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, 2005
Filing Date: March 29, 2006
Unilever operates as a single economic entity through two parent companies, Unilever N.V. (Netherlands) and Unilever PLC (England). The company is a leading global supplier of fast-moving consumer goods in Foods and Home & Personal Care categories. In 2005, the company completed the sale of its prestige fragrance business, Unilever Cosmetics International (UCI), to Coty Inc., which is reported as discontinued operations. The company also announced intentions to sell its European frozen foods business (Iglo/Birds Eye) in February 2006.
Key Financial Metrics
| Metric | 2005 (€ million) | 2004 (€ million) |
|---|---|---|
| Turnover (Continuing Operations) | 39,672 | 38,566 |
| Operating Profit | 5,314 | 4,239 |
| Operating Margin | 13.4% | 11.0% |
| Net Profit (Total Operations) | 3,975 | 2,941 |
| Net Profit (Continuing Operations) | 3,502 | 2,894 |
| Net Profit (Discontinued Operations) | 473 | 47 |
| Net Cash Flow from Operating Activities | 4,353 | 5,547 |
| Ungeared Free Cash Flow (UFCF) | 4,011 | 5,346 |
| Net Debt | 10,502 | 9,663 |
| Return on Invested Capital (ROIC) | 12.5% | 10.7% |
Material Changes vs. Prior Period
- Revenue Growth: Turnover increased by 2.9% to €39.67 billion. Underlying sales growth (constant currency, excluding acquisitions/disposals) was 3.1%, driven primarily by volume increases.
- Profitability: Operating profit rose 25% to €5.31 billion. The operating margin improved to 13.4% from 11.0%. This improvement was driven by cost savings (€700 million) and an improved product mix, which offset higher input costs and increased advertising spend (€500 million).
- Impairments: A significant impairment charge of €363 million was recorded for the Slim·Fast business in the Americas region due to a decline in the weight management market. This compares to a €791 million charge in 2004.
- Discontinued Operations: Net profit from discontinued operations increased significantly to €473 million, primarily due to a €458 million gain on the sale of UCI.
- Regional Performance:
- Europe: Turnover declined 2.6% at current rates due to disposals, though underlying sales declined only 0.8%. Operating profit remained flat.
- The Americas: Turnover grew 7.2% and operating profit surged 92% (excluding the prior year's large Slim·Fast impairment).
- Asia Africa: Turnover grew 6.9% and operating profit increased 24%, driven by strong performance in developing markets like China and India.
Guidance, Outlook, and Risks
Management Commentary: Management highlighted the successful stabilization of market share and the restoration of growth momentum. The "One Unilever" restructuring program is expected to deliver €700 million in savings by the end of 2006 and €1 billion by the end of 2007. The company plans to continue investing in high-growth developing and emerging (D&E) markets and vitality-focused innovations.
Dividends: A final dividend of €1.32 per NV share and 13.54p per PLC share was proposed, representing a 5-6% increase over the prior year. Total dividends for 2005 represented 51% of net profit.
Risks and Contingencies:
- Legal Proceedings: Ongoing inquiries regarding the conversion and cancellation of NV preference shares. While the company believes the likelihood of a successful challenge is remote, the outcome is uncertain.
- Regulatory: Investigations by competition authorities regarding ice cream distribution in Europe (specifically Ireland).
- Market Risks: Exposure to currency fluctuations (significant strengthening of the US dollar against the euro in 2005), commodity price volatility, and potential economic instability in developing markets which account for over one-third of turnover.
- Portfolio Strategy: The company is actively divesting non-core or low-growth assets (e.g., European frozen foods) to focus resources on high-growth opportunities.
Investor Verification Checklist
- Impairment Assumptions: Verify the cash flow projections and discount rates used for the Slim·Fast impairment review and the global savoury and dressings cash-generating unit.
- Discontinued Operations: Confirm the final settlement of the UCI sale and the treatment of deferred payments contingent on future sales.
- Preference Share Litigation: Monitor the status of the Enterprise Chamber inquiry and Supreme Court appeal regarding the NV preference share conversion.
- European Frozen Foods Sale: Track the progress of the proposed sale of the Iglo/Birds Eye portfolio in Europe, including regulatory approvals and potential financial impact.
- Pension Liabilities: Review the sensitivity of pension obligations to changes in discount rates and long-term return assumptions, given the significant unfunded liabilities.
- One Unilever Savings: Assess the realization of the projected €1 billion in savings from the restructuring program against actual cost reductions.