UN Unilever NV

Unilever PLC (UN, UL) beat expectations with its third-quarter sales performance Thursday, as volumes grew strongly for the second quarter running and margins edged higher than expected, and said it expects further volume growth in the fourth quarter.

The maker of Ben & Jerry's ice cream and household products such as Dove, Lynx and Cif posted a 2% drop in sales to EUR10.2 billion for its third quarter, after a 1% rise in the previous quarter. Net profit dropped to EUR1.05 billion from EUR1.64 billion a year ago, when a number of disposals boosted the bottom line.

Stripping out acquisitions, disposals and currency movements, second-quarter sales grew 3.4%, after a 4.1% rise in the previous quarter and ahead of analysts' estimates of 2.7% growth. This measure of sales is closely watched because it's a directly comparable measure of how the company's products are selling.

The sales rise was wholly a result of a 3.6% increase in volumes rather than any price hikes, after a 2% volume rise in the previous three months.

New Chief Executive Paul Polman identified volume growth as his key focus for the group when he joined earlier this year, and the company said Thursday all regions and categories showed positive volumes.

Chief Financial Officer Jim Lawrence said he expects volumes to continue to grow in the fourth quarter. "There's nothing slowing our underlying momentum.

The volume figure compares favorably with rival Procter & Gamble Co (PG), which saw its volumes fall 3% in its latest quarter.

"We are on track towards our objective of restoring volume growth while protecting margins and cash flow for the year as a whole," said CEO Polman.

Operating margin was up 0.7 percentage points in the period. The company said earlier this year its margins would return to growth in the second half as commodity prices fall from their record high levels of last year.

Andrew Wood at Sanford Bernstein said the company is now in a "commodity sweet spot," with strong gross margin growth supporting a big increase in advertising and promotion spend, yet still allowing good operating margin growth and driving strong volume momentum.

"We expect more of the same in the fourth quarter," he said.

While both the volume and margin performance exceeded expectations, by 0833 GMT, the shares were dragged down by a lower London market. The shares were down 18 pence, or 0.9% at 1810 pence.

Lawrence said the company had trimmed prices on some categories by up to 3% after raising them too far last year as it attempted to recover commodity cost increases.

He said prices were "now about where they should be" though certain prices could come down in order for the group to remain competitive.

Pricing will remain negative for the next few quarters however as the company laps the strong pricing levels of last year.

"Market conditions remain challenging and in this environment we will continue to increase investment behind our brands and build long-term capabilities in research and development," said Polman.

CFO Lawrence said Unilever had an array of possible acquisitions in the pipeline, but confirmed the group had no intention of making a bid for Cadbury PLC (CBRY.LN) - currently in the sights of Kraft Foods Inc (KFT) - and was happy to concentrate on organic growth.

-By Michael Carolan, Dow Jones Newswires; 44-20-7842-9278; michael.carolan@dowjones.com

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