more unmeasured, but of course, on a sequential basis it's still very relevant. So it's still a critical, critical measure. First way we look at things is to look at the total growth in the market. And we think our markets are growing about 3%. And against that we grew 3.3% in the half and 3.5% in the quarter, with a few ups and downs in there, but broadly that's sort of awash. So -- and we're growing at around about the rate of growth in the market. Now that correlates with another measure you can use, which is the percent of your business that's winning. And you're right. We were, a couple of years ago, sitting about 60%, which is good result, I think, for any business. I'm not sure that you would necessarily sustainably go further than that, but -- and we dropped below that over the course of the last 18 months, 2 years or so. And we're getting back now towards 50%. So we're around 50%. Now we're on an upwards trend here and a couple of things I want to call out. First of all, from a volume share perspective, so real consumer consumption across all of our emerging markets, so 60% of Unilever, we are at that 60% volume share gain across the emerging markets on an MAT basis. So that's a good, positive sign. We're also at 60% volume share gain in our Home Care business. Now of course, Warren, there's quite an overlap between the Home Care business and the emerging market business. So it's almost the -- not quite, almost the same thing, but also we're almost at 60% winning volume share in Beauty & Personal Care on an MAT basis as well. So we're getting close to that 60%. Again, we're on an upwards trend and more competitive. We have got a few hotspots. We -- just to call out a few: North American ice cream in the mass market. Our developed markets tea business is not competitive; our North American's dressing business; and North American hair, which Alan mentioned in his remarks; et cetera. But they're in quite focused number, half a dozen, a handful to half a dozen, of key sells where we know that we have to turn-around our competitive performance. And that will give us the jump back up into the 60s, although we're still -- we're making good progress on that. Just a final point: The broad correlation is that, if you're gaining share in 60% of your turnover, that's around about a 1% outperformance above market growth, not 2% which you mentioned. Alan?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [19]

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Yes. Home Care, boy, is performing well right now. And I think it's important to remind that 80% of our Home Care turnover comes from emerging markets. So it is -- in a way, it's a microcosm of Unilever structurally advantaged because of its footprint in emerging markets actually. And within that, 60% is in Asia, Africa and the Middle East. So -- and then where we have business in North America is basically Seventh Generation. So it's a super on-trend brand. So we’ve got this nice combination of strong position, strong shares in emerging markets. And in North America we've got a lovely portfolio that comprises mainly Seventh Generation. Now I think we're adding to that in North America with things like Love Home and Planet. Second thing I would say is that, because Home Care is more exposed to commodity markets, it is a matter of survival, to be quite blunt, on pricing pass-through. And you can see that in the very good job that Home Care have done on passing-through pricing that really -- we need to do that in order to have a healthy Home Care business. And the final thing I would say is we're actually in a very strong innovation program, so especially in home and hygiene, but also some of the Omo introductions that we've made in Latin America and Brazil and the growth we're seeing in, for instance, capsules has been very good. So it's a blend of things, but if I had to put my finger on one thing, it's the very strong footprint we have with Home Care in Asia, Africa and the Middle East.

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Richard Williams, Unilever PLC - IR Officer [20]

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Right. Thanks, Alan. So next question is from Pinar Ergun from UBS.

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Pinar Ergun, UBS Investment Bank, Research Division - Executive Director & Lead Research Analyst for Household, Personal Care and Manufacturing [21]

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First, has the Quala acquisition now come into the organic sales growth base? And could you please tell us how that acquisition is doing given that it's a fairly sizable one? Secondly, Unilever's growth rates in the U.S. and in the personal care division have been fairly muted for much of the last 2, 3 years now. Could you please talk about your plans on how you're intending to improve your performance in the face of competitive challenges? And I guess, would you consider abandoning your 20% EBIT margin target if that meant you'd achieve a significant step-up in your competitiveness by perhaps reinvesting more of the EUR 6 billion savings? And finally, a really quick cheeky one: Would you consider mature market black tea categories to be attractive in the long term?

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Richard Williams, Unilever PLC - IR Officer [22]

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I think that's more than 2 questions, Pinar, but let's see what we can do.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [23]

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To be honest, you -- I missed the second. Just repeat the second one there, Pinar. I was writing them all down. I missed the second one.

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Pinar Ergun, UBS Investment Bank, Research Division - Executive Director & Lead Research Analyst for Household, Personal Care and Manufacturing [24]

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The second one is, so the growth rates in the U.S. and in personal care division have been fairly muted for much of the last 2, 3 years now. How are you responding to -- how are you planning to respond to the competitive challenges there? And would you consider abandoning your EBIT margin target if that meant you'd achieve a step-up in your competitiveness by perhaps reinvesting more of the EUR 6 billion cost savings?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [25]

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Okay. So Graeme, why don't you take the first one, on Quala?

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [26]

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Yes. Okay. Pinar, yes, the -- so the Quala business, which when we bought it was around about 350 million, is now about a 400 million business, I think. That completed in March, so yes, we've included the USG from March. It is growing strongly. By the way, it secured our #1 position globally in daily hair care. I'm not so sure what a global #1 position is, but it nonetheless took us there. And what we have done very successfully with it, so far, is extend the brand across into other categories in which we play, such as deos with Ego and Savile. And we did that very quickly after closing the acquisition, so yes, it's in our numbers. Yes, it's performing strongly. And then -- and we're happy with the rollouts that we've had.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [27]

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All right, let me try and tackle the second point there. First of all, BPC growth is competitive. We're growing slightly ahead of the market. As Graeme said, we're now up to about 60% of our volume growing share in Beauty & Personal Care, but am I satisfied with 3.5% growth in the latest quarter in BPC? No, definitely not. And it's going to require us to continue to evolve our portfolio, build our position in the fast-growing channels and take advantage of our emerging markets footprint. An example of what I mean by evolving our portfolio is prestige. Prestige is now becoming quite a meaningful business for us. This year, it will be over a EUR 600 million business. It continues to grow at double digit, and it's making a nice contribution to our BPC growth. In the U.S. we really need to decompose it. It's becoming quite polarized. So yes, we're struggling in things like tea, ice cream and hair care in North America. We hope to see that turn around. We're very, very determined to get hair North America back into share growth, but if you look through, look at some of the other categories like deodorants, we continue to see the beautiful portfolio that we've built up. And deo is growing quite well. So I think the U.S. will remain an absolute highest-priority market for us, world's biggest economy, source of a lot of innovation and tech developments. BPC is definitely our highest-priority division. And if I thought that the key to unlocking better growth in BPC or the U.S. was to give up on the 20% margin target, of course, we would sacrifice margin for quality long-term growth, but I'm afraid it's just not that simple. And we're well on track for delivery of the margin target, and that's not the tradeoff that we're looking at. We're looking at stepping up invest. We've got the ability to step up investment in North American hair, for example, and we will do that. Oh, and your cheeky question about mature market black tea, the answer is no. That's not a structurally long-term source of growth. And that's why we are very quickly pivoting our portfolio in tea into green herbal infusions both within Lipton but also by acquiring things like TAZO and Pukka to put us, our portfolio, more in the fast-growth segments, bluntly. By the way, there's still room for a nice cup of PG tips every now and again, my personal favorite.

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Richard Williams, Unilever PLC - IR Officer [28]

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Okay. Thank you. Straight to Celine Pannuti at JPMorgan.

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Celine A.H. Pannuti, JP Morgan Chase & Co, Research Division - Head of European Food, Home & Personal Care and Tobacco and Senior Analyst [29]

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Apologies. I've missed the beginning of your call, but I understand that you were talking about market growth about 3%. But there seem to have been some highlights that were not so great about Europe, U.S., and that's even excluding the bad weather. Could you comment on what you think the market growth is at? And are you taking maybe a more cautious view on what the development will be in the second part of the year? And if you could comment on that by geographies. I'm not so sure neither on hair care, whether -- U.S. Is this a market slowing, or is it you underperforming? And my second question is on the margin performance. You have said that you will re-increase in A&P in the second half of the year. We have now seen 50 basis point margin increase in the first half. And if I look at the past couple of years, you've been running at 90 basis point to 100 basis point. Is 50 bps this year or next year the new run rate? That would get you to 19.6, which I think is a rounding level at 20%. Would that be a right level to look at?

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [30]

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Celine, let me take the first question, on market growth. You maybe missed -- I used a question from Warren to give a bit of a broader view on market share and competitiveness, but let me do the same with you on the question of market growth and particularly the slowdown. So we think our markets are growing at around 3%. We did see a slowdown in the last 12 weeks driven by a couple of things. Obviously, the European weather had an impact on the slowdown in Europe and a little bit in North America there as well. We also saw a moderation of growth which we expected to see in India, which is a consequence of some constraints on the rural consumer. We're seeing a slowdown in the rural consumer in India. And we've had a weaker monsoon. And there's food pricing. Inflation is lower, and that means a little bit less spending power with the rural consumer in India, who broadly work in the agricultural sector. And in North America market growth has slowed down from what was between 1% and 2% in 2018. It's slowed down quite a lot in the last 12 weeks and indeed from that 2018 point. It's now only slightly positive. That's driven not just by the poorer weather but by a slowdown and particularly this year in the BPC category. The specific competitive challenge that you mentioned in hair care, yes, there's a slowdown in BPC in the hair care category in North America, a slowdown in growth, but the particular performance hotspot that we have is around competitiveness in U.S. hair care. And as Alan said, we will be putting more investment, innovation and communication funding behind that particular [cell]. It's -- we're the leader there, and it's very important that we recover our competitiveness.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [31]

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Thanks, Graeme. Celine, look, on A&P, over the last couple of years, we've stepped up our investment in media by about EUR 310 million. And it is a complex area, where rather than looking at a headline number, let me give you a sense of some of the things that we are very focused on. The first is we continue to shift our media mix into channels that are growing their audience, not shrinking their audience, specifically digital. So digital channels now represent 40% of our media spend. We're absolutely preoccupied with message relevance, asset quality, segmentation and targeting. And we're getting significant step-ups in ROI from our media investment from that approach. And it's a step-up in effectiveness actually, not a reduction. It's not a cost-driven exercise. Thirdly, we are miles ahead of the pack, I think, on eliminating ad fraud. And it's definitely there, but we think it's very low single-digit levels in our media spend compared with up to 20% or 30% for some of the industry. And lastly, we sort of now have to look at A&P and overheads together because at the moment the bottleneck on some of the great work we're doing is warm bodies to run our digital campaigns rather than just absolute media spend. And that's actually why you see -- there's 2 reasons why you see a small increase in our overheads. One is a lot of the acquired businesses like prestige beauty come with a higher level of overheads as part of their business model. And the second is we are putting marketing people in place to run these more complex digital campaigns. As far as, you snuck in a third question there about progress towards the 20% UOM: Graeme has repeatedly answered this by saying that anything between 19.6% and 20.4% is 20%. And I don't care to choose right now where on that range we'll land. It could be at the bottom end. It could be at the high end of it. There will be a certain elegance of landing on the nail, but it'll be somewhere in that zone, Celine.

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Richard Williams, Unilever PLC - IR Officer [32]

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Okay. Thanks, Alan. Okay. I think, looking at the time, we've got to make this the final question. So it's from Alain Oberhuber at MainFirst.

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Alain-Sebastian Oberhuber, MainFirst Bank AG, Research Division - Head of Equity Research Switzerland & MD [33]

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Richard, Alan and Graeme: Alain Oberhuber, MainFirst. I have 2 questions as well. Just regarding the U.S. again, coming back, could you give us some kind of a guidance when do you expect that turnaround? Because looking into Q2, obviously that deteriorated further. So on one side, when could we expect the bottoming-out in North America regarding the growth rate? And the second question is regarding group pricing. Could we expect an acceleration in group pricing, or do we expect for the second half a similar pricing we have seen in the first 6 months?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [34]

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Thanks very much, Alain. We definitely will not be providing guidance country by country or market by market looking forward. First, we don't want to box ourselves in. Secondly, sort of I think that you should be highly suspicious of anyone who predicts country-level market activity. I think in the U.S. we're relying on 2 things. One is the overall market growth which has been muted and, in fact, in the last 12 weeks has been very muted. So we're a little bit bearish on U.S. market growth. And the second is resolving some of the competitive issues that Graeme highlighted. So we will be much more focused on making sure that our ice cream portfolio and our hair care business in the U.S. have really excellent plans for the second half and are properly invested. And the market growth will be what the market growth is. If I had to comment on the rearview mirror, the last 12 weeks of market growth in the U.S. have been quite soft.

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [35]

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Alain, just to pick up your question on pricing and the outlook on pricing. I mean just to say what we did in Q2. We got price away in most countries, particularly in Home Care, which Alan talked a little bit about earlier and where we saw the highest inflation driven by organics. So I mean it's got the highest emerging market footprint. And we also took some pricing in North Asia, in Africa and across 5 or 6 categories in North America. So we got a bit of price in there in Q2, which is why pricing was a little bit ahead versus Q1. Now I won't comment on pricing outlook going forwards, but I will tell you what we expect from a commodity inflation perspective. And that is, in the second half, we expect broadly similar to H1. We've got better visibility now. We've locked in a fair bit with our covers and et cetera; and we think that'll be around mid-single-digit commodity increases, a little bit higher in organics and petrochemicals, a little bit more flow-through into Home Care again, but we've got good visibility on the year. And the good news, the really good news, and it could change, of course, but relative to the very strong currency devaluations that we saw last year, currencies really have been relatively stable, with the notable exception of Argentina. But by and large, that gives us more visibility on where we think pricing will be -- or rather where we think cost inflation will be and therefore where we think pricing will be.

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Richard Williams, Unilever PLC - IR Officer [36]

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Okay. Thanks. Right, I know everyone has got a very busy day today, so let's -- we need to stop on time. A number of you still have questions. If they haven't been answered, then please feel free to give anybody in the IR team a call today or tomorrow or whenever you manage to get to the phones.

So Alan, would you like to make any closing remarks?

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Alan W. Jope, Unilever PLC - CEO & Executive Director [37]

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Yes. Thanks, Richard. Sorry. I'd forgotten you were going to ask me to do that.

We've delivered, I think, a good balance of top and bottom line growth. It's well within the range that we've guided. Meanwhile, of course, we continue to work on the more important task of ensuring that we have purpose and sustainability at the core of our brands and at our business model as we prepare Unilever for a fast-changing future. We're particularly pleased to see the sequential pickup of our growth in emerging markets. And our guidance hasn't changed.

So thanks, everyone, for dialing in. Thanks for your support. And we look forward to talking to many of you in the coming days.

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Richard Williams, Unilever PLC - IR Officer [38]

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Thank you, Alan.

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Alan W. Jope, Unilever PLC - CEO & Executive Director [39]

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Graeme...

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Graeme David Pitkethly, Unilever PLC - CFO & Executive Director [40]

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Thanks, everyone. Cheers. Buh-bye.

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Operator [41]

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Thank you.

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