Unilever NV (UN)

Unilever NV (UN) manufactures, markets, and sells a broad portfolio of consumer products across the globe in developed, developing, and emerging markets. The Netherlands-based (Rotterdam) company operates in Europe, North America, Asia and the Pacific, Latin America, Africa, and the Middle East. On January 1, 2001, Unilever adopted the euro as its principal reporting currency. Management's financial ambition is to be in the top third of its peers in terms of Total Shareholder Return.

Since January 2001, Unilever has organized its businesses into two global divisions: (1) Foods and (2) Home and Personal Care (HPC). The Foods division, which accounted for 54% of revenues and 55% of operating profits in 2007, operates through three business units: savory, dressings and spreads ice cream and beverages and culinary and frozen foods. Savory, dressings and spreads include margarine, cheese products, and cooking oils, with leading brands, such as Knorr, Hellmann's, Country Crock, Becel, and Bertolli Olive Oil. The company s premium ice cream brands are Breyers, Magnum, Ben & Jerry s, and Wall s. Unilever is also the largest seller of packet tea, with leading brands like Lipton and Brooke Bond. The company owns tea plantations in India, Kenya, and Tanzania. The Home and Personal Care division accounts for 46% of revenues and 45% of operating profits. Personal care products in the home and personal care division include deodorants (Suave, AXE, Degree), fragrances (Calvin Klein), skin care (Dove, LEVER 2000, Lux, Lifebouy, Caress, Pond s, Qtips, Vaseline), hair care products (Suave, Thermasilk, Sunsilk), and laundry products (Surf, Wisk, Snuggle). In February, management announced a change in the company s organizational structure. Management is combining the Home & Personal Care and Foods segments into a single segment. In addition, to better focus on growth in developing markets, the company will be managed on a geographical basis with Central & Eastern Europe being managed within an enlarged region, which is comprised of Asia, Africa, and Central & Eastern Europe. Western Europe will become a standalone region.

Unilever's reporting currency is the Euro. Income statement items are translated into USD ($US) at the average conversion rate during the period being reported. Balance sheet items are translated at period-end rates of exchange. Transactions in the past are converted at the exchange rate at the time of the event while projections are translated at current exchange rates as of the date of this report.

Unilever PLC (UL) and Unilever NV (UN) operate as the two parent companies for the Unilever Group. A series of agreements ensure that the position of shareholders in both companies is, as nearly as possible, the same as if they held shares in a single company. Unilever PLC (UL) is listed as American Depositary Receipts (ADRs) on the NYSE and as shares on the London Stock Exchange. Unilever NV (UN) is a public limited company registered in The Netherlands with listings on stock exchanges in Amsterdam, Frankfurt, Zurich, and New York (NYSE). Shares listed on the NYSE of Unilever NV (UN) are known as New York Shares. In May 2006, a share capital consolidation was approved and implemented. The Unilever NV shares were split in a ratio of 20 to 9 and the Unilever PLC shares were exchanged into new 31/9 pence ordinary shares. The net result is that UN and UL are almost equivalent shares in terms of both company ownership and price per share.

Management's top priority has been and is the restoration of sustainable top-line growth in the mid-single digit range and earnings growth in the low double-digit range. Over the past seven years, management has implemented a series of initiatives to attain these goals: the Path to Growth, Unilever 2010, One Unilever, and Accelerating Change strategies along with the Overhead Simplification Project. In addition, the company continues to target growth opportunities in the developing and emerging markets and to develop new products in order to achieve growth.

Unilever's Path to Growth strategy was announced in February 2000. The financial targets of the program were to achieve 5% to 6% sales growth by 2004, to attain an operating margin above 16%, and to generate low double-digit EPS growth in the long term. By focusing on selected, leading brands and reducing costs through restructured operations, the operating margin should improve through economies of scale. Approximately 140 business lines have been divested, including chemicals, canned meats, frozen fish, pregnancy testing, and professional cleaning. In addition, several acquisitions have bolstered the brand product portfolio, namely Slim Fast, Ben & Jerry's, and Bestfoods (all in 2000). Over the years, acquisitions have added to and strengthened the portfolio of Unilever's brands. Utilizing the cash flow of Unilever and of the brands acquired, the company has financed many acquisitions, such as Breyers in 1993 and Helene Curtis in 1996.

The Path to Growth strategy has been successful in terms of increasing the operating margin, even though the company could attain the operating margin above 16%. Leading brands (#1 or #2 positions in the majority of key markets in which they operate) moved from 75% of sales in 1999 to over 93% of sales. The company has 13 brands with sales of over 1.00 billion ($1.47 billion), compared to only four brands in 1999. In 2003, 50 businesses were sold and disposals have continued through 2007. In February 2004, Unilever completed the sale of four home care brands (Rit, Niagara, Final Touch, and Sunlight) to the Lehman Brothers Merchant Banking Group, and in March, the Mexican edible oil business was sold for $110 million in cash. In December 2004, the sale of the frozen pizza and baguette business in Europe was announced. In 2005, the prestigious fragrance business, Unilever Cosmetics International (UCI), was sold to U.S. based Coty Inc. for $800 million in cash. In 2006, Unilever sold Mora to Ad van Geloven snacks business and Frozen Food businesses in Europe (including Iglo and Bird Eye brands). In 2007, the company sold the Boursin (French cheese) business for 400 million ($588 million), in addition to the Brazilian margarine brands (Clayborn, Delicata, and Doriana) and the Lawry's seasoning business. Major cost reductions and streamlining of the asset base have resulted in improved capital efficiency. The benefits from the Path to Growth program and its follow-on program (the Overhead Simplification Project) were utilized to support additional investments in the core businesses. Overall, the programs generated savings of nearly 1 billion ($1.5 billion) by the end of 2007.

In January 2004, management unveiled a successor plan, Unilever 2010, with a free cash flow generation target of over 30 billion (originally $36 billion in 2004, but $44 billion at 2007's average rate of exchange) between 2005 and 2010. In February 2004, additional targets were set: annual EPS growth between 8% to 12% and an increase in return on invested capital to at least 17% compared to the 12.5% achieved in 2003. However, in February 2005, management rescinded prior guidance except that free cash flow is expected to be in the top-end of the 25 billion to 30 billion range ($37 billion to $44 billion) over the next 6 years.

In 2005, management announced the One Unilever program, which reduced costs by 700 million, through streamlining and simplifying the organization with the implementation of a common set of best practice IT services. Dubbed PRISM (Project to Realign and Integrate Service Management), six processes were implemented across six regions in order to reduce costs, better procurement, and manage change on a global scale.

In August 2007, management announced a new strategic plan, Accelerating Change, which should assure underlying sales and earnings growth through 2010 and beyond. The plan's three key features are 1) Innovation, 2) Shaping the Portfolio, and 3) Margin Improvement. Through Innovation' the company will continue to add value to existing brands and products, but more importantly, innovation will be focused increasingly towards global platforms in order to produce world class brand mixes by the better use of technology. Management will continue Shaping the Portfolio' by disposing of businesses generating more than 2 billion ($2.7 billion) in revenues, including North America Laundry. Management believes that these disposals will increase Unilever's growth rate by approximately 0.4% and will be neutral to operating margin after uncovered costs are removed. Lastly, management will focus on Margin Improvement' and will streamline the organization by grouping countries into clusters and regional structures. Management plans to reduce supply chain costs and assets, while simultaneously improving on-shelf availability. The annual cost base is expected to be reduced by approximately 1.5 billion ($2.2 billion) by the end of 2010 from the 2006 base. The cost reduction goal includes benefits from Accelerating Change, One Unilever, and Unilever 2010 plans, along with other existing initiatives. Management expects restructuring costs to average around 2.5% of sales between 2007 and 2009. Since the implementation of the programs through the first half of 2008, the company has incurred 1.2 billion ($1.9 billion) in restructuring charges and delivered savings of 450 million ($711 million).

Management is targeting growth opportunities in the developing and emerging markets which are witnessing a consumer spending growth rate that is faster than in developed markets. The percentage of revenue from developing and emerging markets has increased from 20% to 44% over the last 15 years. The company holds relatively high market share positions in many key markets like ice cream in Turkey, laundry detergent in South Africa, and soups & sauces in Indonesia. Unilever Brazil is the seventh largest operating company in that country. In Asia, Unilever is a market leader in many categories including face care, skin cleansing, hair care, and fabric cleaning. The strategy of building relationships with local customers and suppliers through the managers who share the same culture is paving the way towards success in the developing and emerging markets for Unilever.

Management's long-term growth strategy includes introducing new products with sharper execution and favorable pricing. Recent new products include Wishbone salad Spritzers , Lipton Pyramid tea bags, new Knorr soups and bouillons, an expanded range of Bertolli premium frozen meals, AdeS nutritional drink, Lipton Linea slimming teas, and Knorr Vie shots. In the Foods segment, Unilever launched cholesterol-lowering mini-drinks (Promise Activ SuperShots) and a cholesterol-free mayonnaise. The company has also improved the Hellmann s brand by introducing the new Extra light mayonnaise with citrus fiber, free range egg extra light mayonnaise, and olive oil mayonnaise. In the ice cream category, the company has extended Breyers double churn to fat free, light, and no sugar versions, and introduced the Frusi frozen yogurt (with wholegrain cereals and real fruit pieces), Solero Smoothies, and Rama flavored ice creams. In the HPC segment, the company strengthened its portfolio of products with the launch of Sunsilk, enhanced hair care lines for Suave and Dove, and improved the Omo laundry brand in Brazil by introducing baby and foam control varieties. The Axe brand was extended with shower gel and deodorant stick products. The latest Axe fragrance, Chocolate, and a revolutionary upside down roll-on deodorant for Dove and Rexona were launched in Europe in 2008. In North America, the company launched the new Dove Go Fresh product line, including cleansing bars, body washes, deodorants, mists, and shampoos. The company introduced new concentrated liquid detergents in Argentina and Chile. In the Developing and Emerging (D&E) markets, new product launches include Pond's age miracle cream, Clear anti-dandruff shampoo, Clear scalp oil control in the Philippines, Indonesia, Thailand, and China, Axe/Lynx fragrance, Click' in Australia and New Zealand, Moo vanilla chocolate ice cream, green tea innovations in South Africa. Also, the company launched a new form of Knorr bouillons for preparing thick soups in China and milk tea powders under the Lipton brand in South East Asia. In addition to Rama margarine, the company focused on Vitality products and on other products that would appeal to the lower income consumers in Latin America. In Japan, Unilever launched Axe, Dove self-foaming facial wash, and Lux hair styling ranges. Unilever also extended the Dove range of glow' lotions with subtle self-tanners and introduced Dove pro-age range of products (skin, deodorants, and shampoos), which is specifically designed for women over 50. The Sunsilk range was enhanced and launched in India, Indonesia, and the Philippines. In Europe, Small and Mighty' concentrated liquid detergents were launched in six countries. Management strives to enhance value by continuously focusing on product innovation. Unilever spends almost 1 billion or 2.6% of sales every year on research and development of new products.

Unilever's European business accounted for 38% of revenues in 2007. Unilever's European underlying sales showed signs of stabilization in 2005 with a slight 0.8% decline compared to the 3% decline experienced in 2004. Underlying sales growth rebounded in 2006 with 1.0% growth and accelerated with 2.8% growth in 2007. Management believes that the key priority in Europe is to build share rather than enhancing profitability. Hence, the company will introduce new low-priced products and enhance Go-to-Market capabilities. In addition, the company initiated customer-focused development programs in select markets of the U.S., France, and Germany in 2005. The programs enabled the company achieve positive growth in 2006. Management's European strategy for growth emphasizes greater advertising and promotion spending and more aggressive pricing to enhance market competitiveness. In 2007, the company streamlined or closed 10 factories in Europe.

Unilever has simplified the management hierarchy whereby the dual Chairman structure was replaced by single Chief Executive Officer (Patrick Cescau) and non-executive Chairman. Other organizational changes are being undertaken in order to expedite decision-making, improve execution, and enhance customer focus. Certain changes in the organizational structure have been proposed to further enhance financial and capital structure flexibility. The changes include: 1) Adoption of Unilever's constitutional arrangements to bring greater flexibility in the allocation of assets between the two parent companies, 2) Simplification of the relationship between PLC and NV shares by establishing one-to-one equivalence in their underlying economic value, thereby ensuring transparency between the quotations of various shares (management has split the NV shares and consolidated the PLC shares) and 3) Giving shareholders the right to nominate candidates to the Board while ensuring the unity of management. The propositions were approved at the Annual General Meeting in May 2006.

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