Are about
to hand over to Unilever to begin the conference call. Please ensure you are calling from a landline telephone and not a mobile phone. Please avoid using a speakerphone to ask your question. Please use the telephone handset to minimize any background noise. We will now hand over to Andrew Stephen.
Good morning, and welcome to Unilever's half year results, which will be presented in the usual way by Paul and Graeme. Paul will give the headlines of the first half performance and talk about how we're building agility and resilience into our business in a volatile and challenging environment. Graeme will cover the results in a bit more detail and Paul will wrap up. And we'll leave plenty of time for Q and A. As usual, I draw your attention to the disclaimer relating to forward looking statements and non GAAP measures.
With that, I'll hand over to Paul.
Well, thank you, Andrew, and good morning, everybody, and good afternoon. As you have seen, the first half results again demonstrate the progress we're making in transforming Unilever into a more resilient company and a more agile company, able to generate the competitive and profitable growth that we aspire to and deliver this in a consistent and responsible way. Undoubtedly, reading the newspapers, you would agree with me that this is a challenging trading environment that, frankly, is not getting easier. Within that context, providing a consistent growth, in this case, again, a top line growth of 4.7%, is well within our guidance of 3% to 5% top line growth. It is also competitive.
It's all of our 4 categories growing ahead of their markets and building overall market share as a company. It is also profitable with our core operating margins up by a whopping 50 basis points to 15%, including the 80 basis points improvement in gross margin that we have flagged to you before. And last but not least, it is responsible growth. In fact, our sustainable living plan brand, which now represent more than a third of our turnover, grew a full 1 percentage faster than the rest of our business. Now we're increasingly seeing that the Unilever Sustainable Living Plan is a positive driver for growth as well as a positive driver to reduce costs, reduce risks and build the needed trust that is needed in today and tomorrow as well.
But again, we no doubt that this is a fast changing and challenging environment. The IMF has again downgraded the projections for global growth for this year, which now seems to be a weekly occurrence coming from their offices. It's now down nearly a full percentage point over the last year and is estimated to grow at best 3% on a global basis and others actually could be closer to 2%. Political uncertainty is acute and widespread, be it in the U. S.
Elections, the fallout of the Brexit referendum, the presidential impeachment in Brazil or the regrettable events in Turkey and the LIF DORSAN. With political processes and economic conditions being more difficult almost everywhere you look, it is not surprising that the consumer demand in all of the markets that we operate continues to be sluggish. In emerging markets, consumer demand is flat in volume terms. In Brazil and Argentina, in particular, market volumes are contracting following the sharp reduction that we are seeing there in disposable income. Of course, there is local currency market growth on pricing in Latin America, but this is offset, as you well know, by currency devaluation.
Market conditions here are likely to get worse before they get better. But we believe that we have, obviously, the depth of management there and company presence. We have the portfolio, then all the other things needed to come out of this recession stronger than any of our competitors. In fact, in Argentina, where I just recently visited, market shares are actually up despite this challenging environment by over 200 basis points. In the developed growth, consumer demand is down.
In the European market, where we already had a fragile situation even before the U. K. Referendum, we decided to make it worse. They are now likely to be varied further and uncertainty will remain high for some time to come. And when there is uncertainty, you undoubtedly will see less investment from business.
In the U. S, market growth remained subdued in the 1% to 2% range. Meanwhile, new trends and technologies are shaping the future, disrupting the traditional models on a global scale while at the same time encouraging fragmentation on a granular or local level. This goes well beyond the rights of nationalism in individual countries. It applies to consumer goods, media choices, competition and route to market channels.
We call it hyper segmentation. While this makes for a challenging environment to operate in, it is also a very stimulating one and one that I believe Unilever is well placed to win in. We have the global scale, but we also have the deep roots in the local culture. Our portfolio spans price points to meet the needs of different income levels and includes a mix of both strong global brands as well as very strong and attractive local jewels. In fact, in our total portfolio, 80% of our business finds itself now in number 1 or number 2 positions.
In these environments that we operate in, strategic changes we are making to continue to build our business are obviously very important, and they focus on driving agility and resilience. To get the same results or the great results that we are announcing today, you clearly need to work twice as hard as probably 5 or 10 years ago. So what are we doing? 1st and most importantly, we're stepping up our innovations. Secondly, we continue to evolve our portfolio, including the adoption of more flexible models for some parts of our business that operate on the edges of our traditional models.
And the Dollar Shafecard acquisition we announced yesterday is a good example of that. And thirdly, by implementing the 3 key initiatives, which we discussed with you and Fedele at the beginning of this year or at the end of last year, a focus on strengthening the organization as well as driving the efficiencies. And these initiatives are the rolling out of net revenue management, finding the next wave of cost efficiencies through a zero based budgeting and implementing the organizational changes, which we have provisionally labeled new functional models, but which we now call connected for growth. Now let me say a little on each of these strategic planks, starting with innovation, which, as you would agree, is the lifeblood of pretty much any business and where we've spent an enormous amount of time over the last few years to step up our scale and pace of innovations. And probably, it's the key driver of these underlying strong top line growth.
We've made a lot of progress over the years to step up our innovations to be bigger, better and faster. Needless to say, this will continue. At the forefront are our big global brands with clear differentiated brand positions. And they're getting even stronger. More and more of them are building social profits in their essence and more and more are building brand equity.
And as a result, we are overall growing share. This is what we've often explained to you as the focus of our core of the core. And in this environment, getting stronger is more important than ever. Dove is a great example of that. It has had a clear purpose for many years to raise the self esteem of women.
This is truly a global issue, and Dove is able to address it powerfully with communication that really engages people and builds tremendous brand loyalty. Dove grew actually 6% over the first half of the year, exemplifying the faster growth across our portfolio of brands with pockets. Now we will continue to increase the differentiation of our innovations with proprietary global technologies that give distinctive consumer benefits. Take ice cream, for example. The reason that you're able to enjoy such high quality and delicious treats wherever you are in the world is because of our unique ice structuring proteins or the double dipping technology which we use in Magnum, which actually, by the way, a brand despite lousy weather, may I say, also grew again by 6% over the first half of this year.
And we're speeding up the rollout of our innovations as well. Our new antibacterial deodorants with MotionScent Active Technology, which started in Latin America, has now been introduced in 36 countries over the first half of this year alone. Now the laundry, tree treaters and stain removers, that's a new segment for us. We spent a year probably establishing women in Brazil and obviously learning from that and are now rolling it out rapidly to the rest of Latin America, Southeast Asia and China. In all, and very roughly, about 70% of our portfolio is truly global, and we plan to cut the rollout time for these initiatives from 1st to last market by up to 1 third.
The other 30% of our portfolio is what I would call more local. Again, I believe a competitive advantage to have that balance between global 70 percent and local 30%. Roughly 20% is in local variants of our global brands. The global brand propositions and some of the core global technologies are obviously deployed, but we need local adaptations driven out of deep local consumer insights. Take a brand like Sunstroke that does it particularly well, using local insights to meet the particular needs of the Nazi women wearing a hijab or the Filipinos who have spent much of their day on motorbikes wearing helmets, it is no coincidence that Sunsilk is our fastest growing hair care brand.
The remaining 10% of our portfolio also is truly local brands, meeting specific local needs and yes, manage locally. You can see just a few examples on the charts here, a new special prom care toothpaste, Faraz Mom under the Pure Line brand, or Bangor in Indonesia, Lucknow in India or for the ones who love it, Marmed in the U. K. We expect that the changes we are making under the Connected for Growth initiative will enable us, in this case, to halve the lead time on many of our local launches as well. The final aspect of innovation I want to cover is how we are addressing the high growth segment, which can be with either global or local initiatives.
You will have heard many people talk about the trends towards naturals. There are many facets to this trend. The Russian example I just mentioned, the forest bomb, is just one example of one segment that you could call inspired by nature. Others in this segment would include Sesame Botanic, recently launched in our 3 largest markets or Radox, which is charged by Nature in the shower gel segment. We have a very strong presence in naturals across most of our brands, and that probably is driving part of the growth.
In Food and Refreshments, it is more about the authenticity or the origins of the ingredients itself. As we now see with natural meal makers, for example, range from Knorr are purely teas that we've just won. In fact, taking purely the sales of around €500,000,000 already in the Pepsi Lipton joint venture, we grew nearly 30% in the first half of this year alone. Building on the success, we also will be introducing Pure Leaf and hot tea brands in our mainstream business over the balance of this year. Another segment, just to take on, is the free from segment, like our non dairy Ben and Jerry's, our Luxe silicone free shampoos, or anti allergenic products under the neutral brand and the list goes on.
And we see rapid growth in the hyalurhetic products that have their roots in the Indian herbal medicine. We've launched these products on Fair and Lovely, and we are introducing also some of our old brands, one of the old brands being Ayush. And not surprisingly, we've acquired a hair care oil brand in Bellecca that is also benefiting from this trend. Now our innovation program is guided by our 4 category strategies, increasingly differentiated, as you know, be it driving premium and personal care and refreshments or the focus on more added value formats in home care or getting into more attractive supplements in food. The category strategies are also building more resilience into our portfolio.
For example, increasing the margins in Home Care, which you see in these results once more, while driving up the return on invested capital in ice cream, again, as promised and as delivered. This makes us less dependent on Personal Care and Foods alone for our cash generation. And we continue to evolve our portfolio to M and A. I know something that is of high interest to many of you. Over the last 7 years, we've built our Personal Care business from just 28% of sales to now nearly 40%, making it a business of some €20,000,000,000 in the process, €20,000,000,000 this is, probably the fastest growing personal care business.
And I recall myself that it was about €12,000,000,000 when I started into this job. And our foods portfolio is now much more focused on the attractive segments. The largest of these is cooking ingredients, and 2 thirds of this is now in emerging markets, where we are growing double digits. Of course, there is still a drag from spreads. But even with this, the total food category is accelerating its rate of growth.
We're also increasing flexible ability in the way we approach our business models. By setting up, for example, the baking, cooking and stress as a separate unit, we've given ourselves the flexibility to manage this part of the business to best preserve the value of the strong cash flow it generates. Flexibility in our business model also helps us capture incremental opportunities and build capabilities by experimenting at the edges of our traditional structures. This is what has enabled, for example, Ben and Jerry's to continue to grow at double digit rate or our Food Solutions business to grow at over 6%. This is also how we are expanding businesses like T2, Gran and the newly acquired prestige brands.
And yes, yesterday, by coincidence, we announced the acquisition of the Dollar Shave Club. And I'm very excited about this move, as you can imagine. Let me explain why. 1st and foremost, it takes us further in the new grooming category, where Unilever, if you exclude the shaving segment, is the outright number 1. This is much more than just a razor company.
Their portfolio and the dialogue with consumers extends across male grooming into hairstyling, skincare and skin cleansing. Male grooming, as you probably know, is a $40,000,000,000 market, growing faster than the personal care efforts, so we see this as a huge opportunity. We're buying an innovative and disruptive brand with a cult like following of diverse and highly engaged consumers. So it will be beautifully complementing our existing core male grooming brands like Dove, Memphis Care or X or some of the other brands. And then we see the rapid growth in our U.
K. Products that have their roots in no, sorry. And then we see what we are buying with this excuse me, what we're buying with this also, obviously, is the category leader in the direct to consumer channel, which is very attractive and successful. People call it a subscription model. The model involves upfront investments in acquiring subscribers during the rapid growth phase that this business is in now.
Thereafter, it is inherently profitable with a loyal base of consumers regularly buying a range of products, the gross value, mid tier and premium brands. And finally, the acquisition brings expertise and technology in direct to consumer sales that we can use internationally and in other parts of our business. So we believe that is a great acquisition that goes well beyond either shaving or e commerce. And we look forward to welcoming the business into our portfolio and scaling it further. And working obviously, needless to say, was Michael Dubbin and his wonderful team that have built this business.
But before I hand over to Graham, let me give you a brief update on the 3 key initiatives that we set out at the end of last year. The first one is net revenue management. As we have explained before, this is a rigorous approach to optimize pricing and grow volume by unlocking new purchase locations that we would have otherwise missed. So far, it has been rolled out to about a third of our turnover, and we expect to have about 50% covered by the end of the year. The second is the organizational change, which we have labeled as new functional models and is now called Connected for Growth.
It will make the organization faster, simpler, more consumer and customer centric and future proof for the connected world. It will help us unlock the trapped capacity to do more with fewer people. We are creating a single marketing team with distinct and clearly defined global and local roles. We will better leverage what we do globally with scale, whilst at the same time we will be dialing up in each country as what is best done locally. The new organization will have fewer layers.
There will be only one layer between a category leader in a country and their category president, for example. If I may bring this to life, Hai Van, who runs our Personal Care business in Vietnam outstandingly, will only be one take away from, let's say, in this case, our job. More of our resources will be deployed in strong global brand communities as well as local operations and less than staff roles. There will be fewer touch points. And by redesigning our processes, we aim to reduce the time we spend from activities by managing the innovation funnel by up to 50%.
This means more time spent with consumers and customers and a more market saving organization. In a nutshell, Connected for Growth will help to make us more agile, lower cost and more efficient. And finally, the third initiative is serial based bird shopping, which actually is an integral part of the 4 gs growth model and also an integral part of the connected for growth organizational change. It will actually help us enable to identify the next wave of efficiencies, eliminate costs that don't add consumer value and change processes that are needed. This is essential to both fuel investment behind growth and underpin the steady margin improvement.
A few weeks ago, we completed the feasibility case and we're close to finalizing the value targeting phase to unlock the savings into our plans. Now we are rapidly moving to implementation. The visibility phase gave us a more detailed and comparable view of our costs than we've ever had before, And we've used this to benchmark both internally and externally vigorously. It has confirmed that overall and in many of the residual areas, our spend is already below the median of our peers. But even so, there are plenty of opportunities to redirect spending for higher impact or to eliminate this.
To give you just one example, market research is fundamental to our growth model, but we can reduce the amount we spent on continuous resets and leverage increasingly digital methods to focus more on deep consumer impact. The work already done has confirmed to us that the ZBB program, together with the organizational changes under the Connect for Growth, should deliver the expected savings of at least €1,000,000,000 in overhead and marketing alone by 2018. And we will continue to absorb the associated restructuring costs within our core operating margin. So you get what you see. With that, let me now over let me hand over to Graeme to take us through the results in more detail for the first half of the year.
Graeme?
Thank you, Paul. Good morning, everyone. Good afternoon if you're listening in from Asia. The first half year results demonstrate continued delivery against the priorities that we set out for each of our 4 categories. In Personal Care, growth of 5.7% was led by volume, which is up in all of the subcategories.
Our premium brands, those with a price index more than 20% above the average in the market, grew by 8.4%. And core operating margin increased by 10 basis points. In Foods, growth has continued to accelerate and was 2.3% for the half year. Cooking products and dressings again grew strongly. We've slowed the rate of decline in spreads in North America, but not yet in Europe.
Margins in Foods remain well above the Unilever average, though slightly down on last year due to the relatively high exposure to Europe, where we're lapping some one off pension gains and a higher restructuring cost this year. Home Care margins improved by a further 2 50 basis points to 9.8%, and we're now very close to our medium term target of double digits. Growth remains strong at 6.5% with very good uptake for our margin accretive innovation. Refreshments grew 4.1% with core operating margin up by 90 basis points. Our return on invested capital in ice cream has increased by more than 3 percentage points over the last 2 years and now sits at a much more attractive 15%.
In Tea, we have a good growth in premium segments, more than offsetting a decline in the more commoditized parts. As more of our portfolio shifts towards higher growth areas, we can expect the growth in fees to accelerate further. Now looking at our underlying sales growth for the first half year by region, it continues to be driven by emerging markets, up 8% with nearly 3% from volume. Volume growth was strongest in South Asia and Southeast Asia, regions where price growth has recently been subdued compared with the historic norms. By contrast, in Latin America, growth is all from pricing.
Argentina alone contributed around 100 basis points to total Unilever price growth. As expected, consumption in South Latin America is now contracting and our volumes were down in the 2nd quarter by less than the market as Paul touched on earlier. In North America, we saw growth of just under 1%, mostly from volume and close to the level of market growth. In Europe, we've sustained solid volume growth of close to 2%, but this is again offset by price deflation to leave underlying sales virtually flat. Overall, underlying sales growth of 4.7% for the first half included 2.2% from volume and 2.5% from price.
The pickup in pricing in the Q2 to 2.8% comes from a little less deflation in Europe and some improvement in pricing in Asia from the historically low levels of the Q1. M and A increased turnover by 0.7%, largely through the acquisitions of the prestige skin brands. Currency translation reduced turnover by 7.6%. If exchange rates were to stay as they are today, we would have less drag from emerging markets in the second half of the year, but of course, a new headwind from the weaker British pound. For the year as a whole, the total currency headwind would be around 5% on turnover and a little bit less than that on EPS.
Core operating margin increased by 50 basis points. Gross margin was up by 80 basis points. The main drivers were supply chain savings and improved mix from margin accretive innovations. Commodity costs continue to be benign in hard currency terms, but with aggregate inflation in local currencies, driven by devaluation relative to U. S.
Dollar, which is particularly acute in Latin America. Brand and marketing investments have increased by more than EUR 2,000,000,000 over the last 7 years, and this is supporting our market share gains across all of our 4 categories. In the first half of twenty sixteen, we sustained the absolute end market investment at last year's level. As a percentage of sales, brand and marketing investment was 50 basis points lower against a relatively high comparison last year when it was up by 50 basis points. Overheads increased by 80 basis points, and there are 3 reasons for this.
Firstly, in both 2014 and 2015, we have gained some changes to pension plans. This year, we have a much lower gain from the pension plan changes. Secondly, the newly acquired Prestige France have very different cost structures to a traditional model. We operate with a higher level of overhead costs for running therapist education centers, beauty salons and so on. These help to build brand equity and so fulfill some of the role that brand and marketing investment plays in the traditional model.
There's an offsetting benefit in gross margin and so no material impact on core operating margin overall. And thirdly, as we began to implement the Connected for growth changes, we incurred a slightly higher level of restructuring charges than last year. This will step up further in the second half of the year. Core earnings per share increased by 7.5% at constant rates of exchange. And at current exchange rates, the increase was 1.3%.
Operational performance, which is a combination of growth in margin, contributed 8.2%. The impact of minority interests increased as we generated higher profits in countries like India, Arabia and Egypt, resulting in a drag of 1.6% on EPS. Strong growth in ready to drink tea is producing increased profits from the pepi lipsyn joint venture. And this, together with the revaluation of 1 of our non current investments, offset higher finance costs. The core tax rate was 26.1%, in line with last year and within the range of our medium term guidance of 26% to 27%.
Currency movements had an adverse impact of 6.2%. Free cash flow was €800,000,000 including the effect of the unusual sorry, the usual seasonal increase in stocks and debtors. It was €300,000,000 lower than the first half of twenty fifteen, following the exceptionally low working capital position when we exited last year. As we said before, rather than looking at working capital at a single point in time, a much better day to progress at the half year is the moving annual average. This improved again from negative 6.1 percent of turnover at the end of last year to negative 6.6%.
Capital expenditure was slightly lower in the first half. For the year as a whole, we continue to expect it to be well within our medium term guidance of 3.5% to 4% of sales. Net debt at the mid year was €12,600,000,000 an increase of €800,000,000 compared with the same time last year following the acquisitions of the Prestige France. Over the last 6 years, net debt has increased by €5,000,000,000 This mainly reflects an investment of €11,500,000,000 in acquisitions, be it businesses, minorities or the Leverhulme family rights compared with net proceeds of disposals of €3,800,000,000 Paul summarized earlier the strategic rationale for the acquisition of Dollar Shave Club, which we announced yesterday. The deal is expected to complete during the Q3.
The net pensions deficit has increased by €1,500,000,000 to €3,800,000,000 This is a result of the further reduction in bond yields used to discount liabilities, including the initial impact of the Brexit bill. Bond yields are likely to remain low or even lower for some time to come. And with that, let me hand back to Paul for his concluding remarks.
Thanks, Graham. So let me wrap up briefly. Our priorities and outlook for the year remain unchanged. We continue to expect underlying sales growth in the 3% to 5% range. USD in the second half, however, will likely be lower than in the first half.
The comparisons are getting tougher, particularly in the Q3, which we left last year's strong ice cream sales. And in Latin America, we actually expect market conditions to get tougher before they improve. There's also no change to our guidance on core operating margins. This is for another year of steady improvement similar to the improvements we have delivered in each of the last few years. We expect it to be somewhat front half weighted this year for two reasons once more.
Firstly, because brand and management assessment is likely to be up in the second half of the year and secondly, whilst we start to realize savings from our CERO based budgeting and Connected for Growth programs, we will also have to deal with the hiring higher restructuring charges that will be absorbed in the margin. So in summary, over the last 8 years, Unilever has become a much more robust and resilient company. The first half results, despite challenging market conditions, again demonstrated. The consistent delivery has underpinned a 64% increase in dividends over the last 7 years. And with the consistency of performance over the long run, which is increasingly valued in what is becoming unfortunately an increasingly volatile and uncertain wealth.
We are taking the next steps to ensure we continue to create long term value for our shareholders in the years to come. We continue to roll out net revenue management to optimize pricing and minimize new purchase occasions. We continue to eliminate costs as the shareholders budgeting to generate fuel for profitable growth. And we will add and rigorously implement Connected for growth. This will be another important step in building resilience into our business model.
It will increase our agility, unlock the truck capacity and help us better adapt to a changing world by becoming both more global and more local. And with that, let's move quickly to taking your questions. Thank you very much.
Thank you, And I think the And I think the first question is from Celine Panuti from JPMorgan. Celine, please go ahead.
Yes. Good morning, gentlemen. My first question is on pricing. It seems that there was less price deflation in Europe, and you mentioned as well a pickup in Asia. So what is the outlook for using these two regions?
Because I would presume that we will start to see a fading of pricing that was implemented in Latin America and H2 last year. And if you're still comfortable with around 2% pricing for the year, I think that you had alluded to that in the previous calls. My second question regards to your commentaries on the savings initiative. How what is your having done all the groundwork over the first half, what is your comfort level of when you say at least €1,000,000,000 around or above that number? And also the step up in restructuring charge, is there a way you can quantify that step up and as well how long that step up will last?
Because I would presume that would probably be kind of a one off step up for the coming, I don't know, halves. But then after we face that, we should come back to a number 9 level.
Yes. Thanks, Helene. I will ask Graham to give you a little bit more granularity on the savings because, obviously, he is a key engine of helping us deliver that with the intensity that we have become accustomed to from Graham. So absolutely key. On the pricing, as you've seen, I'm just looking at the numbers, it actually picked up a little bit from 2% in quarter 1 to 2.8% in quarter 2.
But frankly, I wouldn't really be that granular on a quarter to quarter basis. We think what we will see is slightly less deflation in Europe, more pricing in Asia, no change in Latin America. The outlook that we have on pricing is cautious on pricing for the rest of the year. In weak markets that we see in many of these emerging markets, it's price increases that will be difficult. But where we see costs going up, take for example the U.
K, we're seeing enormous currency devaluation we've seen and we various pounds, we will look at pricing. And elsewhere, our price growth is likely to drop, if you want my best estimate, as we left last year's increases. So don't expect too much from our price components moving forward. Your estimate of what was our previous guidance, I imagine, of around the 2% sounds still more or less right to us. What will get tougher is the volume comparison over the second half.
As I alluded to in my introductory remarks, especially Q3, where we had an enormous ice cream sales. This was a record way beyond what we've done. And then I don't expect Latin America to get easier either, where we have weaker second half. So that's why we want to guide you to a little bit more reasonable growth over the second half than the first half. And bringing our run rate probably for the year, if I may estimate, to about the 4% level is something that we would feel more comfortable with.
And then with that, let me bring it to Graham for giving you a little bit more insight into our wonderful Connected for Growth program in sub disease.
Yes. Hi, Celine. On the level of confidence around savings delivery from ZBB and Connected for Growth, now that we have done the detailed data exercises and really interrogated where we spend our money, why we spend our money. I think we have high confidence now in the $1,000,000,000 that we indicated in the second half of last year, would be delivered by both of those programs through 2018. As you know, it's a very data driven exercise, and we've had some very senior leaders from around the business looking horizontally, if you like, around cost segments.
We call them cost segment owners. These are big jobs, and having that data and the insight that the ZBB work has brought to us has been very insightful. Within that, the critical question, of course, was it's not as we've indicated, we won't expect everything to fall through to the bottom line. Part of this will be a reprioritization and a reinvestment of where we spend our money. And of course, it covers both overhead, BMI and supply chain costs.
So really, we are looking at all facets of the P and L. But we have high confidence that both Connected for Growth and ZBB will deliver the GBP 1,000,000,000 that we indicated. Now over what time frame? Well, as you'd expect, it's a couple of years program. But if we look at it over the course of this year and next in terms of the restructuring investment to get there, We want to manage this and accommodate it within our normal delivery of profitability at the sort of levels we've been delivering over the last couple of years.
And we will continue to manage things that way and accommodate that. But against our normal average restructuring of about 100 basis points, maybe we'll now be sort of plusminus20 basis points around that range. That's how we would look to the position of restructuring investments.
Two quick comments. The you need to do these things because it's a tougher environment and to continue to deliver the same resources. I think a message that Graham gives, and I will certainly agree with that. A part of working harder to be able to do the same. And the other thing I wanted to point out is the 2 biggest spending buckets that we have is the whole pricing investment bucket that we are attacking this net revenue management.
And the other biggest bucket we have is BMI. So from the CO based budgeting, we expect most of the savings actually to come out of indirect partly, but out of BMI. So you will see in the future more BMI efficiencies into our model.
The next question is from
Thank you.
Thanks, Celine. The next question is from Eileen Ku from Morgan Stanley.
Good morning, gentlemen. I was wondering if you could talk a little bit more about your ambitions medium term for the Dollar Shave part. You talked just now, Paul, about increasing sales. Would you therefore consider acquiring more assets, including manufacturing facilities in the shave category in due course? Or are you thinking more about using this business as a platform to push growth in other categories?
And what do you think is the risk of pressure to the profit pool given that one of the attractions for consumers of this business is the low pricing?
Yes. Thank you, Eileen. And obviously, I had guessed with Graham that the question would come on the dollar shave cup. So I won my bet for some reason. But let me just say it again very clearly.
The male grooming market, and you have to see this trend from us on male grooming. When you make an acquisition like this, you have to say, is this a segment you want to be in? And the segment is male grooming. That's a $40,000,000,000 segment and growing quite nicely. We have twice our share than our competitor, a direct competitor, if you take shaving out of it.
So we are very well placed, and it is more than a shaving model itself. So we feel very good. The second reason that we like this is because we fast in the absence of the subscription models. Big companies like us, like we've seen also with our competitors, have a hard time as having those things because of the culture, the knowledge, it's just simply not there. Not a good thing, not a bad thing, as long as you recognize that.
And we're able to acquire the knowledge that they have built very quickly. And undoubtedly, will apply it also on other brands. And then lastly, this is a very attractive proposition that has been built, growing Faiza with a very loyal following amongst millennials, which is equally attractive to us. So there are many elements that are within this acquisition, and that's probably why the market overall reacted positively. Now what we need to do is look at further building this in the U.
S. Because that's obviously the core of the business we supply it and where we have advanced the most. But we'll also look at other expansion opportunities beyond that and then leveraging the knowledge that we have acquired here across some of our other businesses. I can just think of our tea business. I can think of our prestige business and other things.
So I think overall, this is one acquisition that will be seen favorably in a few years' time, at least I sincerely hope. Now we've also, over the last 8 years, had a consistent acquisition strategy of looking at these bolt on acquisitions, getting to the €2,000,000,000 to €3,000,000,000 in total that has transformed our portfolio. Personal Care being a great example of that. But the main transformation, I will honestly come out again once more, has come from consistent above market organic growth. The best way that we can still build value on our books, also for our shareholders, is by growing ourselves.
And that will be continuously both continue to be our priority, whilst we will look at perhaps some smaller bolt on microsystems like you've seen with the dollar shave cap. What we are going to bring in, in terms of efficiencies and what we do in house and outside is a little bit of a scope of our studies now, but we also see that we can certainly help bring some efficiencies and product and quality and optionality to this model that will help us as well. So we think it's a key addition to a strategy that we've carefully laid out in front of you and that we're carefully implementing and obviously we forget about. The razor market itself is obviously a part of that. We don't deny that.
This is a good way to get in without having had some competition. But I do want to point out that market is about €4,500,000,000 in retail sales, and we currently don't have any of that. So for us, it's all incremental, and there's a lot more to go for.
The next question is from Alain Oberstevez of MainFirst.
Yes. Good morning, gentlemen. A question regarding emerging market, more specific Latin America. I mean, you mentioned, Paul, that things are getting worse before they get better. But do we see already a bottling mat in some of these smaller countries?
Or should we expect difficult H2 as well as difficult H1 next year? Well, Alan, first of all, good Scott. And also, thanks for issuing your report. I have to compliment you. You're always the first one to issue.
And you had your 3 questions in there, and this is probably one of the 3 questions I'll just share, the efficiency the Swiss efficiency with which you work. We definitely see in the second half a worse trading environment in Latin America than the first half. We want to be only clear about that. Brazil is in recession. I'm actually going there in a few weeks' time, but it has high devaluation of the currency, an incredible drop off of consumer demand.
The market is negative, and it's more negative than people think, unfortunately. Now we have a very big business. We continue to drive our innovations there. Baby Dove, our affiliates of Ormo are a great example, but also what we're doing on sunsilk or on deodorant. So we are actually growing in Brazil.
But it requires disproportionate effort from our organization, and the trading environment is actually getting worse. We see pressure on some of the retailers, financial pressure and other things. So we have
to be very
careful. Argentina was there 2 months ago and had extensive discussions with Markri, the new President, and many others there. And here again, we've seen a significant step devaluation of the peso. We are obviously having more currency, but it's at a significantly reduced level. The country is to really go through a significant economic adjustment.
Again, we see the market being negative for the first time since I'm here at least, but we are growing share, a testimony to our organization once more and our enormous presence there. And Mexico, the economy is slowly gaining traction. I think that's probably a little bit of the brighter light, but disproportionately smaller for us in terms of the business that we have there. But it's not really to write home about that. So consumer demand is contracting in the major markets and consumers are down trading in these major markets.
And volume growth definitely has turned negative there. In fact, the first half, we have zero volume growth in the numbers from Latin America by memory. I'm looking at gray and reshape it had. So that is true. And we think that you will see low- to mid single digit decline in the second half.
So that's what we have to deal with. We have our plans. We have our innovations. We have to do some pricing still, but it will be tougher over the second half than the first half. After that, 2017 is difficult to predict.
I always think we hit the bottom and then somehow the politicians are able to go a little deeper. I hope that in Latin America that we start to see again more positiveness as of 2017.
Next question comes from James Harbiot of Berenberg.
Good morning, gentlemen. Two questions from me. Just firstly on North America. You just had a sort of pickup in sales growth in the Q2. I was wondering if you could talk some color on the sell in versus sell out there because I know you were flagging some destocking over the last couple of quarters when the situation has improved.
And then secondly, just on the margin. So Graham, maybe if you could give some color on the impact of the pensions you mentioned on the overhead costs and also the food in Europe margins.
Yes. I don't want to go into destocking or not because frankly, it's hard to read. And when the numbers are poor, we say destocking. When it's better, we say we have a great business and initiative. I'm sorry.
I'm personally not very keen to go into that discussion. The reality is that the economy is growing and the market is growing in the 1% to 2% range. We are currently putting in a performance of 0.7% over the first half. So we are slightly disappointed by that. I don't want to call it differently.
We are still in the transformation of the U. S. We have to completely recapitalize our industrial base. And what we see is some very strong things emerging in the areas that we focus on. Ice cream, we are now outright market leader.
We have very good strategy. It's out of home, in full Sierra as well now, in line with the global strategy, and it's starting to pay out. We also launched the deodorant space, the dry space, which are working extremely well. Brands like Helmut have a very strong growth rate. So there are areas that we feel comfortable about.
Our Hair Care business has obviously propelled from a number 3 position 7, 8 years ago to the number 1 position now. So we think there are a lot of things in the U. S. That we are doing right to keep the basics back in place for continued long term growth. But we have some down forces.
Our spreads business is sizable, and that's the down force. And our tea business, which had been grossly underinvested for years and was commoditized, is obviously pulling us down. With the Pure Leaf launch now and the other actions we've taken, we're starting to see that trend being reduced. And as you have seen from Graham's thought, the rate of decline in spreads has also slowed down. So we think we're on the right track, but we should see the U.
S. Performing more closer to the 1% to 2% range than the current 0.7%. There undoubtedly will be continued efficiency drives by retailers in the stock level. I would say that quite normal in this low growth environment and so would we. Graeme has separately talked about working capital, how from being 2nd best in class in the industry the way I look at it, we are still able to put the target higher and deliver more on our own working capital.
And it's fair to say that our retailers should be doing the same thing. But the answer to stronger growth in the U. S. Is in our own hands. Then we had the other thing.
Yes.
James, your question on the margin and the impact of pensions, etcetera, Just going into that, so 80 basis point increase in reported overheads. If you dig into that, the lapping of the gains on pension plan changes in Europe in 2015 is roughly half of that and about the other half comes from the impact of the different shape in the P and L shape, balance between overheads and BMI, if you like, in the prestige businesses, which we called out in the presentation, and a slightly higher level of restructuring charges. But about half of the or just over half, in fact, of the eighty basis point moving in overheads comes from the European changes. Now as you think the thing you said rightly in your question, you do see that disproportionately in two parts of the segmental results. First of all, you see it in Europe, where the column reported profit was down 70 basis points.
We also see in Foods down 70 basis points because of the higher exposure of the Foods business, the bigger footprint that it has within Europe. The thing I would say that if you take the impact of that out from Foods in particular, then the comp core operating margin in Europe sorry, for Foods would have been flat in the first half, which is bang on where we want to be strategically with the acceleration in growth rate, which we talked about in the presentation.
Great. Thanks very much.
Thanks, James. We could have the next question, which is from Warren Ackerman of Societe Generale.
Good morning, Paul. Good morning, Graham. It's Warren here at SocGen. Also two questions. First one is, can I come back to market growth?
At the Q1 stage, you said, I think, Paul, no category growth in either developed or emerging markets. And today, you're saying that market volumes have slowed further in the quarter. So should I take it then the aggregate category volume growth is now negative? And then specifically, can you talk about what you're seeing in Personal Care subsegments in Europe and North America? And then secondly, just back on the question on spreads.
Paul, you said that North America is getting bit better, which is encouraging, but Europe is still challenging. I was wondering if you can kind of quantify the decline rates. And are you disappointed that the initiatives in Europe are not making much impact? I think Paul, you said that this is a year of reckoning for the business. We are at the midpoint of the year.
Just interested to hear what your overall assessment of the progress in spreads is.
Thanks, Juan. Appreciate that. And so in terms of the market growth, we talked about the softening that we've seen in the different types of the world, especially Latin America. In Europe, if you want to go because on market, you have to go a little bit more granular. And we measure the markets that we are in, by the way, and the other markets that might do differently.
But if you take Europe, the market decline now is close to 2%. And that's driven broad based by price recession. And you see that in most of the markets in Europe, a little bit better in the northern parts of Europe than in the second half, but it's there. And market volumes are certainly now negative. And then in North America, I would re guesstimate that the range of growth is between 1% 2%, with volumes actually slightly down, but driven by price growth.
And if you look at that price growth, it probably comes from where you what you identified, which is the premiumization of personal care. Latin America, we talked about. In Asia, we just published our Indian results. They had a terrible rural performance because of the absence. Again, climate change is sitting there as well, and the monsoons stayed out.
And when they come, they're too heavy. So we see the urban parts doing well, but the rural parts staying behind. So there, we've also seen volume growth going down. China is a story in itself. It's very hard to read the Chinese market.
I think you'll be hearing a lot of our other colleagues when they publish their results to talk about the Chinese market because the rapid shift to e commerce is confusing and the rapid move away from the Tier 1 cities to the Tier 2 and Tier 3 cities. You can go to China now and really see empty stores when you go into hypermarkets and supermarkets that we've not seen before. So we think that growth has significantly slowed down. And again, everybody has to draw its conclusions from that. The only bright spot, I would say, within the total was Southeast Asia, where we do see mid single digit growth.
Countries like the Philippines or Indonesia actually are stronger than I would have thought. So that is the positive bright spot. So if you translate that on a global level, it's hard to make this effort work. But we certainly would say, at best, there is a flat volume growth, if not slightly negative in my reading for the markets that we are in. In the PC subcategories, you actually see a premiumization happening, and our prestige businesses are doing well.
The Odorant business is doing well. In fact, our hands and body business is coming back quite nicely. We just had a review yesterday with the Board on our Hair Care business, with Laurent Clitman and Alan Jolt, and that is a star performer for us. So we think our Personal Care business is doing well and actually are growing share. And we see in these results as well that we just published that after Home Care once more, our Personal Care unit is our 2nd fastest growing unit, again, above the company rate.
If you then come to the top ratio of spreads, and I'm glad you brought that up. North America, we're starting to see some of the positive signs because we have the broader implementation now of our product improvements there and are able to we have built some new capacity, and we are able to supply the markets. We were not able to fully supply the markets in that transition. And that is helping us undoubtedly. And then in Europe, there are actually good signs.
Although Europe is a challenging market in total, our shares are flat to up over the last period. So it's one indicator that what we are doing is actually good. In the U. S, also our shares are starting to move up there as well. One of the good indicators is FluorA in the U.
K. We're plant based. Obviously, all of our margin is plant based. Consumers are getting more interested into plant based nutrition. We have been slow to put that word out there.
We have had a major relaunch now with Flora in the U. K. On the plant based relaunch, and the initial indications are positive. And then at the same time, obviously, we're trying to manage this business very rigorously for cash flow. Not to go into too granular details, but by running it separately, like we're doing now, we're not only making the decision faster, as I have predicted, but we are also running it with a 5 linear organization.
I think we've taken out the box, and this is a rough guess because I have to go through the detailed updates, But we've taken out €70,000,000 €80,000,000 that allows us to continue to take that cash flow and run this business from this without having the shareholders pay for this. So we continue to stay the course. We think that the actions that we're now taking are the best we can take in the interest of our shareholders at this moment, but we continue to look at all options.
We have
Martin. We have the next question from Jonathan Feeney of
Consumer Edge. Please. Thanks very much. Paul, you mentioned the growth in China e commerce. And I guess, it's fascinating what's going on in that market.
It's almost as if the Chinese consumer maybe is skipping a step in the evolution, at least
in the
way we think about purchasing goes on in Western developed markets. Can you talk about how your approach is different to managing that e commerce growth and maybe transition in some of those markets than some of your competitors? And secondly, when you look at the Dollar Shave Club purchase, is there any thought of that maybe you're getting ahead of some of those changes maybe that are happening in the Chinese consumer, maybe happening over the next 5 to 10 years in other markets emerging and developed? Thank you.
Jonathan, that's a very good question and very much on our minds as well. And I wish I could give you the obviously, the right answer because it's moving so fast that, first of all, we spent a disproportionate amount of time on educating ourselves. And it's frightening the speed of which it is changing. Just like they leapfrog the landline and move to mobile phones, you now see the millennials. And it's interesting if you go to China one day, just let them show you all the things they can do on WeChat.
And it's you take Amazon and YouTube and Twitter and Google altogether in one app and PayPal and whatever, it's incredibly frightening. No more of the Muletsi or so to the store anymore. So the speed with which this is changing is mind boggling, and I think not many people predicted it. So the first thing you have to do as a company is to be sure that you are educating yourself and the people. And we are spending a disproportionate amount of time on that.
One of our main rollout things with our marketing community is what we call Digital 2.0. And Steve Reit is up to be leading this, and he's on the advisory board of many of the leading companies. We prefer partners to work with Alibaba and Tencent in the U. S. In China as well.
So we're trying to keep up with it. And I think the same thing is for our competitors. 13% of the retail sales is now already in e commerce. And our estimate is that it might be growing with about 20%. We are outgrowing this.
We've put in a significant organization. Globally, we are 600, 700 people now. We're totally focused on e commerce. We are continuing to ramp that up. We are getting people in from the outside as well to help us accelerate that.
So we think that our approach that we're taking in China is right, adapting our products, making them e commerce ready, introducing new products on e commerce only, strengthening our own resources and capabilities to be able to do that. And as a result, we have a significant market outperforming growth rate. But sometimes you feel that what you can gain there right now in China is not compensated with the decline in other channels. I'm thinking about this, and we're diving deeply into this. But I think because of the phenomena of the e commerce, the rest of the retailers are struggling.
And although there are still 80% of the people buying in the rest of the retailer, if you look at these statistics, they are aggressively adjusting their stocks and they're aggressively looking at their business models and their financial exposures because it's the gearing that they're missing. It's incremental sales that was giving them the profitability that is disappearing. So the dynamics will be interesting, and we need to closely follow them, but they will rapidly change in the Chinese market. We need to work a little harder to fish where the fish is, and much harder to fish where the fishes. And as I've mentioned before, you need to take different fishing ones.
One of the reasons the dollar shake up is attractive and why Michael has done such a great job creating this company is indeed the knowledge of the subscription models. And we will be certainly looking at that as well for the Chinese market. And if we would have done that internally by reeducating ourselves, I'm not sure we would have succeeded. But what I'm sure about is it would have taken us too long and the market would have moved somewhere else then already. So we have to get used to buying in that knowledge and dealing with a higher level of ambiguity perhaps than what we've seen before.
Now the good thing on this whole thing is the other side of the flip side of the equation that our Chinese business is still relatively small compared to some of our bigger competitors. And we are able to manage the business. We still have a lot of other brands to introduce and grow. So I expect China to continue to be a contributor. Although we are going through a little bit of a flat period right now, I'm not dealing with that as an indicator to be worried about.
I think in China, we should be able to grow mid single digits in this environment, and we will continue to work from that. So I hope that answers a little bit the question, Jonathan.
Very much. Thank you.
Thank you.
There's a few more questions on the line. And first is from Charles Hicks of Numis.
Good morning, gentlemen. Thanks so much. Just two questions, please.
At the group level, I
think you said exiting Q1, you were growing almost 60% in terms of market share growth for the group's various operations. I Wonder if you can update that percentage because it sounds like it's probably increased a bit. And at the Q1 stage, you were indicating that the FX debit was about 50% via the Brazilian real and the Argentinian peso. Was it a similar percentage, please, for Q2?
Yes. Charles, the first one I can say is about the same. It's not up or down. So it's about the same. We have about 60% of our business building share and overall building share.
Yes. On the foreign exchange, Charles, you're pretty much sort of on by 50% in Brazil and Argentina. I'd like to be right now, but and go the biggest impacts are Brazil, Argentina, South Africa and India and all in, they sum up to about 4.5% of the 7.6
percent that we saw on the top line.
Okay. Thanks very much. Thank
you. Thanks, Charles. And our final question is from Alex Smith of Investec. Hi,
good morning. Charles actually stole my question on market share, but I was wondering if you could say a little bit on that 60% number how that might vary across geographies and categories? Just to give us a rough idea where you are, I guess, relatively outperforming and relatively underperforming. And then maybe just a follow-up on India. It's clearly a big market for you.
I guess the market growth rate there has continued to slow down and I think you pointed to it being rural led weather impacts. I guess you got some commodity deflation there as well. But I was just wondering, are you seeing some unhelpful competitive behavior in your categories? I guess I'm just surprised that the category growth rate continues to track below GDP growth rates. And I guess some other categories, FMCG categories are doing a little bit better at
the moment. Yes. So let me go first to the market share once more than add a little bit more granularity. If you look at the overall market shares, it's mainly driven by the emerging markets. The developed markets are about flat in market share.
Both the U. S. And Europe are about flat. And so I would see that as the bigger picture. We are obviously gaining share in more businesses than we're losing.
The main drivers of that is Personal Care, outgrowing the market. So that is a key thing. If you want to go even more granularly, it's Dios again, where we are doing well. It's hair, but actually also skin cleansing is back. It was a category that was on the edge of that is now positive.
So we feel good about that. Home Care, we continue to drive competitive share gains. Actually, interestingly in both Laundry and Home Care. And whilst we have promised you a 10% margin on the business by 2020, we're actually recording already now a 9.8% margin. So our strategy is also working there at the same time as we're growing share.
On refreshments, we have a good story on ice cream, as I've mentioned before, globally. We're down a little bit still on tea. Although, we're growing share in the premium segment. We had a drag on the commodity segment. And in Foods, we actually gained share overall in savory and dressings.
And as I mentioned before, spreads, I would call it flattish. There's a little bit positive news, as I said before, on spreads, but it's overall flattish. So more categories growing with 1 or 2 of the spots that you can imagine where you have your welcome. So that's on a granularity on shares, if you want to. I'm actually less interested to spend too much time on global shares because they are calculations of coverage of Nielsen as well as for senior emerging markets that sometimes might be hard to read.
So I always look more at the overall growth of these categories versus what these overall markets are doing. And I think it will pretty much follow the picture I just laid out in front of you. If you look at India itself, the macro environment is mixed. I was there not long ago again. I'll be there with the Board actually.
We have our Board strategy meeting this year in India. The GDP growth is about 7% officially. Some people think it's less. Inflation definitely is under control. But there is subdued consumer sentiment, especially in the rural areas, where we have seen actually the pressure now for 3 quarters already, which is obviously a big part of our business and a competitive advantage with our enormous distribution reach and with our products.
So you have to take the upsides and the downsides a little bit. Volume growth is still a good 3.5% there. The pricing is flat, and you've alluded to that already. At Postmil Care, we actually have modest growth, but we have negative pricing. Very good performance on Hair Care, good performance on Skin Care by memory.
So Oral Care, we have a competitive battle going on, but we have initiatives entering the market there. Home Care is very robust. On Laundry, we have no price growth. We have competitive activity that is perhaps a little bit driving that pricing thing. But our premium segment serve is doing well.
Our Fabric Conditioner Comfort is doing well. On refreshment, as you know, we have a good refreshment business there. It's tea being the bigger one. We have strong growth on tea. We have in foods now a business that is significant.
This was a home care and personal care business. It's increasingly also becoming a good food business with growth in dressings and savories. So our share price performed well there. I know the announcement they made was probably a little less on the growth than what people expected, but that's a quarter that I'm not feeling too excited about. But it is a market that is probably not as buoyant as it was a year ago if we would have had the same discussion.
So I hope that gives you a little bit and we answered your questions, right? I think that was it, no? Did I forget anything, Alex? No?
No, good. Thanks. Thanks.
So let me just thank you guys because I think we're coming to the end of it. So I just wanted to wrap up. So the first thing I want to do is thank you again for your interest. I know that is really appreciated by us and your questions also help us. I also like to thank you for your support.
I hope you will have some time off for the holidays with your dear ones and recharge the batteries. We have a very full agenda. I think the change agenda happening right now in Unilever is bigger than I can imagine. It has been for a long time over the last few decades, implementing the Connect for Growth. At the same time, net revenue management, serial based budgeting keeps us incredibly busy, but we will not drop the ball.
And it is absolutely needed to be able to continue to give you this 4 gs performance in an increasingly challenging environment. So without any doubt, in my opinion, and my modest 35 years or so in the consumer goods industry, which I'm sure you will beat that collectively, is one of the toughest environments that we're operating in. Despite that, I think we can continue to promise you that we will be at the 3% to 5% range. There's a little bit lower top line growth over the second half, And we will continue to be in the 20% to 40% range on our core operating margin. So where consensus is right now, we are fine.
If you run too far ahead of yourself and you think that we could do better on core operating margin, we actually don't disagree with you. So won't get excited, but we will have to use that money to invest in restructuring to accelerate the implementation on the Connect for Growth program. So long term is our mantra, and long term it will be. And despite, again, once more the challenging environment, we will make this another year of delivery. Thanks.
Enjoy the summer holidays, and hopefully, talk to you soon. Thank you.
This conference has been recorded. Details of the replay can be found on Unilever's website and will be available shortly. Thank you.