Oct 24, 2014
Operator
We are about to hand over to Unilever to begin the conference call. [Operator Instructions] We'll now hand over Jean-Marc Huët.
Raoul Jean-Marc Sidney Huët
Well, good morning, everybody, and welcome to the Unilever's results presentation for the third quarter of 2014. I will begin this morning with the context for this set of results and a brief review of our overall performance; James will then take us through the categories and the regions overview; and then I will then conclude with the actions that we are taking to ensure sustained competitive, consistent and profitable growth.
We continue to stay focused on taking the right decisions for the long-term health of the business. At the same time, we are sharpening our execution to reflect the market conditions, which are likely to remain tough for at least the remainder of the year.
The actions that we are taking gives us confidence that we will meet the objectives that we set for ourselves for 2014. First, let me draw your attention to the usual disclaimer relating to forward-looking statements and non-GAAP measures.
So now let's begin with the wider context for this set of results. There is no doubt that the market conditions are very tough.
The global slowdown has been more pronounced, more prolonged than expected. On a worldwide basis, our markets had been growing in value of between 3% to 4% last year in 2013.
And today, they have now slowed to less than 2%. So given the magnitude of this slowdown, I want to be very clear this morning about what we are seeing.
In the Eurozone, the modest economic recovery is faltering. Consumer spending power remains below historic levels by any means.
As people struggle to make their ends meet, they may change how much product they use, which products they buy and the channels where they buy them. It is difficult out there.
Even in the U.K., where we are today, where the economy has improved, discount has continued to prosper at the expense of more established retailers. Add to this a benign commodity cost environment in the region, and it's not hard to see why there is price deflation in many of our European markets.
In France, for example, there has been retailer price deflation for several months. And in the U.K., the recent consumer price index data shows that food prices are down for the first time in many years.
So the combination of weak consumer demand, a challenging retail environment and price deflation in a number of countries means that the market size in Europe is actually declining by 2% in value. Fortunately, in North America, the economic picture is a bit better.
So far, most of the improvement has been in other sectors, but we are starting to see some improvement in demand in, actually, our categories. Market value growth in the last quarter improved to just over 1%, giving some cause for optimism here; but again, pretty modest levels.
The emerging market conditions have also weakened further in the third quarter. Let me be clear here.
We continue to be very confident in the exciting longer-term prospect for emerging market growth, and that will come from an ever-expanding urban middle class. We see the current slowdown in emerging markets is cyclical, not structural.
We will, however, be cautious about predicting when our markets will improve. But it is at least encouraging that currencies have been more stable in many countries over the last 6 months or so.
In the meantime, the near-term weakness is absolutely evident. Brazil is now in recession.
In China, GDP growth is the lowest since 2009. Domestic demand has slowed sharply.
Market value growth rates in our categories have slowed from around 7% to 8% last year, 2013, to less than 2% in the last couple of months or so. That is a fast deceleration.
Now within this, there is a channel shift with hypermarkets -- sorry, hypermarket sales actually down in a number of categories including laundry, hair and skin cleansing. In India, market growth rates have started to improve a little, although they remain well below where they were a year ago.
A typical consumer in an emerging market spends a high proportion of his or her budget on basic foods and has seen those food prices rising fast. It's not surprising that he or she is having to make a little go a long way.
Getting an extra day or 2 out of a bottle of shampoo across enough of the population, obviously, impacts volume growth. And of course, uncertain situations, like the ones in Russia, Ukraine, the political turmoil in the Middle East, also impacts consumers profoundly.
And this even extends to the demands for everyday products like ours. So in total, emerging market value growth rates have now slowed to around 4% to 5%.
And within this, volumes are flat. Developed markets are weak, emerging markets slower, and worldwide value market growth is now less than 2% for our markets.
We anticipated a slowdown, but I must admit not quite to this extent. Nevertheless, our strategy remains as relevant as ever.
But we do need to sharpen our execution on both top line and costs to ensure that even in a lower growth environment, we continue to drive competitive, importantly, consistent and, even more importantly, profitable growth. I will return to this after we have reviewed the performance in the first 9 months and for quarter 3.
Let's start now with the key headlines for the quarter. Our growth remains competitive.
Underlying sales growth was at 3.2% for the first 9 months, 1.4% coming from volume. Both the value growth and volume growth are 1 full percentage point ahead of our markets.
We're actually continuing to gain market share in about 60% of our business. While the reported underlying sales growth in the third quarter was disappointing at 2.1%, you need to see this in the context of 2 specific factors that each had a significant impact.
Adjusting for them, the run rate of our top line is currently around 3%. Now you know us all well enough to appreciate that we do not like to call out one-offs.
But for this quarter, I think it is important to give you extra clarity to help you get a good assessment of where the business performance at a big picture level is. The specific factors that affected in the third quarter were: firstly, weather in Europe, no surprise to you.
And while this is becoming less important as we build ice cream businesses throughout the emerging markets, the European ice cream business in the third quarter is still capable of moving the needle for the group. Last year, spring was poor; key summer months were good.
This year was the opposite. A good start to the season but an incredibly poor weather in July and August.
It's evened out over the 9 months, but it reduced the global third quarter growth rate by around 50 to 60 basis points. And if you were to just take Europe, its impact was 2 percentage points.
The second factor, China. Underlying sales growth was down by close to 20% in Q3.
That's the equivalent of around 2 to 2.5 weeks of sales there. The slowdown in market growth rates in China has been particularly sharp in top cities' hypermarkets, where we have a stronger presence.
And this has triggered significant stock level adjustments across the extended supply chain, retailers, wholesalers and distributors. The impact of China on the third quarter underlying sales growth is approximately 70 to 80 basis points at a group level.
If you take our categories, Personal Care and Home Care, the impact is over 100 basis points. And if you look at our Asian/African/RUB region, the impact is close to 2 percentage points, 200 basis points.
So we expect a similar decline in our sales in China for the fourth quarter as well. But by then, the destocking will have largely played out by the end of the year.
Set against these 2 factors, you'll also remember the soft comparator from the SAP implementation that took place in Brazil last year, and that boosted the third quarter of last year. So adjusting for all this gives a run rate of around 3%, which I referred to.
Let me now move on to the analysis of turnover for the third quarter. Underlying sales growth, 2.1%, includes volume growth of 0.3%; price growth, at 1.8%, which is around the same level as last year; an increasingly positive contribution to price from emerging markets as we progressively recover currency-driven cost increases.
Let me give you some examples. In Brazil, we raised prices by 3% at the start of Q3, followed on from a 5% increase in the first half.
In Indonesia, we increased prices by 5% in September. At the same time, however, there's an increasingly negative contribution in Europe, where the cost environment is generally more benign.
The growth in underlying sales is offset by our continued drive to dispose of noncore slower-growth businesses. So M&A had a negative impact of minus 1.5% in this third quarter, and that follows the disposals of the U.S.
pasta sauces and the well-known SlimFast. The currency headwinds are easing, and this is good news.
You will remember that in the first half year, currency reduced turnover by 8.5%, following the devaluations that took place in the second half of 2013 and at the start of 2014; of particular note, Argentina, Brazil, Indonesia and India. Over the last 6 months, however, many of the emerging market currencies have been more stable, and the Indian rupee has actually strengthened, while the peso in Argentina, the ruble in Russia have actually continued to weaken.
The net result is that in the third quarter, the currency effect on turnover was more muted at minus 2.6%. The estimated full year currency impacts are all included in the appendix of this presentation.
Let me now hand over to James, who will take us through the regional and the category performances.
James Allison
Thank you, Jean-Marc, and good morning, everyone. As usual, we'll start with Personal Care, our largest category.
Growth of 4% in the first 9 months continues to be broad based across our subcategories and brands. It's also equally split between volume and price.
Growth is ahead of our markets, led by global share gains in hair care and deodorants. Markets have continued to slow during the year, particularly in the mass segments, as consumers have adjusted to squeeze disposable incomes and become more frugal in their usage and purchases.
As Jean-Marc said, many are making a little go a long way. At the same time, competitive intensity remains high, especially in the U.S.
and in oral care in a number of countries. The strongest brand growth in Personal Care comes from Lifebuoy.
This brand combines superior technology with a clear social message all built around helping more children reach the age of 5. Lifebuoy is now in 37 countries after the most recent launch into China, which has started well.
Our 2 largest Personal Care brands, Dove and Rexona, continue to show good innovation-led growth. For Dove, new technologies are bringing added benefits in products like the improved NutriumMoisture body wash or the Dove Advanced Hair Series, with a range of premium variants offering clearly differentiated benefits, be it more volume, shinier hair, fullness or 72-hour manageability.
Both are good examples of our Maxing the Mix way of innovating. Rexona is seeing a good start for the compressed format, which is now in 6 countries, another example of a sustainability initiative enabled by superior technology for the benefit of consumers.
There's no compromise on quality and performance, it is more convenient and it is better for the environment. In the third quarter, Personal Care growth of only 3% was well below the levels that we have become used to.
Adjusting for Chinese destocking, the run rate is around 4%. This is still well ahead of market growth rates, which have slowed broadly across segments and countries and now average just 2%.
Foods declined by 0.5% in both the first 9 months and the third quarter, and this includes some contrasting performances. Cooking ingredients under the Knorr brand continued to show solid growth ahead of markets.
Demand has actually held up better here than in some other segments as more consumers choose to cook from scratch. This gives more opportunity for products that make their lives easier like Knorr Stock Pots and Baking Bags or the Mealmaker ranges, which can help turn even a relative novice into a wizard in the kitchen.
The Hellmann's brand is going in low-single digits despite slowing markets and some heavy promotional activity in the category. However, margarines continued to hold back Foods performance.
You will remember that 1.5 years ago, we said that we were determined to turn around the performance of this business and that it would take some time to do so. The first step was to improve our competitiveness against other margarines.
This has been done, and we have been steadily gaining share from other margarines for -- over the course of the last 4 quarters, as you can see in the chart. The margarine market has continued to contract, although the rate of decline has reduced.
To counter the market decline, we've been investing in campaigns to increase the usage of margarine for cooking and baking. And we've been entering the fast-growing segment of blends of vegetable oils and butter or so-called mélanges.
Rama with Butter in Germany has led the way here. And Bertolli with Butter is performing ahead of our expectations in the U.K., though it is still early days.
So far, we have launched more than 10 new mélanges in Europe, with more still to come. There is no shortage of activity in spreads, and we are confident that the actions we continue to take will progressively improve this important business.
Refreshment has grown 3.5% in the first 9 months, with a little over half of this from volume. The third quarter performance reflects the weather impact on ice cream in Europe, so it makes more sense to look at the year-to-date, which is less affected.
Over the 9 months, ice cream is back to modest growth in both Europe and the U.S., following the portfolio reshaping there last year. The new premium innovations of Ben & Jerry's Cores, Magnum Infinity and Breyers Gelato are all doing well.
Across the emerging markets, our ice cream growth is averaging 10%, with close to half of this from volume. Tea continues to grow in total, and we're back to growth in the U.S., following the introduction of K-Cups and liquid iced tea mixes.
Home Care has grown by 6.4% in the first 9 months. Half of this is coming from volume growth.
Underlying price growth is increasing as we progressively recover the impact of currency devaluation on commodity costs. We're doing so cautiously, taking into account both affordability for consumers and the competitive context.
Fabric conditioners are growing particularly strongly, helped by super-sensorial variants such as Aromatherapy introduced last year. And the launch of Omo stain removers and pre-treaters in Brazil is going very well.
The priority now in laundry is to improve margins faster than the Unilever average without losing market share. However, this year, commodity cost inflation in emerging markets and the competitive situation are both working against us in that respect.
We will discuss this further at our Investor Day in December. Household care continues to show good broad-based growth as we consolidate Domestos and Cif in the new markets we've entered and launched new variants like Sunlight Nature in Thailand.
Let me now turn to our regional performance. North America returned to growth in the third quarter.
We're gaining market share in total and particularly in Personal Care despite a high level of competitive intensity. Ice cream has improved following the actions taken last year, and our Foods business is now more closely aligned to our global portfolio as a result of the disposals we have made.
We're now focused on sustaining an improving trend as we go forward. In Europe, underlying sales declined by 1.8% in the first 9 months.
The decline is entirely in price, with volume slightly positive. Jean-Marc has already described the market conditions that lie behind this dynamic, so I won't repeat that now.
In the first 9 months, we have seen growth in France, Spain and Greece, in all cases driven by volume. In the third quarter, underlying sales in Europe declined by 4.3%, with something of a perfect storm.
The ongoing market weakness was made worse by more price deflation in a benign commodity cost environment. And adding to this was the impact on our ice cream businesses of the poor weather compared to the third quarter of last year.
In fact, our ice cream business in Europe was down by over 10%. Latin America continues to grow strongly, with a substantial contribution from price.
In Brazil, we are still achieving double-digit growth, with volumes up by 3% over the course of the first 9 months. In Argentina, there is increasing government intervention to control pricing given the very high levels of inflation.
Even so, price growth remains high, and we are broadly maintaining volumes there. Markets across most of Asia/AMET/RUB have continued to slow through the course of the year, most notably in China and South Africa.
As mentioned earlier, the trade destocking in China had an impact of nearly 200 basis points on growth for the region in the third quarter. We sustained consistent double-digit underlying sales growth in both the 9 months and the third quarter in a number of key countries, including Indonesia, Turkey and the Philippines.
India has also grown well. Russia has seen modest growth, and here, we have largely been able to mitigate the impact of the import restrictions on some of the ingredients used in our products.
And with that, let me now hand back to Jean-Marc.
Raoul Jean-Marc Sidney Huët
Thank you very much, James. Despite the tough conditions, our priority remains to grow and to grow consistently and profitably.
So let me now turn to the actions that we're taking to sharpen our execution. There are always opportunities to grow.
Our job is to make sure that we are seeking these out, addressing them, while at the same time continuing to invest behind the core and provide value for our consumers at all levels of the income pyramid. First and most important is innovating with products that bring new benefits and take us to higher price points.
This drives growth and margin by Maxing the Mix. In many markets, we see these premium propositions continuing to attract consumers even while mass segments are struggling, be it in hair care, where the premium TRESemmé 7 Day Keratin Smooth is doing well; or our new toothpaste brand, REGENERATE, which we have so far launched in limited channels in the U.K., selling for GBP 10, showing encouraging rates of both trial and repeat purchase; in ice cream, premium innovations of Breyers, Magnum and Ben & Jerry's are playing an important part in bringing the U.S.
business back to growth; and the newly acquired T2 brand takes us into the premium tea section. Maille dressings, a great illustration of how far we can reach up in Foods, particularly, for example, if I go to our store in Piccadilly, where I see black truffle mustard selling well and people happy to pay GBP 29 for a jar.
But there are many more everyday examples, like a new range of Knorr ready-to-heat soups that we've just launched in Germany, or baking bags. But we also continue to enter white spaces.
See the launch of Omo in Saudi Arabia and the Gulf; building presence in countries like Ethiopia, Myanmar, with sizable populations, a big opportunity for driving increased per-capita consumption over time. And even in countries where we have well-established businesses, we are extending distribution in territories that are underserved, like the Indonesian islands, like rural India and the north and central parts -- sorry, the north and central west parts of Brazil.
At the same time, where appropriate, we are introducing more affordable products at lower price points. Examples are Spain, where we launched a smaller EUR 1 version of Cornetto.
Volumes are up threefold. And we've now extended this to Turkey, with the TRY 1 Cornetto.
In Argentina, we've learned from the previous economic crisis the importance of having such value brands in the portfolio that can capture some of the down-trading that inevitably happens when disposable income level falls. This positions us well for the current environment in Argentina, as an example, and it's helped us broadly maintain volumes despite the high pricing.
In Brazil, we're now following a similar principle, activating a local food brand called Arisco that offers a low-price alternative to consumers who are switching from the higher-priced brands. Now to fund our investment behind these growth initiatives and to ensure that the growth is profitable, we've also been accelerating our cost-reduction initiatives.
This applies to all aspects of the business, involves all countries and all categories. As we said before, we want to avoid the disruptive, big-bang restructuring, so we have and are taking a continuous improvement approach and absorbing any associated costs, which remain around the 100-basis-points level within our core operating margin.
Although it's almost becoming routine, we have extensive ongoing programs to drive down our supply chain costs. In addition to this, we are accelerating initiatives to make a step change in our overheads.
In the first 9 months of this year, we've reduced the number of management and support roles by 1,400 year-to-date. And we're well on track to deliver our Project Half savings target of EUR 500 million on an annualized basis, with at least now half realized this year.
But we've also reduced the so-called nonworking parts of brand and marketing investments. Agency fees, production costs as a percentage of media is down nearly 4 basis points -- sorry, 4 percentage points to around 20%.
And we're getting better returns on our investment as we direct more of our advertising spend to digital, which is now nearly 20% of the total and where the returns are exceeding those on traditional advertising when done well. We're particularly focused on advertising via mobile devices, as you know, and this is by far the fastest-growing media channel.
So in summary, we're accelerating cost initiatives, be it supply chain, be it overhead, be it inefficiencies with what we used to call advertising and promotion. Related but separate is we're enhancing agility, and this is necessary in this VUCA world that we're in today.
So we're taking steps to just continuously simplify the business. This continuously reduces duplication, wasted effort, supports our cost-reduction initiatives, but most importantly, enhances agility.
We'll talk more about this at our investor events in 4, 5 weeks, so let me just now just give you a couple of examples to illustrate what I mean by this. Let's just take laundry.
We've invested heavily, as you know, in our products to get winning formulations, and they are winning. This was an essential first step in regaining competitiveness in the category.
We succeeded, but the solutions for each market were bespoke. So today, we now see plenty of opportunities to harmonize base formulations while continuing to tailor the finished products to meet the range of needs across all our markets.
So our plans, actually, are to reduce the number of formulations by around 80%. This is material, a sizable opportunity.
Let me take a region like Europe, where we're really seeing the significant cost benefits, faster decision-making from the centralization of the regional brand teams that are now in Rotterdam. But also in terms of processes, we've been simplifying many of our global processes.
Let me just take one example here. We've reduced the number of steps in our HR planning and performance review from 8 to 4.
Sounds simple, saves an estimated 200,000 hours of work, which is equivalent to around 100 people. These are just illustrations of how we're enhancing our agility, and that will enable us to also reduce cost.
Now in times like this, where growth is less, markets are weak, it's all the more important that we apply all the levers to translate top line growth and operating margin improvement into earnings per share. And this is something that I've been discussing with you for the last 1.5 years or so.
And for 2014, this is very important. What are we doing?
Let me just summarize. The first one is managing our balance sheet effectively to give access to financing at very attractive rates and, obviously, preserving financial flexibility for our bolt-on M&A programs.
Secondly, we're reducing our long-term exposure to pension financing costs, closing defined benefit schemes, reducing funding deficits. These are not easy changes, not immediately apparent perhaps to you, but nonetheless, very important.
The hard choices made now will benefit the business for a long time to come. We're also paying close attention to ongoing tax efficiency.
We expect our core tax rate this year to be at around 25%, which is slightly below our longer-term guidance of around 26%, so as much focus above core operating margin as well as below. Another example, we've been using cash to make earnings-accretive investments.
Firstly, as you know, we increased our stakes last year in India and Pakistan, and this reduces the earnings leakage to minorities. And this year, we bought back the Leverhulme family rights, simplifying our capital structure and enhancing our core EPS by 2% on a full year basis.
So we are applying all the levers of earnings growth. So to conclude, we are on track to meet our objectives for 2014 despite these tougher market conditions: firstly, profitable volume growth ahead of our markets; steady, sustainable, core operating margin improvement; and importantly, strong cash flow.
We will continue to face headwinds for the remainder of the year that we assure, from the weak market conditions and from the effects of foreign exchange on our margins. Commodity cost inflation, including the embedded foreign exchange effect, is still expected to be around mid-single digit for the year.
You've seen the recent easing of some commodity prices, more stable exchange rates in many countries, and this should reduce the level of commodity inflation for next year. But only once we've worked through our natural forward covers, there's going to be little relief of this for this year.
And yet despite all these headwinds, we are confident through all these levers that there are the benefits from our cost savings that we accelerated, our efficiency programs, and that this will enable us to deliver an improvement in core operating margin and at current rates. So with that, let James and I take all the questions that you have.
James Allison
Okay, everybody, it's the usual format. [Operator Instructions] So I see that first up, it's Celine.
So Celine, what's your questions?
Celine A.H. Pannuti
My 2 questions, first one, if I think about the deflation you alluded to in Western Europe and, clearly, pricing in Western Europe worsening throughout the year, how do we look at that going forward? You mentioned as well there was a weaker, benign environment, which now I presume, as I look into 2014 -- 2015, is still going to be there.
So do we look at a minus 2, minus 3 as a normal pricing level now going into the next quarter? That's my first question.
And second, on the margin -- on the EPS levels that you are -- the different levels that you are enacting in order to deliver the EPS, obviously, you mentioned about the lower tax rate and some of the activities you are doing below the EBIT line. Are you flagging that maybe probably margin is going to be a bit less, and you are going to deliver on the EPS through these levels below the EBIT line?
Or shall we take these benefits, including the tax benefit, as on top of what we already have in our numbers?
Raoul Jean-Marc Sidney Huët
It's Jean-Marc. Let me just make a key message on your last point on earnings per share.
We are responding to this lower growth environment by driving our savings program harder. We're doing a variety of things, not just below the line.
The first one is, we've talked about it for a lot, is Maxing the Mix within our categories. 75% of our innovations are margin accretive.
This is good for gross margins. Secondly, you're right, we're doing a lot in terms of ongoing savings, tight control on costs, supply chain savings programs.
We're accelerating low-cost business models, which are currently focused on laundry and ice cream, and we are pricing, but we're doing this in a judicious manner. Much easier in emerging markets; I've mentioned Brazil, India, Indonesia.
And I'll come to your first point on deflation. In terms of overheads, we've made good improvements over the last 4 to 5 years, but that will continue.
And just a data point, 1,400 people, management, support functions, down just this year. And we're on track for the EUR 500 million of savings.
And so what I'm trying to say is that, be it through gross margin, overheads, nonworking media, we expect core operating margins to be up for the year. Now this is up at current rates.
If you just look at where the costs actually lie within Unilever, they've all increased because of foreign exchange. So important is, despite the growth, applying the levers, core operating margins will be up despite the impact of FX, which, at this point in time, on a core operating margin level, is anywhere around 30 to 40 basis points.
In addition to that, Unilever has not focused as much below the line, below core operating margin. So the second message is, be it in terms of associated, be it in terms of minorities, be it in terms of tax rate, there is much more focus on translating the top line to the bottom line.
Where we'll actually be? We'll tell you when the year-end closes.
But the tax rate, yes, it's at 25%, which is at the lower level, and this will benefit. Most important is to just recognize with lower sales, we want to provide consistent performance.
On the point of deflation, let me just make a couple of points for clarity. The first one is, is that we are talking about Europe, not developed markets.
So the minus 2% that you're referring to is Europe, not North America. We do see the benign commodity cost environment continue.
There will be some benefits, obviously, within gross margin next year, but I will say that we are not assuming that we're able to take any pricing, specifically in Europe, going forward. That is not within our assumptions today.
And so pricing in developed markets, specifically in Europe, will be difficult for the remainder of the year, and I do not anticipate that getting easier for 2015. But we will come back to that, be it either at the IR event or in January.
James Allison
I think we're going to move on to Warren Ackerman now.
Warren Ackerman
It's Warren Ackerman here at Societe Generale. Two questions from me.
The first one, could we dig a bit deeper on China? Down 20% in the quarter, is that all destocking?
So x that, is China flat? I mean, others have mentioned some destocking but not to this extent.
I was just wondering whether you can go to what you're seeing in the supply chain. How much stock is there in the supply chain, and how can you be sure that it will be worked through by the year-end?
And then just secondly, on pricing, you disclosed that LatAm pricing was 9.8% in the quarter. So working that through, LatAm would be 1.6% of the 1.8% group pricing.
I mean, if I strip out LatAm pricing, as I imagine that most of that is hyperinflation pricing, although you did say Brazil took some low pricing, the group organic growth would have been much lower at 0.5% rather than 2.1%. So I'm just wondering, are you able to say how much was hyperinflation pricing in LatAm out of the 9.8%?
So I'm just a bit surprised that you're saying that you're growing ahead of your markets when I look at the real underlying growth x LatAm pricing.
Raoul Jean-Marc Sidney Huët
Why don't I just take Latin America first, and James, you take China, and I can supplement if need be. If you don't mind, Warren, I'll just make a couple of comments on Latin America in general, and then I'll zoom in on your point just on pricing.
Let's make a couple of points clear. The first one is that economies do remain difficult in Latin America.
Markets -- our markets continue to grow double digit, but volumes are flat. So the USG is driven primarily by price.
We do grow ahead of our markets, and we are gaining share in Latin America. And in these types of environments, it's so important to continue to focus on that point, we're gaining share in Latin America.
If you look at Brazil specifically, which is our largest market in South America, it's actually our largest market in emerging markets, we've had good growth. And it's price and volume driven even despite the SAP go live.
You take laundry, very good performance, gaining share. The Omo stain lifter is doing very well.
Ice cream, growth continues. And in Personal Care, deodorants is just continuing to be the powerhouse that it's always been.
And we've just launched Rexona Anti-bacterial, which is doing well. Argentina, it's all price.
Volumes are flat, and we're actually happy with the fact that the volumes continue to be flat. This is a very difficult economic situation.
As you know, inflation is at around 25%, 35%. This happens every 10 years.
Thankfully, we have a team which knows economic crisis in Argentina very well, and we have market shares that are very good. There are price controls that are now embedded in the law.
It's difficult to get that pricing. But again here, we're gaining leadership -- or we've gained leadership in laundry liquids.
We were already lead in powders. And so we're competitive, be it Brazil or Argentina.
Let me just go to Colombia and a bunch of other of the small Andina markets, as we call them. They're also doing well.
And I take a market as Colombia, where our laundry performance, which we bought, as you know, from Colgate a couple of years ago, is doing very well. So overall, it's good growth, it's competitive, but absolutely more is to do with price than volumes.
But don't knock the volumes because it's actually a good performance. Venezuela is very small for us.
We said that before. So it's not material; it's less than 0.5% of turnover, so it's not important.
Argentina is probably just over 2% of our business. Just to give you a context, if you take -- and this goes to your actual question, but I wanted to give you more color on where we are.
If you take the pricing in Argentina, it probably adds around 80 basis points to the Unilever USG. It's not too different to the contribution that it had same period last year.
So year-on-year on, the impact isn't actually that much. But just to give you the precise point, 80 bps to the Unilever USG.
Obviously, we look at the question mark about hyperinflation, accounting or not. There's a lot of judgment behind that.
Where we are right now is that we do not need to apply IAS 29, the hyperinflation accounting, and that's, obviously, a discussion that we continue to look at. On China, James?
James Allison
Yes. Warren, thanks for that question, I'm sure it's on many people's minds.
So let me just say a word or 2 about China, and then I'll come directly to your specific question. So for Unilever, this is a EUR 2 billion business with very attractive gross margins.
It's an important part of Unilever as a whole. It's still only 4% of the overall group.
We have there 3 primary categories that we are putting a lot of our attention into. Those are skin cleansing, hair and laundry; to a lesser extent, also ice cream; and we have a strong Food Solutions business there as well.
And in April of this year, you remember that we bought the Qinyuan water purification business, and I'm glad to say that that's off to a really good start. So that's just a little bit of context about China for those of you who don't know it so well.
Now as Jean-Marc was saying, we've seen market growth slowing very dramatically and quickly in China from 7% to 8% in 2013 to now less than 2% in quarter 3 of this year. And this slowdown is particularly acute in the larger cities and the hypermarkets where Unilever happens to be stronger.
So as a result of this, there's been a triggering of some very sharp reductions in stock levels throughout the extended supply chain. And in this context, Unilever has chosen to reduce the level of promotional activity that we put into the trade now -- or in quarter 3 because we just don't want to exacerbate that stock situation any more than it is already.
We'd much rather have these stocks coming down to allow our new innovations to come through and to reduce any risk of future returns coming to us. So consequently, that has meant that our sales were down 20% in the quarter.
Largely, that is to do with stock just coming out of the supply chain. Now I do want to reassure you a little bit that when we look at our consumer sales, they're holding up very well.
Indeed, our market shares are continuing to remain strong. So this is not about consumer demand, this is simply about -- or rather, it's not about Unilever losing competitiveness, it is simply about reduction of stock in the supply chain.
Now I think as Jean-Marc has already said, we do anticipate a similar level of a decline in quarter 4. To your point, Warren, it's very, very difficult for us to be absolutely sure because the visibility across the extended supply chain in China is not that great.
But of course, we have looked at this extensively with our people on the ground. And we think that by then, we'll have taken 5-weeks stock out of the supply chain, and that will put us into a position where we start next year having the right levels of stock in the trade, and then we will continue to pursue our objective of growing faster than the market, wherever that might be.
So hopefully, that addresses your question, Warren. And we'll move on to the next caller, and that, I think, is David Hayes.
David?
David Hayes
Just going back to the margin outlook and trying to piece together some of the moving parts, I mean, the acceleration on the cost saving, I assume, may come with a restructuring charge, which is slightly higher than you thought, beginning of the year. I guess that's part of the question.
Just picking up on the comment about why the geographic reach in terms of growth, driving growth, I assume that's quite high cost to serve, initially. And then again, picking up on the point you made earlier, that the slowdown was more than you perhaps you expected.
So I guess the leverage -- or deleveraging is a little bit more severe than you would've expected. So just putting that all together, I just wonder how confident you are that, that core margin can still be up, whether there's an element of comfort around that or whether that's an aspiration and there is some pressure there when you put those things together.
And I guess just related to that, which maybe is the answer in some ways, I'm just looking at Slide 17, where you showed that nonworking media drop of circa 400 basis points year-to-date. Just wondering, can you explain what that's showing.
It looks -- when you're looking at that, that's a 400 basis points of sales benefit in terms of nonworking media costs. I just want to make sure whether that's what it is and whether that's partly why the margin benefit -- or the margin delivery is still likely.
Raoul Jean-Marc Sidney Huët
Well, thanks, David. Let me take your question, and I can make it very short.
We are confident in the core operating margin improvement for 2014 on a current basis. So that's actually making life harder for ourselves because of the adverse impact of foreign exchange.
But we are confident this is not an aspiration. And we've said that each and every year for the last 5 years, and it's with the same level of confidence.
Let me also say, at the same time, is that we will remain competitive. So you mentioned brand and marketing investment and specifically nonworking media.
Let me also be clear is that our spend has been and will continue to be competitive. Obviously, we want to start next year with momentum.
Let me also say that on nonworking media, you know what it is, it's reducing basically ad agency fees, productions. It's a proxy, actually, of just having a simple, effective, global and local organization in terms of supporting our brands.
Now our target is 20% of media, not of sales. So the savings is around EUR 100 million or so.
It's not as a percentage of turnover, but it's a percentage of media. Five years ago, we were at, if I may say, embarrassing levels.
As we've bought other business, we've gotten to know -- at Alberto Culver, more simple business, what those levels can and should be and given those as our aspiration for the entire company. So we're now close to 20%.
It can go up or down each and every quarter because it's activity based, but it's -- we're talking about a saving of around EUR 100 million. You mentioned restructuring levels.
As I said in my prepared remarks, they will be at around 100 basis points. It's not going to change that much more.
Accelerations of initiatives don't always mean making -- spending more money. It's about bringing in discipline to the whole organization, different behaviors, different ways of working and, yes, also challenging restructuring costs more because it's now part of our core operating margin.
So the levels of restructuring will not be very different than they were last year. But given the quarter, we just wanted to flag where we thought restructuring levels would be.
Yes, there is some deleverage. If you have less growth, there's less absorption of your fixed costs.
That's inevitable. But given that we've been in this volatile environment for a while, we have anticipated that we would need to apply these levers.
And so that's why I'm pleased that we're focused on applying all the different levers, accelerating, if need be, for already 1 year, 1.5 years. And this is the type of year where you just need to demonstrate agility.
And so despite the lack of leverage, we still think we can apply these levers and get the core operating margin improvement that I referred to.
James Allison
Okay, we've got Richard on the line now.
Richard Withagen
Richard Withagen, Kepler Cheuvreux. Two questions.
Could you talk a bit about how the build up to the seemingly high stock levels in China happened? And also China, is there -- is it only hypermarkets?
Or is it also in other channels? And the second question I have is, you plan to reduce SKUs by 10% to 20% in 2014.
So I'm wondering, where do you stand today? And what kind of reduction do you plan for next year?
Raoul Jean-Marc Sidney Huët
Let me take just the one on SKUs. That is very much going to plan.
We actually had a very specific effort of reducing SKUs that amounted to less than EUR 50,000 of sales or so, totally according to plan. Success, however, of SKU reduction is if it really is part of the way we work each and every year because these initiatives, actually, can be very successful within a certain period of time and then, all of the sudden, pop back up.
So I am pleased with the performance that we've been making on SKUs. I think the reduction, I look at Andrew [ph] here, is around 25% to 30%, so absolutely on plan.
I think we had 40% as a real aspiration. But obviously, keeping the discipline around SKUs next year as we continue to innovate is going to be very important.
No promises made there, but just the acceptance that we need to improve each and every year because, otherwise, it's just not worth it. SKU reduction is one of those initiatives within Project Half, which I am happy to say is really starting to stick within the organization.
James, on China.
James Allison
Yes, Richard, so I think what we are seeing is that there are stock -- stock levels are high across all aspects of the supply chain, so we mean here the distributors, the wholesalers, all the way through. I think the point we're making about hypermarkets is that that's where our business predominantly is, and some of the slowdown in sales has happened there.
How can it happen? Well, I think the point that we've been making is the speed with which the Chinese demand has come down has been rather more quick than we've seen in other markets.
So it happens quickly, and it does take time for people to adjust to a new normal. And so I think it's not just Unilever that's been mentioning stocks and the trade in China.
Perhaps our level is a little higher than so far people have reported, but nevertheless, I think it's probably true for a number of people. So if you don't mind, we're going to move on to the next question now, and it's from your colleague, Marco Gulpers.
Marco Gulpers
I've got 2 questions. The first is, what do you see in terms of the acceleration and the discount channel having an effect, basically, on your market, especially in Europe?
And the second is also related to China, the destock effect. Is there any risk that this might move to other markets as they slow?
Raoul Jean-Marc Sidney Huët
Let me ask my residential China expert, James, next to me, to give the comment on China, and then I'll go back to lovely Europe.
James Allison
So we're not picking up, Marco, any particular signs of this destocking elsewhere in our markets. Now, that doesn't mean to say that there isn't some or there won't be some as markets slow.
That can always happen. But there's certainly nothing on the scale that we're seeing in China.
Raoul Jean-Marc Sidney Huët
If I then, Marco -- if I just go to your point on discounters, and the real question is, is it a challenge to your business model or not? A couple of points.
The first one is this is not a new phenomenon. They've been around for a long time.
And companies like Unilever, we just simply follow the shopper, and we've been focusing on serving discounters for a while. In actual fact, if I'm not mistaken, our turnover with discounters is north of EUR 1 billion, growing ahead of the EU average.
And in actual fact, it may surprise you, but the margins that we have are actually in line with our overall business. So what we've been doing is we've been stepping up our focus, given the growth on discounters.
We have a dedicated discounter team, and that focus is very different to the other customer teams. You can imagine they are very focused on the GBP 1 or the EUR 1 ranges.
They are very focused on the very large packs. They are very focused on specific packaging solutions.
And overall, the overall business model is a more volatile one with discounters, where you're talking about annual tenders and the like. So we have a very dedicated team to deal with the discounters.
But rather than see them as the enemy, it's part of our business. And we need to serve the shopper, and the shopper has decided to go more to discounters than the traditional retailers.
And yes, there are implications, but we serve the shopper.
Marco Gulpers
All right. Then maybe a small follow-up question.
So the channel shift that you're seeing in China, you are not seeing any acceleration in any other markets that you feel you need to highlight?
Raoul Jean-Marc Sidney Huët
No, especially not at this point in time. China is very specific.
In terms of the growth deceleration, in terms of just the complexity of the go-to-markets and, as a result, the call out is China and China only.
James Allison
Okay, I think we've got time for one more question, and that's coming from Harold Thompson.
Harold Thompson
I just got one question. On North America, clearly, a very impressive performance overall and good volumes there.
But how should we see the margin performance of that volume given there's the need to -- negative pricing to achieve that? And you also comment that North America is maybe finally picking up from a consumer perspective.
So does that mean you're calling the U.S. turn or you're simply stating a fact that in the last -- in recent weeks, just U.S.
data had been better for your categories?
Raoul Jean-Marc Sidney Huët
Harold, overall, the banners in the newspaper around North America have been actually positive for a while. And what we've always said is, yes, that's the case, but it's maybe in real estate, maybe it's in other industries, but we don't see it actually in our markets.
For the first time, for longer than 1 day, if I may say, it's now starting to impact positively the markets which we're operating in. So we see a clear improvement, and now the markets in which we operate are growing at around 1%.
But let me, at the same time, say it's only 1%. And so while we do see improvement, glimmer of hope, it is only 1%.
The environment in the U.S., specifically, remains a challenging one. There's around 1/3 of volume, I think, sold on deal.
Promotional intensity is higher. I was there a couple of weeks ago, and specifically, in the hair care market, there's a huge level of intensity.
So we're happy that the overall market seems to be improving. It is at modest levels.
We are gaining share and growing ahead of the market. I think we're gaining share in around 3/4 of our business.
Refreshments is back to growth. Tea is doing better.
So we are more bullish on our own specific business. But obviously, I would say, at this point in time, that a swallow doesn't make a summer.
James Allison
Okay, I think probably there are other callers on the line, so if you don't mind, the IR team are very happy to take your calls. We'll do that in a few moments when we get upstairs.
And so I'll just pass back to Jean-Marc for final words.
Raoul Jean-Marc Sidney Huët
Well, thank you very much, everybody, for your time this morning. Let me just sum up in a couple of words.
There is no doubt that market conditions are tough or very tough. We at Unilever, we continue to focus on the right long-term actions for the health of the business.
And we are confident -- yes, we are confident that we will deliver our objectives for 2014. So thanks from me, James and the team for your time today.
I look forward, Paul looks forward to seeing many of you at our Annual Investor Day on the 4th of December. And as usual, for the remainder of the day and the week and the months, the IR team is very happy to answer any further questions that you may have.
Thank you very much.
Operator
This conference has been recorded. Details of the replay number and access codes can be found on Unilever's website.
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