Unilever PLC (UL) Q1 2015 Earnings Report, Transcript and Summary

Thank you very much. And good morning, good afternoon and good evening to, everybody. Welcome to Unilever's First Quarter Results Presentation of 2015. Before I start, I just like to thank my very good friend, my sparring partner at times, James Allison, for his over six-years leading Unilever's Investor Relation. It's been an absolute pleasure working alongside him. During that time, I think we all have valued his deep understanding for the business, his clarity of communication and at times, his humor. Many of you may know James has now added the leadership of category finance to his many responsibilities, and this is such an important role as we’re driving our differentiated category strategies. And so that’s alongside strategy ventures in M&A means that he has his plate full. And so has stepped down from Investor Relations. So today I have here Andrew Stephen alongside me. And it's good to have someone on the call with the experience that Andrew has, heading up now the IR team, big shoes to fill very confident that he will fill them well. We’ll try to keep the call today as efficient and as effective as possible, knowing that you’re all very busy. So, we’ll start-off with just 15 or 20 minutes of prepared remarks, and then take all the time required for your questions. I will begin with the context for the results, a brief review of our overall performance. Andrew will then take us through the categories as well as the regions. And then I will conclude with an update on some of the actions we've been taking to ensure that we deliver consistent, competitive, profitable and importantly, responsible growth this year and beyond. Before we go further, let me draw your attention to the use of disclaimer relating to forward-looking statements and non-GAAP measures. So, assuming you’ve read that, let's start with the wider context for the set of results. Conditions overall remained challenging. Market volumes still fasts across most of the world. If you look by Region, let me first hit the developed markets. Europe, we continue to see price deflation. Some, maybe from many of the economies, are now starting to pick up. But any improvement in demand for our categories is likely to be slow at best. Turning to North America, more positive consumer sentiment is now translating into low single-digit market growth. So far, this has been driven by pricing. Volumes still remain flat. In the emerging markets, there are divergence trends today. Some of the emerging markets are showing signs of improvement. Examples are; India or South Africa; China pleasingly, is stabilizing but it's at much lower levels of growth than we’ve been used to over the last couple of years, and the biggest cities hyper markets are flat. For the many of the oil importing countries, the lower price of crude should help stimulate demand progressively through this year, but in countries like Indonesia, make no mistake, that the reduced fuel subsidies blunt the benefit to consumers. Elsewhere, take Russia, Brazil, very important emerging markets. The cost of living and you know this all too well is raising shortly consumer spending under serious pressure. So in summary, it's a very mixed picture. There still lots of volatility in currencies, commodities. But we are, overall, starting to see more tailwinds than headwinds in our markets. So with that background now let's just look specifically at Unilever and our turnover development for the first quarter. Sales were up 12.3%, just shy of €13 billion, €12.8 billion. Our underlying sales growth was at 2.8%, which was a little ahead of our own expectations. Three principle reasons for this; one, Chine performed better; two, happy to say, European savory and dressings had a good start to the year; and three, the benefit of the earlier Easter at around 40 basis-points, was at the upper-end of the range we had forecast. Turning to the specifically volume growth, this was up 0.9%, pricing at 1.9% and this largely driven by the carryover of increases in emerging markets to cover higher costs where currencies weakened against the dollar. In the first quarter, we've taken further pricing in places like Brazil, Russia and Turkey. M&A had a net impact on the top-line of minus 1.2%. That driven mainly from the disposals of pasta sauces in the U.S. Slim-Fast, Bifi, Peperami, et cetera, and obviously borrowing any further disposals this percentage throughout the year will improve. Importantly, currency translation added 10.6% to turnover. That’s volatility. The strength of the U.S dollar, the Chinese one, the Indian rupee, relative to the euro, contributed around half of this increase. In fact, the euro is weak against all our main currencies, with the notable exception of the Russian ruble. Importantly for yourself as well as ourselves, if currencies were to remain where they are today for the rest of the year, we would expect a tailwind on turnover of around 8% to 9% for the year as a whole. The effect on core earnings per share would be essentially the same, perhaps a little less, but in that ballpark. So, now, I'll handover to Andrew and he will take us through the category and the regional performances. Andrew?

Thank you, Jean-Marc. If I may say, after many quarters hitting to the left view on these goals, I'm happy to have moved over a few feet to the right. That’s not a political comment, by the way. Now, all four categories contributed to growth in the first quarter. In fact, the level of underlying sales growth was remarkably consistent. But the contributions from volume and price varied. The categories with the largest proportion of sales in emerging market or with higher commodity costs have seen the most pricing. Underlying sales growth in Personal Care improved compared with the fourth quarter. Our brands and our innovation pipeline remained very healthy and we are holding share in total. However, growth in the quarter was held-back by Europe where competitive activity set-up again, and by China and Russia. We have a strong plan and are confident that we will see volumes improve further in the remainder of the year. Foods picked up sharply with good growth in savory and dressings from both innovation and market development activities. Spreads improved with emerging markets growing well, but still more than offset by declines in the U.S and Europe. The earlier Easter helped, contributing about half of the growth, in Foods and about 40 basis-points to Unilever in total. This will reverse in the second quarter. Home Care growth reflects our focus on striking a better balance between market share gain and profitability in laundry. Our innovations have been landing well and fabric conditioners with above average margins are leading growth. This helps to max the mix within the category. Refreshment had an encouraging start with growth of 2.5% coming on top of a strong competitor of nearly 6% in the first quarter of last year. You will remember that ice cream is another category where we are focused on improving margins. So, it's encouraging to see that our premium brands and innovations have been doing particularly well, with Ben & Jerry’s up 10% and Magnum also growing strongly. Now turning to regional performance. Growth continues to be driven by the emerging markets, which are now approaching 60% of our business. Within this, Asia/AMET/RUB improved compared with the end of last year, but was still below the levels we've been used-to. Sales in China were flat in total with growth in Foods and Home Care, offsetting the decline in Personal Care. The trade destocking is now behind us and we will have easier comparators in the second half of the year. Growth in Africa picked up well in the first quarter, and there was a solid performance in South East Asia. But Russia declined as sanctions and the lower oil price weighed on the economy and consumers struggled with the impact of high inflation. Latin America had another quarter of good price driven growth. Our brand remains strong, allowing us to increase prices to recover higher commodity costs and still maintain volumes, despite weak underlying consumer demand. North America again grew albeit at modestly with ice cream, dressings and the new dry-spray deodorants, all contributing. In Europe, volumes picked up well, helped by the earlier Easter, but we continue to see price deflation across almost all countries in the region. With that, I'll now hand back to Jean-Marc, who will take us to the actions we've been taking to accelerate growth this year and beyond.

Thank you, Andrew. Growth of 2.8% is an improvement on the second half of last year, but it is still below where we wanted to be. In particular, it is important to our financial growth model that we rebuild momentum in underlying volume growth, which includes both volume and mix improvement. The changes we have already put in place make us more resilient, gives us a better platform for growth. We have, indeed, simplified the organization, streamlined many of our processes and we are increasingly becoming more agile. We're now building on this; be it firstly, investing more even more in our innovation; secondly, continuing to strengthen our go-to-market capabilities; and thirdly, further sharpening our execution as we always will. So let me just say a few words on each, starting with innovation. We’ve recently completed internally a full review of the plans for each category as we do actually every year, and it's without a doubt that the greater integration of R&D into the category organizations has really helped us have a much stronger pipeline to-date. It is increasingly delivering the technologies that give us the bigger innovations, based on sharper insights, clearer benefits to consumers. This is evidence in the recent cross-brand launch of dry-spray deodorants in the U.S. The technology, it's the same, as in the compressed deos, which are growing very well in Europe. But the products and communication are tailored to the U.S. consumer need. By the way, they still have the same packaging efficiency as the compressed deos in Europe and sell at a premium. Back in December, at our investor events, I explained that we now have much sharper category strategies. These help us, make clearer choices in allocating resources. And together with a simpler regional organization, they’re helping us get even closer alignment between the categories that develop the innovations, and the countries that take them to markets. For all of the categories, the most important priority is building the established core of our brands. Be it with innovations like the new Dove Shower Gels, that use nutrient moisture technology to give the best ever wash. These were first-launched in the U.S. in the second half of the last year, now landing in Europe and Russia. Or great advertising to strengthen the essential brand proposition and support the innovations that land in market. The Knorr, Flavour of Home digital campaign that’s just started, had 40 million views in its first week. I understand sources tell me now up to 75 million. Of course, these are just a couple of examples. Having established a strong pipeline of activities to build the core, we also extend our brands into adjacent segment and new countries. The launches of Dove baby, OMO pre-treaters in Brazil towards the end of the last year, are very good examples of this, both selling well. We have a great oral care brand, as some of you know, called Zendium, in the Nordics and Netherlands, with a very compelling proposition. It boosts, the mouth's natural defenses, harnessing the same protein and the enzymes that the mouth uses, sells at a price approximately four-times the average, and we’re now launching in France. Other example is extending the Lipton range, with green-teas in countries where this is not yet an established habit; examples, North Africa or the Middle East, Russia or India. And it's no coincidence that most of the innovations be they around the core, or in wide spaces in adjacencies, are for the most part margin accretive. It's been a very deliberate part of our Maxing the Mix strategy. There's opportunity to go further, moving into even higher premium segments and channels, that’s why we acquired REN Skincare, a month ago. It has a clean and pure positioning sell-through prestige channels which are largely new to us. Take refreshments for example where we’re growing their acquired T2 and Talenti brands, also off to a good start. Orion Foods, where we continue to build Maille with new flagship store openings, capitalizing on this with direct sales through e-commerce, as well as the traditional retail. Now to ensure that we fully support both the core of our brands and the extensions, we plan to increase brand and marketing investment this year, both in absolutes as well as a percentage of sales and this despite further for activity gains in our overall spend. So, we will be really investing behind our brands this year. In particular, just wanted to highlight, how we’re going to really further accelerate digital. We have got some well leading examples in this area; Dove Sketches, Cornetto Cupidity, KKT radio for mobile phones in India, just to mention a few. Importantly, when we get it right, we really do get it right. But more than any other area, this is really a very fast moving world. So, here again, we are stepping up our capabilities and our investments in digital, making sure that we get more returns from our investments, and from these investments. The second element, I wanted to just briefly touch upon in terms of building growth momentum, is strengthening our go-to-market capabilities. And here, we start from a good place, deep reach emerging markets but there are still plenty of opportunities to extend further. More than a third of the global consumer spent on our products takes place in small stores, which we reach through distributors and wholesalers. In many emerging markets, it's over 70% of total sales. Now, here we have a proven model. It works well where it's established and which we are extending to an increasing number of countries. Our scale and portfolio allow us to carefully select exclusive distributors to cover a particular area and effectively make some extensions of our own sales force. So, to maximize this benefit, we’ve developed a new IT system. What does it do? It makes the order taking process much more efficient. It gives us visibility on stocks all the way through the chain, and lastly helps drive growth in store through better merchandizing. In Thailand, one of the first countries to implement the new system, we've seen a significant uplifting growth in the outlets covered. So, we're starting to roll-this out elsewhere in South East Asia and in Africa. As well as driving high sales with existing customers, the distributor model also enables our geographic expansion to areas where we are currently underserved, like the outlying islands in Indonesia or the Philippines. If you just take South East Asia alone, we see this roughly as €0.5 billion opportunity. These traditional channels will continue to be hugely important. But let me now turn for a moment to the new kid on the block, IMA e-commerce, small today growing very fast. It's only really become relevant in our categories in the last two years, but it's developing rapidly with different models depending on where in the world you are. The economics tend to favor higher price items and this has limited the opportunity for our products so far to around 1% of our total sales. But if you take the UK or China, it's already at 5%. We know the consumers tend to be more loyal online, brands are as important here as they are in traditional channels. So we're stepping up our resources in this area across more than 20 countries and we have plans to grow our global sales in this channel by around 40% in 2015. The other focus area that I'd just like to highlight, which will take us to higher levels of growth is simply sharpening our execution. None of this should really be earth-shattering new news to your-selves. Between 2009 and 2011, we made major improvements in customer service and in the competitiveness of our products. These were important contributors to making us more competitive. But the competition doesn’t stand still, and so we need to step-up our efforts here as well. Firstly, we’re extending the perfect store program, launched a while back by Harish. This helps make sure we have the SKUs in the right place on the shelf and properly marketed. It applies equally to the modern trade, to the traditional trade, where it has and is enabled by our key distributor model and the new IT system that I was talking about. Secondly, we're improving the discipline of our sales and operations planning. This drives both, improved customer service and lower working capital. We have some best practice examples in a number of places and need and are rolling these out to more countries. Thirdly, we are re-examining the assortment, our assortment of SKUs, in each country to make sure that we have the right packs to hit key price points. To take a good example, the €1 Cornetto, which we launched in Spain, has tripled sales and we're now introducing it to eight new countries. So, just to conclude, our priorities do not change, they remain unchanged; firstly, profitable volume growth ahead of our markets; secondly, steady and sustainable core operating margin improvement; and lastly, strong cash flow. While currency and commodity volatility is likely to persist, at this stage of the year, we do expect an improvement in volumes in the second half but with a softening in price growth. We have strong momentum from our savings programs, including Project Half, as you know, the low cost business model initiatives, driven by Pierre Luigi. And these, together with a more benign commodity cost environment, enable us to fully fund the growth initiatives that I have described. And we expect to do this while delivering another year of steady improvement in our core operating margin. Finally a few words on the dividend, an attractive, sustainable and growing dividend. Over the last 35 years, our dividend has increased by an average of 8% per annum. That's an important measure of long-term value creation for shareholders. In the last few years, currency headwinds have actually held back core EPS growth, and so our payout ratio rose to approximately 70%. Today, we have announced a 6% increase in the quarterly dividend consistent with last year's rise. The currency tailwinds, which we expect this year, as I described earlier, should reduce the payout ratio somewhat, but still very much in line with our policy of an attractive, sustainable and growing dividend. With that, let’s open the line to your questions.

[Operator Instructions] So I see the first question is from Graham Jones. Graham, can we have your question please.

I've got two questions if I may, firstly on North America. You talk about good momentum in a few years, especially in deodorants, ice-cream. But volumes were negative in Q1. And I think looking at last year you’re lapping the easiest volume comparison of the year in North America. So, I was just wondering, what was driving that for the weaker performance in North America on volume terms? And also, why you we’re seeing an improvement in the pricing environment in North America in Q1, given the import cost deflation? And my second question is on China. And I was looking for a bit of color about what sort of your consumer off-take was perhaps looking like in China. And whether you are confidently still at least growing in line with your categories in China, and you stated that the Chinese major citizen hypermarkets are flat. But I know that the latest retail sales figure for China as a whole is still showing about 10% growth, so a bit more color on China would be appreciated.

Sure, Graham, good morning, and thanks for these questions. Let me just take North America firstly, your first question. There continue to be mixed signals in the U.S. economy, but we do see consumer confidence improving. So that's the first point to make. Specifically, on volumes, we had some timing in terms of the launch of our deos, which drove some of the lower volumes in Q1 versus Q4. But overall, if you just take a step away from 90 days, we see an improvement in our business. There is more momentum. I can't give you views on pricing on volume per region, but we're just happy with the overall performance in our U.S. business. Competition remains intense, specifically if you look at hair, but also in dressings. But overall, things are going well. As we look at the markets, the markets are probably growing at around 2%, all of that’s from price. So, I think that our numbers also stack-up with the overall market trends. When it comes to your second question, on China, obviously, overall, the newspapers everyday are full of articles about what the GDP growth is, and it's very difficult to really get a good grasp. As you see, our market growth rates within our overall sector, let's call it FMCG, they’ve stabilized to around 2% to 3%. You take the top cities, the hypermarkets are basically flat but there is growth and the growth is either in the tier-2 cities or in the smaller stores and also in e-commerce, which obviously is growing very nicely. If you take our business, first point, we're just pleased that we've gone through this phase of destocking that is behind us and with very difficult comparables our actual performance in China has stabilized. So, in summary, sorry for the long answer, but I think we're in line with consumer off-take, we've got the right strategy in terms of cities, e-commerce to grow and the difficult year of 2014 is behind us.

Our next question is from Alain Oberhuber, Alain.

I have question about input cost, if you could give us a little bit a pattern where input cost will be during the year and give a little bit more highlight of which input costs are going more down? And then the second question is on Personal Care development. Will the acceleration in volume in Personal Care be through all the soft categories or is there a specific category which will grow faster?

Okay Alain, thank you very much for your question, just on commodity costs. In January, we thought that we would have a small tailwind. And so, since the dollar has strengthened so much, where we are right now is we think that commodity costs for the year are basically going to flat. Now this can change, it takes around four to six months for costs to get through our P&L. But as it stands today, we expect commodity costs to basically be flat. If you take our commodities, also the question that you are posing, around 20 billion of commodities of which 20% to 25% are indirectly or partly affected by oil. So, that's where we are with commodities. Your second question on Personal Care, can you just repeat that quickly Alain was it about certain sub-segments?

Yes, exactly, so in the statement you said that you expect the Personal Care volumes to go up, but within the personal care which soft categories deodorant or the other one. Do you expect which will grow faster than the others?

I think the three categories that I would just highlight and expect further improvement in performance is deos, which, by the way, has gone through quite competitive battles, hair as well as overall. So those are the three that I would mention. But making perhaps a more broader overall comment Personal Care will improve, it's been impacted by what we discussed in China. We have an important Personal Care business in Russia. And there's been a lot of competition here in Europe. And so that is the reason why Personal Care is where it is today, which is not where we'd like it to be and we do expect it to improve.

I think the next question is from Celine.

Good morning. My first question is on Latin America. You mentioned that Brazil was difficult. Could we get a bit more detail on numbers there, because -- and overall whether these high prices, how much comes from at present Argentina and what's coming from Brazil? The second question in on the overall commentary you made about higher A&T. Some of your competitors have clearly said that they will use their FX tailwind in order to reinvest in the market and have guided to more modest margin improvements. Would that be fair to believe that -- how would you read see yourself competing and how you balance your top-line opportunity versus the margin expansion.

Okay Celine, good morning. Thank you for your questions. If I just take Brazil, as a country, we see like you probably do as well, conditions actually continuing to deteriorate, negative GDP, consumers spend declining. You see it in the newspapers, a lot of uncertainty. If you actually look at our markets, they are basically flat in volume. Who would have known by the way a couple of years ago that what a rationing in a place like Sao Paolo is actually changing the consumer behavior. Now you know I don’t speak that often about how we have sustainability integrated into in our business plan. But what an example, people are showering, washing clothes less frequently, so what an opportunity for us dry shampoos, one rinse fabric conditioners, et cetera. So, it's a huge pace and point but anyway lots of volatility be it economically or from a sustainability perspective in Brazil. Our own performance from a USG perspective basically made to high single-digits as it stands today and its broad based actually across all the categories. Your question about pricing and alike, if I take Argentina. Let me actually take Argentina and Venezuela. Argentina, it's important for us. But it's only 2% of total Unilever turnover. And I think that one of the strengths of our portfolio, now that we are just shy of 60% in emerging markets, is that we are never too reliant just a one country. Be it either China, be it any other specific African country, or a place like Argentina which is just over 2% of Unilever. Venezuela and other market that many people ask questions about, is less than half a percent of turnover. The pricing in those two countries you put it together are the basically similar levels this year as it was same time last year, adding around 80 basis points to the overall Unilever UPG. If I then turn to your second comment, we will invest in our business. If you actually look at our overall business, over the last 12-months, we’ve been gaining share in around two-thirds, 60% of our business. That has fallen somewhat over the last three months, very important for us to bolster the competitiveness of our portfolio throughout. So, point one is, we will reinvest and invest behind our brands, when and as needed. Most importantly be it commodities or not, is that we have built a lot of firepower over the last years through all our discipline and processes, Project Half, low cost business models. And so whatever happens to commodities and FX, we have enough firepower to drive top-line growth and deliver good sustainable core operating margin improvements. And both of those are important to us. So, we’re not talking about trade-offs between the two for the overall Company. It is absolutely a fact, however, that there are two parts in our categories where we need to lift our margins. We talked about those at the investor events, one being ice-cream and the second one being Home Care. And there, we will balance hopefully better, which is a fine balance growth in margin as we move forward.

Next question is from Jeremy Fialko.

Good morning. Jeremy Fialko, Redburn, here. Just one question for you, you talked about how you’d expect volume growth to accelerate in a second half, but then pricing to moderate. Really can you just talked about as you see things today, what the sort of relativities are here in terms of the extensive volume improvement relative to the extensive pricing softening. Do you think the two reasons carries one and other out or do you think one component will be stronger than the other? Thanks.

Let me give this to one to Andrew.

Clearly, the fact that we’ve got currencies and commodities moving around a lot, does adds to a little bit of difficulty in predicting forward precisely. But we’re certainly even looking for an improvement in volumes. The price growths should ease. Of course there will be different trends depending on where you are in the world, we'll see emerging markets, many of them continued to take some fresh pricing as we’ve seen recently in Brazil and Turkey, and Russia for example. But there will be other parts of the world, notably Europe where we won’t expect to see positive pricing we may while see continued price deflation in fact. And indeed in many of the emerging markets so we’ve had good momentum that momentum in pricing may ease because they'll be less pressure upwards, so less pricing. Where that will end-up? We'll have to see when we get through to the end of the year. We haven't changed our guidance, which remains 2% to 4% for underlying sales growth in the year, we'll clearly be aiming to try to get in the top-half of that range, but there's a long way to go yet.

The next question is from Warren Ackerman.

Good morning Jean-Marc, good morning Andrew. It’s Warren Ackerman here of SoGen. Also two questions, the first one, can I ask about two countries we haven't mentioned yet, which are Russia and India. I was wondering whether you could tell us what the like-for-like was in the quarter for each country and an idea of your share trends and perhaps your outlook for the rest of the year in those two countries. Particularly, interested in how Clean is doing in Russia and in India the kinds of trends you're seeing between rural and then urban consumption in India and then just secondly on pricing just coming back to Jeremy's question, down 1.9% in Q1 in Europe. Are you able to kind of split it for us between food and HPC, I mean are we seeing negative pricing in all four categories? And you talk about pricing potentially being more negative in Europe for the balance of the year, given we're already at minus 2 in Q1. I mean how much lower, could pricing go in Europe? Thank you.

Couple of points on pricing, down 1.9%, we basically see it broad based, the decline through all four categories. On India, if you can just suspend disbelief just for a little bit till the 8th of May, that's when that quarter is they will do a better job and they would also help me to not speak too much about HUL. So just wait for the 8th of May. But overall, we're happy with the performance of India over the last quarter. So wait till the 8th of May. On Russia, Russia again is one of these important markets to us. It is only 2% of Unilever's portfolio at around €1 billion. 50% of that business is Personal Care, and so important for our PC franchise. Russia you know the economy is continuing to weak, you've got the sanctions, lower oil prices that Andrew mentioned, GDP expected to decline mid single-digits, the ruble has devalued by around 20% versus this time last year. So consumers are in bad shape. So the overall macro context for Russia is really worrying. Within that whole context, our underlying sales growth was down essentially mid single-digit. And just to lift the bonnet a little bit more, PC and dressings down in weak markets and in actual fact home households care and ice-cream have been holding up relatively well. But then again, this is just one quarter.

I think the next question is from Chris Ferrara.

Good morning. I was hoping you could talk a little bit more about Brazil. Obviously, you’ve thought enough of the deceleration to call it out specifically. I think you said the market volume is flat. But what is the value growth of the market, and I guess how much of a deceleration did you see in your business specifically? And I guess could you talk a little bit about how much of your own fate do you control, given that these are more macro problems? And then I guess secondly you cited a bunch of competitive battles, I think last quarter, that you had chosen not to participate in. Can you maybe give us a little bit of a status update on what has happened in those? Have you seen some of that competition level subside? Did you join some of those battles? And is that maybe part of the balance you saw in the laundry where you decided the balance share gains with profitability?

Thank you, Chris. I'll give Andrew the question on competitive battles, let me just deal with Brazil. I said our markets are flat in volume. Our underlying sales growth in Brazil is mid to high single-digit and it's through all the categories. So, very difficult markets but we've performed well in those markets, can we perform at these levels as the markets continue to decelerate with the volatility that we have, is a huge question mark. What I can tell you is time and time again is that when markets in emerging markets go through difficult times, the more we invest the closer we are to our consumers, the community, the stronger we are, as the things improve. So we will continue to invest in important markets, like Brazil and others. So, at the end of the day, we have a big business. The problems are much bigger than our business. We can continue to do well. But obviously, if the macro-environment just continues, that is going to impact our business and there will be some correlation. But for now, I'm very pleased with our financial performance. Over to you Andrew.

On competition, I mean a few overall comments. Competition from both multinationals and local competitors remains tough, but there's really nothing new in that. Local competitors have always been important, and we're very mindful of them. They can be agile they can pick up on local consumer insights. In categories like laundry, they tend to be the ones that have been around for time. But other categories, like skin, they come and they go more. And of course that's a reminder for us that what's important for us to use our global scale and R&D behind our innovations, but at the same time being sensitive to local needs and aspirations, and of course drive our costs hard. Specifically on the battles that we talked about in the fourth quarter, we talked about in Personal Care, in Europe, the fact that competitive intensity, particularly promotional intensity, was higher than ours. We have raised our game there. We have stepped up, but then so have competitors. So that remains an issue, which we're addressing. In China, we also talked about the fact that we'd reduced our promotional intensity, while others have continued to promote highly, again that continues to be the case at the moment but will improve through the course of the year. The other one we talked about was India and skin cleansing and laundry. But as Jean-Marc says, we'll need to wait until HUL report their results before giving you any update on that. I think the next question is from Javier Escalante.

Good morning everyone. Thank you for taking my question. Coming back to China and Brazil, one aspect, it has been alluded but not developed, has to do with the changes in retail. China you mentioned online and the initiative of growing at 40%. But then you said another big channel-shift towards specialty stores. And I wonder whether you have the brands to compete there, because a lot of it has to do with local Chinese brands, particularly in skin care. What are your thoughts in that? And the same thing in Brazil, to what extent, what is happening also there is changes in retail and also with the demise of direct selling companies, you don’t seem to be benefitting as much in Brazil? Thank you.

Javier, good morning, and thanks for your questions. I think -- I can't give you perhaps the detail that you're looking for in specifically the changes in the retail. But what I can tell you that it is absolutely clear that versus five years ago, local Chinese brands are now taking China for us are much more competitive than they were five years ago. And so, I think that rather than just focus on the strategy of multinationals, dealing with local competitors and dealing with local brands which by the way are successful, not only on the low but also on the medium and increasingly on the more premium levels, is absolutely a challenge that we face. We see higher competitive intensity and we see increased loyalty towards Chinese brands. What I will tell you, though, is that it's important for our franchise; one, is to understand those local trends; leverage the globality of our business, but make sure that we are locally relevant. And part of that local relevance is being available where the consumers shop. And so, the main trend right now is just the explosion of e-commerce taking place in China, and all related. And we're just making sure that we're as well positioned as possible to capture that growth. When it comes to Brazil, I can't mention any trends away from direct selling to our business. But quite frankly, with the performance that we’ve had in Brazil for the last four to five quarters which are either double-digit or this quarter mid to high single-digit, I'm pleased with the performance. And I'm not just looking at the financial performance. But just the overall state of the business, it's gone through some serious IT transformation programs and the like, I'm very happy with the competitive position of our business and the overall health.

We have just two more questions on the line. So I think we'll take those two and then call the call to a close. And the next question is Richard Withagen.

Good morning. It’s Richard Withagen from Kepler Cheuvreux. I just have one question Jean-Marc you touched upon e-commerce in your remarks. And I was just wondering, whether you’d give any more details on your e-commerce initiatives in Personal Care, specifically I understand that that is a category where e-commerce is booming or starting to boom?

Let me give that one to Andrew.

So, this is something that we’ve very much been on over recent years, and we’ve been stepping up our resource. We've actually put resource, particularly into five hubs around the world, so the UK, US, Brazil, China and now Singapore as well although, we have resource in more than 20 countries. There are different models depending where you are, whether it’d be the traditional of bricks-and-mortar, Tesco.com, type of model in the UK. Or the marketplace model like, Taobao for example in China, different models in different parts of the world. So we're very much piloting different models, they will evolve over time. We have, at the moment, our fair share of these markets. We'd like obviously to be ahead of the game. They are relatively smaller use channels for our sorts of price-points than some of the other higher price-point products. But we’ve very much looking to accelerate there. And as we said, we're looking for strong growth this year to keep ourselves ahead of the game and even get a little bit ahead of where others are.

And could you perhaps say what kind of growth rates we're talking about in Personal Care in e-commerce.

I mean, Personal Care, has a higher percentage. So when we talked about 1% overall for our Unilever sales or for 5% as it is of our sales now in UK and China, it would be a higher percentage in Personal Care. I can't give you the growth rate specifically by category. But I can tell you that it is higher in Personal Care than in the other categories.

So we'll just take the final question now from Alex Smith.

Good morning. I have a follow-up question on your comments on input costs, and reinvestments, I guess. I think you said you're now looking at flat costs for the year. But presumably given that the timing of your hedges, you'll still see deflation in the second half of the year. And I think that laps probably quite considerable inflation in H2 last year. So, it strikes me that you've got quite a dramatic swing in your cost base, as you get into the second-half of the year, and that's in your favor obviously. And that's on top of good savings momentum in H1, coming through from Project Half. Pricing doesn't seem to be turning negative, even as you get into the back-half of the year. So, I guess, I'm just wondering why we're only looking at modest margin improvement, unless A&P is up quite dramatically? So I was just really wondering if you could help me square that equation please.

Well, I can square it actually quite easily, core operating margin has been increasingly important to us. You will know, over the last five years, we've invested a huge amount into the business, be it either OpEx or capital. And for us, we want to make the whole system work, be it top line as well as core operating margin, as well as earnings per share. I won't give any guidance on H1, as well as versus H2. But yes, we will have gross margin improvements in the second half, which are more weighted due to forward covers, stocks, and the like. We'll also have some good overheads improvements in H1. But that's also driven by the one-offs in the second half of the last year. But overall, we expect good core operating margin improvement. We demonstrated that last year. We expect to be able to do that each and every year. But this year is the year of investing behind our brands to make sure that we're competitive and that we continue to win share like we've been doing over the last 12-months, and really bolstering our portfolio.

Okay, we're bringing the call to a close there. If there are further questions, of course, Ansgar, Steve and I will be happy to take them as soon as we get back to our desk. And I'll just hand back to Jean-Marc to conclude.

Well, thank you very much from myself as well as Andrew and all your time today. Thank you very much for the questions, which we will obviously always further reflect upon. Let me just sum-up in a few words. The first quarter puts us on-track to deliver another year of competitive top-line growth and this combined with steady margin improvement and another consistent increase in the dividend which underscores the long-term value that we are aiming, and trying, and creating from our business model. So as usual, the IR team will be happy to answer all your other questions, or more specific questions. But from me, enjoy please the rest of the day and eat as much as ice-cream as possible as it remains good weather. Thank you very much.