聯合利華 (UL) 2004 Q4 法說會逐字稿

Welcome to Unilever's 2004 fourth-quarter and full-year results conference call. This conference will begin with a presentation by Mr. Patrick Cescau, Joint Chairman of Unilever, 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, www.Unilever.com.

We will now hand you over to Mr. Cescau.

Good morning, and welcome to Unilever's 2004 results presentation. I am sure that you will have seen our announcements this morning. We have a lot to get through in the next couple of hours, but our message to you today is simple and straightforward. As a business, we're committed to delivering long-term value creation for our shareholders. We cannot deliver long-term shareholder value without sustainable topline growth, something that we have failed to do in recent years. We cannot blame our lack of growth on our portfolio or external factors. Our problem is that we are not competing as effectively as we need to, right across the business. We know how to win, but we are not always making this happen where it matters, in the marketplace.

We therefore need to raise our game, and are making changes to the business in order to do this. We're going to set clear business priorities, improve the way we execute, simplify our organization and make some changes in people. We're confident the decisions we're making are the right ones to address the issues. It will take time to restore momentum to the business, but Unilever is a great company, and we're determined that our future business performance reflects this.

So, having set the scene for today, I would like to start by asking John to give you a brief overview of our 2004 results and Path to Growth. I will then pick up with what we have learned and what we're going to do differently.

John, over to you.

Thank you, Patrick, and good morning, everybody. Before launching into my presentation, please may I point out that this discussion is subject to the usual disclaimer related to forward-looking statements. This disclaimer is included here, and will be posted with the text of the presentation on our website. May I also remind you that, unless otherwise stated, the financial numbers used in this presentation are in Euros, at constant exchange rates -- that is, average 2003 rates.

Turning to chart 2, 2004 was clearly a very disappointing year for Unilever and its shareholders. Underlying sales growth was 0.4 percent, with leading brands growth up 0.9 percent, while total turnover after disposals was down 2.1 percent at EUR42 billion.

Operating margin BEIA was down this prior year at 15.2 percent, leaving operating profit BEIA 6 percent lower at 6.4 billion. In spite of lower operating profit, lower financing costs and the reduced underlying tax rate of 25 percent enabled EPS BEIA to grow by 5 percent in the year.

Exceptional items for the year amounted to EUR1.7 billion, made up of 845 million of net restructuring costs related to Path to Growth, a EUR177 million provision for a potential sales tax liability in Brazil and a EUR650 million impairment to Slim-Fast.

EPS after exceptional items fell by 31 percent in 2004.

Cash flow was again strong, which, together with the weaker US dollar, reduced net debt by EUR2.9 billion during the year, to a 9.7 billion at year-end exchange rates.

Also, you will have seen that we're proposing a dividend increase for 2004, ahead of underlying earnings, for approval of the AGM in May.

Looking at our sales performance in a little more detail, let me turn to chart 3. Our underlying sales performance in 2004 was weak, and we have spoken previously about the principal causes. Europe, which represents over 40 percent of our sales, declined by nearly 3 percent, as we have suffered share erosion in some categories and unusually weak markets. North America as a whole grew by 1.5 percent, in spite of severely disappointing sales of Slim-Fast. Growth in Asia slowed to 1.4 percent, as our predominantly HPC business defended its leadership positions against specific competitive threats.

Unilever's other D&E businesses continued to grow, with Latin America in particular delivering strong growth of over 7 percent in the year. Our aggregate growth of 5 percent in D&E markets translates into an incremental underlying sales of over 700 million.

The poor performance in Europe affected the underlying sales growth in all of our categories. This was particularly true in Ice Cream and Frozen Foods, which declined by 3.4 percent. We lost some share in European take-home ice cream, and sales continued to decline in frozen foods. These more than offset good progress in our Ice Cream businesses in North America and elsewhere. In contrast, both Savory & Dressings and Spreads and Cooking products posted positive growth of 2.6 percent and 1.6 percent, respectively. This reflected a strong innovation program, which helped to drive improved growth of our leading brands, such as Knorr, Hellmann's and Flora/Becel. The 3.9 percent decline in beverages was principally due to Slim-Fast and European ready-to-drink tea.

Sales were broadly flat in Home Care. There was strong volume-driven growth in D&E markets, but declines in Europe and North America, where markets were down due to lower prices and we lost some share.

In Personal Care, our aggregate share was broadly flat. There was good growth across much of our Personal Care portfolio, with notable contributions from Deodorants globally and from Hair and Skin in Europe and D&E markets. However, overall growth of 2.1 percent was well below what we normally expect of our Personal Care business, reflecting the low market growth in Europe, pricing action in India and share loss in Japan and North America.

Turning to chart 4, our operating margin fell in 2004, as we adjusted to improve our competitiveness. Over the year, we have invested considerably more on in-store promotions and slightly more on A&P, as well as lowering prices in a number of key markets. Organic growth was insufficient to offset the dilutive effect of unrecovered overheads due to disposals.

Material prices increased by 2.5 percent in the year, equivalent to an on-cost of around EUR400 million. However, we were able to more than compensate for these with savings from our procurement and restructuring programs.

In aggregate, these factors have led to a 60 basis point reduction in operating margin, with approximately equal impact from lower gross margin, higher overheads and higher A&P.

Turning to chart 5, there are two features of the results in Q4 that I'd like to comment on -- specifically, the development of operating margin and the exceptional charges that we've taken in the quarter. In September, we announced that we would be stepping up our investment in market competitiveness, and the Q4 results include the cost of this. A&P were sharply up in the quarter, and lower pricing reflected both adjustments to price positions in certain markets, as well as in-store promotional spend that was maintained at the levels of the previous quarters. The additional A&P investment was principally in areas of the business where we needed to rebuild competitiveness or where there were opportunities to build on success.

For example, we have invested heavily in the quarter behind Hair in Japan, behind our "Dirt is Good" laundry activation campaign and the proactive rollout in Europe, and behind our hair brands in the United States.

Input costs were also particularly high in the quarter, reflecting the impact of edible oil, dairy and mineral oil related costs. Operating margin in the quarter was also reduced by the net impact of a number of one-off items. These included asset write-offs and disposals that were not part of Path to Growth, and therefore not treated as exceptionals.

The volume-driven sales growth of 3.2 percent in the quarter was helped by the two extra floating days in our reporting calendar. Although we have arrested share declines in a number of our key markets, it is too early to confirm a significant improvement in underlying sales momentum.

As you can see in chart 6, we took exceptional charges in Q4, in total of EUR1.5 billion, which led to a net loss in the quarter of EUR283 million. Of this, 710 related to planned completion of Path to Growth restructuring, including acceleration of the One Unilever simplification project we announced in July. There was also the charge in the fourth quarter of EUR177 million pretax, relating to the Brazil sales taxes that I referred to earlier. The remaining 650 million non-cash charge relates to the write-down of goodwill on Slim-Fast.

In the two years immediately following its acquisition, Slim-Fast delivered strong profitable growth and cash flow. Although we knew the weight management category to be more volatile and fashion-driven than most, the speed and the magnitude of the low-carb phenomenon surprised us. We were too slow in finding a solution for addressing the consumer's fascination for a dieting regime that did not fit easily with the brand's reputation as a responsible, scientifically based approach to weight management.

In contrast, our other US foods businesses were first to market with their Carb Options and Carb Smart ranges. As a result, low-carb products contributed around EUR300 million to our sales in 2004. This shows that Unilever can win when it embraces the consumer and focuses on rapid execution.

The interest in the Atkins diet has now dropped off sharply, but consumers have yet to return to the more conventional weight management programs. Thus, while the extensive recovery program put in place for Slim-Fast is bearing fruit in the form of some share recovery, a sharp decline in the market leaves us with a substantially smaller business than we planned.

Weight management remains relevant to our Vitality mission, and we still expect Slim-Fast to contribute to growth in the future. However, the base from which we will grow is significantly smaller, and it now looks as if the weight management market will take more time to recover. It has therefore been necessary to reduce the goodwill and intangibles of Slim-Fast from EUR1.4 billion to 0.7 billion.

To put our 2004 results in the proper context, I would like to turn to our longer-term value creation metrics of free cash flow and return on invested capital, as detailed in chart 7. Our free cash flow delivery in 2004 was strong, at EUR4.9 billion. However, this reflects a particularly low tax rate in the year, the effects of the Slim-Fast impairment and other non-cash exceptional charges. A more representative base would be around EUR4.2 billion.

Our return on invested capital has fallen during 2004 to 10.8 percent, reflecting the significantly higher exceptional items, as well as a lower operating margin. Assuming a more normal level of restructuring, our 2004 ROIC would have been in the region of 11.5 to 12 percent.

The Slim-Fast goodwill write-down has no effect on the ROIC calculation. Our definition for invested capital includes the full amount of acquired goodwill, whether on the balance sheet or previously written off.

2004 marks the end of Path to Growth. I would therefore like to summarize what has been achieved during this period of Unilever's strategic development. Turning to chart 8, Path to Growth was a bold transformational agenda. It was designed to bring about a step change in the sustainable growth rate of the business and its growth of value creation -- by improving the growth potential of our portfolio through the acquisition of Bestfoods and others, and the disposal of low growth non-core businesses; by concentrating our resources on bigger, stronger brands with the greatest growth potential; by generating more resources to fund growth through Bestfoods synergies, global buying and supply chain restructuring; and by restoring the strength of our balance sheet and rebuilding our financial flexibility, following the Bestfoods acquisition.

As you see here, many of the milestones that we set ourselves have been achieved. But, after a promising start, including two good years of growth and market share gains in 2001 and 2002, our initial progress was not sustained. Our growth stalled. We began to lose share in places and, after reaching our goal of top-third TSR in 2003, we have dropped back to 13th out of our 21 peers by the end of 2004. At the end of Path to Growth, we're a long way from where we set out to be.

I shall now hand back to Patrick to take you through what we have learned, and what we're going to do about it.

Thank you, John. So, despite the progress we made under Path to Growth, the stark reality is that we have not succeeded where it matters, in the marketplace. The conclusion is simple -- we're not competing effectively enough to win in an increasingly tough business environment.

Turning to chart 9, why has Path to Growth not delivered the step change in our competitiveness that we sought? For three simple reasons.

First, we were boxed in by too many targets. We wanted to be transparent, but in doing so, we created a straitjacket for ourselves. When the business environment became more difficult, we were too mindful of short-term financial targets, and perhaps too slow to adjust our pricing and increase support investments.

Second, we have not played our portfolio to its full potential. Brands do not all have the same strengths, and focusing on big brands was absolutely right, but category leadership can rarely be realized through a single brand. I have seen several examples where we have neglected to play our brand portfolio to the full, across market segments and across price points.

Third, our execution has not always been good enough at the sharp end of the business, in our go to market operation and in our customer management. When we are at our best, we are world-class. But we are not always at our best.

I have visited a number of Unilever's customers in recent months. The feedback I invariably get during these visits is we're good, but not always as single-minded as we could be in pursuit of growth. We are not making the most of our successes because at times, we're too slow and too fragmented. We are not sufficiently focused on getting products on the shopping list and onto the supermarket shelves.

Recognizing our mistakes does not in any way undermine my faith in Unilever as a great company. While we have things to fix, we still have a business with tremendous inherent strengths, great people and a strong set of values.

As laid out in chart 10, we're undoubtedly a stronger business than we were five years ago. We have excellent market positions in the 13 categories in which we compete. We have a more focused portfolio, with 12 brands above EUR1 billion and nearly two-thirds of our sales coming from brands with sales in excess of EUR500 million. We have a deep understanding of our consumers, R&D capability that matches the best and strong brands that are the vehicle for delivering innovation to the consumers. Importantly, we now have much better capabilities to build great brands, and to leverage our brands and innovation across borders. We are exploiting our scale far better than before, as evidenced by significantly lower supply chain costs and improved capital efficiency. These strengths are real, but we need to direct them better.

Turning to chart 11, what are we now going to do differently in order to grow? We're going to take steps to improve our competitiveness, and we're going to change our organization to give us the focus and discipline we need to make this happen. Our number-one priority is to sustain an increased level of market aggression and get the business growing again.

We started back in September. We signaled our intent by announcing that we are increasing investment through more aggressive pricing and higher A&P spend. We are determined to sustain this aggressive level of support, and are therefore accelerating our savings program in order to fund the additional investment.

But improved competitiveness is not just about throwing money at the problem. We will also make sure that we spend our money effectively, and this means working our portfolio work harder, in three ways.

First, by doing more in the core of our business and less at the periphery. We will channel innovation and support investment towards strengthening what we have. Stretching into new areas is an important source of growth, but only if from a healthy base.

Second, by using all our brands more effectively to cover different price positions and different consumer segments.

Third, by exploiting the Vitality credentials of our brands to go after consumer growth hotspots within our existing Foods and HPC categories.

We will also sharpen our execution where it's needed, especially in our go-to-market operations. Our new organization is designed to reinforce this by improving our customer focus and accountability for delivery. I will say more on this in a minute.

Appropriate investment, intelligent portfolio management and excellent execution -- we know the formula works, because we have many examples of outstanding success that prove it. Let me highlight just three of these, starting with chart 12.

Our ProActiv cholesterol-lowering technology addresses a Vitality need, and it was launched under our Flora/Becel brand that had already a strong consumer franchise in heart health. It was rolled out quickly, both geographically and across relevant product forms. As a result, we have built a EUR300 million business in three years, contributing to growth in Flora/Becel of over 6 percent in 2004.

Turning to chart 13, in Deodorants, a ruthless category focus, combined with the intelligent exploitation of a portfolio of brands covering different consumer segments and price positions, has delivered organic growth of over 12 percent over the past five years, and a doubling of profits.

And lastly, on chart 14, in our US foods business, we successfully implemented a new go-to-market approach in 2003, with a minimum level of disruption. This has improved efficiency on investment and supported our innovation through 2004. The result has been a sustained improvement in topline growth.

Raising our competitiveness matters because if we do so, we generate sufficient growth to achieve our ambition of top-third total shareholder return. But how can we be confident that our existing portfolio can deliver the necessary growth? As set out in chart 15, Unilever's growth drivers remain unchanged.

First, Vitality. Consumers are changing. They are more knowledgeable and more concerned about how their choice of brands and products affects themselves, their families and their environment. Unilever's portfolio of brands and categories is ideally placed to benefit from these growth opportunities.

Second, D&E markets. Unilever already has over one-third of its sales in D&E countries, one of the largest footprints of any of the major consumer product companies in these high-growth markets. We have widespread strength across Latin America, Asia, Africa and in nearly all major developing countries. We have grown there consistently over many years, and with margins at close to the Unilever average.

Third, Personal Care. Well over one-quarter of Unilever's business is now in Personal Care, where our growth has averaged 6 percent per annum over the last five years. These categories are set to grow faster than consumer products as a whole.

At this point, I would like to make a few comments about Unilever as a Foods and HPC business. I know that this has been a subject of much discussion, and therefore I want to make my position clear. Our mission is to "Add Vitality to Life." This means meeting the everyday needs of consumers for nutrition, hygiene and personal care, with brands that help people feel good, look good and get more out of life. Our presence across both Food and HPC is central to the pursuit of this mission. It gives us an understanding of our consumers across the globe that is both broad and deep. It gives us scale where it matters, in fast-growing D&E markets, in Vitality science and technologies and in our voice with consumers and customers. It also lends weight to the Unilever brand, in the world where corporate citizenship is an increasing influence on the decisions of consumers, customers, regulators, investors and our other external stakeholders.

We are a Food and HPC business, not just because of operational synergies, but because it brings real strategic differentiation that we can an will exploit with our customers and with our consumers.

Moving to chart 16, against this background, we have reviewed the assumptions that underpin our financial model for the period 2005-2010. Last year, we said that we believe that our portfolio of categories and regions was capable of delivering volume growth averaging 3 percent per annum. We estimate that in 2004, the market-weighted volume growth rate was somewhat lower, at around 2.4 percent. In the longer term, however, we don't expect any significant change from the our previous estimates.

On pricing, we're now more cautious, as trends are harder to predict. With world inflation firmly in check, and no end in sight to the pressure from private label and hard discounting, we believe that pricing may be somewhat lower than our original forecast of plus 1 percent.

Taken together, this suggests that with our mix of geographies and categories, our market should grow in value in the region of 2 to 4 percent per annum. We have not achieved this level of sales growth over the past two years, not because our portfolio is inherently weak, but because we have been losing share in too many places.

It goes without saying that, going forward, we're planning to maintain market share, and in some places gain market share. In this way, we will grow at least in line with our markets, while setting ourselves the challenge to do better than this.

At this point, it is worth remembering that our financial model is based on organic growth. We will, of course, continue to seek improvement in our portfolio through tactical acquisition and disposals, but our main priority is to ensure that what we already have performs to its true potential.

We have a good track record for delivering savings from our global buying and restructuring activities. We have significant further opportunities going forward, and we may even be able to do better here than we originally anticipated. This should enable us to offset any price/cost under-recovery and increased investment behind our brands, albeit that margin development may be slightly slower, due to our more conservative view on pricing.

We enter 2005 with lower turnover and a lower operating margin than we anticipated a year ago, and therefore, a lower base from which to build. And as I have explained, our review of assumptions points to growth at the lower end of our previous estimate, as well as a slightly slower rate of margin development. Even without these changes, given that we report in Euros, currency movements alone have reduced our cumulative free cash flow over the next six years by some EUR2 billion.

So, taking all of these factors into account, what is realistic, but stretching targets of free cash flow and return on invested capital going forward? Value creation remains our overriding goal, and total shareholder return in the top one-third of our peer group is the yardstick by which we will continually measure our performance. To deliver this, we must grow our free cash flow from the current underlying rate of EUR4.2 billion per annum, while aggressively improving return on invested capital.

To achieve our original free cash flow target of EUR30 billion, we would need not only to perform at the highest level, which I am determined we will, but also for the business environment to be towards the top end of what we might reasonably expect. We therefore believe the range of between EUR25 and EUR30 billion for our cumulative free cash flow between now and 2010 to be realistic.

As far as return on invested capital is concerned, our lower base means that we do not expect to reach 17 percent by 2010, but we do expect a significant improvement between now and then.

Moving to chart 17 -- to deliver this level of financial performance, we need the right organization and leadership. Despite much that was achieved through Path to Growth, it is quite clear that aspects of our organization are now hindering our ability to execute. We are a considerably simpler business than we were five years ago, and the current organization has enabled us to focus and to leverage our global brands. However, we have not yet aligned our organization beyond this more streamlined business.

Our priority is growth, and we know what we need to do to make us competitive -- an organization to win; an organization that results in single-point accountability and responsibility, and therefore, faster decision-making and clear accountability for delivery; an organization that brings the consumer and the customer closer to the leadership; an organization that strikes the right balance between scale and market focus. We have already started to tackle this challenge at the operating company level, with the One Unilever simplification program we announced in July of last year. The changes we're announcing today bring one Unilever to its logical conclusion, by tackling the way Unilever is run above the operating company level.

There are two main features of the new organization, as detailed in chart 18. First, we will move to a non-executive Chairman and a Group Chief Executive. Last year, we established a majority of non-executive Directors on the Board, but we retained our dual chairmen/CEO model that has served us well for many years. The non-executive Directors have now fully replaced the need for two chairmen to provide the necessary checks and balances.

The Board has therefore decided that the Executive Committee of the Board and the dual chairmen will be replaced by a single non-executive Chairman and a single Group Chief Executive. Anthony will become non-executive Chairman of both Unilever NV and PLC, and as such, will no longer be involved in the day-to-day management of the business. It is expected that the position of Chairman will be filled in the course of 2007 by an independent non-executive Director.

I will become the new Group Chief Executive, with full accountability for all aspects of company operations and performance. At the same time, Bertrand Collomb will be appointed non-executive Vice Chairman of Unilever, while remaining our Senior Independent Director. We will start moving to these new roles immediately, and propose to make them formal at the annual general meeting in May.

But it is not only at the very top that we are making changes. Just as important are the fundamental changes that we're making to the way we organize ourselves below Board level. Thus, the second feature is the de-layering of the organization and the full integration of Foods and HPC in a single top executive team, with full accountability for all aspects of operations. ExCo and the divisions will be replaced by the executive team under me, combining the regional, category and functional leadership of our business, as shown in chart 19.

Three Regional Presidents will head up Europe, the Americas and Asia/Africa, and will drive growth across both Foods and HPC in their region. They will be profit-responsible, and will be single-mindedly focused on growth through excellent go-to-market execution and customer management. They will be responsible for leveraging Unilever-wide synergies in their regions.

The two Category Presidents, one for Foods and one for HPC, will be fully responsible for category strategies, brand development and innovation. By focusing responsibility for all innovation resources, marketing, development and research in the hands of the Category Presidents, they can leverage Unilever's global categories and brands to develop winning marketing mixes. Equally, they will free up the regions and operating companies to concentrate on what they need to do to take these winning mixes and make them count in their markets, with their customers and their local consumers.

We will thus have a structure that strengthens the focus on brand development, and at the same time strengthen the focus on customer and execution, where categories and regions will have distinct but complementary roles and accountabilities. These five Presidents, together with the Chief Financial Officer and the Head of HR, will sit on the Unilever executive chaired and run by me. The executive team will be charged with determining category and geographical priorities and managing business performance, growth, market share and profits.

You'll have seen the appointments that we announced this morning. The Board and I absolutely delighted with the balance of the new top leadership. This is a great team. It has a good mix of experiences, proven track records and complementary skills. Most importantly, we have the authority to act decisively and the accountability for delivery that I believe is necessary to get his business back to growth.

Turning now to our corporate structure in chart 20, our dual NV/PLC structure has created considerable value for our shareholders over the years, and there are still considerable benefits today from this structure. However, we need to be sure that our corporate structure is optimal, not only for today but also so as to give us the business and financial flexibility that we may need in the future. We will therefore conduct a thorough review of our corporate structure, with the intention of presenting any proposals to our shareholders at the AGM in May 2006.

As Chairman of the Board, Antony will lead a review. The review team will be made up of management, external advisers and two additional non-executive Directors. Any change in our corporate structure would be a complex process, and we will need to be very clear on the strength of the business case.

Turning to chart 21, our immediate objective for 2005 is to reverse to share loss we have suffered over the past 18 months or so, and return the business to growth. In setting out to do this, our plans are not predicated on a rapid turnaround in the business environment. In 2005, we expect markets to remain tough in Europe and North America, and no let-up in the level of competition we face in D&E markets. Against this background, we have set ourselves some clear short-term priorities for 2005.

Firstly, we must regain momentum in Europe. While topline growth is likely to remain modest until there is a pickup in our European markets, we will protect and build our market share in what is still our most important region.

Secondly, we will be driving harder and faster where we can build on our successes. I'm not going to go into details for competitive reasons, but you will not be surprised that our areas of focus will include Personal Care, D&E markets and Vitality.

Thirdly, we will accelerate our savings initiatives to free up the funds we need to invest in the marketplace.

And we will implement the organizational changes we have announced today as quickly as possible, but without compromise to short-term delivery in the marketplace.

Turning to chart 22, as we have said before, we will not be giving guidance for topline growth or EPS for 2005. It is clear, however, that 2005 will be a year of transition.

The actions we are taking are designed to regain the growth momentum that we lost during the last two years. Our 2005 plan requires an even stronger emphasis on innovation, higher support investment and keener pricing, which costs money. We expect a significant part of this investment to be funded by our savings program, including the benefits of One Unilever. We also expect some benefits from operational leverage from volume growth and better mix, as we grow higher-margin businesses.

As John mentioned earlier, our operating margin in Q4 was hit by a number of one-off costs, as well as the peaking of certain commodity-driven input costs. The year-on-year increasing commodity prices will still be a factor, especially in the first half of 2005.

We will be taking business restructuring, including gains or losses on disposals, to normal operating margin in 2005. We expect the net impact of this to be within our long-term range of 0.5 to 1 percent of sales.

It should be noted that the phasing of our sales in 2005 will be affected by our reporting calendar, with five extra days in Q1 and six less in Q4.

I will also remind you that Unilever will be reporting its 2005 results under IFRS. We will be restating our 2004 numbers on and IFRS basis, and will share these with the market before our Q1 results.

We will also post a full Q&A on the impact of IFRS on Unilever's results on our website. In considering the impact of IFRS on Unilever's results, it should be noted that we already provide our P&L on a before-amortization basis, and we have already adopted the tighter accounting standards on pensions and the costing of share options.

Finally, moving to chart 23, I would like to talk about how we're going to return value to shareholders. Through Path to Growth, we have considerably enhanced the cash-generating capability of Unilever, and we intend this to continue. How we use this cash is important to our shareholders. To achieve our top one-third TSR ambition, we need to maintain a competitive cost of capital, which in turn requires an appropriately geared balance sheet.

As of the end of 2004, we have restored financial flexibility, reduced net debt to below EUR10 billion and met our liquidity and interest cover targets. We now have a competitive balance sheet, and we continue to manage it consistent with a strong single-A credit rating. It therefore follows that we expect to generate surplus cash in 2005. We will apply this in a way that we believe creates the most value for our shareholders.

The first priority will be the payment of the increased dividends. Our second priority will be to convert the outstanding 5 Euro cent NV preference shares, as we announced this morning.

We have previously said that we would convert the preference shares in Q1 2005 without issuing new ordinary shares. In order to manage this in an orderly manner, the conversion will be carried out using NV stock already held by the Company. We currently hold these shares for ESOP hedging, and they will therefore have to be replenished to the extent required by buying shares in the open market.

Even after allowing for dividend payments and the effects of the preference share conversion, we believe that we should still have surplus cash flow during 2005. After considering the options, we believe that the most appropriate use for this cash will be a share buyback program. Barring any significant movements in exchange rates, we expect to start this by buying in up to EUR500 million of shares in 2005.

That ends a rather long presentation. We have shared a lot of new information with you today, and I am sure that you will have many questions. But before I move to the Q&A, I just would like to share a couple of personal (technical difficulty) and investors and other stakeholders. And of course, what I heard was a lot of frustration -- a lot of frustration because we don't like to be second or worse.

What I also saw is a lot of pride in Unilever -- a lot of pride in brands, in skills, in assets and people, a lot of pride in our value of standards, our assets and the role that we're going to play in the communities responsibly (ph). And I also sense a lot of energy and desire to leverage these and to be back.

Now, the profit warning was painful. It was the first in Unilever history. It was painful; it was difficult to swallow. But at the same time, it generate a lot of energy in the Company -- one, because we faced realities; and second, because we were very clear as to we set out to achieve and how we would be achieving it.

So, looking forward, 2005 will be of progress. We're not going to kick all the boxes (ph), but we're making progress and will be, I'm sure, in a much better place when I address you next year, leading from our strengths, capabilities. And I am confident we will have delivered better growth number, that we will receive back confidence in our ability to deliver and sustain shareholder value.

With that, let's move to Q&A, and John will explain that.

(OPERATOR INSTRUCTIONS). Kevin Holt, Van Kampen.

I was wondering, when you compare the margin structure of Unilever, given its mix of business between HPC and Food, it looks to have a relatively low margin compared to a lot of the US companies, where the HPC companies are in the low 20s and the food companies or kind of in the midteens area. Could you talk about Unilever's long-term potential, in terms of margin depreciation, that could possibly get them to more of a realistic level with the US companies, and what some of the factors are that would inhibit that from happening?

Thank you, Kevin. I would just like to say that Rudy Markham has joined us. And to welcome him, I'll pass that over to Rudy.

Your question was about margin growth and margin comparison between European companies and mainly US-based companies. You'll have seen that in our case, our margins on our food business and our HPC business are both very nearly the same -- Foods is actually slightly higher -- and they are both around 15 percent. If you look at the spread of margin across the business, then we have slightly higher margins in parts of our business in North America and in Europe, and, depending on where we are in Asia, we are around the average or slightly below.

We're aware that there are differences between the average margin of companies in North America, and also between the margins that we have in companies in Western Europe. We see a potential for growing our margins going forward, in both HPC and Foods across the world, and that is factored into, as you will have seen, the three main areas where we see strengths -- that we see as the core of our priorities as we go forward towards 2010. Those three areas are our portfolio around Vitality, which are products which have higher margins, better margins and better growth prospects; secondly, around our presence in developing and emerging markets, which continue to offer very long-term growth opportunity and progressive increase in margins; and thirdly, in our Personal Care portfolio, which has over the whole portfolio higher margins and also higher growth. And that's what we're focusing on as we go forward.

Alec Patterson, RCM.

Somewhat following up on that last question, but from a different angle, you put up a slide outlining how, in particular, some of the HPC categories you're in, you're a number-two or number-three player. And as you are well aware, that is not necessarily a position of strength, and in most cases, it's in a position of erosion to the overall fundamentals of the Company.

Has the assessment of being in that position of number two or number three, in particular, been raised to a higher level of -- maybe the hurdles need to be higher than they were before, or an increased level of scrutiny to why you're a player in those categories.

I think you are referring, Alec, to the chart which shows our worldwide position in categories. You'll appreciate that if you go behind that, you will find that in many markets around the world, we have number-one positions -- in some cases, very strong number-one positions. In some cases, in those markets, we have number-two positions, and sometimes we have number three.

So the aggregate world position is not a complete guide to the strength of our portfolio across the world. Our focus is very clear. Those areas where we are number one, in many markets in D&E, particularly across the breadth of our Home and Personal Care portfolio, we will continue to extend the lead that we have in those markets by growing both margin and volume. In those markets where we are number two, we will continue to work through innovation and through better execution, to which Patrick talked during the conference call, and improving our ability to challenge for the number-one position, building our portfolio provided we're satisfied that that growth is profitable in adds value to our overall business.

I just would like to add one point, which is what is critical, in order to survive as a number two, is that you have a very clearly differentiated positioning in the categories in which we operate. There must be absolute clarity as to what it is you are offering differently from a number one. And you can very often do pretty well in number-two position -- the challenger positioning. And that's what we average in the categories, and we're doing pretty well.

The objective of faster growth was to raise our game, both in terms of brand and in terms of category, whereby in the latter case of the category we have not done as well.

Can I just follow up? I would have to argue, though, the notion that most of the competition you have in those categories where you're number two or three are global players, and as such, isolating certain markets where you're number one or two regionally, and thus number two or three globally, doesn't make you in a better position, because you are going to deal with a company, a competitive set, that is going to portfolio manage their geographical base and footprint to play you as a number-three player. So I guess I would want to hear from you guys that you are increasingly scrutinizing a number-three position from a global perspective.

Yes, differently. We are looking category by category, and that's an exercise that we have reviewed very recently, together at the top level. We look at country by country, category by category, and review how well we are doing in each regional category in each local market, and ask ourselves what the strengths and weaknesses of each of the positioning, in terms of quality of the mix, in terms of the pricing, in terms of the consumer appeal. And there are cases where, indeed, we know a way to move to a much better position. There are other cases where we don't; and, where we don't, we will exit.

Let me just make one more point, if I may, which is just to reassure you that we play the global category game. And that's -- the organization change that was announced today is designed to reinforce that.

Secondly, since much of our business in HPC particularly -- more than half -- is in the D&E markets, where our positions are generally much stronger, they have faster growth rates. We see our opportunity to grow to where we are not yet number one, a much stronger opportunity, simply from the growth of the market.

(OPERATOR INSTRUCTIONS).

If there no more questions -- if there are any more questions, can we have them now? Otherwise, I would like to thank everybody for listening, and remind anyone that, if they have any questions, the IR department will stand ready to answer them over the next few days. Do we have any other questions?

No, sir, there are no further questions.

Fine. Thank you very much, everyone. Goodbye.

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 in today's presentation. You may now disconnect.