聯合利華 (UL) 2004 Q1 法說會逐字稿

Good morning. Welcome to Unilever’s 2004 First Quarter Results conference call. This conference will begin with a presentation by Mr. Howard Green, Senior Vice President Investor Relations, followed by a question and answer session.

[Operator Instructions] This conference is being recorded and will be available for a period of two weeks. Details of the replay numbers and access codes can be found on Unilever’s website. An audio webcast of the teleconference will also be available on Unilever’s website at www.unilever.com. We will now hand you over to Mr. Green.

Ladies and gentlemen good morning and welcome to Unilever's First Quarter 2004 Results Presentation. A transcript which contains the usual formal disclosure to forward-looking statements within the meaning of relevant US legislation can be accessed via our website at www.unilever.com. This presentation and discussions are conducted subject to that disclaimer.

I will not read out the disclaimer, but propose we take it as read into the records for the purpose of this presentation and conference call. Can I remind you, that unless otherwise stated the financial numbers used in this presentation are in euros at constant rates of exchange, that is average 2003 rates.

I'd just like to also say that, in case any of you think I sound a bit strange, I've actually got an extremely bad cold. So, you'll have to excuse me for that.

Let me turn to chart one where you'll see the quarter's key features. Leading brands have grown by 1.3% in the quarter, some 1.4 percentage points from underlying volume growth.

HPC leading brands grew by 1.6% with some 2.9 percentage points from underlying volume growth, whilst Foods leading brands grew by 1%, with some 10 basis points in underlying volume. Operating margin before exceptional items and goodwill amortization at 14.9% is 30 basis points ahead of last year, after a 20 basis points increase in advertising and promotion.

Net borrowing costs have reduced by €46m or by 22% and reflects the benefits of cash flow from operating activities and the sales of businesses as we focus the portfolio and lower rates. The net FRS 17 financing costs for pensions was €22m compared to €43m in the prior yet. Net debt at closing rates is €12.6b, with the benefits of cash flow offset by currency movements.

For the last twelve months progress on the two key metrics within our financial strategy is as follows. Firstly we have an EBITDA interest cover of 10. Secondly, funds from operations to lease adjusted net debt, is 37%, or, applying new SEC regulations for calculating liquidity ratios, 33%.

The beia tax rate in the quarter was 29%, 30 basis points lower than last year. EPS beia is ahead by 7.5%, which is after absorbing over 3 percentage points of dilution from disposals.

Exceptional items in operating profit were a charge of €67m and include €95m of restructuring investment costs and €28m of net profits from disposals.

EPS declines by 15% reflecting higher after tax profits on disposals in the prior year. At current exchange rates EPS beia has risen by 2% in euros, by 19% in US dollars and by 4% in £ sterling.

Let me turn to chart 2 where I show the build-up of our sales growth for the year. Underlying sales grew by 40 basis points, all from underlying volume growth. The difference between this growth rate and that of the leading brands comes from our strategy of managing the tail on non-leading brands for value. This has two aspects to creating that value, firstly, via a harvesting strategy.

In the quarter we have seen an underlying sales decline of 11.5%, impacting underlying sales growth by some 80 basis points. Secondly, through the sale of businesses. In the quarter the effect has been to reduce turnover by the equivalent of 320 basis points or just over €300m. Acquisitions at some 60 basis points. Altogether this gives total sales in the quarter of €9.8b, some 220 basis points below last year.

Let me turn to chart 3 and get behind the growth of leading brands to explain our slow start to the year. Firstly in this quarter we have one less trading day compared to 2003. The effect is partly offset by the soft comparator in the prior year, when we saw the start of sharp de-stocking by retailers, particular in US Home & Personal Care.

The net of these two year-on-year comparator effects is to reduce growth by some 50 basis points. Secondly, as expected, Slim-Fast and Prestige Fragrances continued to dilute leading brand growth.

At the full-year results we explained that the impact of progressive share loss during the course of 2003, gave a lower exit running rate. Thus 2004 performance in the first half year will be coming up against a tough comparator, notwithstanding the actions we are taking to address business issues.

In addition, as part of the plan to return our Frozen Foods business to a more consistent and sustainable growth profile, we're taking determined action to further rationalize the product portfolio in order to fully focus resources on faster growing segments. Taken together Slim-Fast, Prestige Fragrances and Frozen Foods dilute leading brand growth by around 100 basis points.

In this quarter we've also seen a continuation of the tough business environment that we saw through 2003. Market growth rates at around 3% continue to be lower than in the recent past, with weak economies in some of our key markets, particularly in Western Europe and North America where our markets in aggregate are growing at around half this rate.

Within this we've also seen aggressive price based competition in a limited number of countries to which we have responded, in order to maintain market position.

So, if we look at the development of price and volume for leading brands on chart 4, we see that overall pricing is flat in the first quarter, which compares with positive pricing of around 1.5% in 2003. To understand the price trend we need to look separately at the developing and emerging markets and the developed markets, as they have different dynamics.

In the D&E markets, defined as including Central & Eastern Europe and excluding Japan and Australia, price growth has come down from approaching 7% in 2002 to around 4% in 2003, and was broadly flat in the first quarter of this year.

At the same time volume growth in the leading brands in the D&E markets has been accelerating from just over 2% in 2002, to around 4% in 2003 and to around 8% in the first quarter. This is, as we would have expected, given the start of economic recovery in a number of markets, and produces leading brand growth in D&E markets of 8%. A level similar to that of the last two years.

Turning to the developed markets, pricing in recent years has generally been flat or up to 1% growth. While in the first quarter of this year price declined by around 30 basis points. Both the slightly lower pricing in the first quarter and an underlying volume decline of around 1.6% derive from economic and competitive conditions in particular markets where we have lost some ground.

Firstly Germany, France and the Netherlands have all been difficult markets, and this has particularly impacted spreads. We have taken appropriate action and have a strong innovation program in the category.

In Laundry we've also seen some share loss, particularly to retailer own brands. Again, we have a program to address this.

Secondly, in North America we lost around 1 percentage point of market share in Laundry in 2003 as we focused on liquids with the Surf and Whisk brands and on Fabric Conditioners. Recent shares have been stable.

In Japan we have doubled our share in Hair Care over the last four years. This success has produced an aggressive response through new product launches by locally based competitors. The Skin Care category has also seen intense levels of competition. In a market, which is sensitive to innovation, we are stepping up our own activity.

The combination of our pricing actions in different countries across the world and markets that are currently being driven by higher than usual levels of investment behind in store activities, means that our investment in trade and consumer price related promotions, which we deduct from sales to arrive at reported revenue is some 200 basis points ahead of the prior year.

Whilst this obviously has implications for our short-term top line growth metrics, and is reflected in the market growth rate, two points should be borne in mind. Firstly that this investment is fully funded from our ongoing savings programs. Indeed gross margins, as I will show you later, improved by a further 110 basis points in the quarter. Secondly we have continued to invest in the long-term development of our business, with all key innovations and market activations being executed in line with our operating plan for the year.

Let me now illustrate this by turning to the development of our categories, and reviewing some of our current initiatives. Starting with our Personal Care leading brands on chart 5.

In Mass Personal Care, which represents around 27% of total leading brands, growth of 2.5% in the quarter reflects a strong prior year comparator, and competitive markets in the US and Japan in the Hair category. In terms of the key initiatives for 2004 that are already in market or announced to the trade, we see firstly in Hair Care that we have a broadening of the Sunsilk range in Europe, Latin America, Asia and Africa. Whilst in Dove we've also launches across the world that strengthen the brand through new formulations and variants to address different hair needs.

In Japan our current innovation program has its focus on mod's and Lux. In the US we also have an extensive program behind Suave. Secondly, in Skin Care the Dove Face range has now been extended in the US. The new firming lotion has been launched in Europe. Whilst in Japan we see initiatives supporting the brand, in the areas of body wash and make-up removal.

We have also re-launched Pond's double wipes and the Pond's Oil Control and Wipe Beauty variants in Asia. We have also extended the range in China and the US. Finally in the area of Skin Care, the re-launch of Lux goes from strength to strength in Latin America and was extended to Indonesia and also to Europe with the launch of Lux Premium Soap Bar and shower products in selected countries.

Thirdly we continue our strong program in deodorants. Behind the Rexona, Axe and Dove brands. In Rexona the focus is on products for specific skin types and an active life style. While in Asia and Latin America we're launching products that appeal to consumers with lower disposable incomes.

In Axe we have further strengthened our position in North America with the launch of sticks and gels. A new variant "Touch" is being rolled out across the Axe world. We also had the launch of selected Axe fragrances in a number of other countries.

In the US Dove Deo is being relaunched with the emphasis on the brand's skin care attributes, and there is further activity for the brand in Europe.

Lastly, in Oral Care the successful launch of Signal Whitening Kits in France will be rolled out to other markets. Together with the re-launch of the Signal Complete Care toothpaste and new low cost tooth brushes. In close-up we have a range of variant initiatives in Asia and Latin America.

In Prestige Fragrances with the new leadership team in place, we have continued to make good progress with our restructuring program. The first phase of this year's Strength and Innovation program was introduced to the market towards the end of the quarter. Given our plan to focus our efforts on a limited number of stronger brands and more profitable channels, and thus the tougher comparator from last year, we still do not expect to see the benefits of our actions on the top line until the second half of the year.

Let me now turn to Home Care on chart 6. Laundry, which represents 14% of leading brands, grew at 1.7% with further evidence of the benefits of our value enhancement strategy. We have further improved operating margins, which are now running over 400 basis points above the level in 2000. Notwithstanding our response through pricing and price related promotions, to competitive markets in Europe, North America and Asia.

In terms of fabric cleaning innovation and following the success of the aloe vera variant in Europe, we are extending this to Latin America, where we're also rolling out Easy Iron. There has been a successful relaunch of the Omo brand in Latin America and Africa, based on new technology, new packaging, new fragrance and new advertising. This is also now being extended to Asia.

In Europe we're extending the improved cleaning properties of the "fizzing" product to powders, liquids and tablets. In the US we are increasing support behind our focus brand portfolio.

In Fabric Conditioners we are sustaining our progress with the Fast Dry variants. In Europe we also have a strong program of new fragrances being launched behind Snuggle and Comfort.

In Household Care, which represents less than 3% of leading brands we see early signs of progress, with growth in the quarter of 1.6% compared with a decline of 3.6% in the first half of 2003.

Our innovation program behind Cif and Domestos focuses on the core of both brands, with improved communication, and with a broadening of their appeal through different fragrances, packaging and product formats.

Let me now turn to chart 7 to look at the development of our Foods leading brands. In Savory and Dressings, which represent 20% of leading brands, we continue to build on our strong brand portfolio, with a wide-ranging innovation plan.

In Savory we continue to innovate around the principles of reaching down, reaching out and reaching up. We have built on the success in 2003 with affordable seasoning cubes or liquids, through rollout to other parts of Latin America and Africa. We're also extending our range of Food Oils with new local flavors and no MSG added liquid seasonings in Asia.

Furthermore we're consolidating our position in the 13 new countries we entered last year and we are continuing to extend the brand into new white spot countries in 2004.

Our Nutritious Soup range is being extended in Europe, with the launch of Frozen Soups, which are low in salt, fat and lactose. While meal kits continue to be rolled out with new flavors, including Mexican Doritos and Japanese Teriyaki.

In the US we have launched three new Mexican cooking sauces and of course we've also launched the new Carb-Options range, which covers Ragu sauces and [Lowery's] Marinades.

In Dressings in innovations in the core to promote the Good for You credentials of the Hellmann's brand have continued in 2004. For example, through the launch of an extra light variant in the UK, a range of low-carb dressings, mayonnaise and ketchup in the US, under the broader Carb-Options range. The launch of Hellmann's light variety based on soy in Argentina.

The greater consumer focus on personal healthiness has also enabled us to bring a variety of new salad dressing products to market, under the Hellmann's, Calve and Wishbone brands.

We've also continued to extend the footprint of the brands into new categories, such as ketchup, mustard, dip-in sauces and snack sauces and used the specific strength of other brands, such as Knorr and Bertolli, to extend geographic coverage.

In Food Solutions we continue to see good broad based performance in tough markets, with underlying growth in the leading brands in the mid single digit range, driven by the rollout of Knorr Soup Solutions across the world, including new flavors in established countries. Dairy cream alternatives in Europe and by a wide range of initiatives in Savory and Dressings, including the rollout of Knorr Ethnic Solutions across all regions.

In Tea Based Beverages which are 3% of leading brands we're launching new premium Lipton Yellow Label variants. Including new fruit tea varieties and rolling out the fruit fusion range across Europe. We're also building on the initial success of Lipton Green Tea. Extending it from its initial ten countries to other parts of Europe and also to the rest of the world.

In the US we have currently launched four new flavor black teas and Lipton Aqua, tea flavored water has recently been launched in parts of Europe, including France.

I'll carry on with Food's leading brands on chart 8. In Spreads and Cooking Products, which are 9% of leading brands, we have seen the expected increase in innovation activity. Crèmefine dairy cream alternatives are being rolled out under the Family Brands and the rollout of Savory Spreads across Europe also continues.

We have also re-launched Flora [Basell] in parts of Europe with new packaging, advertising, and with a new formulation, which further strengthens the brand's credentials of keeping the heart and blood vessels healthy. Also under Flora [Basell] we have launched a range of cholesterol lowering yoghurts and milk products in Europe under the Pro-Active brand name. Finally Skippy snack bars have been launched in the US.

In Health & Wellness the first five products in the Slim-Fast range of low-carb alternatives have performed well, and already represent around 20% of Slim-Fast sales. We're shortly going to extend the range to include a further 17 products. We will be addressing the decline in the traditional range of products later in the year. Udez is also being relaunched in key countries, in Latin America including Columbia.

In Ice Cream, which is 11% of leading brands, growth was driven by a particularly strong performance in the US, where we continued to gain share. We also have an active innovation program across our key regions. This includes, firstly in Europe, the launch of Special Edition Cornetto, a range of new kids' products, the relaunch of Solero and new Magnum products including Magnum light.

Secondly in the US the launch of Breyers Carb-Smart products and a range of low fat, no sugar added and sugar free options under the Klondike Popsicle and Breyers brand are joined by Ben & Jerry's having launched two low-carb flavors, plus light and organic variants and three low fat frozen yoghurt variants. Lastly, in Latin America a broadening of the Magnum range, whilst in Brazil we have recently launched Cabon Light Ice Cream

Finally to Frozen Foods, as part of managing the business to a more consistent growth profile and to improve further its profitability, actions are being taken to rationalize the product portfolio and focus on higher growth in profitable segments. Sales are reduced as a result.

The launch of Knorr in a number of countries and Slim-Fast Frozen in the UK make good contributions in the first quarter.

Through the HPC and Foods category review, you will see a plan that has a level of activity at least as high as last year. It's totally focused behind our leading brands, and which in combination with our actions to address Slim-Fast, Prestige and Frozen Foods, is designed to stimulate growth.

Let me now turn to chart 9 and look at the progress we have made with operating margin. The basis points quoted are all expressed as an effect on total Unilever operating margin, which has moved ahead by 30 basis points to 14.9%.

Gross margins moved ahead by 110 basis points, with the key drivers being firstly an improvement in mix, which contributed 80 basis points through portfolio change, and a larger proportion of higher margin categories.

Secondly, continued benefits from our Path to Growth restructuring programs, which contributed some 40 basis points. Finally, cost increases exceeded pricing by 10 basis points, including the impact in price of the additional investment in trade and consumer value activities referred to earlier.

Let me say a few words about commodity cost increases. Whilst we see some adverse trends, such as Soya and butter fat prices in the US, these have been mitigated elsewhere, where we see higher US dollar prices offset by strengthening currencies.

In the balance of the year, we currently see a modest upward pressure, but less than the increase we saw last year. We will continue to manage this throughout market pricing and the benefits of our hedging and formulation management programs.

Advertising and promotion has increased by 20 basis points. As with the last half of 2003, this reflects that some funds have been redirected to an increased level of trade and consumer activities within pricing. We will continue to maintain an appropriate balance of investment as we go through the rest of the year.

Overheads are 60 basis points higher than last year. This primarily reflects the impact on the overheads ratio of short-term unrecovered fixed costs following disposals, and the phasing of, amongst others, market research and development costs.

Looking forward, we have a strong restructuring program for 2004. Part of the benefit of this will be seen in overheads later in the year.

Turning to the EPS beia delivery for the year as a whole on chart 10. In the first quarter the main drivers of EPS beia were improved gross margins and lower financing costs, partly offset by short-term dilution from disposals. For the full year we expect a slightly faster rate of growth coming from, firstly an improved rate of growth in the leading brands, including the reversal of the first quarter trading day's effect, with an extra two days in the fourth quarter, and less dilution from Slim-Fast and Prestige, given their comparators.

Secondly, an improvement in the overheads progression as described above. In combination, gross margin and overheads are expected to contribute at least 100 basis points to operating margin improvement for the full year. Taking the full year operating margin beia to well over 16%.

In the other elements of EPS growth, we expect sustained benefits in interest and the net FRS 17 financing costs for pensions. Whilst in respect of tax, we expect a rate similar to that of last year, and at the bottom end of the 29% to 30% range, which we guided at the start of the year.

The regional review sections are included in this morning's results announcement and can be accessed via our website.

So, before moving to Q and A let me summarize. It has been a tough quarter, both in terms of the trading environment in some of our key markets, and because of the specific portfolio challenges we're dealing with. Sales growth has been disappointing. However, we have responded flexibly based on the specific needs of individual markets. We have also continued to demonstrate the strength of our business.

We have generated more savings and improved our business mix to deliver a strong expansion in gross margin. We have increased investment behind our brands. We have continued to support all our key innovations and market place activities to build long-term brand and business health. We have delivered 7.5% growth in EPS beia, which has been achieved after absorbing short-term dilution of over 3% through the disposal of tail businesses. We have in place the programs designed to stimulate growth.

That completes my presentation. I'll now be happy to take your questions.

Thank you Mr. Green. [Operator Instructions] Your first question comes from the line of John McMillin with Prudential Equity Group. Please go ahead.

Hi Howard.

Hi John.

Sorry about your cold.

That’s all right. I’m sure it’ll get better.

I wish the Personal Care business didn’t get it I wish it wasn’t contagious I guess. How long does it take before Personal Care gets better. I mean – is this just a one quarter lift?

Let me try and take you through some of the issues behind that John. Because obviously Personal Care has shown a very good rate of growth over the period 2000 to 2003. The growth of 2.5% in the first quarter in the mass business is below what we’ve been achieving.

Of course you have to take into account the one less trading day in the quarter. But lying behind the whole issue is that at the moment we actually see market growth rates of around about 1.5% in the developed markets of North America, Western Europe and Japan in aggregate. That’s well below the historical average of 4%.

We’ve also got some specific price competition in certain key markets, primarily in Western Europe. So, there’s some – what I would call environmental factors that are conditioning the performance.

Beyond that there are a couple of specific issues that we’ve got in key geographies. The first one is the US Hair Care, where we’ve gained share through Dove and that has continued to perform well.

However, that’s been more than offset in other Hair brands, in what has been a very, very competitive market. The market had offerings from L’Oreal, from an aggressive dispense from Proctor & Gamble in respect of Pantene. These are all, together with Dove, are all very, very strong brands. Some of the weaker brands in our portfolio such as Finesse and Salon Selectives were adversely impacted.

We also saw an adverse impact in Suave where Suave was being [corpse] by some downward pressure that was coming in value terms from all of the activity at the top range of the market. Now, we’ve got a good strong program on Suave going forward. It’s coming up into its relaunch period this month. Also Dove has been gaining share after a brief dip over the end of 2003.

So, we think the outlook in respect of US daily Hair Care is better than the figures that we’re actually seeing in the first quarter.

The second market where we’ve seen intense level of action is in Japan where we’ve lost nearly – over 100 basis points of share. That has to be seen in the context of over the last four years – over the past four years we’ve actually doubled our market share in the Japanese Hair market.

There is an intense level of competition particularly from locally based Japanese players. We’ve got an innovation program in place. However that market is very, very innovation sensitive and in our experience there’s not much merit in just bringing, let me call them B2 type products to the market.

You’ve got to be able to bring differentiation through innovation. We will take our time to make sure that we do that properly and to get the full benefit. So, if I take the US Hair and Japanese Hair and some competition that we’ve seen in Skin in Japan as well together, they actually in combination knock around 250 basis points off the Personal Care growth in Q1.

I think the last thing that I’d say is really in relation to the prior year comparator. Because we were up against a tough comp. We had leading brands growth of over 11% in Q1 of 2003. That was partly influenced by the sell-in of Dove in the US and also the rollout of Sunsilk in Europe. So, if you take those in combination there are some very, very specific issues that do – that have produced the performance in Personal Care.

The programs that I described in the presentation are designed to stimulate further growth. We would expect to see that coming through in the latter part of the year.

The only proviso I’d put on that is that we do expect markets in Asia Pacific to continue to be very, very competitive, not least of all because of the situation in Japan. Where we need to make sure that the innovation that we bring is genuine innovation and differentiation as opposed to, as I said earlier B2.

It just seems that these full-year goals that you’re retaining to do sales from leading brand growth of over [27] in the double digit earnings. It seems that you’re - Howard – just to comment – it just seems like they always send you out to do the dirty work. I think when numbers are this short my only comments is Anthony, Niall, Patrick, somebody should be on the European call at least when there are shortfalls. Because it always seems like they have you do the dirty work.

Are you just setting yourself up for more – revisions down the road. Why don’t you just take numbers down to levels that you know you can do. I think just by retaining these targets – it just kind of – what made you retain these targets when it just seems like a stretch.

Let’s be very clear about what the outlook is for 2004 John. Because we did try to get a better balance in to what we were talking about with the markets, or dialoging with the market in terms of outlook with the Q4 results presentation.

It’s better than [25]?

Yes. But the actual outlook was about low double digit growth in EPS beia, and an expectation that there would be an improved rate of growth in leading brands, and an operating margin of over 16%. But the primary measure on which the outlook statement was based, was to do with low double digit growth in EPS beia.

That’s about the focus that I hope that we actually communicated within the Unilever 2010 material. The focus in the business has to be about robust value growth. The long-term surrogate for that is EPS growth. You can rest assured that if we’d felt the need to change the outlook in respect of EPS beia, we would have done so. So, let’s go behind the EPS growth rate, because I think there are some very, very important drivers within that that underpin the quality of delivery. The key drivers are the improved gross margins and lower interest and financing costs, which we expect to sustain through the rest of the year.

So, whilst all of this excitement is going on in the market place about pricing, and all the rest of it, we’ve actually fully absorbed all of that within the gross margin progress within the business. Within the 110 basis points improvement that we’ve made. All of this above the line expenditure we have absorbed within the business. We have increased the level of A&P behind the brands and maintained the integrity of the innovation program.

Whilst we’re not happy with the top line performance, because we remain in what I would call “street fighter” mode – you know this aggressive defense mode as opposed to really investing in advertising and equity building. That’s a factor of the markets that we’re living in at the moment. These things tend to pass eventually.

The importance of the gross margin delivery and the lower interest and financing costs is that once you start looking to a world where there is perhaps a lower level of trade and consumer price related promotions. There’s been a tremendous release of fuel within the Unilever business model. So there’s quality in terms of the EPS delivery.

In terms of why I’m here doing what I’m doing, that’s because it’s my job at the end of the day, and it might have been a different discussion if there had been some need to change the outlook. But we haven’t so I carry on with my job.

Thanks for all your help over the years and good luck in your new job.

Thanks very much John.

[Operator Instructions] Sir it appears that was the last caller. We will now pass back to Howard Green for closing comments.

Thanks very much for listening. There was a very extensive Q and A session that we had on the European call this morning. That I think went on for about an hour and a quarter. That of course is available via replay.

If there are further questions that any individuals, analysts or investors wish to ask, the IR team will be available on the normal numbers here in London. We look forward to receiving your calls. Thanks very much for your interest. Goodbye.

Ladies and gentlemen this conference has been recorded. Details of the replay number and access codes can be found on Unilever’s website. An audio archive webcast will also be available on Unilever’s website www.unilever.com. We thank you for your participation today. You may now disconnect.