Business Context and Reporting Period
Company: Unilever PLC (and Unilever N.V.)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Filing Date: March 29, 2007
Unilever operates as a single economic entity through two parent companies, Unilever N.V. (Netherlands) and Unilever PLC (UK). The Group is a leading supplier of fast-moving consumer goods in Foods and Home & Personal Care categories. In 2006, the Group focused on the "One Unilever" program to simplify operations, leverage global scale, and drive cost savings. The year saw the successful completion of the sale of the majority of its European frozen foods businesses to Permira Funds.
Key Financial Metrics (2006)
| Metric | 2006 (€ million) | 2005 (€ million) |
|---|---|---|
| Turnover (Continuing Operations) | 39,642 | 38,401 |
| Operating Profit | 5,408 | 5,074 |
| Operating Margin | 13.6% | 13.2% |
| Net Profit (Total Operations) | 5,015 | 3,975 |
| Net Profit (Continuing Operations) | 3,685 | 3,335 |
| Ungeared Free Cash Flow (UFCF) | 4,222 | 4,011 |
| Return on Invested Capital (ROIC) | 14.6% | 12.5% |
| Net Debt | (7,523) | (10,502) |
| Dividends Paid (Total) | 2,684 | 1,867 |
Note: Net Debt is presented as a negative value indicating a net liability position. Dividends include a one-off payment of €751 million in December 2006.
Material Changes vs. Prior Period
- Revenue Growth: Turnover increased by 3.2% to €39.6 billion, driven by underlying sales growth of 3.8% (volume and price) and favorable currency effects of 0.3%. Disposals reduced turnover by 0.8%.
- Profitability: Operating profit rose 7% to €5.4 billion. Operating margin improved by 0.4 percentage points to 13.6%, despite higher commodity costs (approx. €600 million) and restructuring costs. One-off gains of €266 million from changes to US healthcare and UK pension plans contributed to the margin.
- Discontinued Operations: Net profit from discontinued operations was €1.3 billion in 2006, primarily due to a €1.2 billion profit on the sale of the European frozen foods business. In 2005, this figure was €640 million.
- Debt Reduction: Net debt decreased by €3.0 billion to €7.5 billion, driven by strong cash generation, proceeds from disposals, and currency effects (weakening US dollar).
- Regional Performance:
- Europe: Turnover flat (+0.4%); Operating profit fell 7.7% due to restructuring and higher costs, though underlying sales grew 1%.
- The Americas: Turnover up 4.6%; Operating profit surged 26.7% to €2.2 billion, aided by a €146 million one-time gain on US healthcare plans.
- Asia Africa: Turnover up 5.7%; Operating profit rose 2.8% to €1.3 billion, with underlying sales growth of 7.7%.
Guidance, Outlook, and Risks
Outlook and Strategy: Management aims to achieve top-third Total Shareholder Return (TSR) relative to a peer group. Long-term targets (2005-2010) include ungeared free cash flow of €25-30 billion, underlying sales growth of 3-5% per annum, and an operating margin in excess of 15% by 2010. The Group plans to continue investing in high-growth areas (Personal Care, Developing & Emerging Markets) and the "Vitality" mission.
Share Buyback: On March 12, 2007, Unilever announced a share buy-back program of up to €1.5 billion for 2007.
Key Risks and Contingencies:
- Commodity Prices: Significant increases in raw material costs in 2006 adversely impacted margins where costs could not be passed on.
- Legal Proceedings:
- Preference Shares: A settlement of €300 million was agreed regarding the 1999 preference shares conversion dispute. Further claims for damages (approx. €81 million) remain pending and will be contested.
- Competition Authorities: Ongoing investigations in France, Portugal, and Germany regarding competition law (ice cream distribution, oral care). No statements of objections received yet; financial implications cannot be assessed.
- Brazil Tax: Provisions exist for potential repayment of sales tax credits and a notice of infringement regarding a 2001 reorganization.
- Market Volatility: Approximately 40% of turnover comes from developing and emerging economies, which are subject to higher volatility and potential downturns in consumer demand.
Important Facts for Investor Verification
- Discontinued Operations Impact: Verify the sustainability of earnings by excluding the €1.2 billion one-time gain from the sale of the European frozen foods business when assessing core operational performance.
- One-Off Gains: Note that operating profit includes €266 million in one-off gains from pension and healthcare plan changes (UK and US), which are not recurring.
- Dividend Structure: Confirm the proposed final dividend of €0.47 per NV share (and equivalent for PLC) is approved at the May 2007 AGMs. The total regular dividend represents a 6% increase.
- Net Debt Composition: Verify the currency exposure of the €7.5 billion net debt, which is 81% in US dollars and 25% in euros, exposing the balance sheet to exchange rate fluctuations.
- Legal Settlements: Monitor the status of the remaining preference share litigation and the outcome of competition authority investigations in Europe, which could result in additional provisions or fines.