Oct 15, 2015
Executives
Graeme Pitkethly - Chief Financial Officer Andrew Stephen - Head of Investor Relations
Analysts
Harold Thompson - Deutsche Bank Warren Ackerman - Societe Generale Javier Escalante - Consumer Edge Research LLC Jeremy David Fialko - Redburn Partners LLP James Targett - Berenberg Bank Robert Jan Vos - ABN AMRO Rosie Edwards - Goldman Sachs Karel Zoete - Rabobank Equity Research
Operator
We are about to hand over to Unilever to begin the conference call. [Operator Instructions] We will now hand over to Graeme Pitkethly.
Graeme Pitkethly
Good morning. And a warm welcome to our third quarter results presentation.
And thank you for listening to that terrible music. This title chart reminds me that Dove Men+Care is a proud rugby supporter here in the UK and Ireland.
With all the excitement and drama of the Rugby World Cup now in full swing, I’m greatly reassured that in my old job running the UK and Ireland business we hedged our bets and agreed deals with all four of the home nations and so can continue to support the three of them still in the competition going into this weekend’s quarterfinals. Now, ahead of starting as CFO at the beginning of this month, I had the pleasure of meeting many of you at various meetings and conferences during September.
It’s been a very valuable opportunity to get up to speed and find out what is on your minds. So, thank you for the interaction and the welcome you’ve extended to me.
A few of you have commented on the big boots that Jean-Marc leaves behind. And I’d like to say a personal thank you to him as both a colleague and a friend for what he achieved at Unilever.
As those of you I have met will know, I worked in finance for a large part of my time in Unilever. And so fairly closely with Jean-Marc on the changes that he introduced in the finance function during his tenure.
We can talk a little more about my own thinking and agenda at our investor event in a few weeks’ time, but for now let’s get on and focus on the review of the third quarter. I’ll begin with the market context and a brief review of our underlying sales growth overall and by category.
Andrew will take us through the regional performance and our turnover development, and I’ll then wrap up with some concluding remarks on our outlook for the remainder of the year in what continues to be a very volatile and so challenging environment. Before we go further though, let draw your attention to the usual disclaimer relating to forward-looking statements and non-GAAP measures.
So let’s get going with the market context. I’m always weary of averages and too much aggregation in looking at performance, but I think it’s fair to say that in aggregate, we have not yet seen any improvement in our markets.
In fact, in a number of countries the economic environment is getting worse with the situation on the ground dominated by the effects of currency depreciation. In Europe, with the exception of ice-cream our markets have stayed flat.
There is some volume growth as a modest and slow economic improvement translates through to increased demand in our categories, but this is offset by price deflation, which is for now the norm. In North America, market growth remains hovering at round the 1% to 2% mark.
In the emerging markets, we are seeing the greatest volatility, of course, and where that continues to be a very mixed picture of country-by-country, the GDP growth trend is slowing in most of them. In India, there is a pickup in urban markets, but rural economies are under pressure.
In China, you would remember that we saw a slowdown in consumer demand during 2014. Since then, market growth is stabilized, but at rates stepped down from those we were used to.
As yet, we haven’t seen any further deterioration as a result of the recent stock market volatility, but we remain cautious. China is however a major consumer of commodities and a driver of sentiment, so the relatively small devaluation there triggered much larger movements in a number of other emerging markets.
These came on top of the earlier devaluations of the past couple of years in major countries like Brazil, South Africa, Indonesia and Russia. This in turn has pushed up the cost of living faster than incomes have risen in those countries and so consumers are having to economize, making a little, go a long way, and in some cases down-trading to cheaper alternatives.
Against this challenging background then, we are encouraged by the improvement in our overall growth in the third quarter. Underlying sales grew 5.7% taking the year-to-date growth to 3.8%.
This improvement was driven by volume, which was up 4.1% in the quarter, so a step up in our growth. However, it’s important to recognize that there were some specific factors in Q3, which helped that growth, each with a similar sized impact: firstly, a strong ice-cream season with better weather in the southern-half of Europe and a competitor quality-related recall in North America; secondly, the phasing of Latin American sales between the third and fourth quarters.
Now, there are number of reasons behind this including advanced sales before announced, price increase in Brazil, and a system upgrade in Mexico. We expect these to reverse with a consequent decline of Latin American volumes in the fourth quarter.
Thirdly and finally, the soft comparator from the trade destocking in China that we talked about last year, we will see a similar though slightly smaller positive effect in the fourth quarter. These factors help the Personal Care, Home Care and Refreshment categories, but there was no impact on Foods.
By region, Latin America, Europe, and AAR were particularly affected with the smaller impact on North America. But as the chart shows, even allowing for those three specific factors we would still have seen a steady improvement in growth momentum as we expected.
Importantly, our competitiveness has improved. And after three quarters in which our growth was no more than in line with our markets, we are now gaining share once again.
All four categories are growing and the portfolio as a whole is demonstrating its resilience with the overall delivery becoming increasingly robust. Our innovation is getting stronger, incorporates more differentiated technologies, and is more and more aligned behind the category strategies.
We’re investing consistently behind the core of our business and behind their innovations. Let’s take a look at each of the four categories in turn.
In Personal Care, our priority is to continue growing the core while building premium. Underlying sales grew 6.2% in the quarter, mostly from volume, and by 4.1% in the first nine months.
The new dry spray aerosol deodorants launched in the U.S. at the end of last year are already approaching €100 million of turnover on an annualized basis.
They use the same innovative nozzle technology that we developed for the compressed deodorants in Europe to crack the problem of perceived wetness on application, which has been the major barrier to this format in the U.S. up until now.
As well as helping to drive strong share gain, this innovation is accretive to margin and are growing the total category. In skin cleansing, Lux is rolling out the world’s first body wash with fragrance touch technology from Southeast Asia to the U.S.
and Japan. The new Dove Advanced Hair Series, now in 11 countries is up-trading a portion of the existing Dove user-base to higher price points and at the same time attracting new consumers and growing overall category value for our customers.
And in oral care, we’ve introduced the Zendium brand into five new countries this quarter, taking the total number to nine. Zendium has a strong proposition, boosting the mouth’s natural defenses by harnessing the same protein and enzymes that our mouths use.
In Foods, our priorities to improve volume growth while maintaining the strong margins and cash flow that this category generates. In the third quarter, underlying sales grew by 1.6% and are up 1.5% in the first nine months.
This is an improvement on the flat sales we have delivered over the last two years, but with still more to be done. Savory continues to grow in mid-single digits.
Knorr has just announced - sorry, introduced the first meal-makers made from 100% natural ingredients. And in a number of markets we’ve launched new cooking ranges of Knorr ready-to-eat soups with home cooking recipes made entirely from sustainable ingredients.
In parts of Africa where iron deficiency is a real issue we have introduced Knorr fortified stock cubes to supplement local diets. Dressings also had a good quarter.
The new Hellmann squeeze bottle already working well in Europe and Latin America is now building nicely in the U.S. The bottle fits neatly in the fridge door and the innovative new nozzle leaves it completely clean after each serving, a very appealing consumer benefit.
The new baking, cooking and spreads unit, up and running since the start of July is now 100% focused on executing its strategy. This includes driving down costs, better allocation of resources and investing to reposition our portfolio more towards the faster growing segments of a market that remains very challenged.
The new blends of vegetable oils and butter like Bertolli with Butter are on track to achieve sales of approaching €80 million this year. We are gaining share within margarine in the developed markets, but the market decline is continued, made worse by low dairy prices.
We’ve made a big change to how we operate in spreads. And 2015 will inevitably be a year of transition.
The results from the new approach will need to be judged through 2016. Turning to Refreshment, our priorities are to improve margins in cash flows in ice-cream and to grow faster in tea by repositioning the business to the segments which are most on trend.
Underlying sales grew 8.5% in the third quarter and are up 4.7% for the first nine months. A strong ice-cream performance in the third quarter was boosted by the factors I mentioned earlier, but we are also seeing good results from our innovations.
What is most encouraging is that the fastest growth in ice-cream is coming from our premium brands, like Magnum and Ben & Jerry’s. We continue to add to the portfolio at the super premium end with the acquisition of GROM just announced and through Talenti acquired at the end of last year, so not yet in our underlying sales growth, but up by more than 40% as we expand its distribution.
Magnum Pink & Black has been our most successful variants of Magnum yet, so much so that we are keeping it in the range for next year. And the new Ben & Jerry’s Cores range with the central cookie core has helped sustain the double-digit growth rates that this premium brand has consistently been achieving.
Tea continues to grow solidly, but not yet to the potential of this attractive category. Our portfolio remains heavily weighted to traditional mainstream black tea, while the growth lies elsewhere in the tea category.
We are focused on addressing this and now have a much stronger innovation program as we build our presence in the more on-trend segments. We are launching new ranges of speciality teas under the Lipton brand in many countries.
In the UK, we have kicked off a complete re-launch of PG tips with a new fresh look extending the core with speciality black teas as well as herbal and green teas. We’ve opened more T2 stores, including six in the UK and one in the U.S.
These stores bring strong visibility for the brand with consumers making repeat purchases online. We are introducing machine compatible single-serve capsules in several European countries.
And in France we have just launched our first tea brewing machine T.O. by Lipton.
I think it’s also worth remembering that the growth rates you see here don’t include our successful joint venture with Pepsi for Lipton Ready-to-Drink tea. This continues to go from strength-to-strength with 13% growth in the first nine months underpinned by further investment in the brand.
Turning to Home Care, our priority is to improve profitability in laundry and scale-up household care. We will report back on the margin development with the full year results, but you will recall that in the first-half we were on track towards our objective.
Underlying sales grew 6.6% in the third quarter, and 5.2% in the first nine months, mostly from volume. Innovation is helping to drive both continued growth and margin improvement through mix.
The new global range of Omo with wash boosters, have an improved formulation for both better whiteness and removal of oily stains. With the renewed focus on speed and simplification, we were able to half the time to launch the new product compared to previous global innovations.
Comfort Intense takes fabric conditioners to an even more premium level with a super concentrated formulation and double encapsulation technology. And in Brazil, where we launched the new Omo specialist pre-treaters and stain removers, we’ve achieved a 20% share in the first year.
Meanwhile, in our household care brands, we have extended the Cif Power and Shine sprays for kitchens and bathrooms across Europe. We’ve also introduced Sunlight Dishwash into new countries in Africa and into the Philippines, and launched Brilhante [ph] small surface cleaners in Brazil.
So if I can summarize the category performances in Q3, there is good progress on executing the sharpened strategies and strong innovations driving growth across the portfolio. But, of course, there is still more to be done, particularly to improve growth in Foods and in Tea.
I’ll now hand over to Andrew, to talk us through regional performances. Andrew?
Andrew Stephen
Thank you, Graeme. Let’s start with our largest region Asia, AMET, RUB.
Here growth of 5.3% was largely volume-driven and included some mixed performances. India showed continued solid volume growth of just over 6%, but pricing has turned slightly negative, as a result of benign commodity costs, a change in excise duty benefits and competitive price pressures in hair care.
In China, the channel shift continues with demand through the modern trade in the Tier 1 cities flat or declining. We are extending and deepening our reach through distributors to the Tier 2 and 3 cities where there is growth.
And we are building in e-commerce, where we’ve grown more than 80, that’s 80% in the year-to-date. We expect 6% of our retail sales in China this year to be online.
Southeast Asia remains subdued, with macroeconomic conditions holding back consumption most countries in the sub-region. Thailand has been particularly weak.
Turkey grew strongly with stand-out performances in ice-cream, tea and hair care. Growth in Russia accelerated, driven by price increases, as we managed through the currency volatility.
While in Africa market conditions are difficult and growth remains low. Moving across to Latin America, our businesses here continue to demonstrate their resilience with broad-based volume growth as well as strong pricing across the region.
We’ve been managing effectively through currency volatility and weakening economies including a recession in Brazil. Pricing decisions are taken locally, always with a view to consumer affordability and we benefit from strong well-supported brands and bringing technology-led innovations to the market.
Volume growth in the third quarter was particularly high for the reasons, which Graeme explained. Growth in North America picked up to 3%, and is now slightly positive for the year-to-date.
We’re gaining share in the U.S. with particularly strong performance in ice-cream, especially Ben & Jerry’s, Magnum and the premium Breyers Gelato range.
Deodorants are also growing well helped by the dry sprays launch, and Dove goes from strength-to-strength, as well as the Dove Advanced Hair series, which Graeme mentioned, we’ve introduced a new body wash. The new formulation and design deliver superior care and a better experience with consumers enjoying softer and smoother skin after just one shower.
And the Dove Men+Care range is also building well. In Europe, growth improved to 2.0% with 4.7% volume.
Here also the year-to-date is now slightly positive. The strong third quarter came from both good traction for our innovations and the boost to ice-cream sales.
All our key countries in Europe grew in the quarter. There was a strong contribution from the UK with the successful laundry innovations and continued rapid growth in e-commerce.
Germany, and Central and Eastern Europe also grew well. So having reviewed underlying sales growth by category and by region, let’s have a look at the impact of the other drivers of turnover for the third quarter.
Turnover was up 9.4%. M&A has now turned positive with an impact of 0.7%.
This includes Talenti, the Zest and Camay skin cleansing brands and the more recent acquisitions in Prestige Skincare. Currency translation added 2.9% to turnover, due to the weaker euro compared with the third quarter of last year.
Over the past few months, the euro has strengthened and a number of emerging market currencies have weakened. If exchange rates were to remain as they are today for the balance of the year, we would expect to tailwind on turnover of around 5% for the year as a whole.
The tailwind on core EPS would be less than on turnover at around 2%. As a reminder, there are two reasons for this.
Firstly, the effect of the strongest sterling and Swiss franc on our central costs; we now expect this to have a negative impact of around 20 basis points on core operating margin for the year. And secondly, the impact of the stronger U.S.
dollar on our finance costs and average tax rate. And with that, I’ll hand back to Graeme to conclude.
Graeme Pitkethly
Thanks, Andrew. The third quarter marks further steady progress in restoring growth momentum in the business.
We’re not expecting improvement in market conditions in the remainder of the year, and indeed markets are likely to remain volatile and hence challenging for a while yet. However, we remain very confident in the longer term prospects for emerging markets, and in our ability to navigate through volatility to deliver consistent, competitive, profitable and responsible growth.
In the fourth quarter, we will see another soft comparator from last year’s destocking in China, but we expect this to be offset by relatively weaker volumes in Latin America after an exceptionally strong third quarter. You will remember that at the start of the year we said we expected underlying sales growth for 2015 to be in the 2% to 4% range, and we now expect to be towards the upper end of that range for the year.
We will drive a continuous improvement approach to simplification and cost savings across the business with restructuring cost staying at around 100 basis points. And most importantly, we will consistently invest in our brands, our innovations and in strengthening our distribution and go-to-market capabilities.
All of this keeps us on track to deliver against our key priorities, which remain unchanged: volume growth ahead of our markets, steady and sustainable margin improvement, and strong cash flow. With that, let’s open the line to your questions.
A - Andrew Stephen
.
Harold Thompson
Yes. Good morning, gentlemen.
Couple of questions, please. The first one is on kind of the one-off contributors to the strong growth results.
You say that China ice-cream effect and LatAm early trade loading are all equally weighted. So, can you maybe just give us an idea of what growth rate would have been I guess without those three factors if you could?
The second one is on margins, clearly there are some mix effects going on with - if you look at refreshments having a very strong quarter and clearly that is a lower margin business. So, is there significant drag from maybe lower margin areas of the group which could put into question the expected margin improvement for the year?
Thank you.
Graeme Pitkethly
.
Of course, we - you know that we managed the business locally and let them take pricing on a local basis thinking about affordability, thinking about competitive dynamics, et cetera. And that means that, in terms of current COM results including the impact of foreign exchange we have to manage the portfolio to do that.
So we’ve got positive mix, we’ve got negative mix. We have more headwinds in the current rate COM from a currency perspective.
But overall, we think we can manage that with no change to the guidance on margins.
Harold Thompson
Okay. And if I could just add one to your first answer, so essentially what you’re saying is in the fourth quarter the LatAm effect will simply reverse boost, but China factor would largely continue.
So, I guess, the two of them together offset each other with ice-cream just no longer being a booster, is that a right way of thinking about it?
Graeme Pitkethly
Absolutely right, Harold, spot on.
Harold Thompson
All right, okay. Thanks very much.
Graeme Pitkethly
Thanks.
Andrew Stephen
Thanks, Harold. And our next question is from Warren Ackerman.
Warren, go ahead please?
Warren Ackerman
Good morning, Andrew. Good morning, Graeme.
So Warren Ackerman here, SocGen. Two questions, first one is on North America.
I think I heard you say that Q3 was around 3% for Unilever and the market growing 1% to 2%, so taking market share again. I was wondering whether you’re able to kind of walk us through some of your key categories in the U.S.
with regards to your kind of growth rates in the subcategories versus the market. I mean, I know you call out ice-cream, but I was just interested particularly in Personal Care, especially in areas like deodorants where you’ve been obviously fighting on an intense battle with Procter.
So any kind of color on the U.S. in terms of where you are versus the category would be great.
And then just secondly on just going back to China, I appreciate the soft comp points and Andrew’s color on what you’re doing in e-commerce and channels, but are you able to tell us what is actually happening on the ground in China and underlying terms what kind of category growth we’re looking at year-to-date versus last year or maybe some color again on sort of market share trends in key categories and perhaps just confirm that is no further destocking in China. Thank you.
Graeme Pitkethly
Thanks Warren. Look, I’ll probably take the first one on North America and let Andrew have a think about the China question.
In North America you’re absolutely right, 1% to 2% market growth is what we’re seeing, relatively patchy, and quite a variation category-by-category. We are seeing an awful lot of couponing and price investment in the marketplace.
We’ve come back a little bit on that, which means we’ve seen a little bit of price growth pulling through. And that delivers the result for Q3.
And importantly, we’re gaining share overall in North America and overall consumer sales we think are growing about 2%. So, it’s been a strong Q3 of growth, little bit of impact from the - ice-cream from one of our competitors exiting the market for a period, which we called out, but that’s not been a very big impact in North America.
It’s one of the regions that’s been least affected by any those special factors that I mentioned. What has been happening on a category level I would summarize it as a strong PC, strong ice-cream, weaker tea and weak spreads.
And just to drill into that a little bit with innovations really landing well in North America, the dry-spray deodorant that I mentioned. The Hellmann’s squeezy bottle, and Ben & Jerry’s Cores are all landing in North America very successfully.
That dry-spray deo has been one of our most successful launches ever in North America. And as I said in the presentation, about €100 million, we think for the year overall.
With that, maybe I’ll hand to Andrew for China.
Andrew Stephen
Yes. I think, there is no doubt that the level of uncertainty in China has increased given the economic slowdown on the currency adjustment and stock market volatility, but it is worth remembering that for our markets, we saw the big slowdown happening during 2014 on last year, in fact in recent quarters market growth rates stabilized at around the mid-single digit rates that includes e-commerce, I talked about the structural channel shift on the call.
So, what we’re seeing in terms of our own growth is we’re seeing mid-teens growth in the third quarter on top of a soft prior comparator and it’s all coming from volume e-commerce sales we talked about and round about 6% of our retail sales probably this year and we’re seeing an improving underlying momentum in personal care and laundry as we pointed out as Graeme talked about the soft comparator will be there again a little bit less perhaps in the first quarter, fourth quarter. We’re going to continue to invest for the longer term with a strong innovation pipeline continuing to build that distribution out and accelerating e-commerce most recently with the strategic partnership with Ali Baba.
Warren Ackerman
Thanks Andrew. Let us come back quickly Graeme, just on the USA case and e-commerce you could make fair…
Graeme Pitkethly
That was been very, very competitive Warren it’s over the last several years really it’s been we brought lot of innovation into the marketplace we had a lot of success and share there we reached number one position I think in washing care which is quite a milestone for us, but it continues to be extremely competitive now. Some of the price improvement that you see in the quarter is because we think it’s becoming a little bit - with Dove back on some couponing and that’s what we think is the right strategy and healthy behind the brands, but it’s the same thing, it’s innovations bringing innovation to the marketplace and it’s investing behind that innovation that’s we will stay the course with that.
Warren Ackerman
Okay. Thanks, Graeme.
Thanks, Andrew.
Andrew Stephen
Okay. Thanks, Warren.
Graeme Pitkethly
Cheers, Warren.
Andrew Stephen
Next question is from James Targett. James, go ahead please.
Do we have James? If not, then we’ll take question from Javier Escalante.
Javier Escalante
Good morning, everyone. I would like to kind of clarify something in China, has to do with your commentary if I understood it correctly that you are gaining share in detergents and hair care.
Does it reflect a changing competitive strategy by Procter which is your main competitor there or it’s something that has to do particularly in detergent with the local players? And then, if you can comment on Brazil, the underlying category growth as economy continues slowing down and unemployment has increase, and whether you are gaining share, where was your underlying growth rate in Brazil?
That would be very helpful. Thank you.
Graeme Pitkethly
Thanks, Javier. I’ll take the question on China and then hand to Andrew for Brazil.
In hair care specifically, I wouldn’t like to comment about direct competition with one single competitor. What I would like to talk about if it’s helpful to you is around local players in laundry.
I think you touched on that in your question. We still think that local competition in the laundry category in China is very significant they’re very steady and very strong.
Companies like Blue Moon and Nice, et cetera. So, local competition that continues to be very vibrant with good performance in the quarter.
As Andrew said, the growth rate has stabilized. It’s at lower levels than we’ve seen historically but still an attractive growth rate.
And I think what’s significant is the shift in where the growth is from the Tier 1 cities and the hyper-markets into the Tier 2 and Tier 3 cities. And I’d just like to highlight something that Andrew touched on, which is that our strategy is to improve our distribution and reach into those parts of the economy in the market which are - where there is more robust growth and things like e-commerce certainly help us to do that.
Andrew Stephen
Yes. In terms of Brazil, let me first of all, if we just take a step-up to Latin America overall, then even adjusting for the phasing issues that Graeme talked about, we still have had double-digit underlying sales growth for Latin America with positive volumes.
Now, specifically for Brazil, we’ve seen strong volume growth in the third quarter and that was helped by the announced price increase that comes into effect on the 1 October, and you’ll - with that should then translate into an increase in price growth in the fourth quarter, as we recover devaluation related cost increases. But our underlying business, we’re actually very pleased that the volumes are holding up well, given that the countries in recession and consumer demand is clearly under pressure.
So our innovations are doing well, the Omo, pre-treaters doing very well, we’ve just launched some refill packs for those, and Baby Dove is also doing very well, you remember that was launched in October last year, but it’s doing very well so far. So…
Javier Escalante
I think [indiscernible] the price, the incremental pricing as we see the pricing in Latin America has been double-digits around. So what was the incremental pricing that you announced and so we get the [indiscernible].
Thank you.
Andrew Stephen
Yes. It’s worth bearing in mind that we’ve been increasing prices in Brazil necessarily to recover costs for some time now, so we have more than one price increase last year, for example.
And we are increase - we’re taking new prices and we are lapping old prices as we go through. So what we talk about in terms of price increase now, won’t all be incremental, because the old price increases will dropout if you see what I mean.
So it vary category-by-category, but it’s up to 10% depending on the category. So…
Graeme Pitkethly
I would just make a general point have about Latin American pricing and it really is a window in our world in the emerging markets and the number of - of course it’s devaluation, strong devaluation in that part of the world, and we think about emerging markets that sort of breaking into two groups, some which where currencies are held up more strongly, for example, India, China and Mexico with the examples, but then Brazil, Indonesia, Argentina et cetera, where we’ve seen devaluation. And we are market leader in those markets and it’s up to us with the team on the ground, reading the impact of consumer spending power, measuring the cost increase and very much key capability in the leadership teams they are to be able to make the right pricing decisions in the marketplace.
So it’s pretty much business as usual albeit we’re seeing stronger devaluations that we have perhaps in the last seven, eight, nine years.
Andrew Stephen
Thanks. Thanks, Javier.
Javier Escalante
Thanks, everyone.
Andrew Stephen
And the next question is from Jeremy Fialko. Jeremy, go ahead please?
Jeremy David Fialko
Hi, good morning. A couple of questions for me.
First one is on H2 margin, do you necessarily expect those two increase given these comments you made about the currency factors. So clearly your miles will be up for the full year.
Do you stand by the point you made in H1 the expansion, H2 will be less than it was in H1 or do you think the margins in H2 could be factored to slightly off? And then the second question is just on your innovation phasing.
Has that been a factor at all? Like you said, it seems like you had some pretty good successes across your portfolio.
Would you say, they were perhaps more landing the third quarter than ordinarily and that could have played a role in the pick-up in growth? Thanks.
Graeme Pitkethly
Hi, Jeremy. First of all in the margins, I think we - there is many, many moving parts and - we know with great confidence say that we are moving forward.
As I said earlier there is a currency impact has to be managed. We’ve got more momentum behind the top line and there’s mix going on behind that.
So we have to pull all the levers. It’s one of the things that we do, is to make sure that we can just deliver that consistent uptick in the margin steady as you go.
So you see - your question sort of implied, it’s plain sailing that I would describe as that, but we’re reiterating no change to our guidance and margins for the year. And we’ll just get on with the job of making sure that we deliver that over the course of what’s left now, 10 weeks or so.
Andrew Stephen
Yes, maybe just to add one point of commodities, which is clearly a driver of pricing and also factor in margins, we had guided to commodity costs including currency effect, so commodity costs in local currencies, we’ve said that there was slightly up in the first half, we had guided to expecting them to be slightly down in the second half given the latest currency move and now looks more likely that they’ll continue to be slightly up in the second half of the year.
Graeme Pitkethly
So we’ll see a little bit…
Andrew Stephen
There will be a little bit of pressure there, but that’s again, one of those things that we are managing through in order to live with the steady margin improvement for the year as a whole.
Graeme Pitkethly
That’s one of the reasons we think that we’ll see continued price coming through the balance of the year?
Andrew Stephen
Yes, exactly.
Graeme Pitkethly
And Jeremy on your question on innovation phasing, I think we called out the beginning of the year that we would have stronger second half in innovation than in the first half, and that’s what we’re seeing come through. There is of course between Q3 and Q4, we don’t really do things between Q3 and Q4, as such when innovations coming and hit markets according to the capacity of the market to absorb, things like listing and getting proper investment and execution, buy and building distribution and penetration these are the things that we focus on so.
I think during the two halves, yes, we expected the second half to be stronger for innovation perspective, and we’re very pleased to see those innovations, which are pretty distinctive innovations are starting to go through as we expect, and we’re really big driver of growth, I’ve got a list in front of me here, and it is impressive and what’s impressive is, how broad based across the categories is, we called a lot of them out in the presentation, but just a few more in personal care, Suave Naturals in the U.S. and my old market of the UK, and then the U.S.
Simple Micellar cleansing water. For example, it has been there, it’s strong stuff and we’ll carry on with that, because innovation we think is a critical driver of consistent growth.
Jeremy David Fialko
That was great. Thank you very much.
Andrew Stephen
Yes.
Graeme Pitkethly
Thanks, Jeremy.
Andrew Stephen
I think we should now have James Targett. James, are you there?
James Targett
Hello, good morning.
Andrew Stephen
Hi, James. Could you please ask the question?
James Targett
My apologies for earlier. Two questions for me.
Firstly on e-commerce, I just wondered if you could give some color on the growth of e-commerce at the group level. Obviously, you mentioned that China bigger, but just at the group level and is there any particular end markets contributing to that?
And then secondly, just on your food solutions business, I wonder if considering the pick-up in the U.S. markets and some stabilization in Europe, any comments on the outlook for that division?
Thank you.
Graeme Pitkethly
Hi, James. I’ll do the e-commerce one, and if you wouldn’t mind Andrew doing food solutions that will be great.
So e-commerce, yes, so globally, the channel is growing about 20% and across our business we are growing at about 40%. I would call out though that it is very different market-by-market.
Andrew mentioned the 80% growth rate in China that’s taken that market up to 6%. I can talk for ages really and quite passionately about our e-commerce business in the U.K.
and Ireland, which is our biggest e-commerce business that’s growing in the mid-teens, and the 7% also of the business in the UK. And actually third biggest market is France was interesting of the different models that are emerging for e-commerce and highly pop-up and become a significant shift in the way in which consumer shop, the way in which you communicate with consumers, the way in which you fulfill market-by-market, so - yes, globally 20% but much more exciting when you get into a market-by-market perspective on it.
And that’s very much how we organize buying the e-commerce we have five different models the way in which we think by e-commerce, there isn’t really one single e-commerce model and we don’t organize around that, but in key markets such as China, such as UK, we have dedicated teams and it is a big driver of growth and both of those markets on a substantial part of our overall business.
Andrew Stephen
Yes. In food solutions, food solutions is a little over €2 billion business for us, it’s growing solidly we’re not going to call out this specific growth rate of that food solutions are indeed by region, but we are happy with the performance in the year-to-date.
James Targett
Okay. Thanks.
Andrew Stephen
So I think we next have Robert Jan Vos. Robert, please go ahead.
Robert Jan Vos
Yes. Hi, good morning.
I’ve two questions. Just to be clear on Latin America, are you saying that volume growth Q4 will be lower than what you’ve reported in Q3 or you’ll saying that it is likely to be negative in Q4?
And my second question, I apologize if it has already been answered, but I missed that part, you earlier at half year results you said to expect full year pricing to be lower than that 1.7% reported that the half year results. Considering what you said on LatAm pricing and also in raw materials in general, is that still your view on pricing for the full-year?
Thank you.
Graeme Pitkethly
Thanks, Robert Jan. So first of all in Latin America, and then I’ll give you the response on pricing but also pass that bit of that over to Andrew to give a bit more color on it.
But yes, indeed, LatAm volume growth as we see the reversal of the volume we shifted from Q4 to Q3 because of the announced price increase in Brazil and the systems change in Mexico, that will mean the Q4 volume will be negative in Latin America we expect. Secondly on pricing, when we talked about pricing earlier in the year we hadn’t seen the further shift in devaluation in currencies and, of course, what impacts pricing is local decisions in the marketplace.
What we were seeing there was a more benign commodity environment. We thought that would continue for the balance of the year.
And therefore, we thought the pricing would start to ease. As Andrew mentioned earlier, what we’re seeing now is more devaluation and therefore in local markets costs are going up in local currency terms.
And therefore, we expect that there’ll be a little bit more weight behind pricing in the continuation of the year. And that’s the reason why we think the pricing growth that we got will continue through the balance of the year.
Andrew?
Andrew Stephen
Yes, clearly it will vary by region. It’s likely to remain high in Latin America and some of the other emerging markets.
But elsewhere in some of the other emerging markets it will stay low, would probably stay low in North America and is likely to continue to be negative in Europe, so overall, unlikely to reduce from the current levels for the time being.
Robert Jan Vos
All right, it’s very helpful. Thank you.
Graeme Pitkethly
Okay.
Andrew Stephen
Next, we have Rosie Edwards.
Rosie Edwards
Yes, good morning. Could you just talk a little bit more about Russia?
Obviously you said that, I think volumes were negative, potentially in response to kind of price increases. What are you seeing in the market there?
Are you seeing kind of consumers trading down? And which kind of categories are kind of stronger or weaker?
Graeme Pitkethly
Hi, Rosie. First of all, just a quick refresher on Russia.
We got about €1 billion business there. It’s about 2% of the company and about half of that is in personal care following the acquisition of Kalina a couple of years ago.
What we’re seeing in Russia is obviously a lot of volatility. Combination of the sanctions and lower oil prices are obviously weighing heavily on the economy and there’s been an awful lot of currency volatility, the big devaluation in Q1, and partly recovered.
But where that has pulled through and to what’s happening on the ground is a couple of things, I mean, quite a lot of pricing was taken in the first quarter and second quarter in the marketplace in Russia. It moved very quickly.
There’s still a far bit of price being taken. That’s a little bit less and that’s the reason why we’ve seen an uptick in Russia.
It’s very, very competitive as we go category-by-category. I’d call it categories like tea where we compete against local competitors and skincare where we’re competing against more international competitors.
But basically in Q3 in Russia, we saw growth in the high-single digits. That was still all driven by pricing.
Volumes remain under pressure, a little bit negative. Volumes have been negative for the last - for the whole of the year so far, but as we see pricing start to ease that’s to bring volumes back up in Russia.
Andrew Stephen
Okay. We have one last question on the line, which is from Karel Zoete.
Karel, please go ahead.
Karel Zoete
Yes, good morning, all. Two questions, please.
The first one is with regard to pricing in Europe that it continues to be done quite a bit and a big bulk of deflation is coming through. Can we expect price in Europe to decline further.
And the second question would be on 2016, probably early days, but what about - can you say already with regard to raw materials deflation/inflation in 2016 and currency impact? Thank you.
Graeme Pitkethly
Hi, Karel. So first of all in Europe, we’ve just come from managing one of the largest and most impacted markets.
First thing I’d say is that European markets are different. It’s easy to talk about Europe as one group, but one of my big learnings from the last couple years is the differences that exists country-by-country in Europe.
But the one thing you can see about them all is that they’re challenging markets and that price deflation is very much the new norm as I said in the presentation and very widespread. Now, why is that?
Value conscious consumers, the continued growth of discounters, we all love a bargain. I’m Scottish so maybe me more than most.
But we’ve all been conditioned now to look for value, enjoy receiving value. And then sometimes cheat ourselves with the money that we saved.
And to that very high competitive and promotional intensity and a great deal, that’s not just within the supplier universe, but also within the retailer universe. And suddenly add all that up with the benign commodity environment and you get the sort of a deflation that we’re seeing just now.
Overall, we don’t think that the price growth as Andrew just said is going to tail-off from its current levels, so we got a good growth in Europe in the quarter. And quite encouragingly on a year-to-date basis we’re almost flat now in our developed markets overall.
But as Andrew said, strong deflation continuing in Europe, our assumption would be that that will continue. And therefore, we don’t think our price growth will tail-off at anytime soon.
With regard to your question on commodities for 2016, if only we had a crystal ball that was that accurate, I think it would be folly to call where we’d in 2016 commodities. And certainly, if we - actually if commodities are hard to call then currencies are probably even tougher, because what we’re seeing is that they tend to move even faster and even more volatile way.
So I think we’ll just rely on our model. And just to reiterate, I think it is the breadth and variety of our portfolio, the reach that we have that’s enabled us to deliver a strong set of results in an extremely volatile environment.
It’s a very much - it’s who we are and how we do things. We have a broad diverse business that understands how to act in these markets and how to manage volatility.
And we’ll manage the totality of the portfolio to deliver that consistent result even though the markets remain fairly volatile.
Andrew Stephen
Okay. We’ll bring the call to a close there.
And if there are any further questions then Ansgar, Steve and I will be happy to take them as soon as we get back to our desks. I’ll now hand back to Graeme to conclude.
Graeme Pitkethly
So thanks everybody. Thanks from Andrew and I for your time today.
If I could sum up in just a few words, we remain on track to deliver another year of competitive top-line growth combined with steady margin improvement. Strong innovations, our approach of sustaining investment to drive consistent top and bottom line growth, a resilient portfolio and sharper category strategies position us well to deliver long-term value creation into the future.
That will be my closing message. Thank you and enjoy the rest of your day.
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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