Oct 19, 2017
Executives
Andrew Stephen - Vice President, IR Graeme Pitkethly - Chief Financial Officer
Analysts
Warren Ackerman - Societe Generale Alain Oberhuber - MainFirst Celine Pannuti - JP Morgan Martin Deboo - Jefferies Alex Smith - Barclays James Target - Berenberg Toby McCullagh - Macquarie
Operator
We are about to hand over to Unilever to begin the conference call. [Operator Instructions] We will now hand over to Graeme Pitkethly.
Please go ahead.
Graeme Pitkethly
Good morning everybody and a warm welcome to this Third Quarter Trading Update I’d like to start with some of the highlights of the quarter and what we are going to deliver to – deliver growth and what remains for now at least a stubbornly low growth environment. Andrew will then voer the category and regional performances and I will wrap up with a outlook for the year as a whole and a brief update of our progress and the actions taken to accelerate shareholder value creation which we set out for you back in April.
But first let me, as usual draw your attention to the disclaimer relating to forward-looking statements and non-GAAP measures. Let’s kick off with the market context.
Overall market volume growth remains – flat as it has been in fact for the past two years. But the overall number masks some divergent trends within so we need to unpack this a little bit.
Let me begin with the emerging markets where we continue to expect to return to robust growth in the medium-term and of course where we remain very optimistic about the prospects for the longer term. There are already signs of improvements in some of these countries.
India has been managing its way through the disruptions from demonetization and the new Goods and Services Tax. While it’s not yet back to historic levels of growth, we are cautiously optimistic for the near term and very positive for the medium and longer terms.
In China, market growth has picked up and in Brazil, consumer demand is still well than in last year, but it is flattening out. While these are all encouraging signs, it remains a mix picture with weaker market conditions in South Africa for example and in Indonesia where wages are not getting pace with inflation.
Turning to developed markets, overall demand in Europe remains flat as it has been in for the past few years. And in North America, market growth slowed at the start of this year and has not yet improved.
It is important to point out that this does not mean that there is no growth in these markets. Across all of our markets there are opportunities to grow with brands appeals through a clearly articulated purpose that resonates with consumers’ values with innovations that bring relevant new benefits and by growing in new channels.
But it is clear that many of the more traditional segments and channels are slowing. This is why continuing evolve our portfolio and our channels under connected for growth is so vitally important and why we will keep returning to this during our discussions.
Overall, underlying sales growth was 2.6% in the third quarter with volumes up by only 0.2%. As we had expected price growth is moderating.
Unpacking this, there was a markedly different picture across our different markets and a strong contract between the regions. In the emerging markets, growth accelerated to 6.3% in the quarter and we’ve seen a notable pick up in momentum in volume growth, which was 1.8%.
This is very encouraging and we expect the trend to continue. In developed markets however, underlying sales declined by 2.3% in the third quarter having been around flat in the first half of the year.
Now there were some specific factors that impacted the third quarter in the developed markets of North America and Europe in particular. Now this is an ifs-and-buts presentation, but you will not see us excluding any of these items in our reporting, but I do want to give you some relevant context and deeper background for the quarterly performance by both regions and category.
The first of these factors with the series of natural disasters in the Americas, namely the hurricanes that hit the Caribbean, Texas and Florida, and to a smaller extent, the earthquakes in Mexico. These disrupted both retailer demand and transportation leading to canceled orders and unfulfilled shipments left on the dock.
Secondly, our sales of ice cream in Europe were down as a result of poorer weather in the latter part of the quarter after two consecutive very good summers. Both of these factors were unforeseen and compared with our ambitions at the start of the quarter led to a growth shortfall of around 80 basis points at a global level for Q3.
A third and partly offsetting factor was expected by us. We called out last quarter that the timing of Ramadan in Indonesia and destocking ahead of the implementation of GST in India held back sales in Q2.
These effects partly reversed in the third quarter. The net effect of all three of these factors was to reduce underlying sales growth and specifically underlying volume growth by around 40 basis points in the third quarter.
We are encouraged by the improving volume momentum in emerging markets, but this does not mean that we are satisfied with our overall performance this quarter. The first two factors I just described to help explain the markedly weaker performance in developed markets in the third quarter.
Together, they reduced sales by about 100 million euros split roughly between North America and Europe. But we also lost share in ice cream in North America to Halo Top, a new competitor.
Overall in the third quarter, we came up about 150 million euros at around one day sales short of where Paul and I would have wanted us to be and we are not happy with that in aggregate. In fact, we feel we let some runs on the field of play this quarter and while our overall growth is in line with our markets, we know that we can and will grow faster.
The changes we’ve been making to our organization including the setting up of the country category business themes are not fully established, put us in a much stronger position to win in this fast-changing and more competitive marketplace. We will progressively reap the full benefits of these changes but its reassuring that we are already seeing some good examples of a more focused global innovations funnel together with greater local agilency and speed to markets.
We are reducing the number of global innovation projects while increasing their average size. And we are speeding up the rollout times in the first to last market by up to 30%.
For example, innovations like Magnum pints, less than a year ago are now in 19 markets and we expect them to deliver more than 30 million euros of turnover in 2017. While Baby Dove, which we have taken to more than 20 markets in the last 12 months alone, most recently South Africa, and the Middle American countries.
And Simple, which plays in the fast-growing natural space in the U.S. and the UK and is now rolling out globally through the second half.
At the same time, we are landing more local innovations than ever before. In fact, so far this year, we have increased the number of local launches in Unilever by more than 50%.
We showed you planted examples with the first half results like Hijab Fresh in Indonesia for Muslim consumers or the Lux Botanifique, a premium silicone-free shampoo in Japan. And here is a few more recent ones, a premium Omo Naturals range in China starting with an online launch in Tmall in September.
Brauner Bar in Germany, like many of us on this call I suspect this is an old classic brought back to market in a matter of weeks. And Knorr Fresh Meal kits, an experimental launch in the Netherlands with online retailer picnic.
As has the test is been developed under licensing at a co-packer. If it fails, it wouldn’t have caused much, but if succeeds it opens up a new opportunity for Knorr in chilled foods.
As we’ve said before, we are seeing a rapid change in our channel footprint. It goes without saying that we need to be where our consumers are and so we are becoming increasingly channel-centric bringing our marketing and customer development teams closer together and innovating specifically for our channels.
Let me share a few examples including three completely new brands that we have launched. KJU by Lux specifically for e-commerce co-created with a Korean designer to meet the K-Beauty trend with urban Millennials in China.
In the Health and Beauty channel in Asia, we have extended Dove into face care with a proposition that puts back moisture and nutrients with every wash. In the UK, we’ve launched four Amazon laundry bundles, a brilliant example of understanding the algorithm to win and search and tailoring our offerings.
Leveraging the learnings in Dollar Shave Club, we’ve launched two completely new direct to consumer brands, Skinsei in the U.S., which provides a personalized skin care regime based on skin type and local environment, and Verve in the UK, a monthly subscription of products that protects clothes from damage wash after wash. And finally, taking learnings from our retail operations group in the 1300 stores that we now operate worldwide, we recently opened a St.
Ives Mixing Bar in New York where consumers can mix a product that is uniquely their own. It’s safe to say you see a lot more channel innovation from us in the years to come.
Alongside innovation, we’ve been developing our portfolio through M&A with a faster pace with change and a clear strategy to position our portfolio for future trends and higher growth. Each of our acquisitions had a rationale ahead of strong fit to our strategy.
Acquisitions like Carver Korea and Quala build on our strength in personal care. Dermalogica, Living Proof and the other prestige brands we have acquired extend our personal care presence into much higher growth points with an attractive growth profile.
Sir Kensington’s and GROM are examples of premium brands that can work well through mass channels. Blueair and Dollar Shave Club take us into entirely new channels.
And Seventh Generation and Pukka are examples of meeting the growing demand for more natural products. Since the start of 2015, we’ve been much more active taking all of the 18 acquisitions that was completed through since 2015 we see that the total consideration is 8.2 billion euros, the acquired turnover is 2.1 billion euros and they collectively grew by 16% in the first nine months.
There was a reminder most of this is not yet in our underlying sales growth but will increasingly contribute to USG over the coming quarters. As well as moving into higher growth segments, we also continue to actively manage the portfolio moving to dispose of lower growth brands or brands that no longer fit with our long-term strategy.
We expect that the combined impact of the acquisitions we have made since 2015 once we have anniversaried and the disposals including spreads will add 1 percentage points to our ongoing underlying sales growth. I’d now like to hand over to Andrew to take us through the developments of turnover in the category and regional performances.
Andrew?
Andrew Stephen
Thank you, Graeme. Underlying sales grew 2.6% in the third quarter.
Acquisitions added 1.5% to turnover which was partly offset by the disposal of AdeS to give a net M&A impact of 1.1%. The acquisitions impact includes part of Dollar Shave Club, which was completed half way through the third quarter of last year as well as the eight other acquisitions we’ve completed during the last 12 months across all four categories.
Currency translation reduced turnover by 5% a marked change from the first half year when it was a tailwind. This is a result of the sharp appreciation of the euro between April and August this year.
It’s worth noting that most emerging markets currencies have been stable or stronger against the U.S. dollar this year.
That remains encouraging for day-to-day affordability in these markets. If exchange rates would remain as they are today for the balance of the year, we would expect currency headwinds of about 2% on turnover for the full year and less than 1% on EPS.
Turning to the performance by category, in three of our four categories, that is personal care, home care and foods, we’ve seen a clear pick up in volume performance compared with the first half year. Personal care grew 1.8% in the third quarter with 1.0% coming from volumes.
Price growth has moderated with easing commodity pressures and the effect of GST in India which I will come back to in a moment. The strongest growing brands have been Dove including the extension into Baby and Sunsilk with more natural variance.
However, Rexona and Axe have been weaker, these are brands which is strongly exposed to some of the markets where consumers have been down trading like Brazil, and South Africa. Our personal care portfolio is still heavily weighted to the mid-tier of price points which is where the down trading has had the biggest effect.
Our deodorants brands are also weaker in Europe, where competitor promotion intensity increased. Home care growth improved to 4.6% with 1.3% from volumes.
This is being led by new product launches such as Persil Powergems in the UK and the continued strength of Comfort Fabric Conditioners. In Latin America, Brilhante, which is our whiteness brand in a value propositioning has benefitted from down trading at the expense of Omo.
Foods excluding spreads grew by 2.7% in the quarter with volume turning positive driven by a pickup in emerging markets. Knorr grew by 5% with a good balance of volume and price.
The trajectory for spreads continued to improve with a decline of just 2% in the third quarter and improving volumes. Refreshment is the only category where volumes weakened in the third quarter.
Underlying sales grew 3.1% but this is all from commodity-driven pricing. Volumes were down by 2.4%.
In ice cream, we’ve grown strongly over the past three years, helped by our innovations behind brands like Magnum and Ben & Jerry’s and two good summers in Europe. This year we had poor weather in August and September leading to lower sales.
Despite this, Magnum continued to show double-digit growth globally with almost half from volumes. Tea continued to grow in mid single-digits and we’ve taken share leadership in India, the largest tea market in the world.
Turning to the performance by region, starting with our largest region, Asia/AMET/RUB, underlying sales were up 6% with a healthy pick up in volume growth to 2.7%. China delivered double-digit volume growth led by e-commerce.
In India, we saw an improvement in volumes following the implementation of the new Goods and Service Tax. Our business was able to start invoicing immediately without any problems.
However while some of our customers coped well with the change, others that had more difficulty and only recently returned to a more normal buying pattern. As a result, we’ve only recovered part of the shortfall from the second quarter.
Price growth in India was passed on the benefits of the tax change to consumers as expected. Latin America grew by 6.6% all through pricing.
Volumes were still marginally down but by less though than in recent quarters. The volume decline in Brazil has slowed through the year and was only minus 1% in the third quarter.
Volume growth in Mexico which had been strong in the first half stalled in the third quarter. This is the combined effect of prolonged rains from Hurricane Harvey on ice cream sales in August and the destruction from the earthquakes in September.
We expect volume growth in Latin America to turn positive next quarter and beyond. In North America, underlying sales were down 2.9% in the quarter.
The hurricanes in Florida and Texas, our second and third largest markets disrupted transport and we lost on average about one week of sales in these states. We expect part of this to be recovered in the fourth quarter.
But personal care and foods businesses in the U.S. continued to get gain share, but in ice creams, as Graeme said, we have lost sales to Halo Top’s low calorie, high protein proposition which has taken off rapidly.
We have responded with our entry into this segment in June launching Breyers delights and it followed up with further variants added in September and we expect to be back in growth in U.S. ice cream next year.
In Europe, underlying sales declined by 1.6%. We have continued to grow well in Central and Eastern Europe and returned to growth in the UK.
However, lower ice cream sales led to declines in Germany, France and Spain. And with that, I’ll hand back to Graeme.
Graeme Pitkethly
Thanks, Andrew. Let me just try to summarize the regional picture.
We are encouraged by the improving volume growth in the emerging markets and we expect to see this trend continuing now in both AAR and in Latin America. In North America and in Europe however, we’ve had a particularly difficult third quarter and we are not happy with our performance in the aggregate.
While we don’t expect that to repeat market additions are likely to remain challenging are likely to remain challenging for the time being. We are fully focused on getting back to growing ahead of our markets.
Our share of voice to share of market is competitive and we will be bringing more firepower to bear here. Changing trends in channels through the premium and agility and connected for growth our organizational change truly delivers that.
We continue to expect to deliver against our full year objectives. These are underlying sales growth within the range of 3% to 5%, a step up in underlying operating margin of at least 100 basis points and another year of strong cash flow.
Let me finish up with a quick progress update on the actions we set out in April to step up value creation in Unilever with the accelerated connected for growth program. The first of these was a simpler and faster organization.
All of the country category business teams are fully in place and the integration of foods and refreshments is on track. The second was accelerated margin improvements driven by an amplified savings program.
As we explained at the half year, we are making good progress here with our savings programs delivering a little faster than we’d have planned. We are progressively stepping up the level of reinvestment of savings through the course of the second half year and expect to see the benefits of this over the coming quarters.
The third was an accelerated evolution of our portfolio. I showed earlier the increased pace of change through acquisition.
In the last 12 months, we’ve announced nine acquisitions compared with five in the preceding 12 months. The exit from spreads through sale or demerger is on track and the Board’s review of our legal structure to enable future strategic flexibility is progressing well.
The acquisition of the Preference Shares is an important step to simplify our capital structure and improve our corporate governance. And finally, we target to the increased leverage and returns to shareholders.
We’ve completed 4 billion euros of our 5 billion euro share buyback program and you remember that in April we raised our dividend by 12%. And with that, let’s move on to take your questions.
A - Andrew Stephen
Thank you, Graeme. [Operator Instructions] Our first question comes from Warren Ackerman of Societe Generale.
Warren, please go ahead.
Warren Ackerman
Good morning, Graeme. Good morning, Andrew.
So, Warren Ackerman here at Soc Gen. Two questions please.
The first one, Graeme, I mean, you said that you and Paul were disappointed and you left some runs on the field, and nice saving, you got the share price down 3% to 4% today. Can I ask about your expectations on the shortfall, you said 80 BPS, but 40 BPS net to Ramadan, GST.
So, if I add 40 BPS back to the 3.6%,you still would have only been at 3% USG for the quarter compared to consensus which was much closer to 4%, I am just trying to understand the gap, maybe you can outline the moving parts for Q4, and what USG you expect for Q4 given the difference between what you delivered and what consensus fully would deliver. And then secondly, can I just go back to personal care, specifically in the quarter and maybe you can talk a bit more about deodorants, I mean, I think it’s one of your best of businesses and I think you saw some pressure in deodorants this quarter that you talked about some markets like South Africa.
But is that a concern and what was the outlook for that specific subsector within your PC division? Thank you.
Graeme Pitkethly
Hi, Warren, morning. Thanks for the questions.
Well, if I take the first one, and our feeling of a bit of dissatisfaction with the Q3 performance. You’ve sort of done which I don’t think we should do here which is sort of pro forma add back 40 basis points and come back to a number.
I don’t want to do that, because in aggregate, we just want to describe the factors that made us come up a little bit short and not sort of pro forma it. But I’ll give you an example, two examples of where we know we are not disappointed with hurricanes and with not much we can do to control the weather, but where we are, we feel we left some runs in the table.
Our competitiveness has dropped off a little. We are now growing share in about 50% of our business as opposed to the last couple of years when we have been up around a 60% mark.
So we are growing at mark – or markets are growing in aggregate between 2% and 3%. We are growing about 2.6% in the third quarter.
That’s not good enough for us. We need that 1% outperformance versus market growth and we’ll get that back.
And the second thing, and I said, in the talk there that relative to our own internal expectations, we were about a day sales short on a 90 day quarter. So that’s roughly where it came up other than the fact as I called out, for example, and Andrew mentioned it the battle with Halo Top in North America, I mean that proposition has built a 5% share position very, very quickly.
It’s taking 1.5 share points from us, we have responded very quickly with Breyers. We’ve gone in six months and taken us to get rights, the license in the marketplace, that’s very quick compared to where we were, that’s the benefit of the new organization.
But it’s not quick enough, because that proposition is being built. So, hence, us not being totally satisfied in aggregate with the performance we are in that, that’s where we would stay.
Turning to deos, we’ve had a slowdown in our deos performance. Some of our biggest brands, Rexona for example is growing a little bit, quite a bit more slowly than it was last year.
Obviously, there were one or two marketplaces which are more impacted by that than others. Brazil is a large deos market for us.
The Latin American performance gets taken there. Similarly, in Europe, we are seeing an awful lot of price competitive investment in deos, lot of price promotions which we are having to respond to, but that makes a very competitive environment there as well.
Taking into talent a little across the whole of our deos business, our market shares are still up, that’s driven by North America where I think, I’m looking at Andrew here, I think we’ve established about a 1000 point differential in leadership with the deo market in North America. I might use the example, because I know the North American results will be a focus for everybody.
So across the totality of our North American portfolio, we are very competitive in every category apart from ice creams and in ice cream the loss was due to the new entrant of Halo Top. So, although our North American results have been subdued it is a competitive performance.
Warren Ackerman
Okay, thank you.
Graeme Pitkethly
Thanks, Warren.
Andrew Stephen
And our next question comes from Alain Oberhuber from MainFirst. If Alain is not there, then we have Celine Pannuti and we will take Alaon O after Celine.
Celine, if you are there, please go ahead. It sounds like Alain.
Hi, Alain.
Alain Oberhuber
Thank you, very much. Good morning, Graeme.
Good morning, Andrew. Question regarding, coming back to the ice cream bases, could you give us a little bit more insight when you expect to recuperate market share losses in U.S.
and when we could expect again a stronger growth rate in that business? And the second question is regarding home care.
Great performance there. Congratulations, but do you think that will be sustainable in the next one or two quarters?
Graeme Pitkethly
Morning, Alain, thanks for the questions. So ice cream, in the North American market, we do think we will recover quickly to a winning position and growth again in North America in particular.
Overall, ice cream is growing year-to-date at 6%. Volumes are slightly down.
The relativity to Q3 in ice cream which is a combination of the hurricanes with of course Texas and Florida are our big ice cream markets for us in North America. The competitive share losses to Halo Top, but also the very poor European weather in September, that poor Q3 mask was actually been a pretty good performance I think in many markets, our fastest growing brands in the whole portfolio, at the moment it’s Magnum which is close to 15% growth.
We’ve had some great innovation performance that I talked about Magnum pints going into 20 markets, really, really quickly. Magnum Double, Ben & Jerry’s, all of our big innovations, the big assets that we brought to the marketplace in ice cream this year have gone on very, very successfully.
So we are feeling confident in ice cream. We did have as a consequence of the weather in September, a high single-digit volume decline in Europe in the third quarter.
But I think we’ve got our hands around the issues that are quite specific and overall we are feeling good about ice cream performance this year. Thanks for mentioning home care, because I really think it’s a steady, steady performer from both a overall balance of performance perspective but also importantly also achieving its strategic objective but its proving its margins balancing growth and margin effect.
If you remember the operating margin was up 110 basis points in the first half and we really do think that we are on track to deliver its contribution to the 2020 targets which would be about a 16% margin we think for home care. And so, what’s being driving it?
It’s been high quality growth. It’s driven by market development.
Remember our home care business really is an emerging markets business. So market development is as important as winning share et cetera and a particularly strong innovation.
The thing I’d call out is fabric conditioners. Our fabric conditioners business is growing very, very healthy.
We’ve seen a little bit of a slowdown actually in the momentum that was in fabric cleaning, but then that’s a balance between delivering quality growth and delivering the right shape of margin. Andrew mentioned it on the call, but Brilhante in Brazil is winning big.
It’s also winning at the spends of our other big brands which is almost, and that’s another example where the portfolio and introducing tier-2 and tier-3 brands for a hard press consumer works. It causes a little in aggregate in the short term, but we are fairly confident about managing that in the way that we are, we will prove, we will prove things through and be better positioned in the longer term.
There are some really exciting innovations sitting in ice cream and so white space expansion with Surf into Central and Eastern Europe. We’ve had a lot of success rolling out Domesto’s toilet blocks in the European space and you are now starting to see Seventh Generation the naturals brand we acquired coming into the UK.
So, I think lot of excitement in home care.
Alain Oberhuber
Thank you.
Andrew Stephen
So, we’ll take the next question from Celine Pannuti of JP Morgan.
Celine Pannuti
Yes, thank you. Good morning.
My first question on the market outlook into 2018, you mentioned the market is growing at 2 to 3, do you see that continuing into 2018? And what do you make up to the pricing outlook.
I think yesterday one of your competitors was talking about negative pricing. Yours remains quite positive.
So if you could comment on that and I presume as well, shall we therefore expect given what you said about your ability to grow faster than the category that maybe you will be at the low end of the 3 to 5 into 2018. The second question is will you repeating the question that Warren asked on personal care, if you can give us a bit more background on the moving parts?
I see that this volume accelerated 1% at the same time to a comparative base was 300 basis points easier. So, it has been a rather weak performer.
So if you can comment on the category and different sub-categories please?
Graeme Pitkethly
Okay, thanks, Celine. Good morning.
Let me take the first – the second one first of it, personal care and then, I’ll comment a bit on markets and give Andrew a bit of time to come back on pricing which is a little more complicated with exchange rates, et cetera. And so, on personal care, yes, personal care performance was a relatively low rate of growth as you’ve seen in the quarter, 1.8%.
But thank you for calling out that the – it’s the sequential acceleration in volumes in personal care which we are encouraged by in this quarterly performance. In fact, we’ve seen a volume step up sequentially in three of our four categories that only that isn’t is refreshment and was spoken a lot on this call already about the specific factors that caused volumes to be negative in ice cream in particular.
So, yes, it’s a low rate of growth in personal care and – but we are encouraged by that step up in volume for sure. The performance is being a little bit mixed.
Dove and Sunsilk are growing strongly, as I said earlier we’ve had very, very good share gains in North America in deodorants and in hair and in skin cleansing, but the overall market remains quite soft. In Latin America and South Africa, we got quite significant down trading.
Our portfolio is largely mid-tier and so as the consumer moves down to tier-2 and tier-3 brands, we suffer a little bit of a loss of volume in those situations. Our performance has been a little bit weaker in Southeast Asia.
That’s where we find the impact of new local competitors who are agile, who are faster to react to local trends and spot local consumer opportunities. That is I think this is a premier league of where that’s happening in Southeast Asia and it’s no surprise that you see a lot of a local innovations that our new organization is bringing in are focused on Southeast Asia where those trends are.
So our personal care performance in Southeast Asia has been a little bit uncompetitive, but in fact shift to the locals, it’s not – that dynamism and pace that’s needed through the new organizational design where we expect to see the benefit gland hardest if you like and I mentioned it earlier that the deo business in Europe is pretty price competitive with a particular competitor. We are doing a lot of the new innovation and the reshape of the portfolio through M&A.
Of course, it’s focused on personal care. I mentioned this three new organic brands that were launched this year in personal care.
Long time since we lost brands, we brought to market which we generate I think in perhaps before that Dove men and care. The lots of new exhibit was truly new organic brands focused on personal care.
You know what we are doing in naturals, behind Simples and eyes. The launch of Ayush in India which is our biggest number of SKUs we’ve ever launched in the Indian marketplace.
You know what we are doing through M&A repositioning the portfolio in prestige, new channels with Dollar Shave Club and getting into very strategically significant new spaces like skin care in North Asia. So, lots of actions in personal care.
All the right things happening for the future, but a relatively low growth month, the one where we do see the volumes picking up nicely. Overall market growth as I said, 2% to 3%, even just to give you the context of that in this 3% to 5% long-term outlook that we have given you.
I am really looking to 2018, if market growth doesn’t pick up from where it’s today, we pretty much expect to be in the 3% to 4%. So the bottom half of that 3% to 5%, that’s going back to that expectation we have of always being competitive in growing 1% ahead of the market growth.
If the market does pick up however to say 3% to 4%, then that would get us into the top half of that range and we would expect to grow between 4% and 5%. On pricing let me hand over to Andrew.
Andrew Stephen
Yes, thanks. Yes, you remember that in the first half year, price growth was 3% and we said then at the mid year that we expect that to moderate, come down a bit in the second half and the first most important thing is put it in the context of commodity cost.
The commodity cost increases were mid to high single digits in the first half and we expected them to be up by low to mid single-digits in the second half. So it’s some easing of the commodity cost pressures, which is what we are saying.
In terms of few countries, we are seeing price now positive in Germany and Central Eastern Europe and flat in Italy, Spain and The Netherlands. So that’s better than where we were.
But in Brazil, we’ve got pricing now virtually flat, which is clearly quite historic context unusual. And finally, India.
So, India, we talked about – a bit about on the half year call. So in India, we get a benefit from GST through both lower taxes on the Goods and Services we buy in and getting full tax credits on the goods – on those goods and services as well as changes in tax rates on output.
The net-net of all that is a benefit from a tax point of view which we pass on to our consumers. Hence we said at the half year that that – we expect that to be around 20 to 30 basis points lower pricing on Unilever in total.
I would - just clarification, in case anyone was wondering, there is no impact on Unilever reported results from the treatment of – the accounting treatment for excise duty, because, in Unilever’s group accounts, group reporting, we were already netting those off from turnover. So in terms net share, I think clearly we are looking for some kind of outlook and guidance and I think we wait till the full year and see what commodity costs are doing to take that before we guide on pricing for next year.
Celine Pannuti
But you don’t have a specific issue on pricing pressure in DMs.
Andrew Stephen
There are always price pressure points. Celine, and we constantly commented on for example, personal care, particularly deodorants in Europe, but there equally there are other places where we are coming out of some price pressures which we are using every where around the world, we always see some pressure points, but nothing I would say at the macro level difference.
Graeme Pitkethly
I think, Celine, you can always expect that the developed markets are going to be highly promotionally intense. A lot of volume on deals in a number of our European markets, levels of couponing remains very, very high in North America.
Looking through that to net pricing at the end of the day, it’s all about managing your PAT price architecture making sure that you are available in the right channels, making sure you are there at the right price for the consumer. And that’s really the focus of what we talked about in the calls past – that revenue management.
We are building our capability out there. I think it’s an essential market – essential muscle rather for all consumer companies.
Some are better rather than others and I think we need to continue to build our capability there because, I mean, you touch on a key point , which is the pricing environment in the developed market is not going to get any easier. Sure there is going to be a little bit of inflation perhaps coming back in intense markets like the UK.
But overall, it’s a highly price intense marketplace.
Celine Pannuti
Thank you.
Graeme Pitkethly
Thanks, Celine.
Andrew Stephen
Could we have our next question please from Martin Deboo of Jefferies.
Martin Deboo
Yes, morning everybody. Martin Deboo at Jefferies.
Two questions. One is a question that Warren asked, I am not sure which is answered, which is how should we think about Q4 in the light of the Q3 and the 9M I mean to make full year consensus you need to grow about 6% in Q4 which looks like a big ask, but how should we think about Q4 structurally relative to Q3?
And the second question Graeme, I guess is a more structural one which is, you like, one could characterize Q3 as a quarter of little local difficulty. So one could characterize it as a quarter where there is some tax only shifting.
Your comments about only gaining share in 50% of sales and that has an echo is a conference call I was on with a large company in Slov yesterday commenting that they feel the ability of big brands to take share he is being questioned. So, I am sure the answer to the second question is complicated, but are you seeing any systematic patterns of local competitors to take share from you?
Or is it little local difficulties? Those are the two questions.
Graeme Pitkethly
Okay, good morning Martin. Couple of good questions there.
The – so how do we think about Q4. We obviously think about Q4 a lot less than – to be honest, we had to say it before, but we really do not manage the business by reference to a series of quarters.
Obviously, there is a Q4 consensus that will adjust following the results that we announced this morning and then we’ll see where we are. Our Q4 and all we are prepared to say is in the long run, we think we will get into that 3% to 5% range for this year and we think that 3% to 5% range is right level of expectations we set for the years to come and as we said to Celine, that will largely be driven by market growth rates recovering will be the big determinant where we sit within that range.
So to take that and sort of extend that into your second point about, is it little difficulties or more structural, I mean, the hurricanes and the weather are just are what they are. That’s more there just to give you a little bit of color on what isn’t underlying if you like and what we’ve seen.
But back to that point around where we are unhappy with the aggregate performance in Q3, it is exactly that dropdown in competitiveness. That 1% outperformance, that 60% winning share in aggregate has dropped to 50%.
That could speculate about why and what that maybe, but I do think to build on your conversations from yesterday that there are some challenges and there are challenges in our industry, there are fast moving changes, there are new competitors, and there are consumers moving to new channels. And in order to do that, we have to change our businesses.
Now we believe that what we are doing with our organizational change to make us more local and more faster but also do – the global innovations faster and bigger with higher impact is exactly the right move. You have to shift your organization in order to that.
We are augmenting that with the strategic use of M&A while we talked about it specifically in the presentation, but I think in combination with how you change your capability, that you innovate in a more channel-centric way, you empower your businesses in the frontline more, frankly you make sure that your global – whatever you are doing globally, has to add value globally, otherwise there is no point in doing it. It kind of getting the way of the frontline of the operations and the ability of people in our marketplace to be closer to consumer and to react to that in a very, very competitive way.
And that’s what we are trying to do is to get out the way of the frontline of our business and empower them with the organizational changes. The M&A point is around giving them longer term, the access that they need in order to connect with the consumer where the consumer is shifting to and in every one of our M&A transactions over the course for the last couple of years, starting to see a pattern where there is a strategic objective to it in the form of an ability to reach the consumer in a different way or address a new trend.
So, I think it is feeling more to come back to the specifics of your question, I think is giving more respect on it, but I think it’s quite possible to have the benefit of scale while making sure that you are able to compete highly competitively in – against those titanic shifts and it’s sometimes – you won’t be able to lie in the pace of those two things up perfectly and that’s I think what we have seen in the third quarter, where we are a little bit less competitive than we had expected to be.
Martin Deboo
Okay. Thank you.
Graeme Pitkethly
Thanks, Martin.
Andrew Stephen
Next question is from Alex Smith at Barclays. Alex, go ahead please.
Alex Smith
Hi, good morning. I guess, just coming back to those comments about leaving runs in the pitch or your competitiveness having dropped off a little.
I guess, you’ve clearly made very good progress with your margin in H1 and on track to make good progress again in H2. But I am just wondering how much of that revenue shortfall is perhaps being overly focused on delivering on that margin target?
I guess, how do you get that balance right? Historically, it’s been something that’s very difficult to achieve across consumer open space.
And then the second question is on market shares, again, the 50% versus the 60% where you were before presumably that – those are value shares I think, would you able to share with us the similar sort of statistic on a volume perspective? And I guess, maybe if you could give us a bit more color as to where you are doing very well gaining share, where you are not gaining share and where you are underperforming?
Is that to certain extent an element of by choice – where again you are prioritizing cash and margin? Thanks.
Graeme Pitkethly
Thanks, Alex. Good morning.
So, on the question of fundamental question of investment levels, let me step back a little bit and just to reconfirm that we – I mean, this is a balance point to be worked at all times in consumer companies. We are very clear that we are a growth model and was not about growth or margin it’s about both growth and margin as you said us say many, many times.
But if we weren’t able and we found ourselves over a long period of time structurally not getting the growth we think we should because of a margin target then we would prioritize the growth every single time. And first thing, as we continue to invest BMI at very high level and we certainly say before we’ve increased it by 12 billion over the last eight years.
We are now hitting about 7.5 billion a year. We think that that is an often, you basically said in the strategic review over the full years, we’d have about 30 billion of firepower in investment levels.
So, that’s basically – and we anticipate that we’ve got around about the current levels as just fine to fuel the growth in our business. And we are very clear in the third quarter and year-to-date in fact that our spend is very competitive.
Now the whole market is recalibrated and it’s spending a little less, against that and this is never a very good market of measure. But what’s in aggregate if you like, our share of spend to share of market is over 100, well over a 100 and it’s stable versus last year and our brand sales numbers which are the most important trailing measures of where that investment goes, because a lot of it doesn’t result in share gain or growth, but in fact it is the – it is invested in the long-term equity of the brand.
Our brand sales measures remain very strong. But there is a changing approach here, because when we are spending as competitively in terms of the share spend, share of market level as we were last year, I am absolutely certain that we are doing so in a much more effective way.
Because ZBB allows us to took more of our reinvestment back and cut waste out and invest in a more effective way. So we’ve got much more consumer-facing media and promotional point of sale investment as part of that mix unless on non-working media.
So less money spent creating advertising, more money spent showing that advertising in a more effective way to our consumers and then of course the way in which you show the advertising is shifting. So we’ve got a third vector here which causes some of the correlations over the last ten years maybe not to be quite as relevant for the next ten years and that’s something we are all going to have to work through.
But we could talk ranges about what we are doing in terms of digital and social and video and search capability and those sorts of things. But clearly the mix of advertising has changed a lot.
So, no, we don’t think that there is a correlation between our investment, our margin delivery which was – once we expect to be over a 100 for the year and overall growth and that’s step down in growth. We think that step down in growth competitiveness which is in the third quarter was quite focused in a few areas.
As I said, when you deconstruct and take most of our market, North America for example, very competitive across all categories apart from ice cream. Europe a little less, Southeast Asia a little less, so, but we’ll be focused on bringing that back.
Alex Smith
I get – sorry, quickly, my question was impart how much of the margin priority has been a distraction for the organization in terms of trying to balance that growth not so much be the A&P spend?
Graeme Pitkethly
Yes, I don’t think - I mean, the level of – we’ve always delivered margins. We’ve delivered a steady increase in margin consistently for the last seven or eight years.
It’s not like the organization isn’t used to balancing a P&L and managing the shape of the P&L. We are dealing, the big disruption is that levels of market growth are lower than they’ve been in many years and the specific challenges are in some markets where we have big businesses are particularly intense.
What I think is terrific is in aggregate when we balance out, the diversity of our portfolio exposure to the emerging markets means that we are able still to deliver a competitive growth number through those challenges and as those markets recover as it convince, we will seek the benefit and when we do that with a higher rate of margin accretion and the value creation is substantial.
Andrew Stephen
Okay, the point on the market shares is – okay, exactly. So the 50% applies to both value and volume and just to give some color around by category, so in personal care, we are gaining in skin cleansing, Dove Baby and deodorants in the U.S.
as well. But deodorants in Brazil, South Africa, we mentioned affected by down trading and in Europe, down in deodorants due to that competitor promotional activity.
In home care, good gains overall, particularly emerging markets, up in laundry, household cleaning flat, particularly given competition in the Europe, but holding share in household cleaning. Within food, up in savory, we’ve actually – we gained share in U.S.
mayonnaise as well, although the whole market is down in value terms in U.S. mayonnaise because of competitor pricing.
And margarine we are almost back to flat, almost back to maintaining share. In refreshment, we are down in ice cream, entirely for the reason that Graeme mentioned through Halo Top that we mentioned, but also actually one other factor which is that, in Europe we’ve been prepared to seed some share in the low margin bulk in-home ice cream business as we evolve our portfolio.
So I hope that gave you some extra color around the wins and losses.
Alex Smith
It does. Thank you.
Graeme Pitkethly
Just one overall point, maybe Alex, that we are round about 50% in value share business winning at at the moment, our volume share performance is a winning performance with about 5% higher than that in terms of volume share winning. So this kind of leads back to the first of your question before about our willingness to invest in price and winner of volume level is still very robust and these are the things which our businesses are managing on the – day-to-day and you can see there that there is no sort of desire to chase after a profit number at the expense of competitiveness or fundamental volume level.
Alex Smith
Got it. Thanks.
Andrew Stephen
Thanks. So we have two more questions.
We’ll take those two and then close the call. So, firstly from James Target of Berenberg.
James? Okay, in that case, we will take, we have James Edward Jones of RBC.
James Edward Jones
Morning, guys. Questions are major.
The winning share, the 50% winning share used to I think to fine winning or gaining – sorry, winning or holding share in the figure 60%. Can I just confirm that that 50% absolutely winning, or not just winning and holding?
And the second one, I am not really sure how to ask this, but your selling spend is competitive and brand health measures is strong, but by your own admission, sales and market share performance is disappointing. I’m seeing P&G’s comments that some extent digital marketing isn’t working.
How well are you coping with developments in marketing? And is that spend is effective as it used to be?
Andrew Stephen
Let me take the first one James. So, no, I bet you're wrong on that one.
When you are getting mixed up with someone else, we’ve always done a binary it’s either winning or it’s losing. So when we said 60%, it was 60% winning 40% losing.
We don’t have a maintained category in that. So we are being very consistent when we say that at the moment it’s around 50% winning and 50% losing, nothing in the maintained, plus one BPS is a win, minus one BPS is a lose.
Graeme Pitkethly
James, I’ll take your second question there. So, yes, spend is competitive.
We are clear on that. We have more spend coming in, in Q4 and we always said that we would be a little bit backward weighted in terms of innovation and spending.
So we have a very high spend quarter coming up from an investment perspective. And when we said that we are a little bit disappointed with the Q3 performance, really that’s from the perspective of one quarter an expectation and in one quarter.
So, I think overall, what we are very, very sure by is we are making the right changes within our business, the organizational changes in reshaping the portfolio. All of that we think are the right things, because that in many ways is a more strategic response to the changes that are taking place within the consumer communication landscape.
Now, to only to tell you there is an awful lot of change and flux – are very exciting in fact, but if you get it right, you get it very right and if you get it wrong, you get it very wrong. The ROIs on traditional media TV advertising are what they are – this narrow band is quite predictable, the ROIs on today’s landscape of search investment, social investments, video, et cetera are – it’s much, much more wide.
Display advertising for example has a very – or social in fact, has a very, very strong ranges of ROIs or individual types of investment. All we can do there is continue to invest very heavily in building capability in that new marketing space.
So, about a third of our investment is – this is probably the wrong distinction here, but “digital”. Unilever Studios, which – our in-house studio digital content capability, is now in over 20 countries.
So we are doing our own digital advertising and content creation in-house for that. People datacenters which we think are pretty market-leading ability to secure consumer insights from social listening and scrapping up data from around the sort of digital landscape.
That’s now in 20 markets and cover 40 languages. We think we’ve got a world-class programmatic capability in our ultra platform and as you’ve seen Keith Weed, our Chief Marketing Officer, alongside other chief marketing officers I think are doing a lot to shape the industry in terms of proper stewardship and leadership role in terms of basics like viewability, verification, combating ad fraud and making sure that advertising shows up in appropriate and safe places in this new world.
So, you’ve never say you are entirely satisfied, but for sure we recognize the significance of the changes and we want to lead in those changes, invest behind them and make sure that we are as capable as anybody for – in this new landscape.
James Edward Jones
Thank you very much, Graeme.
Graeme Pitkethly
Thanks, James.
Andrew Stephen
And the final question comes from Toby McCullagh of Macquarie.
Toby McCullagh
Hi guys. Thanks for letting me squeeze in the end.
Just a couple. First on acquisitions, you say that the aggregate of the acquisitions that you’ve made over the last couple of years without a 100 basis points also to runrate underlying sales growth once they all annualize.
Can you say how much they added to 3Q given that some of those have already annualized? And then the second one is, a point about A&P and you said that you are spending less money creating, more money is showing, just wondered can you remind me what the rough split between creating and showing is?
Graeme Pitkethly
Hi, Toby, how are you doing? So, on that breakdown of the acquisition 1%, by the way, it’s from acquisition and disposals, there is an impact there from the divestment of spreads which we are assuming we are successful with all indications are that it’s going well so far that its biggest complex and it’s very, very high profile.
So – but we’ve assumed that in that number of 1%. Yes, in the third quarter, it was a very small number, but basically to get that 1% you have to look through until we anniversary of closing transactions and then feeding into our underlying metric our own anniversary day.
So, that is a momentum rate enhancement that you would see in sort of mid-2019 relative to the end of 2015 before we started doing any of those acquisitions does not make sense and obviously there will be lots of other portfolio change in the mean time I would assume. But right now, we think we got a 1% tailwind from that in terms of Q3, it was only around 10 basis points.
So that’s all out there in the future for us as we go forward.
Andrew Stephen
Yes, on the spend on advertising, first point is to make about 30% of our spend on advertising is digital and really that question of how much is produced at production? How much you are showing really isn’t relevant in that space.
Then the other 70% that is traditional, it’s roughly 75-25 between showing and producing.
Toby McCullagh
That’s great. Thanks a lot.
Graeme Pitkethly
Thanks, Toby.
Andrew Stephen
So, thanks very much and we will bring the call to a close there. If there are any further questions then of course, Ansgar, Becky and I will be happy to take them as soon as we get back to our desks.
And enjoy the rest of the day.
Graeme Pitkethly
Thanks, everybody. Have a good day.
Operator
This conference has been recorded. The details of the replay can be found on Unilever’s website and will be available shortly.
Thank you.