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UPDATE 2-Unilever sales spruced up by China demand

Sarah Young
Thursday, 25 Oct 2012 | 9:53 AM ET

* Underlying sales up 5.9 pct, vs 5 pct forecast

* Strong demand for cleaning, hair and skin products in China

* On track for modest improvement in core operating margin

* Shares up 3.1 percent

(Adds more CFO comments, analyst comments)

LONDON, Oct 25 (Reuters) - Unilever's quarterly sales growth beat forecasts as demand for cleaning and personal care products in China helped the consumer goods group outshine larger rival Nestle.

Shares in the maker of Dove soap and Cif cleaners climbed on Thursday to equal their all-time high as the Anglo-Dutch group shrugged off the worries about slowing growth in China that have rattled a procession of consumer goods companies recently.

``It is probably our best quarter out of the last three quarters so it is really very, very good growth throughout our categories,'' finance chief Jean-Marc Huet said of the group's Chinese business, adding Russia was also growing strongly.

Unilever posted underlying sales growth of 5.9 percent in the third quarter, ahead of a company-compiled consensus of 5 percent and a second-quarter rise of 5.8 percent. Emerging markets, which make up 55 percent of sales, grew 12.1 percent.

The group's performance in China contrasted with the experience of Switzerland's Nestle.

Nestle, the world's biggest food group, said earlier in October that China was not meeting its potential, as it reported growth slowed more than expected in the first nine months of the year due to cooling emerging market demand.

Both Nestle and Unilever have benefited from their emerging markets exposure in the recent past, contrasting with a more negative trend at French and U.S. peers Danone and Procter & Gamble. The latter is due to report its results later on Thursday.

Unilever's London shares were up 3.1 percent at 2,335 pence by 0925 GMT, outperforming Britain's bluechip index which was up 0.4 percent. They earlier touched 2,353 pence, equalling an all-time high hit last week.

COMMODITY COSTS

Unilever, which also makes Knorr soups, Lipton tea and Ragu sauces, said it was on course to meet its target of posting a modest improvement in core operating margin for 2012, but cautioned inflation in the cost of ingredients was high.

Huet said volatility in commodities prices was challenging, and predicted the increase in their cost would be higher than the ``above mid-single digits'' percentage forecast in July, although below ``double digits''.

Investors will be keeping a close eye on Unilever's margins as, despite grinding out consistent growth, the company's profitability continues to lag that of Nestle.

``Epic growth out of homecare suggests to me that they're winning market share from the troubled P&G,'' Investec analyst Martin Deboo said, noting that homecare is Unilever's lowest margin business.

``If you're looking for the clouds in the silver lining, I think they've slightly tweaked up their commodity cost inflation guidance which pressures the margin.''

Selling consumer goods in more developed markets remained difficult, said Huet, with the company noting that markets in Europe were ``intensely competitive''. While business in Greece was still difficult, he said the Spanish market had stabilised.

($1 = 0.7711 euros)

(Reporting by Sarah Young; Editing by David Cowell and Mark Potter)