聯合利華 (UL) 2004 Q3 法說會逐字稿

Welcome to Unilever’s 2004 Third Quarter Results Conference Call. This conference will begin with a presentation by Mr John Rothenberg, Senior Vice President of Investor Relations, followed by a question and answer session by Mr Rudy Markham, Financial Director of Unilever, and Mr John Rothenberg.

[Operator instructions]. This conference is being recorded and will be available for a period of 2 weeks. Details of the replay numbers and access codes can be found on Unilever’s website, and an audio webcast of the teleconference will also be available on Unilever’s website, www.unilever.com.

We will now hand you over to Mr Rothenberg.

Ladies and gentlemen, good morning and welcome to Unilever's Third Quarter 2004 Results presentation.

A transcript which contains the formal disclosure, that's the forward looking statements within the meaning of relevant US legislation can be accessed via our website at unilever.com, and this presentation and discussion are conducted subject to that disclaimer.

I will not read out the disclaimer, but propose we take it as read into the record for the purpose of this presentation and conference call. 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.

Firstly, I'd like to introduce myself, as I know that there are a few of you on the call whom I have not yet had the opportunity to meet. I'm John Rothenberg, and I have recently taken over as Head of Investor Relations here at Unilever following my previous position as Senior Vice President Finance of our North American HPC business.

In keeping with usual practice, I'd like to take you through a brief overview of our Q3 results before taking questions with Rudy Markham, who is here with me on this call.

The fact that our Q3 numbers are in line with and, in some respects, slightly ahead of what we had anticipated when we issued our trading update on September 20 is no cause for satisfaction here at Unilever.

Put simply, our sales performance is just not good enough. We will not sustainably deliver the level of shareholder returns that you require from us unless we re-ignite growth in our business.

So let us turn briefly to the numbers, which are set out on Chart 2.

Turnover was 4% in the quarter down, including the impacts of disposals which lowered sales by 270 basis points. Underlying sales, therefore, declined by 1.3%.

Operating margin before exceptional items and goodwill amortisation was slightly ahead of last year at 17.4%.

Net borrowing costs were down by €19m, or 10% in the quarter, benefiting from both lower debt and interest rates.

Net FRS17 pension financing cost was down €21m, reflecting slightly higher asset values and the impact of increased cash contributions into our funded schemes.

Net debt at quarter-end exchange rates was €11.8b, down by €2.5b over the past 12 months. Our key financing metrics continue to improve. EBITDA interest cover of nearly 12 exceeds our target minimum, thanks in part to the benign interest rate environment, while funds from operations to lease adjusted net debt rose to 38%, (equivalent to 31% based on the recent SEC guidelines). This compares to our 40% target minimum.

The effective tax rate beia in the quarter was 27%, in line with our expectation for the year as a whole.

EPS beia was 3% ahead in the quarter. This is somewhat better than indicated in our trading update, as September sales were slightly ahead of expectation and A&P slightly lower.

Exceptional items amounted to a €71m charge in the quarter, made up of €106m of restructuring costs and €35m profits on disposal. Also in the quarter were a number of minor restructuring activities and disposals that were not part of our Path to Growth program. As such, these do not qualify for exceptional treatment. While these affect margins in certain segments of the business, in aggregate they have no material impact on operating margin beia in the quarter.

The interim dividend has been set, following our normal policy, at 35% of last year’s total dividend, in the stronger of the 2 currencies, which for the first 9 months was sterling.

Looking at the top-line in a little more detail, let me turn to Chart 3.

Underlying sales were down in both foods and HPC in the quarter, although with different contributions from price and volume. The decline in Foods was driven primarily by the sharply lower volume in Western European Ice Cream and Ready to Drink Tea. Pricing was positive, mainly in the Americas.

In contrast, HPC delivered modest volume growth, with a strong contribution from D&E markets, partly offset by declines in developed markets. However, prices declined, reflecting our response to the market and competitive environment across a number of our main HPC markets.

With leading brands now accounting for over 95% of total sales in the quarter, a 9% decline in the tail diluted underlying sales growth by only 40 basis points.

Turning to margin development as summarized in Chart 4. Gross margin is 40 basis points down in Q3. The main features were as follows.

Firstly, lower sales of Ice Cream in Europe accounts for a 30 basis points reduction in Unilever’s Q3 gross margin.

Secondly, restructuring savings and an improved mix from disposals together increased the gross margin by 130 basis points.

And thirdly, against a background of flat overall pricing, increased input costs reduced the gross margin by 140 basis points. Procurement savings continued to accrue, but these were offset by commodity price increases of some 4% year on year, or around €150m in the quarter.

We are seeing some increases in packaging, chemicals and transport costs due to the higher mineral oil price, although these have been partly defrayed in Europe by the weaker US dollar. At the same time, edible oil prices have eased somewhat, although our hedging arrangements mean that these have yet to feed through fully into gross margins.

In line with previous quarters we continue to channel our brand investment towards improving the availability, visibility and promotional footprint of our brands at the point of sale. Thus, while advertising and promotions fell by 70 basis points, in store promotional expenditure, which is reflected in the flat pricing, rose by 180 basis points. Overheads were 10 basis points higher as the impact of lower sales, including the dilutive impact of disposals, was largely offset by restructuring and other savings initiatives.

At this point, rather than going into details of the performance of each of our individual categories, I would like to take a slightly different approach and focus directly on the challenges that Unilever currently faces as a business, and what we intend to do about them. For those of you who are interested, further details on leading brand growth by category can be found on our website with this presentation.

Turning to Chart 5, the first thing I want to do is to distinguish clearly what is working well and where our challenges lie.

Firstly, nobody should doubt our commitment to shareholder value. Unilever has a long track record of placing the interests of its shareholders as the driving force behind its business decisions, even if this means making difficult and painful choices. Neither is our problem one of control of costs or capital.

Through Path to Growth we will have delivered around €5b of savings in annual operating costs. Over the same period we have reduced capital employed as a percentage of sales by 860 basis points, and considerably reduced our tax costs. We have an efficient balance sheet and have committed to keeping it that way. In the past 4 years Unilever has delivered over €16b of free cash flow. By any standards this is a good performance.

Furthermore, we believe that we have ample capacity to deliver further savings and reduce capital requirements going forward. We have identified savings of some €700m per annum from our simplification program across Unilever, and we are now looking to accelerate delivery.

We are also confident that our global procurement program will continue to yield savings in both production and non-production items for some time to come.

Our challenge is getting the business back to acceptable levels of sustainable growth. So turning to Chart 6, it is clear that we need to address market competitiveness across a number of our categories.

Certainly some parts of the business stand out as areas where we must move quickly to reverse our poor performance, and we are doing just this. We have also spoken on several occasions about our under-performing businesses, and I'll say more about these in a minute.

In our September trading update we identified the challenges we face in Europe and Asia. As you can see, these regions are having a significant impact across our categories. Europe, because it accounts for over 40% of Unilever sales, with a strong weighting in almost all categories, and Asia, because it has historically been a major driver of our top line growth, most especially in Home and Personal Care.

But before going into the actions we're taking in these regions, we should recognise that there are many parts of the business which are delivering good growth, some of which is illustrated in Chart 7.

In aggregate, our D&E markets continue to deliver volume growth in excess of 5% in Q3, in spite of the competitive battles being waged in HPC Asia. Latin America in particular stands out as a region where the steps we took to protect the business health in the face of economic crises and competitive entries have been rewarded by profitable growth -- over 6% underlying sales growth in Q3 and for the year to date.

Our global Deodorants business grew by high single digits in the quarter notwithstanding the weak market conditions in Europe and North America. Axe and Rexona continued to set the pace in this category across the world.

In the US market we now vie for Deodorant category leadership, having come from a distant third position as little as four years ago. The picture in Ice Cream outside Europe is similar with share gains and sales growth across our businesses in North America, Latin America and Asia. We remain the clear number one Ice Cream business globally.

Our Spreads business is making good progress. This is a highly profitable category for Unilever, which we are finding ways to grow in very tough markets. Becel and Flora, our heart health brands, continue to go from strength to strength, recording high single digit growth in the quarter, driven by innovations such as Pro-Activ milk, yoghurt and yoghurt drinks as well as progress in the core spread categories.

Meanwhile our move into non-dairy cream is helping our family brands to grow again. Our large Knorr and Hellmann's brands, acquired with BestFoods, continued to deliver solid growth, with Knorr in particular proving its potential in the D&E markets.

There are many other examples around the world where we are demonstrating our ability to win in the marketplace, but what about the parts of the business that are performing less well?

When we fail to grow sales it can mean only one thing, that are brands are becoming less popular with our consumers. This might be relative to other brands and products in the category, in which case we're losing share. Alternatively it might be that the categories in which we compete are losing their share of the consumer's wallet, in which case we see a decline in the market value.

Either threat requires a response. To stimulate demand in our brands, we need to improve the value they offer to our consumers and we are doing this in 3 ways.

Firstly, we are adjusting price points of our products where this is necessary to align them more closely to the consumer's perception of value.

Secondly, we are improving our product offering through innovation to boost the functional and emotional benefits of our brands.

And thirdly, with the right products at the right price, we can focus on improving availability, visibility and awareness of our brands through increased investment in media advertising, promotions and other brand activation activities. This seems straightforward, although in practice each market situation requires its own specific response. As we have said, we will do what it takes to improve the market competitiveness of our offerings and we will do so in a way that is carefully targeted and sustainable.

Turning to Chart 8, I would like to address those areas of the business that we have indicated as priorities for our attention.

Firstly Europe, where we have experienced a 5% decline in underlying sales across Foods and HBC in Q3. In Foods the poor summer weather certainly influenced a double-digit decline of Ice-Cream and Ready to Drink Tea sales in the quarter, which together accounted for around two thirds of the sales decline in Europe. But we also suffered share loss in take home Ice-Cream and in some other Food categories, primarily to own label products and hard discounters.

In Frozen Foods, we continued to make progress in reducing the cost and asset basis of the business with margins increasing once again in the quarter. Our strategy of repositioning the brands towards a “fresh and natural” platform is underway, starting with Bird's Eye in the UK. But this has not yet been translated into an acceptable sales performance.

In HPC, there were declines in both Homecare and Personal Care markets in the quarter. Year to date the Homecare market is down 3% and Personal Care up a meagre 1.5% compared with the 4%+ growth rates that we normally see in European HBC. Our market shares are more encouraging. Although we have lost some share year on year in Laundry to both own label and branded competitors, there has been modest improvement in recent months. Household Care continues to disappoint. While markets are weak, we have also suffered some share loss. In Personal Care, however, we have in fact gained share in Europe in 2004.

So turning to chart 9, what actions are we taking in Europe?

Firstly pricing. To adapt to the new realities, we have already acted to adjust our pricing in a number of areas. In Spreads we reduced pricing on our family brands in Germany and Poland, where we have been rewarded with a turn up in volumes. In Laundry, we are strengthening our coverage of price positions -- for example, with the recent re-launch of our Surf Smart Shopper brand in the UK and Ireland, and the launch of a new low price Skip variant in Portugal. Further actions will follow.

We are also driving harder on innovation. For example, following early success with the extension of cholesterol lowering technology into milk and yoghurts, we've accelerated the launch of a range of “one a day” yoghurt drinks, which are now on the shelves in the UK, Portugal and Belgium. We see this as an exciting opportunity, and one which will receive much attention in coming months.

Another example can be drawn from Fabric Conditioners, where in the UK, Comfort Pearls has been launched as the first unit dose fabric conditioner in a convenient capsule.

We are also putting greater weight behind brand activation programs across both Foods and HBC. For example, in Fabric Cleaning we are putting even more impetus behind the “Dirt is Good” brand activation that has proved so successful in a number of markets around the world. We've also strengthened programs in support of our Hair brands, which are performing well across Europe, and on various Knorr activities.

Coming to Asia, the situation is somewhat different. These are large and growing markets where we have excellent positions and have understandably attracted the attention of several of our competitors. We have already made substantial moves to protect our market positions against a specific threat in India, and these are bearing fruit. Our volume shares in both Laundry and Hair are now increasing again.

However, we are determined to move away from the defensive and onto the offensive in these markets. We are doing this with an aggressive and well-supported innovation program incorporating a whole raft of activities. These are either already in the market or will be brought to the consumer within the next few months.

Amongst these, some of the more important already announced can be seen on chart 10.

In the Japanese Hair market, where we have already strengthened the Mods brand, we are coming to market in November with improved formulation, packaging and communication for our leading Lux Super Rich brand.

In India we are launching Rin Advance laundry powders, promising superior whitening to augment the Surf Excel innovations already in the market. Other innovations targeting the large anti-dandruff shampoo segment include Clinic All Clear in India, Hazeline in China and Clear across South East Asia.

We are confident that these and other initiatives will help to restore top-line momentum. Of course, opportunities to accelerate growth are not limited to Europe and Asia. We are committing additional resource behind key brands and priority projects in North America and elsewhere, where we scope -- where we see scope to drive harder.

And finally, turning to Slim Fast and Prestige on chart 11. We have completely revamped the Slim Fast range in the US, and our market share has stabilised at around 25% in recent months, securing our brand leadership in this attractive market. Press and outdoor advertising behind the new Optima range starting in October and media support will ramp up in the fourth quarter as we approach the peak New Year season.

Similarly in Prestige, the benefits of our restructuring are now apparent, with margins well ahead. We have a well supported program behind our Calvin Klein Eternity Moment launch in both Europe and North America and initial signs are positive. It will be a while yet before we can assess whether these activities are having the desired long term effect, although the combined impact of these two businesses is no longer a significant drag on Unilever's top line.

Turning to Chart 12, the short term impact of our more aggressive marketing program is reflected in our reduced 2004 earnings guidance to low-single-digit EPS growth.

The turnaround in our top line performance will not happen overnight. Going forward, we will need to manage the business flexibly in order to respond competitively, and to protect our build our market positions. In this context, we expect EPS in Q4 to be affected by the step up in support expenditure. There will also be a substantial increase in exceptional restructuring in the quarter.

Looking forward, we have announced our intention to review the assumptions that underpin Unilever 2010 in the light of current market trends and our recent business performance.

We will communicate our conclusions from this review with our 2004 full year results in February 2005.

In the meantime, I want to leave you with the reassurance that we remain fully committed to growing, free cash flow and increasing return on invested capital. We cannot deliver this without growth, and we will not shy away from any decisions or actions that we consider to be necessary to deliver on this commitment. We know what it takes to win, we are making the necessary adjustments and we are absolutely clear that re-igniting profitable growth in the business is our number one priority. That completes my presentation, and I would now like to invite questions to Rudy and me.

Thank you, Mr Rothenberg. We will now poll for questions from analysts. [Operator instructions]. Our first question comes from the line of Andrew Lazar with Lehman Brothers. Please go ahead.

Thank you. Good afternoon.

Afternoon, Andrew.

Just a quick follow up on the 180 basis points increase in the spending that you talked about around trade spending or in-store advertising. I’m just curious, what portion of that do you think is more towards short-term, tactical spending, towards businesses or brands that need more attention today, versus the ongoing shift, which is just that a lot of companies are spending more now on truly advertising, but in-store, at the point of sale.

Is that a trend you think we’re likely to continue to see in your business, going forward?

I think the first point, Andrew, is that, as we’ve said now for a couple of quarters, we’ve been experiencing an increase, and it’s particularly true in Europe. And much of the increase is, indeed, in-store and is aimed at making sure that our products are there, available and attractive in the store.

It’s very difficult to differentiate between what is short-term and what is long-term, because each part of one of those promotions has a theme content. But we’re very clear that we treat that above the line and put it in Price. A long time ago we used to have it in Promotion, and it was in the A&P line. And we’ve always had this difficulty of saying on a particular promotion how much of this is theme and how much is purely a short-term price.

But I would say that there’s an element of both in most of it, and it’s been certainly increasing this year, not just in this quarter but throughout the year, with a particular emphasis in Europe, where the competition has been at its highest in-store.

Just one additional comment, Andrew. If you put it in a longer-term context, this is accelerating at a rate this year which is significantly ahead of the increases that we’ve seen for the last 4 or 5 years, reflect the fact of what John has commented on.

Thanks. And then one quick follow up. We’ve heard, I guess, mixed things around -- at least North American food -- around where certain list price increases have been taken, and in various different categories. And I think some have said-- Some industry peers have said, “We’re hopeful we’ll get it, but it takes a little time, of course, to raise some other price points.” Others have been a little bit more clear that it may not just happen. This is purely in relation to input costs and such.

I’m just curious on your thoughts around that, what you’ve seen as it relates to your business and where you’ve attempted to do some things around this pricing.

We’re pretty pleased with the performance of our Foods business in North America this year. We’re seeing good growth, quite widespread across the capitals in which we operate, with our brands Lipton, Hellmann’s, Skippy, I Can’t Believe It’s Not Butter, and so forth.

In terms of pricing, that is also part of the mix this year, and I just flagged that, for example, where we have products which have a higher commodity content, such as spreads, then, of course, since we’ve had higher raw materials we have recovered some of that in selling prices.

Thank you very much.

Just to add to that, we have to look category by category. In Ice Cream, where the dairy prices were something that was discussed earlier this year, there have been moves, and prices have moved with that. In edible oils, in mayonnaise, you’ll see that prices have moved slightly, but more importantly, I think, edible oils don’t necessarily move exactly with mineral oils. So there’s a different phasing there, and each of these categories is different.

Thank you.

[Operator instructions]. Our next question comes from the line of Marla Simms with Stanford [Brunstein]. Please proceed.

Good morning.

Good morning, Marla.

I was hoping that you could provide us with a little bit more color on what’s going on in Indonesia, and specifically if the issues there are new to Q3 or if this has been an ongoing issue?

Let me put it in 2 contexts. We’ve been in Indonesia for well over 75 years, and through that long period we have had many brushes with all sorts of competitors, both low-priced local competition and international competitors. We have a very strong business with a very sustained growth rate over many years.

What we’ve seen this year is yet again a resurgence of some low-priced competition, particularly in Laundry, and we’ve seen a little more aggression in the Hair category. Nothing that we haven’t seen many times before and have dealt with many times before.

Has it started to turn worse during Q3, or has this been a deteriorating performance throughout the year?

No. I think our Foods business has grown in Q3. I think our HPC was flat. We have been growing. We’ve taken some actions. We’ve got a very strong innovation program coming up. And as Rudy says, I think we feel confident that this is the cut and thrust of the normal battle in Indonesia.

Okay. Thank you.

Our next question comes from the line of Tom [Venagine] with FMS Securities. Please proceed.

Hello. I have several questions.

Good morning.

Hello. The first one is regarding North America, as you have volume decline. In second quarter there was still volume growth. What is happening here? Especially you told us that Food is performing very well.

The second one is Frozen. The leading brands have declined with -7%, which is, I think, a record. What’s happening here?

And the third question is about your tax rate. You have said it will be 27% for the year. What can we expect in the future?

Let me take North America first, Tom. We have said we are pleased, and Rudy just reaffirmed that we are pleased with our Foods business. There are several things, of course, going on within the Foods business. We’ve talked at length about Slimfast, and we are still, on a year-on-year basis, seeing shortfalls there.

If we take our Ice Cream business, that’s growing. That’s continued to grow, and we feel very comfortable about that. The key brands in the Food business, whether it’s the margarine brands, the mayonnaise Hellmann’s, we feel very good about that. There is small increases on those key brands, so I think in aggregate -- Skippy I could mention as well -- we feel strongly about that.

In HPC, we had a strong second quarter, and we were careful to say that there is a different comparator in the third quarter, that when you take our performance overall, there hasn’t been a significant change. But there has been, Q1, Q2, Q3, a slightly different pattern from last year.

I think, finally, we should just say, as we’ve mentioned, that the Prestige business in Q3 has a strong third quarter. So overall in the totality of it we feel that we have a reasonable situation in North America. That doesn’t mean that we’re satisfied with those areas, which I mentioned (for instance, skincare, where we’ve lost a little bit of market share, and we have plans to make sure that we do not yield any market position).

Okay.

To take Frozen, let me just deal with that one, Tom. We have-- are concerned, very concerned, at the performance in the quarter. Our strategy, as John has outlined earlier in the call, is to improve the value of the franchise that we have, and we’ve taken a number of measures to improve the margin and improve the capital efficiency, again also in this quarter.

We’ve not yet succeeded in generating the growth that we’re comfortable with. John talked of the progress we’re making in a number of markets, and we hope to see the benefit of that as we go into the next quarter. I don’t think I can add anything more useful than that.

And on the tax rate, I think we said in the call that we’re expecting a 27% tax rate for the year. It was close to that in the quarter, and there is nothing particularly that we would want to mention this quarter.

I think if you comment is about the longer term -- remember we talked about 2010, we indicated a tax rate of the order of magnitude of 30%. We’ve not given any guidance yet for 2005. We’ll deal with that when we get there.

Okay, thank you.

Thank you.

That was the last caller. We will now pass back to John Rothenberg for his closing comments.

Thank you. Rudy, why don’t you close for us?

Thank you, John. Ladies and gentlemen, to close I want to reassure you that we-- reigniting our growth is our top priority. We know what we need to do and where we need to do it to get more competitive.

We’re stepping up our aggression in the marketplaces around the world where we need it and spending more to support this, and I want to assure you it is definitely not business as usual at Unilever.

Thank you very much for listening to us.