Prepared and filed by St Ives Burrups

As filed with the Securities and Exchange Commission on March 26, 2004

   

UNITED STATES

   
   
SECURITIES AND EXCHANGE COMMISSION
    
   
WASHINGTON, D.C. 20549
    
   
FORM 20-F
    
  (Mark One)
   
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
    
   
OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
   
OR
    
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   
   
THE SECURITIES EXCHANGE ACT OF 1934
   
   
For the fiscal year ended 31 DECEMBER 2003
    
   
OR
    
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   
   

THE SECURITIES EXCHANGE ACT OF 1934

   
   
For the transition period from ______________ to ______________
   
   
   
   
Commission file number 1-4546
    
   
   
   

UNILEVER PLC

   
   

(Exact name of Registrant as specified in its charter)

    
   

ENGLAND
    
   
(Jurisdiction of incorporation or organization)
    
   

UNILEVER HOUSE, BLACKFRIARS, LONDON, ENGLAND
    
   
(Address of principal executive offices)
    
   
   







  Securities registered or to be registered pursuant to Section 12(b) of the Act:    
 
 
  Title of each class Name of each exchange on which registered  
 
 
  American shares (evidenced by Depositary Receipts) New York Stock Exchange  
       
  each representing four Ordinary Shares of the nominal amount of 1.4p each    
 
 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
 None
(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)

 
 
  The total number of outstanding shares of the Registrant’s capital at the close of the period covered by the Annual Report was 2 911 458 580 ordinary shares  
 
 
  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  
     
 
  Yes                        No
 
     
 
Indicate by check mark which financial statement item the Registrant has elected to follow.
 
     
 
Item 17                Item 18
 
     
2003 Unilever Annual Report & Accounts
and Form 20–F
     

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Our corporate purpose
Our purpose in Unilever is to meet the everyday needs of people everywhere – to anticipate the aspirations of our consumers and customers and to respond creatively and competitively with branded products and services which raise the quality of life.

Our deep roots in local cultures and markets around the world are our unparalleled inheritance and the foundation for our future growth. We will bring our wealth of knowledge and international expertise to the service of local consumers – a truly multi-local multinational.

Our long-term success requires a total commitment to exceptional standards of performance and productivity, to working together effectively and to a willingness to embrace new ideas and learn continuously.

We believe that to succeed requires the highest standards of corporate behaviour towards our employees, consumers and the societies and world in which we live.

This is Unilever’s road to sustainable, profitable growth for our business and long-term value creation for our shareholders and employees.

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Contents
 
 
 
Report of the Directors  
General information 02
Key performance measures 04
Financial highlights 06
Chairmen’s statement 07
About Unilever 09
   Description of business 09
   Business structure 09
   Foods 09
   Home & Personal Care 09
   Other operations 10
   Corporate venture activities 10
   Technology and innovation 10
   Information technology 11
   Environmental responsibility 11
   Responsible corporate behaviour 12
   Competition 12
   Distribution and selling 13
   Exports 13
   Seasonality 13
   People 13
   Related party transactions 13
   Intellectual property 14
   Description of our properties 14
   Legal and arbitration proceedings and regulatory  
      matters 14
   Government regulation 14
Financial review 15
   Basis of reporting and discussion 15
   Reporting currency and exchange rates 15
   International Financial Reporting Standards 15
   Critical accounting policies 15
   Results – 2003 compared with 2002 16
   Results – 2002 compared with 2001 17
   Acquisitions and disposals 17
   Dividends and market capitalisation 18
   Balance sheet 18
   Cash flow 19
   Finance and liquidity 19
   Treasury 20
   Pensions investment strategy 20
   Total Shareholder Return (TSR) 20
   Significant changes 20
Operating review 21
Operating review by region 21
   Europe 21
   North America 23
   Africa, Middle East and Turkey 25
   Asia and Pacific 27
   Latin America 29
Operating review by category – Foods 31
   Savoury and dressings 32
   Spreads and cooking products 34
   Health & wellness and beverages 36
   Ice cream and frozen foods 38
Operating review by category – Home & Personal Care 40
   Home care 41
   Personal care 43
Risk management 45
Corporate governance 47
   Organisational structure of Unilever 47
   Legal structure of the Group 47
   Corporate governance developments 47
   Directors 47
   Advisory Directors 48
   Board Committees 48
   Requirements 49
   Auditors 50
Report of the Directors (continued)  
Relations with shareholders and other investors 51
   Reporting to shareholders 51
   Biographical details 52
      Directors 52
      Advisory Directors 52
      Business Presidents 53
      Corporate Officers 53
   Board changes 53
   Business President changes 53
Remuneration report 54
Remuneration report – policy 54
   Introduction 54
   Remuneration commentary 54
   Directors 55
      Remuneration policy 55
      Remuneration committee 55
      Remuneration package 55
      Other items 58
   Advisory Directors 59
Remuneration report – detailed information 60
Detailed information on Directors’ remuneration 2003 60
   Table of aggregate remuneration for Directors 60
   Table of remuneration for individual Directors 61
   Directors’ share matching plan 62
   Directors’ conditional share awards under  
        the TSR Long-Term Incentive Plan 63
   Directors’ share options 64
   Directors’ pensions 65
   Directors’ interests: share capital 66
   Summary information in respect of Directors  
      and Executive Officers 67
   Directors’ service contracts 67
   Advisory Directors 67
Report of the Audit Committee 69
   
Financial Statements  
Contents listing for financial statements 70
   
Shareholder information  
Control of Unilever 152
   Share capital 152
   Unity of management 152
   Equalisation Agreement 152
   More information about our constitutional documents 153
   General Meetings and voting rights 153
   Directors 154
   Mutual guarantee of borrowings 154
   Combined earnings per share 154
   Leverhulme Trust 154
   N.V. Nederlandsch Administratie- en  
      Trustkantoor (Nedamtrust) 155
   Material modifications to the rights  
      of security holders 155
Other shareholder information  
Analysis of shareholding 156
Information about exchange controls  
   affecting security holders 157
Nature of the trading market 157
Taxation for US residents holding shares in NV 159
Taxation for US residents holding shares in PLC 160
Dividends 161
Cross reference to Form 20-F 162
Glossary 163
Financial calendar and addresses 164
Website 165
Publications 165
Share registration 165

 

   
Unilever Annual Report & Accounts and Form 20-F 2003
01

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General information
 
 

The Unilever Group
Unilever N.V. (NV) is a public limited company registered in the Netherlands, which has listings of shares or certificates (depositary receipts) of NV on the stock exchanges in Amsterdam, New York, Frankfurt and Zürich.

Unilever PLC (PLC) is a public limited company registered in England which has shares listed on the London Stock Exchange and, as American Depositary Receipts, on the New York Stock Exchange.

The two parent companies, NV and PLC, together with their group companies, operate as nearly as is practicable as a single entity (the Unilever Group, also referred to as Unilever or the Group). NV and PLC and their group companies constitute a single group under Netherlands and United Kingdom legislation for the purposes of presenting consolidated accounts. Accordingly, the accounts of the Unilever Group are presented by both NV and PLC as their respective consolidated accounts.

Publications
This publication is produced in both Dutch and English and comprises the full Annual Report and Accounts for 2003 of NV and PLC. This document complies with the Netherlands and the United Kingdom regulations. It also forms the basis of the NV and PLC Annual Reports on Form 20-F to the Securities and Exchange Commission in the United States for the year ended 31 December 2003, and cross references to Form 20-F are set out on page 162. It is made available to all shareholders who request or elect to receive it, and on the website at www.unilever.com/investorcentre.

The separate publication, ‘Unilever Annual Review 2003’, containing a Summary Financial Statement with figures expressed in euros, with translations into pounds sterling and US dollars, is also published in Dutch and English. It is a short form document that is prepared in accordance with the United Kingdom regulations for Summary Financial Statements. The Unilever Annual Review 2003 is mailed to all registered shareholders and to other shareholders who are either entitled or have asked to receive it, and is also made available on the website at www.unilever.com/investorcentre.

Reporting currency and exchange rates
Details of key exchange rates used in preparation of these accounts are given on page 130, together with Noon Buying Rates in New York for the equivalent dates.

Basis of Discussion and Analysis
In parts of this document, notably the Chairmen’s statement on pages 7 and 8 and the review of operations by region and category on pages 21 to 44, discussion of performance is based on constant rates of exchange. This removes the impact of currency movements and more clearly portrays the underlying performance of the operations themselves. The constant rate used is the annual average rate for the prior year. For each two-year period, the year-on-year trends in euros are the same as those which would arise if the results were shown in sterling or US dollars at constant exchange rates.

Wherever used in this document, the abbreviation BEIA refers to profit measures before exceptional items and amortisation of goodwill and intangible assets. Unilever believes that reporting profit measures before exceptional items and amortisation of goodwill and intangible assets (BEIA) provides valuable additional information on underlying earnings trends to shareholders. The term BEIA is not a defined term under Netherlands, UK, or US Generally Accepted Accounting Principles (GAAP), and may not therefore be comparable with similarly titled profit measurements reported by other companies. It is not intended to be a substitute for or superior to GAAP measurements of profit.

Operating profit BEIA is a key metric used by management and investors to measure the progress of Unilever’s Path to Growth strategy which commenced in 1999 and will conclude at the end of 2004. At the beginning of the Path to Growth, Unilever communicated to investors its targets for the programme, including a target based on earnings measured on a BEIA basis. Unilever’s internal performance targets and management information are also measured on a BEIA basis. As such, Unilever believes that the communication and explanation of measures BEIA is essential in order for readers of Unilever’s financial statements to understand fully the performance of Unilever and progress towards Path to Growth targets.


 

02
Unilever Annual Report & Accounts and Form 20-F 2003

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General information
 
 

In our reporting, Turnover comprises Group turnover plus the Group share of turnover of joint ventures, net of the Group share of any sales to the joint ventures already included in the Group figures, but does not include our share of the turnover of associates. Operating profit comprises Group operating profit plus our share of operating profit of joint ventures. This measure does not include our share of the operating profit of associates. References to turnover growth include the effects of acquisitions and disposals. Underlying sales growth reflects the change in revenue excluding the effects of acquisitions and disposals. We believe this measure provides valuable additional information on the underlying performance of the business.

Leading brand growth is a subset of underlying sales growth and measures the change in revenue arising from our leading brands. Leading brand growth is a key metric used to measure the progress of the Path to Growth programme.

Return on invested capital is profit after tax but excluding net interest on net borrowings (excluding joint ventures and associates interest) and amortisation of goodwill and intangible assets (excluding joint ventures and associates amortisation) both net of tax, divided by average invested capital for the year. Invested capital is the sum of tangible fixed assets and fixed investments, working capital (stocks, debtors and trade and other creditors due within one year), goodwill and intangible assets at gross book value and cumulative goodwill written off directly to reserves under an earlier accounting policy.

Ungeared free cash flow is defined as cash flow from group operating activities, less capital expenditure and financial investment and less a tax charge adjusted to reflect an ungeared position.

Tables reconciling certain of these measures to the statutory measures included in the Financial Statements are shown on page 4 and 5 and throughout the section entitled ‘Operating review’ on pages 21 to 44.

€
  

is used in this report to denote amounts in euros.
£
  

and p are used in this report to denote amounts in pounds sterling and pence respectively.

Fl. is used in this report to denote amounts in Dutch guilders.

$ is used in this report to denote amounts in United States dollars, except where specifically stated otherwise.

The brand names shown in italics in this report are trademarks owned by or licensed to companies within the Unilever Group.

Cautionary statement
This Annual Report & Accounts and Form 20-F may contain ‘forward-looking statements’ within the meaning of the US Private Securities Litigation Reform Act of 1995. Words such as ‘expects’, ‘anticipates’, ‘intends’ and other similar expressions of future performance or results are intended to identify such forward-looking statements. These forward-looking statements are based upon current expectations and assumptions regarding anticipated developments and other factors affecting the Group. Because of the risks and uncertainties that always exist in any operating environment or business, the Group cannot give any assurance that the expectations expressed in these statements will prove correct. Actual results may differ materially from those included in these statements due to a variety of factors, including, among others, competitive pricing and activities, consumption levels, costs, the ability to maintain and manage key customer relationships and supply chain sources, currency values, interest rates, the ability to integrate acquisitions and complete planned divestitures, physical risks, environmental risks, the ability to manage regulatory, tax and legal matters and resolve pending matters within current estimates, legislative, fiscal and regulatory developments, and political, economic and social conditions in the geographic markets where the Group operates. The Group undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise, and you are cautioned not to place undue reliance on these forward-looking statements.

Risks and uncertainties that could cause actual results to vary from those described in our forward-looking statements include those given under the sections entitled ‘About Unilever’ on pages 9 to 14, ‘Financial review’ on pages 15 to 20, ‘Operating review’ on pages 21 to 44, and ‘Risk management’ on pages 45 and 46, to which you should refer.


 

Unilever Annual Report & Accounts and Form 20-F 2003
03

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Key performance measures
(including reconciliation to GAAP measures)

Amounts reported in 2002 and 2001 have been restated following changes in our accounting policy for pensions and other post-employment benefits and in our accounting policy for share-based payments. See note 17 on page 99 and note 29 on page 116.

Key performance measures 2003 compared with 2002
  € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
              Restated          
                         
Group turnover 47 421   (4 728 ) 42 693   48 270   (12)%   (2)%  
Group operating profit 6 014   (531 ) 5 483   5 007   10%   20%  
 
                         
Turnover 47 700   (4 758 ) 42 942   48 760   (12)%   (2)%  
 
Operating profit BEIA 7 501   (729 ) 6 772   7 054   (4)%   6%  
Exceptional items (137 ) 37   (100 ) (702 )        
Amortisation – goodwill and intangible assets (1 298 ) 155   (1 143 ) (1 261 )        
 
Operating profit 6 066   (537 ) 5 529   5 091   9%   19%  
 
Operating margin 12.7%       12.9%   10.4%          
Operating margin BEIA 15.7%       15.8%   14.5%          
 
Interest and other finance income/(cost) (1 213 ) 200   (1 013 ) (1 065 )        
Taxation (1 656 ) 129   (1 527 ) (1 605 )        
 
Net profit BEIA 4 277   (354 ) 3 923   3 902   1%   10%  
Exceptional items in net profit (96 ) 29   (67 ) (550 )        
Amortisation – goodwill and intangible assets net of tax (1 239 ) 145   (1 094 ) (1 216 )        
 
Net profit 2 942   (180 ) 2 762   2 136   29%   38%  
 
EPS – per €0.51 ordinary NV share (euros) 3.01   (0.19 ) 2.82   2.14   32%   40%  
EPS – per 1.4p ordinary PLC share (euro cents) 45.12   (2.79 ) 42.33   32.16   32%   40%  
EPS BEIA – per €0.51 ordinary NV share (euros) 4.39   (0.37 ) 4.02   3.95   2%   11%  
EPS BEIA – per 1.4p ordinary PLC share (euro cents) 65.79   (5.48 ) 60.31   59.27   2%   11%  
 
 
Key performance measures 2002 compared with 2001
  € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
  Restated       Restated   Restated          
                         
Group turnover 51 499   (3 229 ) 48 270   51 514   (6)%   0%  
Group operating profit 5 314   (307 ) 5 007   4 946   1%   7%  
 
                         
Turnover 52 020   (3 260 ) 48 760   52 206   (7)%   0%  
 
Operating profit BEIA 7 533   (479 ) 7 054   7 032   0%   7%  
Exceptional items (767 ) 65   (702 ) (579 )        
Amortisation – goodwill and intangible assets (1 364 ) 103   (1 261 ) (1 423 )        
 
Operating profit 5 402   (311 ) 5 091   5 030   1%   7%  
 
Operating margin 10.4%       10.4%   9.6%          
Operating margin BEIA 14.5%       14.5%   13.5%          
 
Interest and other finance income/(cost) (1 180 ) 115   (1 065 ) (1 604 )        
Taxation (1 693 ) 88   (1 605 ) (1 519 )        
 
Net profit BEIA 4 133   (231 ) 3 902   3 380   15%   22%  
Exceptional items in net profit (593 ) 43   (550 ) (329 )        
Amortisation – goodwill and intangible assets net of tax (1 316 ) 100   (1 216 ) (1 371 )        
 
Net profit 2 224   (88 ) 2 136   1 680   27%   32%  
 
EPS – per €0.51 ordinary NV share (euros) 2.23   (0.09 ) 2.14   1.66   29%   35%  
EPS – per 1.4p ordinary PLC share (euro cents) 33.51   (1.35 ) 32.16   24.86   29%   35%  
EPS BEIA – per €0.51 ordinary NV share (euros) 4.19   (0.24 ) 3.95   3.39   17%   24%  
EPS BEIA – per 1.4p ordinary PLC share (euro cents) 62.81   (3.54 ) 59.27   50.80   17%   24%  
 

The tables above present financial information at both constant and current exchange rates. The basis of calculating performance at constant rates is explained on page 2.

04
Unilever Annual Report & Accounts and Form 20-F 2003
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Key performance measures        
(including reconciliation to GAAP measures)        
         
         
Turnover and underlying sales growth        
(at constant exchange rates)        
  2003   2002  
  vs 2002   vs 2001  
 
Underlying sales growth (%) 1.5   4.2  
Effect of acquisitions (%) 0.6   0.3  
Effect of disposals (%) (4.3 ) (4.8 )
Turnover growth (%) (2.2 ) (0.4 )
 

Return on invested capital
Return on invested capital is profit after tax but excluding net interest on net borrowings (excluding joint ventures and associates interest) and amortisation of goodwill and intangible assets (excluding joint ventures and associates amortisation) both net of tax, divided by average invested capital for the year. Invested capital is the sum of tangible fixed assets and fixed investments, working capital (stocks, debtors and trade and other creditors due within one year), goodwill and intangible assets at gross book value and cumulative goodwill written off directly to reserves under an earlier accounting policy.

  € million   € million  
  2003   2002  
 
      Restated  
Profit on ordinary activities after taxation 3 011   2 448  
Add back interest expense (excluding joint ventures and associates) net of tax 569   753  
Add back amortisation of goodwill and intangible assets (excluding joint ventures and associates) net of tax 1 086   1 197  
 
 
 
Profit after tax, before interest and amortisation of goodwill and intangible assets 4 666   4 398  
 
 
 
         
Year end positions for invested capital:        
Tangible fixed assets and fixed investments 6 854   8 115  
Stocks 4 175   4 500  
Debtors 5 881   6 571  
Trade and other creditors due within one year (9 640 ) (11 018 ) 
Goodwill and intangible assets at gross book value 21 202   22 948  
 
 
 
Total 28 472   31 116  
         
Add back cumulative goodwill written off directly to reserves 7 262   7 397  
 
 
 
Year end invested capital 35 734   38 513  
 
 
 
         
Average invested capital for the year 37 377   44 735  
         
Return on average invested capital % 12.5%   9.8%  
 

Ungeared free cash flow
Ungeared free cash flow is cash flow from group operating activities, less capital expenditure and financial investment and less a tax charge adjusted to reflect an ungeared position, all expressed at current exchange rates.

  € million   € million   € million   € million   € million   € million  
  2003   2003   2002   2002   2001   2001  
 
Cash flow from group operating activities     6 780       7 883       7 497  
Less capital expenditure and financial investment     (1 024 )     (1 706 )      (1 358 ) 
Less tax charge adjusted to reflect an ungeared position:                        
   Taxation on profit on ordinary activities (1 527 )     (1 605 )      (1 519 )     
   Tax relief on interest and other finance income/(cost)                        
      – pensions and similar obligations (290 ) (1 817 ) (362 ) (1 967 )  (545 ) (2 064 ) 
 
 
 
 
 
 
 
Ungeared free cash flow     3 939       4 210       4 075  
 

Return on invested capital and ungeared free cash flow are presented as we believe that these ratios are the best indicators of our approach to value creation.

Unilever Annual Report & Accounts and Form 20-F 2003
05
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Financial highlights
at current rates of exchange

 


 

Combined earnings per share and dividends per share(a)                    
  Ordinary €0.51 shares of NV (b)   Ordinary 1.4p shares of PLC  
  2003 2002 2001   2003   2002   2001  
 
 
Basic earnings per share (euros) €2.82 €2.14 €1.66   €0.42   €0.32   €0.25  
Effect of exceptional items net of tax €0.07 €0.56 €0.34   €0.01   €0.08   €0.05  
Effect of amortisation of goodwill and intangible assets net of tax €1.13 €1.25 €1.39   €0.17   €0.19   €0.21  
Basic earnings per share BEIA (euros) €4.02 €3.95 €3.39   €0.60   €0.59   €0.51  
 
 
Basic earnings per share (pence)         29.26 p 20.19 p 15.46 p
Effect of exceptional items net of tax         0.73 p 5.31 p 3.13 p
Effect of amortisation of goodwill and intangible assets net of tax         11.70 p 11.72 p 13.01 p
Basic earnings per share BEIA (pence)         41.69 p 37.22 p 31.60 p
 
 
Diluted earnings per share (euros) €2.74 €2.08 €1.61   €0.41   €0.31   €0.24  
Diluted earnings per share (pence)         28.40 p 19.59 p 15.05 p
 
 
Dividend per share (euros) €1.74 €1.70 €1.56              
Dividend per share (pence)         18.08 p 16.04 p 14.54 p
 
 

Combined earnings per share and dividends per share for shares traded on the New York Stock Exchange (on a UK GAAP basis) in US dollars(a)

  New York €0.51 shares of NV(b)   5.6p American Depositary Receipts of PLC
  2003 2002 2001   2003 2002 2001
 
Basic earnings per share $3.18 $2.02 $1.48   $1.91 $1.21 $0.89
Effect of exceptional items net of tax $0.08 $0.53 $0.30   $0.05 $0.32 $0.18
Effect of amortisation of goodwill and intangible assets net of tax $1.27 $1.16 $1.25   $0.76 $0.70 $0.75
Basic earnings per share BEIA $4.53 $3.71 $3.03   $2.72 $2.23 $1.82
 
Diluted earnings per share $3.08 $1.96 $1.44   $1.85 $1.17 $0.87
 
Dividend per share(c)(d) $2.15 $1.85 $1.42   $1.31 $1.02 $0.85
 
               
(a)
 		 Operating profit, operating profit BEIA and all earnings per share measures for 2001 and 2002 have been restated following changes in our accounting policy for pensions and other post-employment benefits and in our accounting policy for share-based payments. See note 17 on page 99 and note 29 on page 116.
(b) For NV share capital, the euro amounts shown above and elsewhere in this document are representations in euros on the basis of Article 67c of Book 2 of the Civil Code in the Netherlands, rounded to two decimal places, of underlying share capital in Dutch guilders, which have not been converted into euros in NV’s Articles of Association. Until conversion formally takes place by amendment of the Articles of Association, the entitlements to dividends and voting rights are based on the underlying Dutch guilder amounts.
(c) Rounded to two decimal places.
(d)   Actual dividends payable for 2003 on NV New York shares and American Depositary Receipts of PLC may differ from those shown above, which include final dividend values calculated using the rates of exchange ruling on 11 February 2004 (€1.00 = $1.2668, £1.00 = $1.8703).

 

06
Unilever Annual Report & Accounts and Form 20-F 2003

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Chairmen’s statement

Our mission is to add vitality to life. We meet everyday needs for nutrition, hygiene, and personal care with brands that help people feel good, look good and get more out of life.

 

2003 in context
In a difficult year, we are pleased to have achieved 11% growth in earnings per share (BEIA). We have now met or exceeded our target of low double-digit earnings per share growth in every year of the Path to Growth programme and this year’s performance places our three-year Total Shareholder Return (TSR) in the top third of our peer group. We fully intend to continue this performance as we enter the final year of Path to Growth.

Leading brands grew by 2.5%, and operating margin (BEIA) rose to a record 15.7%, a gain of 1.2% over 2002. Naturally, we are disappointed with revenue growth, but the shortfall against our top-line growth target is mainly due to specific issues in a small number of businesses and a slow start to the year in North America caused by sharp de-stocking in the retail trade. In Europe consumer confidence dropped to levels not seen in recent years.

Nevertheless, we have continued to increase investment in our brands and have maintained our market position. Once again, we have been extraordinarily well served by skilled and dedicated people in all parts of the business and we extend our thanks to them on behalf of all shareholders.

A review of Path to Growth
Path to Growth was designed to simplify the business and release resources to be put behind fewer, bigger brands. It is all too easy to lose sight of what we have achieved. By the close of 2004, with one exception, we intend to have met or substantially exceeded the very challenging milestones we set the business.

The rationalisation of our manufacturing capacity and our supply chain is nearing completion. We have charged €5.4 billion of restructuring costs, which is in line with our €6.2 billion target. With one year still to go we have comfortably exceeded our promised Path to Growth savings of €3.9 billion and our operating margin (BEIA) has already risen from 11.1% to 15.7%.

Capital efficiency has improved by almost 9%, 3% more than target. Ungeared free cash flow has totalled €16.4 billion since the start of Path to Growth and net debt reduction is ahead of plan having reduced from €26.5 billion at the end of 2000 to €12.6 billion at the end of 2003 at current rates of exchange.

In addition, we have seamlessly integrated €30 billion of acquisitions, managed over €7 billion of disposals and implemented a divisional structure to harness our global scale yet retain a spirit of local enterprise.

We are on track to reduce the brand portfolio from 1 600 to 400 leading brands. They now account for 93% of sales as against only 75% in 1999. We have significantly increased investment behind these brands and we now have twelve brands with sales of over €1 billion compared with four at the start of the strategy.

The exception of course is top-line growth where, after excellent performances in 2001 and 2002, we have this year fallen short against our aspirations in testing market conditions. Nevertheless, leading brands have grown at an average of over 4% per year during Path to Growth to date.

Overall the business today is lean, sharply focused, high margin, strongly cash generating and delivering significant incremental value each year.

Foods division
In Foods, leading brand growth was 1.2%. Operating margin (BEIA) improved by 1.8% to 16.0%. We made significant progress on reducing the tail and on migrating and rationalising the brands.

Lipton had an outstanding year, boosted by new launches and a good summer in Europe which also benefited ice cream. At the same time the hot summer also reduced market growth in savoury, but Knorr held position. Bertolli and Hellmann’s continue to make good progress.

Slim•Fast declined by 21% and the focus is now on restoring the brand to growth. In frozen foods we continue to make gains in profitability, but have yet to see a consistent pattern of growth. Becel/Flora grew strongly once again, but the family spreads had a tough year in a market affected by price competition and low butter prices.


 

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Chairmen’s statement
(continued)

 

Home and Personal Care division (HPC)
Leading brands continued to drive growth in the Home and Personal Care division at 4.2%. Operating profit (BEIA) rose by 4.9% and operating margin (BEIA) reached 15.8%.

Mass personal care is now a powerhouse in the HPC division and accounts for 27% of Unilever leading brand sales. We achieved double-digit growth for Axe, Lifebuoy, Lux, Rexona and Sunsilk, and our largest personal care brand, Dove, grew by an outstanding 21%.

Growth in laundry was flat as we put the priority behind value creation through excellent improvements in our margins and capital efficiency. Household care had a difficult first half year, but we saw the new strategy of stronger innovations on the core brands start to bite in the second half.

Prestige fragrances diluted the growth rate of the division by 1%.

The year ahead and Unilever 2010
In 2004, our first priority is to deliver on our promises in the final year of Path to Growth. We intend once again to achieve low double-digit earnings BEIA growth and will focus all the talent and ingenuity of our people on delivering in full our commitments on brand focus, margin improvement and capital efficiency. We will end the year a much stronger and more agile and focused business than at the start of the programme.

Yet as we complete Path to Growth we are also preparing Unilever for the next phase of our strategy to 2010. The Board has conducted a thorough review of the forces that will shape Unilever’s world, and of what makes us unique as a business.

Our roots in hygiene, nutrition and personal care mean that people all over the world choose our brands 150 million times every day for the benefits they bring in helping them feel good, look good and get more out of life. We know that these are benefits that are wanted by more and more of the world’s population – from those just entering the ‘consumer society’ to the more affluent, ageing, health conscious citizens of the developed world. We sum this up in the single word, “Vitality”, and intend the mission of Unilever, which is set out at the top of this letter, to be to add vitality to life through our brands, our people and the communities we serve.

Our consumers are also citizens and demanding ever higher standards of corporate behaviour. We are proud of our reputation for governance, transparency and engagement with communities and the environment, and believe that the Unilever name is a valuable asset. By the time we celebrate our 75th birthday in mid 2005, the Unilever name will be present on our packs as well as letterheads and company signs.

For the period 2005-10 our priority continues to be sustained top-third TSR performance and we intend to deliver shareholder value by the generation of over €30 billion of ungeared free cash flow and growth in economic profit, the latter translating into an increased return on invested capital from 12.5% in 2003 to at least 17% by 2010.

The overall objective is to build our brands and to build sustainable value. We will continue to be flexible in how we pull the levers of value creation as challenges and opportunities arise from time to time. So we will not commit Unilever to any one combination of sales and margin growth in any one year. However, our ambitions for value creation are underpinned by the expectation of sustained revenue growth, continued margin expansion and further improvements in capital efficiency.

In the combination of trusted brands, talented people and an inspiring mission we believe that Unilever is a stronger business than it has ever been.

 

 

 

Antony Burgmans Niall FitzGerald KBE
Chairmen of Unilever

 

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About Unilever

 

The figures quoted in the following discussion on pages 9 to 14 are in euros, at current rates of exchange, ie the average or year-end rates of each period.

Description of business
Unilever is the world’s leading supplier of fast moving consumer goods across foods, home and personal product categories. Unilever’s portfolio includes some of the world’s best known and most loved brands.

Business structure
Our operations are organised into two global divisions – Foods and Home & Personal Care (HPC) – headed by Divisional Directors. This structure allows the appropriate focus on foods and home & personal care activities at both regional and global levels and allows us to optimise synergies across the product portfolio.

The two divisions’ operations are organised into business groups on a regional basis, with certain exceptions: the global businesses of Prestige, our fragrance business within HPC, and within Foods, Ice Cream and Frozen Foods, Slim•Fast Worldwide and UBF Foodsolutions. The regional and global businesses are headed by Business Presidents. These businesses remain the driving force behind Unilever, comprising the operating companies which provide the key interface with customers and consumers, allowing quick response to the needs of local markets.

Full details of significant acquisitions and disposals can be found on pages 17 and 18.

Foods
Savoury and dressings
We are the global leader in savoury and dressings, with strong brands rooted in chefmanship and taste, including Knorr, Hellmann’s, Calvé, Wishbone, Amora and Bertolli.

Our leading savoury brand, Knorr, is Unilever’s biggest brand, and is sold in over 100 markets. Its product range includes soups, bouillons, sauces, snacks, noodles, frozen food and meal solutions. Our wider savoury product range is marketed around the world under a variety of brand names. Our combined dressings business is the biggest in the world. With Bertolli, which began as a leading Italian olive oil brand, we are building on the qualities associated with Italian food to extend the brand into spreads, dressings and pasta sauces.

Spreads and cooking products
We lead the spreads and cooking products category with two key brand families with increasingly consistent positionings around the world. Healthy Heart brands Becel and Flora deliver strong growth through health benefits enabling people to enjoy life to the full. Family brands including Rama, Blue Band and Country Crock are building a positioning based on tasty, nutritious foods for the family.

Health & wellness and beverages
Consumers increasingly demand healthier options in their food and drinks. We respond with products and brands across our portfolio including Slim•Fast, whose range includes meal replacement drinks, soups and snack bars. In developing and

emerging markets, we meet consumers’ needs for good nutrition in affordable formats with Annapurna and, under AdeS, a range of tasty, nutritional, soy-based drinks.

We lead the market in tea-based beverages with Lipton, the global market leader in leaf and ready-to-drink tea. Innovations including Lipton Ice Tea Green and Lipton Fusion target the growing market for healthy, refreshing beverages. A new joint venture, the Pepsi Lipton International partnership, will help us to extend the reach of our brands through a distribution network complementary to our own supply chain.

Ice cream and frozen foods
We are the world’s leading producer of ice cream, with sales in more than 40 countries. Ice cream products under the Heart brand, including Cornetto, Magnum, Carte d’Or and Solero, are sold internationally. Breyers, Ben & Jerry’s, Klondike and Popsicle are leading North American-based brands. Ben & Jerry’s is also sold in Europe.

Our frozen foods business is number one in Europe, focused on the Birds Eye/Findus brand family and Iglo.

UBF Foodsolutions
Although not a separate reporting category as its results are reported within the categories above, UBF Foodsolutions is our global food service business providing solutions for professional chefs and caterers. For example, it provides pre-prepared ingredients that save time and new ways of serving food on a large scale at consistent quality.

Home & Personal Care
Home care
We are market leaders in laundry products in developing and emerging markets, with number two positions in North America and most of Europe. Our products have been developed to meet the diverse requirements of consumers to clean and care for their clothes. They include tablets for convenience, traditional powders and liquids for washing by hand or machine, and for soaking. In developing and emerging markets, tailored products, including soap bars, are available for lower income consumers.

Our brands are available in over 100 countries, many of them holding leading market positions. They include Comfort, Omo, Radiant, Skip, Snuggle and Surf.

In household care, our products are designed to tackle most cleaning and hygiene needs around the home. In this category we are strongest in Europe, where Cif and Domestos hold leading positions in the key markets in which they operate.

Personal care
We lead the global skin cleansing and deodorants markets, and are in the top three in daily hair care and mass-market skin care. Six global brands – Axe, Dove, Lux, Pond’s, Rexona and Sunsilk – form the core of our business in these categories, each with its own distinctive character. These brands are complemented by others such as Suave, principally in North America, together with ‘health brands’ such as Clear, Lifebuoy and Vaseline and regional/local ‘jewels’.


 

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We have an important market share in oral care, with products sold widely, predominantly under the Signal brand with Close Up playing a complementary role.

We also have a global prestige fragrance business with the Calvin Klein range (including cK one, Eternity and Obsession) and ranges developed with other designers.

Other operations
To support our consumer brands, we have invested in tea plantations in India, Kenya and Tanzania and palm oil plantations in the Democratic Republic of Congo, Côte d’Ivoire and Ghana.

Corporate venture activities
We are investing €170 million, over three years (2002-2004), in venturing activities to build business opportunities that fit our core business interests in Foods and Home & Personal Care. Of this, we have committed €97 million to Langholm Capital Partners Fund, which completed fundraising in 2003, raising a total of €242 million. This fund invests in private European companies with above-average longer-term growth prospects. It has invested in Physcience, a French natural food supplements business, and Noiro, the leading company in the mass prestige personal care market in Finland.

Up to €70 million will be invested over the three years, in two venture funds of our own, Unilever Ventures and Unilever Technology Ventures. Unilever Ventures acts as an early stage business development fund for businesses both from within Unilever and from outside. It has invested in Persil Services, a laundry and dry-cleaning business in the UK, Pond’s Beauty Centres in Spain and Insense, a technology spin-out from Unilever. Unilever Technology Ventures invests in technology funds and start-up companies. It has invested in NGEN material science fund, Burrill life science fund and in Perlegen, a start-up company working with the human genome.

As of 31 December 2003 we have invested €59 million in all our venture activities.

Technology and innovation
To support our Path to Growth strategy we continue to focus research and development on select, global projects to reinforce our leading brands. Our network of Global Innovation Centres continues to develop these brands and to accelerate their growth across sectors and regions.

In 2003, we spent €1 065 million (2002: €1 166 million; 2001: €1 178 million) on research and development – 2.5% of our turnover. We have further strengthened our interactions with academia and start-up companies, which will help us to identify hotspots in science and technology and develop radical capabilities for our businesses through the application of these technologies. One such example is our interaction with Perlegen, which is a genomics start-up company based in California with whom we are exploring the application of this new science to open up novel avenues for detailed investigation within our R&D programmes.

The Foods division took major initiatives to focus its innovation programme on health and wellness and introduced a range of innovations into the marketplace. As part of the Knorr brand extension into the frozen food category, a new range of premium quality soups were launched in Belgium, France and Germany during October 2003. The new soups are well positioned to address consumers’ increasing concerns about nutrition, as they are full of chunky, natural, fresh vegetables. We continued the roll-out of mealkits in Europe with an introduction in five new countries including Germany. Knorr also innovated within its core with a host of seasoning launches in developing and emerging countries, particularly in China, Malaysia, Turkey and the Caribbean. We entered the large European cream market with three varieties of dairy cream alternatives. Under Lipton we introduced Lipton Ice Tea Green, a refreshing ice tea extending the brand into the exciting green tea segment. In ice cream, innovations such as Magnum 7 Sins, Magnum Moments, Magnum Sandwich and Carte d’Or Origin and Carte d’Or Fruit & Fresh as well as new Cornetto variants stimulated the ice cream Heart brand. Slim•Fast introduced a full programme of innovations at the end of 2003 in line with its new positioning as a plan. It addresses the key consumer needs for weight loss, with the launch of hot, savoury meal replacements, soups and pasta, low-carbohydrate shakes and bars, as well as high-protein bars and ice cream. In the Hellmann’s and Calvé brands, key innovations addressed the growing snacking opportunity and included the roll-out of the Idaho snack sauces in the UK and Central Europe. Calvé chilled salad dressings were introduced in the Netherlands and fresh Amora yoghurt mayonnaise in France. In Europe Bertolli has launched a range of products such as pasta sauces, salad dressings and vegetable toppings for bread. The main 2003 innovations for the Iglo, Birds Eye and Findus brand family focused in four areas: launching microwaveable Steam Fresh vegetables and fish recipe dishes launched in Europe; authentic, premium, fresh egg pasta meals launched in Italy; the relaunch of Sofficini (fun, light, family snacks) in Italy; and within the platform of kids’ nutrition, launches of chicken dishes and complete meals for kids. UBF Foodsolutions launched a range of dairy cream alternatives in Europe.

In Home & Personal Care, the focus has continued to be on global projects in support of our leading brands. Key developments in personal care have included the Dove exfoliating bar and face care range and the roll-out of Dove moisturising shampoo and conditioner. The Sunsilk relaunch in Asia was underpinned by new consumer-preferred packaging. The growth of other key personal care brands was driven by a new bar range for Lux, a low deposit formulation for Rexona and a male range for Rexona and Degree. The launch of Axe Dry in Western Europe, Latin America, North America and the Philippines was very successful. In Home Care we launched a new core cleaning innovation and a new bar for Omo and an aloe vera version of Skip in Europe. We relaunched Cif cream globally and we launched Comfort Fast Dry in Europe. In 2003, a new research laboratory was opened in China in support of our business in this important region and investment has now begun on a multidisciplinary skin care innovation centre in Trumbull, Connecticut in the US.


 

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In total, Unilever filed 397 new patent applications. While some innovations made a significant contribution in 2003, the benefits of others will be felt during 2004.

Information technology
In 2003 we continued to direct our IT towards achieving Unilever’s strategic objectives.

We further simplified business processes and core transaction systems, using IT to enable a simpler and more agile business. In Western Europe, almost all our Home & Personal Care business is now operating with common processes, supported by common information and SAP systems, as are the Foods businesses in the larger European markets. Similarly, much of our business in sub-Saharan Africa has moved to common processes and systems for supply chain and finance. In North America, we deployed a single system from point of order to cash settlement across the Home & Personal Care business, improving operational efficiency and raising customer service levels.

Our Latin American business continued to roll out common finance and supply chain processes, information and systems across the region, and started an IT-enabled programme to simplify human resources processes. A single system (Siebel) has been introduced for customer relationship management, enabling the roll-out of good practices in field sales, key account management and trade marketing operations. We have also deployed Siebel in our Foodsolutions businesses in Europe and North America, with further roll-out under way in consumer foods in Europe.

In Asia, we began implementing Siebel decision support systems for trade marketing investments, with completion across the region scheduled for 2004. We have also rolled out the standard Unilever data warehouse in six countries so far, with at least four more Asian markets to follow in 2004. This system, firmly based on information standards, provides our sales operations with better quality and more timely information than ever before.

Following the signing of our global contract with British Telecom (BT), we are targeting a 20% reduction in our telecommunications costs, by reducing the number of our suppliers around the world from 400 to one. For Unilever IT this is the first implementation of such a contract on a global scale and has resulted in a high level of learning for both organisations. This complex project is on track, with BT now providing voice, mobile and data services for more than half of our business.

During 2003 work started on the simplification of our IT server base. This will involve a significant reduction in the number of servers as well as increased performance and utilisation. This work is fundamental to the IT strategy and will continue over the next two years.

Our global e-business gateway, the Unilever Private Exchange, strengthens our e-business capability by providing secure links between our operating companies and our suppliers’ and customers’ systems and to external electronic marketplaces. By year-end, the volume of customers’ orders being transacted through the gateway had reached the annual equivalent of €2 billion.

Our Ariba online buying system enables purchases of non-production items to be made at volume-negotiated prices from selected suppliers. We have extended its use into further areas of procurement including market research and plant items. Using eBreviate technology, we have introduced new capabilities for electronic auctions and electronic requests for proposals.

The success of these marketplaces and gateways is, of course, dependent on industry standards for electronic information exchange. We continued our commitment to industry standards by co-chairing the Global Commerce Initiative, a global user group representing the largest companies in our industry, and participating fully in the development and promotion of standards. Using these standards, we are now making our electronic catalogue of products available through the Unilever Private Exchange, further simplifying ordering for retailers and gaining efficiencies in our information supply chain.

Unilever continues to take an active role in the application of IT in our industry. We are working actively with retailers to realise the potential of Radio Frequency Identification (RFID) technology, or ‘intelligent tagging’, to achieve new levels of shared information on our products as they move from factory to supermarket shelf.

Environmental responsibility
We continue to make progress towards our long-term eco-efficiency objectives, as well as driving forward our three main initiatives on sustainable agriculture, fish and water. All these activities are central to our commitment to contribute to sustainable development.

Our manufacturing operations use seven parameters for reporting emissions and setting future reduction targets for eco-efficiency. We have continued to improve our eco-efficiency performance although we did not meet three out of seven of our targets in 2002 (latest data). The setting and achievement of targets at site level can be difficult, for example, ongoing changes in our business through acquisitions, disposals and closures have an impact on our site operations.

If we are to secure a continuing high-quality supply of our main agricultural raw materials, sustainable production methods are crucial. In 2003, five years after laying the foundations for the current programme, we published Good Agricultural Practice Guidelines for five crops – palm oil, peas, spinach, tea and tomatoes. We also began implementing these guidelines across a broader supply base. Learning and sharing with all stakeholders is vital, and some success stories are available on www.growingforthefuture.com. The next challenge is to develop programmes for more crops, beginning with vegetable oils. This work is being supported by the food industry’s jointly established Sustainable Agriculture Initiative Platform.

The Marine Stewardship Council (MSC) has established a global standard for sustainable fisheries. We encourage our suppliers to work towards the MSC Standard, and three important fisheries are making good progress towards this certification – Alaskan pollock, Chilean hake and South African hake.

At the start of 2003, we were buying more than a third of our fish from sustainable sources, and by 2005, we expect this figure


 

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About Unilever

to rise to 75%. Although this will fall short of the 100% target set in 1996, we have nevertheless achieved very substantial improvements. We remain firmly committed to working with others to help drive the whole fisheries market towards a sustainable future.

Almost all our products rely on water – in growing ingredients, in manufacturing and in use by the consumer. Our manufacturing sites have continued to reduce water consumption. Unilever Indonesia, for example, has since 2001 pioneered a Zero Industrial Waste policy, which has now been rolled out to all its Indonesian operations. In Jakarta, treated effluent from ice cream and food plants is pumped across the industrial estate to our detergent factory and used as process water. As a result, the factory has cut water consumption by up to 60%.

We are implementing our environmental strategy to tackle three additional areas: connecting with the consumer on environmental care; leveraging our eco-manufacturing skills across the wider supply chain; and embedding environmental sustainability in our decision-making processes. We shall report on progress in 2005.

We continue to be the leading company in the food industry category in two of the Dow Jones Sustainability Indexes (DJSI), one for the fifth year running – the DJSI World Index. We were ranked top of the food sector in the UK’s first Corporate Responsibility Index, published by Business in the Community in 2003.

Responsible corporate behaviour
We seek to be a responsible employer, business partner and good corporate citizen, earning respect for our values wherever we operate.

Unilever has clear values and standards that govern the way we do business around the world. They are set out in our Corporate Purpose and our Code of Business Principles which are available at www.unilever.com. It is by putting these shared values into everyday working practice that we can operate successfully as a multinational company, and as a trusted corporate citizen in diverse local societies.

Our Code Committee oversees compliance with the Code of Business Principles throughout our business. During 2003 we rolled out a global e-learning programme for new employees, and developed and rolled out an e-learning programme on European competition law to support understanding of the Code. We also completed work on a set of key principles to achieve greater transparency of social and environmental standards in our supply chains.

Two examples illustrate our commitment to the local communities in which we operate. In India, Hindustan Lever is taking part in an innovative scheme that trains villagers in business skills and creates a new sales and distribution mechanism for its products. Through project Shakti, Hindustan Lever provides free business training to women’s self-help groups set up by Non-Governmental Organisations (NGOs) and the government. Once trained, the women have the option to become local small-scale sellers of Unilever’s products, which can generate a steady income of around $20 per month, nearly double their usual household incomes.

In Ghana, our Annapurna iodine-fortified salt has increased its sales and brought essential micronutrients within the reach of low-income consumers. Annapurna consumer-education programmes have helped promote UNICEF and government health messages on the need for an improved diet.

Our business depends on understanding and meeting consumers’ needs. We also need to understand societies’ evolving needs if we are to anticipate potential concerns – as well as trends that present business opportunities. This is why we continually seek to engage with our stakeholders. We listen and learn through consumer carelines, focus groups and websites, research with universities and participation in industry and government working groups. We are also involved in dialogue with NGOs and support international initiatives such as the UN Global Compact.

Partnerships are an effective way to help address social issues; they are a common feature of our many community initiatives, on which we spent approximately €66 million in 2003. Our new global partnership with the World Heart Federation is just one example: heart disease is now regarded as the principal cause of death worldwide and our Becel/Flora brand is helping to promote a healthy heart lifestyle around the world.

To gain the support of our stakeholders, we need to foster their understanding of our business and the challenges we face. Our local companies recognise this clearly, and have started to produce reports that cover their interaction with their local societies. Following our second Unilever-wide social review in 2002, last year saw new social reports from some of our businesses such as those in Brazil and the UK. Designed for local people, they share the common core theme of responsibility towards consumers, employees, business partners and society as the way towards sustainable growth for our business. In 2003 we have continued to work on the assessment and measurement of our corporate responsibility performance, to ensure that our next social review in 2005 gives an insightful and rounded view of our business.

For more information about Unilever’s environmental and social activities, visit www.unilever.com/environmentsociety.

Competition
We have a wide and diverse set of competitors in our consumer goods businesses. Many of our competitors also operate on an international scale, but others have a narrower regional or local focus.

Competition is a normal part of business. We aim to compete and give value to our consumers, customers and shareholders in three ways:

• by continually developing new and improved products; 
• by sharing our innovations and concepts with our businesses all around the world; and 
• by striving to lower the cost of our sourcing, manufacturing and distribution processes while still maintaining, and improving, the quality of our products. 

We support efforts to create a more open competitive environment through the liberalisation of international trade. We also support the fuller implementation of the Single European Market and inclusion of other European countries in the European Union.


 

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Distribution and selling
Unilever’s products are generally sold through its sales force and through independent brokers, agents and distributors to chain, wholesale, co-operative and independent grocery accounts, food service distributors and institutions. Products are distributed through distribution centres, satellite warehouses, company-operated and public storage facilities, depots and other facilities.

Exports
We sell our products in nearly all countries throughout the world and manufacture in many of them. Inside the European Union we make many of our products in only a few member countries, for sale in all of them.

We also export a wide range of products to countries where we do not currently make them. We often use this export trade to develop new markets, usually relying on manufacturing facilities in neighbouring countries, before building local manufacturing facilities in such new markets.

Seasonality
Certain of our businesses, such as ice creams and prestige fragrances, are subject to significant seasonal fluctuations in sales. However, Unilever operates globally in many different markets and product categories. No individual element of seasonality is likely to be material to the results of the Group as a whole.

People
Our future success lies in the hands of the 234 000 people who work for Unilever in around 100 countries. Harnessing, developing and rewarding their skills, energy and commitment is our priority.

Number of employees                  
Year end in thousands 2003   2002   2001   2000   1999
Europe 55   60   71   80   74
North America 20   21   22   39   22
Africa, Middle East                  
   and Turkey 52   52   49   48   50
Asia and Pacific 77   82   85   84   71
Latin America 30   32   38   44   29
Total 234   247   265   295   246

People are at the heart of our business. Our continued success depends on the commitment, enthusiasm and energy of our people around the world.

Recruiting, developing and rewarding our people for their skills and expertise remains a priority. We aim to recruit and retain high-calibre people through our graduate recruitment programmes, augmented by mid-career entrants and by promoting those who have demonstrated ability to take responsibility in their roles.

Our commitment to creating an enterprise culture – one of our six strategic priorities – gained momentum in 2003. New programmes were developed and these, combined with our established initiatives, show our creative approach to developing individuals and diverse, well-led teams.

An example of this is our Leadership Growth Journeys led by the Chairmen, which provide an opportunity for our future leaders to share their experiences and discuss future strategies.

There are many other examples, such as the HPC Learning Forum and the Knowledge Management Group that provide learning opportunities for managers at all levels. We believe learning that is related to the needs of the business and that results in clear action plans is essential to the development of high-performance teams.

Our internal e-learning programme, a screen-based education system, has been extended. More than 24 000 employees have used the facility, with 40% returning to use the sites more than once.

Our international management training centre has been redeveloped to allow more people to benefit from focused learning programmes.

Professional skills training has continued with two new learning academies for Human Resources and Supply Chain set up in 2003. Increasingly our academies will link up and share best practice and learning across Unilever.

Many of our learning experiences involve our people taking part in a wide range of projects based in local communities – these have included helping to renovate old school premises, providing days out for disadvantaged children and helping with educational programmes. These, together with the ‘getting into the skin’ programme, which gives managers the opportunity to experience for themselves the lives of consumers and their families, help us to engage with the communities in which we operate. We also believe these activities underline our commitment to being a responsible corporate citizen.

We have continued to use the results of our 2002 Global People Survey as the basis for much of our thinking on how to link business performance with personal development.

A priority has been to help people understand their role in achieving our performance targets. Our organisational and reward systems reflect the changing needs of the business and the need to reward high performance.

Unilever is one of the most diverse companies in the world – our top team is made up of 32 nationalities – and we continue to strive to leverage this strength.

In 2004 these activities will continue to help shape the business for future growth and foster a sense of belonging to a truly international enterprise.

Related party transactions
Transactions with related parties are conducted in accordance with the transfer pricing policies described on page 75 and consist primarily of sales to joint ventures and associates. Other than those disclosed in this report, there were no related party transactions that were material to the Group or to the related parties


 

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About Unilever

concerned that are required to be reported in 2003 or the preceding two years. In approximately 40 countries, our associated company, JohnsonDiversey Inc., acts as Unilever’s sole and exclusive sales agent for professional channels, in return for which it receives an agency fee. Information concerning guarantees given by the Group is stated in note 24 on page 112 and under ‘Mutual guarantee of borrowings’ on page 154. Guarantees are also given within the Group by the parent companies, as described on pages 147 and 150.

Intellectual property
We have a large portfolio of patents and trademarks, and we conduct some of our operations under licences which are based on patents or trademarks owned or controlled by others. We are not dependent on any one patent or group of patents. We use our best efforts to protect our brands and technology.

Description of our properties
We have interests in properties in most of the countries where there are Unilever operations. However, none is material in the context of the Group as a whole. The properties are used predominantly to house production and distribution activities and as offices. There is a mixture of leased and owned property throughout the Group. There are no environmental issues affecting the properties which would have a material impact upon the Group. The Directors take the view that any difference between the market value of properties held by the Group and the amount at which they are included in the balance sheet is not significant. See the schedule of principal group companies and fixed investments on page 142 and details of tangible fixed assets in note 10 on page 91.

Legal and arbitration proceedings and regulatory matters
We are not involved in any legal or arbitration proceedings and do not have any obligations under environmental legislation which we expect to lead to a material loss in the context of the Group results. None of our Directors or Officers are involved in any such material legal proceedings.

Unilever has businesses in many countries and from time to time these are subject to investigation by competition and other regulatory authorities. The most significant of these in recent years concerns ice cream distribution in Europe, notably the issues of outlet and cabinet exclusivity. In October 2003, the Court of First Instance in Luxembourg ruled in favour of the European Commission’s decision banning Unilever’s Irish ice cream business, HB Ice Cream, from seeking freezer cabinet exclusivity for their products in the Irish market. HB Ice Cream has submitted an appeal against the decision of the Court of First Instance in Luxembourg.

Government regulation
Unilever businesses are governed, in particular, by national laws designed to ensure that their products may be safely used for their intended purpose and that their labelling and advertising complies in all respects with relevant regulations. The introduction of new products and ingredients and processes is, specifically, subject to rigorous controls. Unilever businesses are further regulated by data protection and anti-trust legislation. Important regulatory bodies in respect of our businesses include the European Commission and the US Food and Drug Administration.


 

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Financial review

Basis of reporting and discussion
Our accounting policies are based on United Kingdom generally accepted accounting principles (GAAP) and UK and Netherlands law. These differ in certain respects from United States GAAP. The principal differences are described on page 132. We have shown reconciliations to net income and capital and reserves under US GAAP on pages 131 and 132.

For definitions of key ratios referred to in this review please refer to page 126.

Amounts discussed in the financial review have been restated following changes in our accounting policies for pensions, share-based payments and for the presentation of collateral. See note 14 on page 94, note 17 on page 99 and note 29 on page 116.

Reporting currency and exchange rates
Foreign currency amounts for results and cash flows are translated from underlying local currencies into euros using annual average exchange rates; balance sheet amounts are translated at year-end rates except for the ordinary capital of the two parent companies. These are translated at the rate prescribed by the Equalisation Agreement of £1 = Fl. 12, and thence to euros at the official rate of €1.00 = Fl. 2.20371 (see Control of Unilever on page 152).

The figures quoted in the following discussion on pages 15 to 20 are in euros, at current rates of exchange, unless otherwise stated, ie the average or year-end rates of each period.

International Financial Reporting Standards
Unilever will adopt International Financial Reporting Standards (IFRS) with effect from 1 January 2005. The implementation of IFRS is a major change process for which we have established a project team and are dedicating considerable resource. The impact of the change to IFRS on our reported capital and reserves and on reported net profit is being assessed. In particular, our current accounting policies for retirement benefits, financial instruments, goodwill and intangible assets, biological assets, deferred taxes and proposed dividends differ from IFRS.

Critical accounting policies
The accounts comply in all material respects with UK GAAP and UK and Netherlands law. To prepare the accounts, we are required to make estimates and assumptions, using judgement based on available information, including historical experience. These estimates and assumptions are reasonable and are re-evaluated on an ongoing basis. However, actual amounts and results could differ. Critical accounting policies are those which are most important to the portrayal of Unilever’s financial position and results of operations, and are described on pages 73 to 75. Unilever complies with UK Financial Reporting Standard 18, which requires that the most appropriate accounting policies are selected in all circumstances. Some of these policies require difficult, subjective or complex judgements from management, the most important being:

Retirement benefits
From 1 January 2003 we have adopted United Kingdom Financial Reporting Standard 17 (FRS 17) ’Retirement Benefits’, which requires that pension assets and liabilities be stated at fair values. The impact of adoption of this standard has been reflected by

means of prior period adjustments to the balance sheets and profit and loss accounts.

The determination of Unilever’s pension assets, obligations and expenses depends on certain assumptions used by actuaries in calculating such amounts. The valuation of pension obligations is particularly sensitive to the assumptions made in respect of discount rates and inflation rates; these discount rates, together with the assumptions made in respect of the expected long-term rates of return on assets, also determine the amounts to be included in the profit and loss account in respect of pension fund financing. The table below sets out these assumptions, as at 31 December 2003, in respect of the four largest Unilever pension funds. Details of all assumptions made are given on page 100.

  %   %   %   %
      Nether-   United    
  UK   lands   States   Germany
Discount rate 5.40   5.20   6.10   5.20
Inflation assumption 2.70   1.80   2.50   1.80
Expected long-term rate of return:              
   Equities 8.30   8.30   8.60   8.30
   Bonds 5.30   4.70   4.70   4.70
   Others 6.40   6.80   4.70   5.50

Although the assumptions made are thought to be appropriate, significant differences in actual experience or significant changes in assumptions may materially affect pension assets and obligations and future expenses.

Share-based compensation
In line with recommendations of various standard setting bodies, from 1 January 2003 we changed our accounting policy for share options. We have been hedging our existing share option programmes by buying shares at the time of grant and taking the financing cost within interest. The accounting change is to include an additional non-cash charge against operating profit to reflect the fair value to the employee of the share options granted. Since there is a consensus among the world’s accounting standard bodies that this approach gives the most appropriate accounting treatment, Unilever believes that companies should adopt the proposals in order to improve the comparability of reported results. The impact of the adoption of this change has been reflected by means of prior period adjustments to the profit and loss accounts and balance sheets. In determining the additional charge, we are applying a Black-Scholes based valuation spread over the vesting period of the option. The fair value so calculated depends on certain assumptions which are described in note 29 on page 116. The assumptions made in respect of share price volatility and expected dividend yields are particularly subjective. Unilever considers these and all other assumptions to be appropriate, but significant changes in assumptions could materially affect the charge recorded.

Provisions
Provision is made, among other reasons, for environmental and legal matters and for employee termination costs where a legal or constructive obligation exists at the balance sheet date and a reasonable estimate can be made of the likely outcome.

Market support costs
Expenditure on market support costs, such as consumer promotions and trade advertising, is charged against profit in the year in which it is incurred. At each balance sheet date, we are required to estimate the part of expenditure incurred but not yet


 

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Financial review

invoiced based on our knowledge of customer, consumer and promotional activity.

Goodwill, intangible and tangible fixed assets
Impairment reviews in respect of goodwill and intangible fixed assets are performed at least annually. More regular reviews, and impairment reviews in respect of tangible fixed assets, are performed if events indicate that this is necessary. Examples of such triggering events would include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses or negative cash flows.

Impairment reviews are performed following the guidance in UK Financial Reporting Standard 11, United States SFAS 142 and SFAS 144. Such reviews are performed by comparing the carrying value of the asset concerned to a valuation derived from discounted future cash flows. Significant assumptions, such as long-term growth rates and discount rates, are made in preparing these forecast cash flows; although these are believed to be appropriate, changes in these assumptions could change the outcomes of the impairment reviews.

The most significant balances of goodwill and intangible assets are those arising from the purchases of Bestfoods andSlim•Fast. We have reviewed the balances related to the Bestfoods acquisition (€14.8 billion), by considering actual and planned growth rates of Bestfoods brands and the synergy savings arising from its integration. No impairment loss has been identified.

Our review of the balances related to Slim•Fast (€1.4 billion) is based upon the assumption that the plans for the business, referred to in the Operating Review on pages 23 and 36, achieve a stabilisation of revenues during 2004 and a return to growth thereafter. We conclude, on this basis, that there is no impairment but the position will be monitored.

Deferred tax
Full provision is made for deferred taxation, as required under UK Financial Reporting Standard 19, at the rates of tax prevailing at the year-end unless future rates have been enacted, as detailed on page 75. Deferred tax assets are regularly reviewed for recoverability, and a valuation allowance is established to the extent that recoverability is not considered likely.

Results – 2003 compared with 2002

 
 

As noted in the preceding section, with effect from 1 January 2003 we have adopted FRS 17 in respect of pensions accounting and have implemented a new accounting policy for share options Amounts for prior years have been restated in the financial statements and in the following commentary.

Turnover fell by 12% to €42 942 million. This decrease was primarily due to a 10% strengthening of the average exchange rate for the euro against the basket of Unilever currencies. At constant rates of exchange, underlying sales grew by 1.5% in the year, but the net effect of this and our continued programme of disposals under Path to Growth, partly offset by the increase in our holding in Unilever Bestfoods businesses across Asia, was a 2% reduction in turnover. The main disposal impact came from the sale of DiverseyLever, Mazola and Loders Croklaan.

Group turnover was €42 693 million (2002: €48 270 million). Our share of turnover from joint ventures continued to fall in 2003 to €249 million (2002: €490 million) as a result of increases in our holding in former Bestfoods joint ventures in Asia and South Africa and their consequent inclusion as subsidiaries.

Operating profit was up 9% at €5 529 million for the year (2002: €5 091 million) and the operating margin increased to 12.9% (2002: 10.4%), with a significant contribution from lower net exceptional charges. Operating profit BEIA was 4% lower at €6 772 million, compared with €7 054 million in 2002. Operating margin BEIA improved strongly from 14.5% in 2002 to 15.8% despite an increase in brand investment; this was achieved through improved gross margins and lower overheads as a result of the Path to Growth savings programmes. These improvements were more than offset by the strengthening of the euro. Group operating profit BEIA was €6 719 million (2002: €6 959 million).

Amortisation of goodwill and intangible assets was €1 143 million compared with €1 261 million in 2002. The decrease is mainly due to the strengthening of the euro in 2003.

Net exceptional charges included in operating profit for the year were €100 million (2002: €702 million), which included €470 million of restructuring investment costs and a net credit for the profit and losses on disposals of €370 million. The restructuring costs primarily relate to Path to Growth initiatives, and the continued integration of Bestfoods. Associated costs of €121 million were included within operating profit BEIA for the year (2002: €191 million).

Group operating profit increased by 10% to €5 483 million.

An overview of operating performance by region and product category is included in the regional and category texts on pages 21 to 30 and 31 to 44 respectively.

Net interest cost, excluding pensions interest, fell to €847 million from €1 173 million in 2002 as a result of the lower overall level of net debt and the positive impact of currency movement on the cost of our US dollar-based debt. The net interest cover for the year was 6.7 times compared with 4.5 times in 2002. The net interest cover on the basis of EBITDA was 9.5 times (2002: 7.0 times). The pension net interest charge for the year was €166 million compared with a net interest credit of €108 million in 2002. This change reflected a lower expected return on pension assets for 2003 as a result of lower asset values following the weak stock market performance in 2002.

 

 


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The Group’s effective tax rate on profit was 33.6% for the year (2002: 39.6%) and reflects the non-tax-deductibility of Bestfoods goodwill amortisation. The underlying tax rate for the year, before exceptional items and amortisation, was 29% compared with 30% last year, with sustained benefits flowing from the Path to Growth programme.

Minority interests decreased by 20% to €249 million (2002: €312 million). This decrease is due to the one-off change in fiscal policy, which positively affected local shareholders in India in 2002.

Net profit rose by 29% to €2 762 million with lower exceptional charges and the improvements in operating margin, interest and tax more than offsetting the negative impact of exchange rates. Combined earnings per share increased by 32% and combined earnings per share BEIA increased by 2%.

Return on invested capital for the year was 12.5%, up from 9.8% in 2002. The progress was the result of improved operating margins arising from Bestfoods synergy benefits and additional procurement and restructuring savings. Our capital base was also reduced by further rationalisation and disposal of capital intensive production facilities.

The definition and further details on return on invested capital are given on pages 126 and 128.

Results – 2002 compared with 2001
As noted in the preceding section, with effect from 1 January 2003 we have adopted UK FRS 17 in respect of pensions accounting and have implemented a new accounting policy for share options. Amounts for prior years have been restated in the financial statements and in the following commentary.

The 7% strengthening of the average exchange rate for the euro against the basket of Unilever currencies impacted turnover, which fell by 7% to €48 760 million. Underlying sales growth of 4% at constant rates was offset by the net impact of acquisitions and disposals, which reduced turnover by 4%. The most significant disposal impact came from DiverseyLever and Mazola, offset by the increase in our holding in the Unilever Bestfoods Robertsons business in Africa and the Middle East.

Group turnover, excluding our share of the turnover of joint ventures, fell by 6% to €48 270 million. Our share of turnover from joint ventures fell to €490 million (2001: €692 million) as the increase in our holding in Unilever Bestfoods Robertsons resulted in its reclassification as a subsidiary.

Operating profit was €5 091 million (2001: €5 030 million) and the operating margin was 10.4% compared to 9.6% in 2001. Operating profit BEIA was €7 054 million (2001: €7 032 million). Operating margin BEIA improved to 14.5% from 13.5% in 2001. This underlying margin improvement reflects the continuing contribution from our Path to Growth strategy; it was offset by the strengthening of the euro, leaving operating profit BEIA in line with 2001. Group operating profit BEIA was also flat at €6 959 million.

Amortisation of goodwill and intangible assets was €1 261 million for the year, down from €1 423 million in 2001. The decrease was

primarily due to the strengthening of the euro during the year. Included in the charge is €1 023 million in respect of Bestfoods.

Exceptional items included in operating profit for the year of €702 million included €1 163 million of restructuring costs, a credit of €363 million for the net profits and losses on business disposals and €98 million credit from the release of legal and environmental provisions following the settlement of certain legal claims in our favour. Associated costs included within operating profit BEIA were €191 million for the year (2001: €373 million).

The exceptional costs incurred during the year primarily relate to the Path to Growth initiatives announced in February 2000, and to the integration of Bestfoods.

Group operating profit rose by 1% to €5 007 million, with the underlying margin improvement offset by higher exceptional charges and the 6% average currency impact.

Net interest cost for the year, excluding pensions interest, was €473 million lower at €1 173 million as we benefited from strong cash flow from operations, the proceeds of business disposals, lower interest rates and the favourable effect of currency movements. Net interest cover for the year was 4.5 times, up from 3.1 times in 2001. The net interest cover on the basis of EBITDA was 7.0 times (2001: 4.9 times). The net interest credit on pensions was €108 million (2001: €42 million).

The Group’s effective tax rate on profit for the year was 39.6% (2001: 44.2%). This rate reflects the non-deductibility of the Bestfoods goodwill amortisation and a lower effective tax rate on net exceptional items. The underlying tax rate before exceptional items and amortisation for the year was 30% (2001: 33%).

Minority interests increased to €312 million (2001: €239 million), mainly as a result of a fiscal policy change affecting local shareholders in India.

Net profit for the year rose by 27% to €2 136 million; combined earnings per share were up 29%; combined earnings per share BEIA increased by 17%.

Return on invested capital increased to 9.8% from 8.7% in 2001.

Acquisitions and disposals

Acquisitions
 On 18 February 2003, we announced an agreement to acquire the remaining unheld shares in CPC/Aji Asia, a joint venture with operations in six countries, from Ajinomoto Co. Inc., Japan. Unilever will pay a total of US $381 million (€338 million) for Ajinomoto’s equity holding. Unilever had full management control of the business with effect from 25 March 2003.

On 14 October 2003, we announced the creation of Pepsi Lipton International, a 50:50 joint venture between Unilever and Pepsico, to market and distribute ready-to-drink tea in several international markets outside North America.

In 2002, we increased our holding in the Robertsons business in South Africa and Israel to 59%, and took a one-third equity share in JohnsonDiversey Holdings Inc.

 


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There were no public takeover offers made by Unilever during 2003. Public takeover offers made by Unilever during 2002 related to the following:

On 14 August 2002, Unilever Overseas Holdings Limited and other members of the Unilever Group were obliged to make an agreed public tender offer on the Cairo and Alexandria Stock Exchange in Egypt for 2 938 000 shares (49%) of El Rashidi El Mizan Confectionery SAE at a price of 31.22 Egyptian pounds per share. All the shares were acquired. The purchase and price had been agreed by Bestfoods in 2000 at the time of Bestfoods’ acquisition of 51% of the company.

Subsequently on 22 December 2002, Middle East Food and Trade Company SAE made an agreed public tender offer on the Cairo and Alexandria Stock Exchange in Egypt for 6 000 000 shares (100%) of El Rashidi El Mizan Confectionery SAE held by members of the Unilever Group at a price of 15.33 Egyptian pounds per share. The transaction was completed on 6 January 2003 and all the shares were sold.

Disposals
In 2003, we disposed of 50 businesses with a total turnover of approximately €1 130 million.

On 17 January 2003, we completed the sale of our holdings in Unipamol Malaysia Sdn. Bhd. and Pamol Plantations Sdn. Bhd. to Palmco of Malaysia, a subsidiary of IOI Corporation, for a cash consideration of €138 million. In 2002, these businesses had combined turnover of approximately €51 million.

On 28 March 2003, we completed the sale of Frigedoc, our mobile home-vending frozen foods and ice cream business in France, to Toupargel. This business had an annual turnover of approximately €242 million.

On 12 May 2003, we completed the sale of the fruit juice business in Central America to Alimentos Maravilla. This business had an annual turnover of approximately €27 million.

On 15 May 2003, we announced the sale of the Van den Bergh Oils business in the UK to Pura Foods Ltd, a subsidiary of ADM International Ltd. This business had annual third-party turnover of approximately €60 million.

On 30 June 2003 we completed the sale of ourJohn West businesses in Australasia to Simplot Australia and GS Private Equity. In 2002 this business had an annual turnover of €74 million.

On 31 August 2003 we completed the sale of our cheese business in Austria and Germany to Bongrain. In 2002 this business had an annual turnover of €105 million.

On 30 September 2003 we completed the sale of our Brut brand in North and Latin America to Helen of Troy Ltd for a cash consideration of €49 million. In 2002 this business had an annual turnover of €48 million.

On 20 October 2003 we completed the sale of our oral care brands in North America to Church & Dwight for a cash consideration of €92 million. In 2002 these businesses had annual turnover of €155 million.

On 5 December 2003 we completed the sale of the Bio Presto trademark in Italy to Henkel SpA for a cash consideration of €45 million. In 2002 this business had an annual turnover of €37 million.

On 31 December 2003 we completed the sale of our Ambrosia and Brown & Polson businesses in the UK and Ireland to Premier Ambient Products (UK) Ltd for a cash consideration of €145 million. In 2002 these businesses had an annual turnover of €87 million.

In 2002, we disposed of 35 businesses for a total consideration of approximately €1 993 million.

Significant disposals in 2002 included the DiverseyLever institutional and industrial cleaning business; the Unimills refinery business in the Netherlands; the Loders Croklaan Group; 19 foods brands sold to ACH Food Companies Inc.; the Atkinsons fragrance business; the Iberia Foods business; the Nocilla chocolate spreads business; the Mafer snacks business and the Clemente Jacques culinary business, both in Mexico.

For further information on the impact of acquisitions and disposals refer also to the Cash flow section of the Financial Review on page 19 and to note 25 on page 112.

2003

Dividends and market capitalisation
 Ordinary dividends paid and proposed on PLC ordinary capital amounted to 18.08p per 1.4p share (2002: 16.04p), an increase of 13% per share. Ordinary dividends paid and proposed on the NV ordinary capital amounted to €1.74 per €0.51 share (2002: €1.70), an increase of 2% per share. The ratio of dividends to profit attributable to ordinary shareholders was 61.5% (2002: 79.2%).

Unilever’s combined market capitalisation at 31 December 2003 was €51.1 billion (2002: €59.9 billion).

Balance sheet
During 2003, net debt decreased to €12 555 million (2002: €16 966 million). This was due to strong operating cash flow, the proceeds of business disposals and the favourable effect of currency movements.

Borrowings at the end of 2003 totalled €15 900 million (2002: €19 870 million). Taking into account the various cross currency swaps and other derivatives, 67% (2002: 78%) of Unilever’s borrowings were in US dollars, and 8% (2002: 1%) in euros, with the remainder spread over a large number of other currencies.

Long-term borrowings decreased by €2 467 million to €8 466 million at the end of 2003. At the end of 2003, short-term borrowings were €7 434 million (2002: €8 937 million), including €1 675 million of long-term debt coming to within a year of maturity at the year end. At the end of 2003, 66% of the long-term debt is repayable within five years (2002: 68%).

Unilever has committed credit facilities in place to support its commercial paper programmes and for general corporate purposes. The undrawn committed credit facilities in place at the end of 2003 were: bilateral committed credit facilities

 


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of in aggregate US $3 737 million, bilateral notes commitments of in aggregate US $400 million and bilateral money market commitments of in aggregate US $2 080 million. Further details regarding these facilities are given in note 14 on page 94.

During 2003, a total of €509 million was raised through term financing. The term financing mainly consisted of an issue of a five-year debenture in Thailand of an equivalent of €85 million in March 2003, an issue of a 30-month debenture in India of an equivalent of €122 million in July 2003 and a five-year bond issue in South Africa of an equivalent of €118 million in September 2003.

Unilever is satisfied that its financing arrangements are adequate to meet its working capital needs for the foreseeable future.

Unilever’s contractual obligations at the end of 2003 included capital expenditure commitments, borrowings, lease commitments and other commitments. A summary of certain contractual obligations at 31 December 2003 is provided in the table below. Further details are set out in the following notes to the accounts: note 10 on page 91, note 14 on page 94 and note 24 on page 112. Details on derivatives are given in note 15 on pages 97 and 98.

Contractual obligations at 31 December 2003

  € million   € million   € million   € million   € million  
      Due           Due in  
      within   Due in   Due in   over  
  Total   one year   1-3 years   3-5 years   5 years  
 
Long-term debt 8 466   –   3 600   1 969   2 897  
Operating lease                    
   obligations 1 881   321   527   432   601  
Purchase obligations 391   219   133   38   1  
Other long-term                    
   commitments 264   96   69   45   54  
 
Finance leases under contractual obligations are not material.  

Cash and current investments at the end of 2003 totalled €3 345 million (2002: €2 904 million); these funds were held in euros (51%), sterling (1%), US dollars (3%), Indian Rupee (15%) and other currencies (30%). The funds are mainly to support day-to-day needs and are predominantly invested in short-term bank deposits and high-grade marketable securities.

In 2003, pension liabilities less plan assets (after allowing for deferred tax) amounted to €3 759 million (2002: €3 936 million). The reduction in the net liability has primarily arisen due to the higher than expected return on the equity market in 2003.

The euro appreciated considerably against most other Unilever currencies between the two balance sheet dates. This resulted in an exchange gain on translation of opening balances and of movements of €250 million. The translation gain arose principally on the highly geared balance sheet of our US business, which was partly offset by translation losses in other countries, notably the UK. Profit retained, after accounting for dividends and for the retranslation impact, increased by €1 527 million to €6 190 million.

Total capital and reserves increased to €5 920 million (2002: €4 702 million) reflecting the above movements in profit retained together with a €400 million net increase in shares held to meet

employee share options. On the face of the balance sheet on page 78, an analysis is given indicating how consolidated capital and reserves are attributed to NV and PLC. PLC currently has negative consolidated reserves; this arises largely because of an accounting policy of writing off goodwill arising in previous years; these write-offs do not have an impact on distributable reserves.

In November 2001, NV entered into a forward purchase contract with a counterparty bank to buy 10 000 000 PLC shares at 559p per share in November 2006 to meet the obligation to employees under share option plans. If the PLC share price falls by more than 5% below 559p, cash collateral for the difference must be placed with the counterparty bank. At year end, €20 million of collateral had been placed with counterparties.

Other than as disclosed above and in note 15 on pages 97 and 98, Unilever has no off-balance sheet arrangements.

Cash flow
Cash flow from operating activities decreased by €1 103 million to €6 780 million. This was primarily the result of increased working capital outflows arising from a different pattern of brand investment and sales development between the two years.

Capital expenditure of €1 041 million was 21% below 2002 levels and at 2.4% of turnover has continued to reduce.

Acquisition activity in the year was limited. The principal transaction was the purchase of the remaining unheld shares in CPC/Aji Asia. During the year, cash proceeds of €889 million were received from disposals, notably Ambrosia in the UK and the plantations in Malaysia.

Finance and liquidity
Unilever aims to be in the top third of a reference group for Total Shareholder Return of 21 international consumer goods companies, as explained below. The Group’s financial strategy supports this objective and provides the financial flexibility to meet its strategic and day-to-day needs. The key elements of the financial strategy are:

• Appropriate access to equity and debt capital
• Sufficient flexibility for tactical acquisitions
• A1/P1 short-term credit rating
• Sufficient resilience against economic turmoil
• Optimal weighted average cost of capital, given the constraints above

An EBITDA net interest cover greater than 8 times is consistent with this strategy. An interest cover below this level is acceptable for a period following major acquisitions.

The definition and further details on the EBITDA net interest cover ratio are given on pages 126 and 128.

Unilever concentrates cash in the parent and finance companies in order to ensure maximum flexibility in meeting changing business needs. Operating subsidiaries are financed through the mix of retained earnings, third-party borrowings and loans from parent and group financing companies that is most appropriate to the particular country and business concerned.


 

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Unilever maintains access to global debt markets through an infrastructure of short-term debt programmes (principally US domestic and euro commercial paper programmes) and long-term debt programmes (principally a US Shelf registration and euro-market Debt Issuance Programme). Debt in the international markets is, in general, issued in the name of NV, PLC or Unilever Capital Corporation. NV and PLC will normally guarantee such debt where they are not the issuer.

Treasury
Unilever Treasury’s strategic purpose is to provide financial flexibility in support of Unilever’s Path to Growth strategy and shareholder value creation within the context of the financial strategy set out in the ‘Finance and liquidity’ section above. Unilever Treasury’s role is to ensure that appropriate financing is always available for all value-creating investments. Additionally, Treasury delivers financial services to allow operating companies to manage their financial transactions and exposures in an efficient, timely and low-cost manner.

Unilever Treasury operates as a service centre and is governed by policies and plans agreed by the Executive Committee of the Board. In addition to policies, guidelines and exposure limits, a system of authorities and extensive independent reporting covers all major areas of activity. Performance is monitored closely. Reviews are undertaken by the corporate internal audit function.

The key financial instruments used by Unilever are short- and long-term borrowings, cash and other fixed and current investments and certain straightforward derivative instruments, principally comprising interest rate swaps and foreign exchange contracts. The accounting for derivative instruments is discussed in Accounting policies on page 75. The use of leveraged instruments is not permitted.

Other relevant disclosures are given in notes 14 and 15 on pages 94 to 98.

Unilever Treasury manages a variety of market risks, including the effects of changes in foreign exchange rates, interest rates and credit spreads. Further details of the management of these risks are given on page 46.

Pensions investment strategy
The Group’s investment strategy in respect of its funded pension plans is implemented within the framework of the various statutory requirements of the territories where the plans are based. The Group has developed policy guidelines for the allocation of assets to different classes with the objective of controlling risk and maintaining the right balance between risk and long-term returns in order to limit the cost to the company of the benefits provided. To achieve this, investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. The plans invest the largest proportion of the assets in equities which the Group believes offer the best returns over the long term commensurate with an acceptable level of risk. The Group also keeps a proportion of assets invested in property, bonds and cash. Most assets are managed by a number of external fund managers with a small proportion managed in house.

Total Shareholder Return
Total Shareholder Return (TSR) is a concept used to compare the performance of different companies’ stocks and shares over time. It combines share price appreciation and dividends paid to show the total return to the shareholder. The absolute level of the TSR will vary with stock markets, but the relative position reflects the market perception of overall performance relative to a reference group.

Unilever calculates TSR over a three-year rolling period. This period is sensitive enough to reflect changes but long enough to smooth out short-term volatility. The return is expressed in US dollars, based on the equivalent US dollar share price for NV and PLC. US dollars were chosen to facilitate comparison with companies in Unilever’s chosen reference group. The choice of currency affects the absolute TSR but not the relative ranking.

Unilever’s TSR target is to be in the top third of a reference group of 21 international consumer goods companies on a three-year rolling basis.

At the end of 2002 we were positioned 12th, and during 2003 we rose to 6th, achieving our target position which remains the top third of our reference group.

In 2003, the following companies formed the peer group of comparative companies:

Altria Group Kao
Avon Lion
Beiersdorf L’Oréal
Cadbury Schweppes Nestlé
Clorox Orkla
Coca-Cola Pepsico
Colgate Procter & Gamble
Danone Reckitt Benckiser
Gillette Sara Lee
Heinz Shiseido
   
   
Unilever’s position relative to the TSR reference group

Significant changes
Any important developments and post-balance sheet events that have occurred since 31 December 2003 have been noted in this Annual Report & Accounts and Form 20-F 2003. Otherwise, there have been no significant changes since 31 December 2003.


 

20 Unilever Annual Report & Accounts and Form 20-F 2003  

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Operating review by region
Europe

 


 

2003 results compared with 2002    € million

 2003 at
2002 rates		      € million
Exchange
rate
effects		      € million 

2003 at
2003 rates		      € million 

2002 at
2002 rates		      %
Change at
actual
current rates		      %
Change at
constant
2002 rates		     
 
 
Group turnover 18 720   (512 ) 18 208   19 573   (7)%   (4)%  
Group operating profit 2 617   (54 ) 2 563   1 598   60%   64%  
 
 
                         
Turnover 18 809   (512 ) 18 297   19 657   (7)%   (4)%  
 
 
Operating profit BEIA 3 101   (69 ) 3 032   2 746   10%   13%  
Exceptional items 46   3   49   (615 )         
Amortisation – goodwill and intangible assets (516 ) 11   (505 ) (511 )         
 
 
Operating profit 2 631   (55 ) 2 576   1 620   59%   62%  
 
 
Operating margin 14.0%       14.1%   8.2%          
Operating margin BEIA 16.5%       16.6%   14.0%          
 
 

 

Turnover and underlying sales growth
(at constant 2002 rates)		 2003
vs 2002		   
 
Underlying sales growth (%) 0.6  
Effect of acquisitions (%) 0.4  
Effect of disposals (%) (5.3 )
Turnover growth (%) (4.3 )
 

Turnover fell by 7% at current rates of exchange, with currency movements contributing a 3% decline. Operating profit grew by 59% and operating profit BEIA grew by 10%, with currency movements contributing 3% declines in both cases. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Difficult economic conditions in a number of countries have been reflected in the consumer, retail and competitive environment in 2003 and in general market growth rates have slowed significantly. Against this background, underlying sales grew by 0.6%, with volume ahead by 0.4%. Turnover was 4% lower than last year through the impact of planned disposals.

There has been continued strong growth in mass personal care, partly offset by a sharp decline in prestige fragrances and the impact of price-competitive markets in laundry. In foods, growth by category in part reflects the exceptionally hot summer weather, with strong gains in ready-to-drink tea and ice cream, but lower consumption in savoury, frozen meals and cooking products.

Highlights of another good year in personal care were the launch of Sunsilk across the region and the roll-out of Dove shampoo. Other key innovations included the Dove Silk hand, body and shower range, Dove exfoliating bar, new variants of Axe and the Crystal variant of Rexona/Sure.

In laundry, good progress has been made in improving the profitability of our business through cost reduction and a strategy of focus on priority brands and markets. This has allowed us both to increase margins and to generate the funds to respond to increased levels of price competition which had led to the loss of one market share point in the year, primarily to retailer own brands.

There has been good growth in spreads and cooking products for our Healthy Heart brands Becel/Flora. For our family brands such as Rama and Blue Band we adopted a strategy of recovering substantial increases in edible oil costs which some competitors have not followed. However, overall we have held market share. We have a strong innovation programme planned for both family and heart health brands into 2004. This includes the roll-out of the Rama/Blue Band Finesse range of cream alternatives and the extension of the pro•activ brand to adjacent categories, for which we now have regulatory clearance.

Knorr Mealkits and Good For You soups were successfully launched, though overall growth for the year was held back by low consumption in the very hot summer months. Hellmann’s and Bertolli both grew strongly, with the latter benefiting from extensions into pasta sauces, dressings and toppings. Growth in UBF Foodsolutions accelerated through the year, returning to a good level in the second half, particularly through soups in the UK, the Bertolli range in Italy and the launch of Knorr dairy cream alternatives in the fourth quarter.

Tea-based beverages have performed well with an excellent contribution from Lipton ready-to-drink, including green tea and fruit juice variants. Ice cream sales also grew strongly, helped by the hot summer weather and innovations including Magnum 7 Sins, Magnum Moments, Magnum snacking bars and the roll-out of the Fruit & Fresh mix of yoghurt and ice cream.

In frozen foods we have been reshaping around faster-growing segments of the market and have been restructuring with further gains in profitability. Our priority going forward will be to return the business to a consistent level of sales growth through a more rapid transfer of successful concepts across markets, including Knorr frozen, which is now in seven markets, and through planned innovations in the areas of kids’ nutrition, convenience meals and concepts based on fresh and natural ingredients such as the recently launched range of Steam Fresh vegetables.

The regional operating margin BEIA at 16.5% was 2.5% ahead of last year. This reflects the contribution from our restructuring and savings programmes, improved mix from portfolio change and our strategy for improving profitability in home care.


 

  Unilever Annual Report & Accounts and Form 20-F 2003 21

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Operating review by region
Europe (continued)

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 19 617   (44 ) 19 573   20 119   (3)%   (2)%  
Group operating profit 1 580   18   1 598   2 412   (34)%   (34)%  
 
 
                         
Turnover 19 700   (43 ) 19 657   20 220   (3)%   (3)%  
 
 
Operating profit BEIA 2 746   –   2 746   2 690   2%   2%  
Exceptional items (633 ) 18   (615 ) 254          
Amortisation – goodwill and intangible assets (511 ) –   (511 ) (511 )        
 
 
Operating profit 1 602   18   1 620   2 433   (33)%   (34)%  
 
 
Operating margin 8.1%       8.2%   12.0%          
Operating margin BEIA 13.9%       14.0%   13.3%          
 
 

 

Turnover and underlying sales growth 2002    
(at constant 2001 rates) vs 2001    
   
Underlying sales growth (%) 3.1    
Effect of acquisitions (%) 0.5    
Effect of disposals (%) (6.0 )  
Turnover growth (%) (2.6 )  
   

 

Turnover fell by 3% with no impact from currency movements. Operating profit fell by 33% and operating profit BEIA grew by 2%, with currency movements having only a minor effect. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew 3% with a continuing significant contribution from Central and Eastern Europe. Turnover was 3% lower than last year because of the impact of disposals.

Operating margin decreased 3.9% to 8.1%, but operating margin BEIA increased by 0.6% to 13.9%. This reflected the benefits from our savings programmes, including the integration of Bestfoods and strong growth in ice cream profitability driven by mix improvements and cost reductions. These gains were partly reinvested in additional support for the leading brands.

Western Europe
In Foods, underlying sales grew by 3%, including an increasing contribution from UBF Foodsolutions, our food service business. There was sustained progress in branded spreads and cooking products, which grew 5% due to the continuing impact of

 

innovations, especially in Becel/Flora, which grew by over 10%. Savoury and dressings grew 4% with marketplace activity behind Amora, Hellmann’s, Bertolli, Knorr and Pot Noodle and the launches of soup makers, chilled soups and Bertolli pasta sauces towards the end of the year. Slim•Fast also grew well as we continued its roll-out. Ice cream showed great resilience with innovations such as Cornetto Soft and snack-size ice creams helping to offset the impact of poorer weather than the prior year to give underlying sales growth of 1%.

In Home & Personal Care in Western Europe, good growth in skin, deodorants and hair included particularly strong performances through innovation and range extension in Dove, Rexona and Axe. Laundry volumes grew by 4%, which was partly offset by pricing in a competitive environment to give an underlying sales growth of 1%, with market share being maintained.

Central and Eastern Europe
Underlying sales grew by 9% with particular strength in dressings, tea, household care and personal care. We made further good progress in Russia.


 

22 Unilever Annual Report & Accounts and Form 20-F 2003  

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Operating review by region
North America


                         
2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 11 596 (1 822 ) 9 774 12 446   (21)%   (7)%  
Group operating profit 1 263 (192 ) 1 071 1 541   (30)%   (18)%  
 
 
                         
Turnover 11 710 (1 841)   9 869 12 568   (21)%   (7)%  
 
 
Operating profit BEIA 1 975 (315 ) 1 660 2 070   (20)%   (5)%  
Exceptional items (174 ) 35   (139 ) (3 )        
Amortisation – goodwill and intangible assets (503 ) 83   (420 ) (494 )        
 
 
Operating profit 1 298 (197 ) 1 101 1 573   (30)%   (17)%  
 
 
Operating margin 11.1%     11.2% 12.5%          
Operating margin BEIA 16.9%     16.8% 16.5%          
 
 

 

Turnover and underlying sales growth 2003    
(at constant 2002 rates) vs 2002    
   
Underlying sales growth (%) (3.1 )  
Effect of acquisitions (%) 0.1    
Effect of disposals (%) (4.0 )  
Turnover growth (%) (6.8 )  
   

 

Turnover fell by 21% at current rates of exchange, with currency movements contributing a 14% decline. Operating profit fell by 30% and operating profit BEIA fell by 20%, with currency movements principally the weakening of the US dollar contributing 13% and 15% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales declined by 3.1%, including a positive 0.2% from pricing. The performance of Slim•Fast and prestige fragrances, in combination with the one-off impacts of trade de-stocking and weak out-of-home channels in the first half of the year, diluted underlying sales growth by 3.6%. Turnover, including the impact of disposals, declined by 7%.

In mass personal care we improved our overall market position through Axe deodorants, and have established the Dove brand in daily hair care. In laundry we have further improved profitability, notwithstanding negative pricing through bonus pack promotions in a competitive market in which we have lost a little under one percentage point of market share.

Our prestige fragrance business has declined in weak markets. Our priority has been to restructure the business onto a more robust footing. We have refocused the brand portfolio and we are reducing costs to release funds for future investment behind innovation in the leading brands.

Unilever Bestfoods sales grew in a competitive market and in a year in which we successfully introduced a new ‘go to market’ approach. Particular strengths were Hellmann’s, Lipton and Bertolli through pasta sauces and frozen foods, Becel margarine in Canada and Lawry’s through the new Spice Blends steak sauce. These good performances were partly offset by declines in spreads consumption because of lower butter prices, and by declines in Bertolli olive oil and in Ragú pasta sauces due to changes in our approach to promotional plans and timing.

In ice cream we continue to grow well and gain market share, notwithstanding weak out-of-home markets. Breyers and Good Humor performed strongly in grocery channels, including the extension of the health range and the introduction of Slim•Fast.

Our Foodsolutions business moved ahead despite weak market conditions with a stronger performance in the second half of the year.

Slim•Fast has been heavily affected by changing consumer tastes and dieting choices. We have responded with the launch of a range of new products in the second half of the year, and a relaunch of the brand at the start of 2004. We remain confident of the longer-term growth opportunity, based on our leadership of this large growth market and the proven approach of Slim•Fast to healthy weight management underpinned by clinical studies and continued strong endorsement from the medical profession.

The regional operating margin BEIA at 16.9% was 0.4% ahead of the prior year.

 


  Unilever Annual Report & Accounts and Form 20-F 2003
23

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Operating review by region
North America (continued)

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 13 077   (631 ) 12 446   13 767   (10)%   (5)%  
Group operating profit 1 614   (73 ) 1 541   1 127   37%   43%  
 
 
                         
Turnover 13 205   (637 ) 12 568   13 880   (9)%   (5)%  
 
 
Operating profit BEIA 2 173   (103 ) 2 070   1 999   4%   9%  
Exceptional items (7 ) 4   (3 ) (276 )        
Amortisation – goodwill and intangible assets (519 ) 25   (494 ) (564 )        
 
 
Operating profit 1 647   (74 ) 1 573   1 159   36%   42%  
 
 
Operating margin 12.5%       12.5%   8.4%          
Operating margin BEIA 16.5%       16.5%   14.4%          
 
 

 

Turnover and underlying sales growth 2002    
(at constant 2001 rates) vs 2001    
   
Underlying sales growth (%) 1.1    
Effect of acquisitions (%) 0.2    
Effect of disposals (%) (6.1 )  
Turnover growth (%) (4.9 )  
   

 

Turnover fell by 9% with currency movements contributing a 4% reduction. Operating profit rose by 36% and operating profit BEIA grew by 4%, with currency movements contributing reductions of 6% and 5% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew 1% with a stronger performance in the second half as marketplace activity built through the year. Turnover declined 5% through the impact of disposals, notably DiverseyLever and Mazola.

In Foods, underlying sales grew 2% and our market shares remained firm. Slim•Fast continued to expand, passing the €1 billion turnover mark globally. Ice cream grew at over 5% and Wishbone, Becel and Knorr also moved ahead well. In addition to an active programme behind these brands, innovations including Lipton Brisk lemonade and Ragú Rich and Meaty sauces led growth in the second half of the year. Overall, underlying sales

 

growth in 2002 was held back by promotional price competition in mayonnaise, the exit from Hellmann’s pourable dressings and the impact of lower butter prices on the margarine market.

In Home & Personal Care, underlying sales growth was flat for 2002, with an improved performance in the latter part offsetting a slow start to the year. This reflected both the timing of the overall innovation plan and the steps taken to improve profitability in laundry to give the base for a more active programme from the fourth quarter. The successful launches of Axe deodorant and all fabric conditioner and the relaunch of Dove body wash contributed to a strong finish to the year.

Operating margin increased 4.1% to 12.5% and operating margin BEIA increased by 2.1% to 16.5% in 2002. This was driven particularly by improvements in laundry profitability but also widespread benefits from savings programmes partly reinvested in additional advertising and promotion.

 


24 Unilever Annual Report & Accounts and Form 20-F 2003  

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Operating review by region
Africa, Middle East and Turkey

 

 

 

   

 

2003 results compared with 2002 € million   €   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 3 360 (84 ) 3 276 3 139   4%   7%  
Group operating profit 428   (9 ) 419   282   49%   52%  
 
 
                         
Turnover 3 390 (88 ) 3 302 3 225   2%   5%  
 
 
Operating profit BEIA 450   (12 ) 438   349   26%   29%  
Exceptional items 7   (1 ) 6   (39 )        
Amortisation – goodwill and intangible assets (25 ) 3   (22 ) (19 )        
 
 
Operating profit 432   (10 ) 422   291   45%   48%  
 
 
Operating margin 12.7%     12.8% 9.0%          
Operating margin BEIA 13.3%     13.3% 10.8%          
 
 
                         
                         
Turnover and underlying sales growth 2003                    
(at constant 2002 rates) vs 2002                    
                     
Underlying sales growth (%) 7.4                    
Effect of acquisitions (%) 1.6                    
Effect of disposals (%) (3.7 )                
Turnover growth (%) 5.1                      
                     

 

Turnover grew by 2% at current rates of exchange, with currency movements contributing a 3% decline. Operating profit grew by 45% and operating profit BEIA grew by 26%, with currency movements contributing 3% declines in both cases. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew 7.4% with 5% from volume growth. Turnover grew 5% including the net impact of acquisitions and disposals.

Innovations behind the Omo and Surf brands were the drivers of an excellent performance in laundry. In personal care, Dove, Lux

and Rexona all grew at over 20%, while Sunsilk has achieved the leading position in hair care in Turkey.

In Foods, growth in savoury was led by Knorr, and included the launch into a number of countries in the Middle East. Ice cream and Lipton tea also grew well, while volumes declined in cooking oils, especially in French West Africa.

The regional operating margin BEIA at 13.3% was 2.5% ahead of last year, mainly through higher gross margins from production-cost reduction, the benefits of volume growth and the reversal of previous devaluation-led cost increases.


 

Unilever Annual Report & Accounts and Form 20-F 2003
25

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Operating review by region
Africa, Middle East and Turkey (continued)

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 3 654   (515 ) 3 139   3 191   (2)%   15%  
Group operating profit 342   (60 ) 282   196   44%   74%  
 
 
                         
Turnover 3 754   (529 ) 3 225   3 455   (7)%   9%  
 
 
Operating profit BEIA 422   (73 ) 349   373   (6)%   13%  
Exceptional items (45 ) 6   (39 ) (139 )        
Amortisation – goodwill and intangible assets (23 ) 4   (19 ) (26 )        
 
 
Operating profit 354   (63 ) 291   208   40%   70%  
 
 
Operating margin 9.4%       9.0%   6.0%          
Operating margin BEIA 11.2%       10.8%   10.8%          
 
 
Turnover and underlying sales growth 2002                      
(at constant 2001 rates) vs 2001                      
                     
Underlying sales growth (%) 6.5                      
Effect of acquisitions (%) 5.3                      
Effect of disposals (%) (3.1 )                    
Turnover growth (%) 8.6                      
                     

 

Turnover fell by 7%, which included a 16% reduction arising from currency movements. Operating profit rose by 40% and operating profit BEIA fell by 6%, with currency movements contributing reductions of 30% and 19% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew by 6.5% with turnover ahead by 8.6% as we now consolidated all of the Bestfoods Robertsons business following the increase in our shareholding.

Growth was broad-based across categories with the major contributions from marketing activities behind Knorr, Lipton, Lux,

Dove and laundry brands. South Africa performed particularly well with good underlying sales growth especially in Omo, Sunsilk, Axe and Lux in Home & Personal Care and Knorr, Lipton, Rama and Flora pro•activ in Foods. In Turkey, the weak economy led to consumer downtrading and market contraction and our sales declined as a result. Elsewhere in the region we strengthened our market position, particularly in Algeria, Arabia, Egypt, Morocco and West Africa.

Operating margin increased 3.4% to 9.4% and operating margin BEIA increased 0.4% to 11.2% in 2002 after an increase in investment behind the leading brands.


 

26
 Unilever Annual Report & Accounts and Form 20-F 2003

Back to Contents

Operating review by region
Asia and Pacific

 

2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 8 039 (976 ) 7 063 7 679   (8)%   5%  
Group operating profit 1 217 (145 ) 1 072 1 081   (1)%   13%  
 
 
                         
Turnover 8 076 (982 ) 7 094 7 865   (10)%   3%  
 
 
Operating profit BEIA 1 166 (142 ) 1 024 1 119   (8)%   4%  
Exceptional items 98   (10 ) 88   13          
Amortisation – goodwill and intangible assets (47 ) 7   (40 ) (30 )        
 
 
Operating profit 1 217 (145 ) 1 072 1 102   (3)%   10%  
 
 
Operating margin 15.1%     15.1% 14.0%          
Operating margin BEIA 14.4%     14.4% 14.2%          
 
 
                         
Turnover and underlying sales growth 2003                    
(at constant 2002 rates) vs 2002                      
                     
Underlying sales growth (%) 3.7                      
Effect of acquisitions (%) 1.9                      
Effect of disposals (%) (2.8 )                  
Turnover growth (%) 2.7                      
                     

 

Turnover fell by 10% at current rates of exchange, with currency movements contributing a 13% decline. Operating profit fell by 3% and operating profit BEIA fell by 8%, with currency movements, notably in India, contributing 13% and 12% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew by 3.7%, almost entirely from volume. Turnover, including the net impact of acquisitions and disposals, increased by 2.7%.

In our Home & Personal Care consumer business, growth has been strong and broad-based across categories. Activities behind Lux included the launch of the Lux Spa range in Japan and Lux Super Rich shampoo in a number of markets. Lifebuoy was relaunched in India with new variants and the distribution of Lifebuoy shampoo was extended in Indonesia. Pond’s growth was led by the launch of mini-pack moisturisers in Indonesia and good performances in China and India. The launch of the ‘no marks’ variant boosted growth of Fair & Lovely in India. Laundry

benefited from activities including the relaunch of Breeze Colour in Thailand, improved formulations in Vietnam and launches of variants of Surf with fabric conditioner, and a Surf bar with bleach in the Philippines. Sales in low-margin, non-consumer businesses were sharply lower, as planned.

In Foods the main focus in the year was improving the overall shape of the business. This included acquiring the outstanding part of the CPC/Ajinomoto joint venture, disposing of, or withdrawing from, several non-leading brands and improving the distribution system in the Philippines. This was reflected in a progressive pick-up in the growth of the leading brands over the year. Indonesia has made further progress with Bango, Royco and Sariwangi as we improved distribution. In leaf tea Brooke Bond was relaunched in India and Lipton green tea bags were launched in China. Knorr Soupy Snax were launched in India and the Knorr brand has grown well in China.

The regional operating margin BEIA at 14.4% was 0.2% ahead of the previous year after a 0.4% increase in advertising and promotions.


 

Unilever Annual Report & Accounts and Form 20-F 2003
27

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Operating review by region
Asia and Pacific (continued)

2002 results compared with 2001                        
  € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 8 045   (366 ) 7 679   7 846   (2)%   3%  
Group operating profit 1 130   (49 ) 1 081   873   24%   29%  
 
 
                         
Turnover 8 242   (377 ) 7 865   8 046   (2)%   2%  
 
 
Operating profit BEIA 1 170   (51 ) 1 119   1 088   3%   8%  
Exceptional items 13   –   13   (157 )        
Amortisation – goodwill and intangible assets (32 ) 2   (30 ) (40 )        
 
 
Operating profit 1 151   (49 ) 1 102   891   24%   29%  
 
 
Operating margin 14.0%       14.0%   11.1%          
Operating margin BEIA 14.2%       14.2%   13.5%          
 
 
                         
Turnover and underlying sales growth
(at constant 2001 rates) 		 2002
vs 2001		                      
                     
                     
Underlying sales growth (%) 4.8                      
Effect of acquisitions (%) 0.3                      
Effect of disposals (%) (2.6 )                    
Turnover growth (%) 2.4                      
                     

 

Turnover fell by 2%, with currency movements giving a reduction of 4%. Operating profit rose by 24% and operating profit BEIA rose by 3%, with currency movements contributing reductions of 5% in both cases. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew by 4.8%. Including the impact of disposals, turnover grew by 2.4%.

Home & Personal Care grew well across both categories and countries. Indonesia, Philippines and Vietnam performed particularly well and skin, hair and deodorants all grew at over 10% across the region through innovations and support behind Dove, Lifebuoy and Pond’s. Underlying sales growth in India accelerated through the year to reach 3% for the full year despite the planned harvesting of non-leading brands. The stronger second half in India was led by Fair & Lovely with the launch of a herbal variant, Pond’s with new small packs, the launch of a

new Vaseline variant for treating damaged skin and good growth in laundry.

In Foods, good growth in South East Asia reflected the Bestfoods brands benefiting from the Unilever distribution system, innovation in Knorr, and a strengthening of the Bango soy sauce and Sariwangi tea brands in Indonesia. This performance was partly offset by declines in tea in Central Asia as prices were adjusted to reflect lower commodity prices and a focus on improving profitability as we exited from low-value, low-growth commoditised teas. In Japan the successful alliance with Suntory in ready-to-drink tea has doubled the market share of Lipton to over 25%.

Operating margin increased 2.9% to 14.0% and operating margin BEIA increased to 14.2% in 2002 with gains from our savings programmes partly reinvested in increased advertising and promotions.

 

 


28 Unilever Annual Report & Accounts and Form 20-F 2003

Back to Contents

Operating review by region
Latin America

 

                         
2003 results compared with 2002                        
  € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 5 706 (1 334 ) 4 372 5 433   (20)%   5%  
Group operating profit 489   (131 ) 358   505   (29)%   (3)%  
 
 
                         
Turnover 5 715 (1 335)   4 380 5 445   (20)%   5%  
 
 
Operating profit BEIA 809   (191 ) 618   770   (20)%   5%  
Exceptional items (114 ) 10   (104 ) (58 )        
Amortisation – goodwill and intangible assets (207 ) 51   (156 ) (207 )        
 
 
Operating profit 488   (130 ) 358   505   (29)%   (3)%  
 
 
Operating margin 8.5%       8.2%   9.3%          
Operating margin BEIA 14.2%       14.1%   14.1%          
 
 
                         
Turnover and underlying sales growth
(at constant 2002 rates)		 2003
vs 2002		                      
                     
                     
Underlying sales growth (%) 8.1                      
Effect of acquisitions (%) 0.1                      
Effect of disposals (%) (3.1 )                    
Turnover growth (%) 5.0                      
                     

 

Turnover fell by 20% at current rates of exchange, with currency movements contributing a 25% decline. Operating profit fell by 29% and operating profit BEIA fell by 20%, with currency movements, notably in Brazil and Mexico, contributing 26% and 25% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew by 8.1%, entirely through pricing as we recovered earlier devaluation-led cost increases. The speed of economic recovery is, however, uneven and Brazil in particular remains weak although we have seen a strong improvement in Argentina. Home & Personal Care moved back into positive volume growth in the second half of the year, but this was offset by continuing market declines in Foods categories, resulting in a 2.2% overall volume decline for the year. Including the impact of disposals, turnover increased 5.0%.

The key drivers of growth have been our personal care brands: Lux, which has been relaunched with innovations in both product and packaging; Sunsilk, including the test launch of hair colorants in Argentina, Mexico and Brazil and the success of the Lisage hair-straightening variant; Rexona, with the launch of a deodorant spray in Colombia and Venezuela; and Axe, with the launch of new variants and extension to new geographies.

In laundry we have continued to hold strong share positions and have delivered good growth. A series of innovations were introduced under the Omo, Radiant and Surf brands, and fabric conditioners in Argentina performed particularly well.

In Foods, markets continue to be competitive and consumption remains weak, especially in Brazil. Nonetheless we have continued to improve the base of our business. Innovations have boosted strong growth for the AdeS soy-based drink. Arisco has grown well in Brazil, showing the value of alternative ‘smart choice’ brands in a difficult economy. The savoury portfolio has been strengthened through the migration of the Cica brand to Knorr in Brazil and the introduction of Knorr to Central America. Overall growth in Foods is impacted by our actions to reduce the tail of non-leading brands by managing some brands for value through a harvest strategy or through disposal.

The regional operating margin BEIA at 14.2% was 0.1% ahead of last year with an improvement in gross margin partly reinvested in increased advertising and promotions. We are making good progress with savings programmes and have been progressively recovering the impact of devaluation-led cost increases.

 

 


Unilever Annual Report & Accounts and Form 20-F 2003
29

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Operating review by region
Latin America (continued)

2002 results compared with 2001                        
                         
  € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 7 106   (1 673 ) 5 433   6 591   (18)%   8%  
Group operating profit 648   (143 ) 505   338   49%   92%  
 
 
                         
Turnover 7 119   (1 674 ) 5 445   6 605   (18)%   8%  
 
 
Operating profit BEIA 1 022   (252 ) 770   882   (13)%   16%  
Exceptional items (95 ) 37   (58 ) (261 )        
Amortisation – goodwill and intangible assets (279 ) 72   (207 ) (282 )        
 
 
Operating profit 648   (143 ) 505   339   49%   91%  
 
 
Operating margin 9.1%       9.3%   5.1%          
Operating margin BEIA 14.4%       14.1%   13.4%          
 
 
                         
Turnover and underlying sales growth
(at constant 2001 rates)		 2002
vs 2001		                      
                     
                     
Underlying sales growth (%) 12.1                      
Effect of acquisitions (%) 0.5                      
Effect of disposals (%) (4.4 )                    
Turnover growth (%) 7.8                      
                     
                         

Turnover fell by 18%, after a reduction of 26% arising from currency movements. Weaker currencies in Argentina and Brazil contributed 10% and 5% respectively to this decline. Operating profit rose by 49% and operating profit BEIA fell by 13%, with currency movements contributing reductions of 42% and 29% respectively. The underlying performance of the business after eliminating exchange translation effects is discussed below at constant exchange rates.

Underlying sales grew by 12.1%, driven by pricing action to recover devaluation-led cost increases, particularly in Argentina. Outside Argentina, volumes grew by 2% with price ahead by 9%. Including the impact of disposals, turnover in the region grew by 8%. Excluding the impact of acquisitions and disposals, turnover was 14% below 2001 levels.

Personal care performed very strongly in 2002.Sunsilk shampoo marketed in Latin America as Sedal grew well across the region. Dove shampoo was launched in Brazil, Chile, Mexico and Peru and made very good progress. In deodorants, Rexona was successfully launched in Venezuela and relaunched in Colombia and we took clear market leadership in Mexico. In laundry,

market shares have held firm against our nearest competitor and we responded to changed economic conditions with packs which specifically address the reduced spending power of consumers.

In Foods, ice cream grew by over 10%, mostly volume, with the main contributions from Brazil and Mexico. Good performances were led by the launch of Knorr noodle cups in Mexico, an energised Hellmann’s campaign in Chile and significant growth in Arisco in Brazil. In spreads, Becel de Capullo was launched in Mexico, introducing the Becel brand to that country. Lipton ready-to-drink tea continued to grow well in Brazil and the soy-based beverage AdeS made very good progress in both Brazil and Mexico.

In Argentina, consumer demand was considerably down and volumes were affected as a result. We continued to hold strong market shares and our experienced local management managed the business in a way which preserves its long-term health.

Operating margin increased 4.0% to 9.1% and operating margin BEIA increased by 1.0% to 14.4% in 2002, after an increase in investment behind the leading brands.


 

30 Unilever Annual Report & Accounts and Form 20-F 2003

Back to Contents

Operating review by category – Foods
Financial overview
 
 

                         
2003 results compared with 2002 € million € million € million € million % %  
    Exchange     Change at Change at  
  2003 at rate 2003 at 2002 at actual constant  
  2002 rates effects 2003 rates 2002 rates current rates 2002 rates  
 
 
Group turnover 26 212   (2 241 ) 23 971   26 937   (11)%   (3)%  
Group operating profit 2 794   (146 ) 2 648   2 083   27%   34%  
 
 
                         
Turnover 26 470   (2 270 ) 24 200   27 390   (12)%   (3)%  
 
 
Operating profit BEIA 4 226   (326 ) 3 900   3 885   0%   9%  
Exceptional items (115 ) 24   (91 ) (489 )        
Amortisation – goodwill and intangible assets (1 265 ) 150   (1 115 ) (1 230 )         
 
 
Operating profit 2 846   (152 ) 2 694   2 166   24%   31%  
 
 
Operating margin 10.8%     11.1% 7.9%          
Operating margin BEIA 16.0%     16.1% 14.2%          
 
 
                         

Pages 32 to 39 present a review of performance in each major product category, which are as follows:

• Savoury and dressings 
• Spreads and cooking products 
• Health & wellness and beverages 
• Ice cream and frozen foods 

Included in the figures for each category are the results of our UBF Foodsolutions business.

Foods
During 2003, our leading brands grew by 1.2%, while underlying sales grew by 0.4%. Turnover fell by 12% at current rates of exchange, with currency movements contributing 9% of this decline. Operating profit rose by 24% and operating profit BEIA was flat. Operating margin increased to 11.1% (2002: 7.9%) and operating margin BEIA increased to 16.1% (2002: 14.2%).

Unilever’s food and beverage brands and products are enjoyed by millions of people around the world. Our portfolio focuses increasingly on brands with the potential to grow across borders and categories, in markets that are growing rapidly as consumers

demand more choice, great taste, healthier options and convenience.

Since the creation of Unilever Bestfoods in 2000, we have continued to build the basis for sustained, profitable growth. We are shaping our leading brands for growth through innovation that targets fast-growing segments of the food and beverage market and by building brand equity, rationalising brand families and migrations. We are focusing our portfolio with an ambitious programme of disposals. We are improving profitability, simplifying the business and making good progress on all other key levers of value creation.

UBF Foodsolutions
UBF Foodsolutions is one of the world’s largest food service businesses. It operates in more than 60 countries around the world.

The business is focused on delivering innovative, relevant solutions to the professional chef and caterer, leveraging our consumer brands – already 85% of product sales – and technology. In 2003, UBF Foodsolutions continued to grow despite challenging conditions in key markets.


 

Unilever Annual Report & Accounts and Form 20-F 2003
31

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Operating review by category – Foods
Savoury and dressings
 

                         
2003 results compared with 2002 € million € million € million € million % %
    Exchange     Change at Change at
2003 at rate 2003 at 2002 at actual constant
2002 rates effects 2003 rates 2002 rates current rates 2002 rates
 
 
Group turnover 9 419   (868 ) 8 551   9 272   (8)%   2%  
Group operating profit 499   (24 ) 475   399   19%   25%  
 
 
                         
Turnover 9 482   (873 ) 8 609   9 503   (9)%   0%  
 
 
Operating profit BEIA 1 642   (146 ) 1 496   1 483   1%   11%  
Exceptional items (124 ) 14   (110 ) 8          
Amortisation – goodwill and intangible assets (1 016 ) 108   (908 ) (1 064 )         
 
 
Operating profit 502   (24 ) 478   427   12%   18%  
 
 
Operating margin 5.3%     5.6% 4.5%          
Operating margin BEIA 17.3%     17.4% 15.6%          
 
 
                         
Turnover and underlying sales growth 2003                      
(at constant 2002 rates) vs 2002                      
                     
Underlying sales growth (%) 1.6                      
Effect of acquisitions (%) 1.6                      
Effect of disposals (%) (3.3 )                    
Turnover growth (%) (0.2 )                    
                     
                         

Turnover fell by 9% at current rates of exchange, with currency movements contributing a 9% decline. Operating profit grew by 12% and operating profit BEIA grew by 1%, with currency movements contributing a 6% and 10% decline respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Unilever’s world leadership of both the savoury and dressings foods categories was maintained. The rate of growth in savoury slowed in 2003, partially due to a hot summer in Europe and weakness in food service markets in the first half of the year.

Brazil had a strong performance where the Cica migration to Knorr has gone well, substantially improving overall growth. Elsewhere, innovations responsive to consumer needs sparked growth. The success of wet soups in France continued, with Knorr growing and riding the ’ready-to’ and Good For You wave. Lipton Asian side dish innovations in the US helped regain category leadership, while the Knorr Cubitos seasonings in Latin America is a fine example of the creative use of technology to target low-income consumers.

Knorr frozen is gaining momentum, now having an established presence in seven markets in Europe and with turnover now exceeding €100 million.

Dressings had a good year, with strong performances in Europe and the US. Results reflect good share performance in core markets and the positive impact of innovations.

Category growth was driven by Hellmann’s, Calvé and Amora. Hellmann’s benefited in key countries, particularly UK and Ireland, from a successful launch of snack sauces, strong promotional activity and favourable weather. Calvé was driven by good performance in Russia, based on the continued relaunch of mayonnaise and ketchup.

In North America, results were driven by a strong Hellmann’s performance in a robust mayonnaise market, helped by additional promotional investment.


 

32
Unilever Annual Report & Accounts and Form 20-F 2003

Back to Contents

Operating review by category – Foods
Savoury and dressings (continued)
 
 
2002 results compared with 2001 € million   € million   € million   € million   %   %  
    Exchange     Change at Change at
2002 at rate 2002 at 2001 at actual constant
2001 rates effects 2002 rates 2001 rates current rates 2001 rates
 
 
Group turnover 9 887   (615 ) 9 272   9 597   (3)%   3%  
Group operating profit 413   (14 ) 399   744   (46)%   (44)%  
 
 
                         
Turnover 10 138   (635 ) 9 503   9 999   (5)%   1%  
 
 
Operating profit BEIA 1 602   (119 ) 1 483   1 634   (9)%   (2)%  
Exceptional items (4 ) 12   8   349          
Amortisation – goodwill and intangible assets (1 155 )  91   (1 064 )  (1 218 )         
 
 
Operating profit 443   (16 ) 427   765   (44)%   (42)%  
 
 
Operating margin 4.4%       4.5%   7.7%          
Operating margin BEIA 15.8%       15.6%   16.3%          
 
 
                         
Turnover and underlying sales growth 2002                      
(at constant 2001 rates) vs 2001                      
                     
Underlying sales growth (%) 4.1                      
Effect of acquisitions (%) 1.5                      
Effect of disposals (%) (4.1 )                    
Turnover growth (%) 1.4                      
                     
                         

Turnover fell by 5% at current rates of exchange, with currency movements accounting for a reduction of 6%. Operating profit fell by 44% and operating profit BEIA fell by 9%, with currency movements contributing reductions of 2% and 7% respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

We are world leaders in both the savoury and dressings foods categories. Knorr, Unilever’s biggest brand, grew across 100 markets in 2002 with products as diverse as seasonings and meal kits, snacks and frozen food. There was a clear acceleration in the pace of growth as the year progressed.

Innovation met the needs of consumers with a love of good food but little time to cook: for example, we introduced Knorr soupy snacks, Knax noodle cups, a snack launched in Latin America, and Knorr Vie, a healthy eating range in Europe. The growing international appeal of Bertolli delivered underlying sales growth for the brand of 8.5%. Once solely an Italian olive oil, the Bertolli

portfolio now ranges from pasta sauces and meal solutions to spreads and snacks.

The enduring popularity of mayonnaise drove good growth in Hellmann’s in Europe and Latin America, but competitive pressure in North America and our withdrawal from liquid salad dressings affected the brand’s overall performance, leaving turnover flat year-on-year. Australia was welcomed to the world of Hellmann’s with the launch of dressings and mayonnaise.

Calvé and Wishbone also delivered strong results. Growth was fuelled by innovations that took our key dressings brands beyond mayonnaise into new tastes and flavours, dips and sauces, many inspired by Amora and Maille.

Underlying sales growth was 4% and, allowing for disposals, turnover increased 1% in 2002. Operating margin decreased 3.3% to 4.4% and operating margin BEIA was moderately below 2001 at 15.8%, after an increase in advertising and promotions.


 

Unilever Annual Report & Accounts and Form 20-F 2003
33

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Operating review by category – Foods
Spreads and cooking products

2003 results compared with 2002 € million      € million      € million      € million      %      %     
  Exchange     Change at Change at
2003 at rate 2003 at 2002 at actual constant
2002 rates effects 2003 rates 2002 rates current rates 2002 rates
 
 
Group turnover 5 366   (389 ) 4 977   6 145   (19)%   (13)%  
Group operating profit 806   (24 ) 782   768   2%   5%  
 
 
                         
Turnover 5 419   (391 ) 5 028   6 216   (19)%   (13)%  
 
 
Operating profit BEIA 911   (46 ) 865   967   (10)%   (6)%  
Exceptional items (9 ) 7   (2 ) (161 )        
Amortisation – goodwill and intangible assets (89 ) 15   (74 ) (19 )        
 
 
Operating profit 813   (24 ) 789   787   0%   3%  
 
 
Operating margin 15.0%       15.7%   12.7%          
Operating margin BEIA 16.8%       17.2%   15.5%          
 
 
                         
Turnover and underlying sales growth
(at constant 2002 rates)		 2003
vs 2002		                      
                     
Underlying sales growth (%) (2.9 )                    
Effect of acquisitions (%) 0.7                      
Effect of disposals (%) (10.9 )                    
Turnover growth (%) (12.8 )                    
                     
                         

Turnover fell by 19% at current rates of exchange, with currency movements contributing a 6% decline. Operating profit was flat and operating profit BEIA fell by 10%, with currency movements contributing 3% and 4% respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Against the backdrop of two years of strong growth, 2003 was a tough year for the margarine category due to relatively low butter prices in key markets, and the adverse impact on bread consumption driven by a strong consumer trend towards low carbohydrate diets in the US and UK. However, we maintained our market shares in key countries.

Becel/Flora, our Healthy Heart spreads brands, continued to grow on the strength of pro•activ, which grew strongly during 2003.

Sustained product efficacy endorsement by key opinion formers and healthcare professionals was key to continued momentum. The unique partnership of Becel/Flora with the World Heart Federation helped increase awareness on how lowering cholesterol can contribute to a healthy lifestyle.

Rama/Blue Band had a difficult start to the year due to severe price pressures mainly in Europe. The launch of dairy cream alternatives in several countries in Europe and Latin America in the fourth quarter is progressing well, with a roll-out to additional markets in 2004.

Innovation continues to be the key driver of growth in this category. Examples of adapting to local taste and storage conditions are evident in the launch of ambient stable margarines and sweet spreads in Africa and savoury spreads in Latin America.


 

34 Unilever Annual Report & Accounts and Form 20-F 2003

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Operating review by category – Foods
Spreads and cooking products (continued)

2002 results compared with 2001 € million      € million      € million      € million      %      %     
  Exchange     Change at Change at
2002 at rate 2002 at 2001 at actual constant
2001 rates effects 2002 rates 2001 rates current rates 2001 rates
 
 
Group turnover 6 401   (256 ) 6 145   6 681   (8)%   (4)%  
Group operating profit 779   (11 ) 768   751   2%   4%  
 
 
                         
Turnover 6 474   (258 ) 6 216   6 771   (8)%   (4)%  
 
 
Operating profit BEIA 990   (23 ) 967   1 039   (7)%   (5)%  
Exceptional items (169 ) 8   (161 ) (259 )        
Amortisation – goodwill and intangible assets (22 ) 3   (19 ) (9 )        
 
 
Operating profit 799   (12 ) 787   771   2%   4%  
 
 
Operating margin 12.3%       12.7%   11.4%          
Operating margin BEIA 15.3%       15.5%   15.3%          
 
 
                         
Turnover and underlying sales growth
(at constant 2001 rates)		 2002
vs 2001		                      
                     
Underlying sales growth (%) 2.3                      
Effect of acquisitions (%) 0.5                      
Effect of disposals (%) (6.9 )                    
Turnover growth (%) (4.4 )                    
                     
                         

Turnover fell by 8% at current rates of exchange, with currency movements contributing a 4% reduction. Operating profit grew by 2% and operating profit BEIA fell by 7% with currency movements contributing reductions of 2% in both cases. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

In 2002, we built on our position as the market leader in branded margarine and spreads. In this sector, as elsewhere, the strength of our local roots and understanding of regional tastes and cultures helped deliver growth.

Innovation was key to our strong performance. The sustained success of pro•activ, an innovation that is proven to reduce cholesterol, continued to drive rapid growth in our leading

spreads brands, Becel/Flora, which grew by 11.6%. Healthier, more convenient cooking products, including Rama and Culinesse and family-oriented spreads, such as Blue Band, all contributed towards our good performance.

An important driver of success has been increasing support from key opinion formers, such as healthcare professionals. During the year, we complemented our alliances with national heart associations with the worldwide sponsorship of the World Heart Federation’s World Heart Day.

Including the impact of disposing of several oil businesses, turnover fell 4% in 2002, while underlying sales grew by over 2%. Operating margin increased 0.9% to 12.3% but operating margin BEIA was unchanged from 2001 at 15.3%, after increased advertising and promotions investment.


 

Unilever Annual Report & Accounts and Form 20-F 2003
35

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Operating review by category – Foods
Health & wellness and beverages

2003 results compared with 2002 € million      € million      € million      € million      %      %     
  Exchange     Change at Change at
2003 at rate 2003 at 2002 at actual constant
2002 rates effects 2003 rates 2002 rates current rates 2002 rates
 
 
Group turnover 3 910   (461 ) 3 449   4 064   (15)%   (4)%  
Group operating profit 413   (46 ) 367   347   6%   19%  
 
 
                         
Turnover 4 052   (483 ) 3 569   4 215   (15)%   (4)%  
 
 
Operating profit BEIA 603   (76 ) 527   602   (12)%   0%  
Exceptional items (11 ) –   (11 ) (99 )        
Amortisation – goodwill and intangible assets (137 ) 24   (113 ) (120 )        
 
 
Operating profit 455   (52 ) 403   383   5%   19%  
 
 
Operating margin 11.2%       11.3%   9.0%          
Operating margin BEIA 14.9%       14.8%   14.3%          
 
 
                         
Turnover and underlying sales growth
(at constant 2002 rates)		 2003
vs 2002		                      
                     
Underlying sales growth (%) (1.7 )                    
Effect of acquisitions (%) 0.4                      
Effect of disposals (%) (2.5 )                    
Turnover growth (%) (3.9 )                    
                     
                         

Turnover fell by 15% at current rates of exchange, with currency movements contributing an 11% decline. Operating profit grew by 5% and operating profit BEIA fell by 12%, with currency movements contributing a 14% and 12% decline respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Health & wellness
In 2003, we encountered many challenges with the Slim•Fast brand while other parts of the health & wellness category performed well.

Turnover of Slim•Fast declined by 21% as the entire weight-loss category was hit by an unprecedented shift in consumer preferences towards low-carbohydrate products. The impact was especially pronounced in the US, the largest market for Slim•Fast. Slim•Fast has responded by focusing on the Slim•Fast Plan as a proven and effective weight-loss programme with an expanded range of products, including pasta and soups. Low-carbohydrate and high-protein products were also launched at the end of 2003.

AdeS, our healthy, nutritious drink had another very strong year in Latin America.

Beverages
Lipton had an excellent year with underlying sales growth of 8%. Lipton has continued to build on its natural vitality positioning and provides healthy, refreshing beverages, including a wide range of leaf tea offerings and ready-to-drink Lipton Ice Tea.

Growth was particularly strong in Europe where hot summer weather provided ideal market conditions for Lipton Ice Tea. Lipton Brewed Ice Tea was a very successful new innovation launched by UBF Foodsolutions in the US as we continue to build Lipton in the out-of-home segment. An improved marketing mix for Lipton Green – in both a cold and hot format – was successfully launched in Europe and extends Lipton into an important segment. We also expanded our successful North American partnership with Pepsi to include many more countries.

We continue to have strong positions in key traditional tea markets. In 2003, we had a very successful relaunch of the Brooke Bond brand in India.


 

36 Unilever Annual Report & Accounts and Form 20-F 2003

Back to Contents

Operating review by category – Foods
Health & wellness and beverages (continued)

 

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 4 308   (244 ) 4 064   4 150   (2)%   4%  
Group operating profit 372   (25 ) 347   255   36%   46%  
 
 
                         
Turnover 4 467   (252 ) 4 215   4 299   (2)%   4%  
 
 
Operating profit BEIA 641   (39 ) 602   559   8%   15%  
Exceptional items (105 ) 6   (99 ) (127 )        
Amortisation – goodwill and intangible assets (127 ) 7   (120 ) (136 )        
 
 
Operating profit 409   (26 ) 383   296   29%   38%  
 
 
Operating margin 9.2%       9.0%   6.9%          
Operating margin BEIA 14.3%       14.3%   13.0%          
 
 
                         
Turnover and underlying sales growth
(at constant 2001 rates)		 2002
vs 2001		                      
                     
                     
Underlying sales growth (%) 3.9                      
Effect of acquisitions (%) 0.6                      
Effect of disposals (%) (0.5 )                    
Turnover growth (%) 3.9                      
                     
                         

Turnover fell by 2% at current rates of exchange, with currency movements contributing a 6% reduction. Operating profit grew by 29% and operating profit BEIA grew by 8%, with currency movements contributing reductions of 9% and 7% respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Turnover increased by 4% and operating margin BEIA improved from 13.0% to 14.3%, through the benefits of our savings programmes and the exit from less profitable tea businesses in India.

Health & wellness
In 2002, we continued to meet the growing consumer demand for healthy food products, in both industrialised and developing markets.

New additions to the Slim•Fast range helped consumers to manage their weight healthily with food that fits into their daily lives. Slim•Fast turnover grew 10.8%, with a range extending from meal replacement drinks and bars to soups. It continued to expand beyond its US heartland, in the UK, Germany and the Netherlands. Slim•Fast continues to focus on the health & wellness consumer hotspot and is well positioned in relation to emerging concerns about obesity.

AdeS, our nutritious, healthy drink continued to grow strongly in Brazil, while we expanded Telma, a cereal brand from Israel, into snacking with the launch of children’s cereal bars.

Beverages
Lipton grew by 3.8% with turnover in more than 100 countries. The Lipton product range is inspired by the healthy, refreshing qualities of tea and includes ready-to-drink Lipton Ice Tea, new concepts such as Lipton Brisk lemonade and a wide range of leaf tea offerings.

Ready-to-drink beverages continue to perform strongly. In leaf tea, an area which is critical for the overall health of our beverage business, we continued to focus on improving profitability and innovation. We continued to drive growth around the world through our Lipton ‘Paint the World Yellow’ campaign. This enabled us to position Lipton as a contemporary brand and to perform strongly in the growing out-of-home sector. As around a third of beverages are consumed outside the home, this sector is important for continued growth.

We maintained leadership positions in key traditional tea markets such as the UK and India.


 

Unilever Annual Report & Accounts and Form 20-F 2003
37

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Operating review by category – Foods
Ice cream and frozen foods

 

2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 7 517   (523 ) 6 994 7 456   (6)%   1%  
Group operating profit 1 076   (52 ) 1 024 569   80%   89%  
 
 
                         
Turnover 7 517   (523 ) 6 994 7 456   (6)%   1%  
 
 
Operating profit BEIA 1 070 (58 ) 1 012 833   22%   28%  
Exceptional items 29   3   32   (237 )        
Amortisation – goodwill and intangible assets (23 ) 3   (20 ) (27 )        
 
 
Operating profit 1 076 (52 ) 1 024 569   80%   89%  
 
 
Operating margin 14.3%     14.6% 7.6%          
Operating margin BEIA 14.2%     14.5% 11.2%          
 
 
                         
Turnover and underlying sales growth 2003                      
(at constant 2002 rates) vs 2002                      
                     
Underlying sales growth (%) 2.4                      
Effect of acquisitions (%) 0.2                      
Effect of disposals (%) (1.8 )                  
Turnover growth (%) 0.8                      
                     
                         

Turnover fell by 6% at current rates of exchange, with currency movements contributing a 7% decline. Operating profit grew by 80% and operating profit BEIA grew by 22%, with currency movements contributing a 9% and 6% decline respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Ice cream
Ice cream had a strong year with 4.3% underlying sales growth, assisted by good weather in Europe. In quarter one, there launch of the Heart brand strengthened its resonance with contemporary consumers, and innovations such as Magnum 7 Sins, Magnum Bar & Sandwich and Carte d’Or artisanal delivered strong growth. Originally launched in Australia, Magnum 7 Sins was successfully rolled out across Europe. Roll-out of Cornetto into the growing soft-serve out-of-home sector continued.

It was another excellent year for North America with strong performances from Breyers, Klondike and Popsicle, and new low-carbohydrate ice creams. Latin America continues to make good progress, driven by Mexico and Brazil.

Frozen foods
Frozen foods experienced a difficult year, resulting in a decline in 2003 with share growth in meals being offset by a decline in vegetables and fish. Recessionary trends and increased competition from private labels and discounters impacted sales in Germany and in the Netherlands. The main shortfalls were in Iglo and Mora while Birds Eye showed progress. Knorr frozen continued to deliver good growth and further roll-out is planned.


 

38 Unilever Annual Report & Accounts and Form 20-F 2003

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Operating review by category – Foods
Ice cream and frozen foods (continued)

 

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 7 646   (190 ) 7 456   7 727   (4)%   (1)%  
Group operating profit 577   (8 ) 569   386   47%   49%  
 
 
                         
Turnover 7 646   (190 ) 7 456   7 727   (4)%   (1)%  
 
 
Operating profit BEIA 849   (16 ) 833   736   13%   15%  
Exceptional items (244 ) 7   (237 ) (321 )        
Amortisation – goodwill and intangible assets (28 ) 1   (27 ) (29 )        
 
 
Operating profit 577   (8 ) 569   386   47%   49%  
 
 
Operating margin 7.5%       7.6%   5.0%          
Operating margin BEIA 11.1%       11.2%   9.5%          
 
 
                         
Turnover and underlying sales growth
(at constant 2001 rates)		 2002
vs 2001		                      
                     
                     
Underlying sales growth (%) 2.9                      
Effect of acquisitions (%) –                      
Effect of disposals (%) (3.8 )                    
Turnover growth (%) (1.0 )                    
                     
                         

Turnover fell by 4% at current rates of exchange, with currency movements contributing a 3% decline. Operating profit grew by 47% and operating profit BEIA grew by 13%, with currency movements contributing a reduction of 2% in both cases. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Underlying sales growth for the year was 3%, but after the impact of disposals, turnover fell 1%. Operating margin BEIA improved from 9.5% to 11.1% after restructuring gains and higher brand investment.

Ice cream
In 2002, innovations under the Heart brand, including Cornetto Soft, Magnum 7 Sins, and others under Paddle Pop and Carte d’Or, delivered strong growth as they gave a new twist to a traditional favourite. North American ice cream brands Breyers and Ben & Jerry’s also delivered good results.

In 2002 we took brands like Cornetto out of the static freezer box and into the growing soft-serve out-of-home sector, and continued to target the in-home sector with innovations such as mini multi-packs and Cornetto snack-size ice cream, both of which made good progress during the year.

We made good progress in Latin America and North America and, in the context of a poor summer, performed well in Europe.

Frozen foods
Convenience combined with fresh-tasting, high quality ingredients drove the success of our Iglo, Birds Eye and Findus frozen ready meal solutions, which grew by 11%. Our overall frozen foods turnover fell by 8% in 2002, primarily due to disposals. A strong fourth quarter driven by quality innovations and brand support resulted in an underlying sales growth of 1% for the year.

In 2002, underlying sales growth in ready meals was offset by the implications of the end of the BSE crisis, which in 2001 drove stronger demand for fish, especially in the UK.


 

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Operating review by category – Home & Personal Care
Financial overview

 

2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
Group turnover 20 802   (2 434 ) 18 368 20 801   (12)%   0%  
Group operating profit 3 134 (368 ) 2 766 2 882   (4)%   9%  
 
 
                         
Turnover 20 818 (2 435 ) 18 383 20 824   (12)%   0%  
 
 
Operating profit BEIA 3 279 (401 ) 2 878 3 127   (8)%   5%  
Exceptional items (115 ) 29   (86 ) (213 )        
Amortisation – goodwill and intangible assets (30 ) 4   (26 ) (30 )        
 
 
Operating profit 3 134 (368 ) 2 766 2 884   (4)%   9%  
 
 
Operating margin 15.1%     15.0% 13.8%          
Operating margin BEIA 15.8%     15.7% 15.0%          
 
 
                         

Home & Personal Care
Turnover fell by 12% at current rates of exchange, due to currency movements. Operating profit fell by 4% and operating profit BEIA fell by 8%, with currency movements contributing 13% in both cases.

In 2003, leading brands continued to drive growth in our Home & Personal Care (HPC) Division, in line with our Path to Growth strategy. At constant rates of exchange, these brands grew 4%, while underlying sales grew 3%. Operating profit rose by 9%, operating profit BEIA rose by 5% and operating margin BEIA reached 15.8%.

The breadth of choice that consumers enjoy today suggests that strong brand equities are more important than they have ever been. As part of our Path to Growth strategy, we have focused

our portfolio on powerful brands that are aligned globally but crafted from intimate local consumer understanding. Our key brands continue to grow behind core innovations as well as expansion into new categories and geographies. We have further leveraged our strength in developing markets and our portfolio is evolving into one that is weighted towards the faster-growing, higher-margin personal care business.

Operating margin was improved by numerous simplification initiatives and we continued to focus our brand portfolio through disposals of non-core businesses including our oral care business and Brut fragrances in North America and Bio Presto in Italy. We have also signed binding agreements to sell Sunlight dishwash in North America.


 

40 Unilever Annual Report & Accounts and Form 20-F 2003

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Operating review by category – Home & Personal Care
Home care

2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
Group turnover 8 029 (804 ) 7 225 8 565   (16)%   (6)%  
Group operating profit 977   (69 ) 908   837   9%   17%  
 
                         
Turnover 8 034 (804 ) 7 230 8 579   (16)%   (6)%  
 
Operating profit BEIA 996   (82 ) 914   917   0%   9%  
Exceptional items (4 ) 12   8   (64 )        
Amortisation – goodwill and intangible assets (16 ) 2   (14 ) (17 )        
 
Operating profit 976   (68 ) 908   836   9%   17%  
 
Operating margin 12.1%     12.6% 9.7%          
Operating margin BEIA 12.4%     12.6% 10.7%          
 

 

Turnover and underlying sales growth 2003  
(at constant 2002 rates) vs 2002  
 
Underlying sales growth (%) –  
Effect of acquisitions (%) 1.0  
Effect of disposals (%) (7.4 )
Turnover growth (%) (6.4 )
 

Turnover fell by 16% at current rates of exchange, with currency movements contributing a 10% decline. Operating profit grew by 9% and operating profit BEIA was flat, with currency movements contributing declines of 8% and 9% respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Turnover from our laundry and household care business remained relatively flat in 2003, while operating margins increased by 2.4%. Growth in developing markets was partially offset by difficult trading conditions in North America and Europe.

Our top-performance fabric cleaning brand, Omo, is now aligned behind a common brand proposition across the world. This has extended to a focus on larger innovations and generated substantial savings through standardised packaging, formulation and advertising. The Omo brand remains a strong market leader in Brazil, Indonesia, Morocco, South Africa and Thailand while rebuilding a strong position in Turkey.

In order to meet the everyday needs of consumers around the world, we offer quality products at affordable prices. In South Africa, Sunlight is now the most recognised household consumer goods brand. Its clear positioning of ’Gentle care I trust’ is underpinned by the brand’s strong values of dependability, honesty and reliability. As a mid-priced brand, the strong consumer value proposition of Sunlight has helped generate growth of over 3% in 2003.

In Europe, innovation helped Comfort grow its leading market position in the UK and gain market leadership in Portugal. The new fast-dry variant of Comfort shortens the drying time for clothes and eases the burden of washing laundry for consumers.

While our household cleaning brands performed below expectations, results improved in the second half as innovation around the core business showed signs of a return to growth. Within the portfolio, Cif and Domestos remain leading brands with number one or number two positions in the majority of key markets in which they operate.


 

Unilever Annual Report & Accounts and Form 20-F 2003
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Operating review by category – Home & Personal Care
Home care (continued)

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
Group turnover 9 421   (856 ) 8 565   10 432   (18)%   (10)%  
Group operating profit 893   (56 ) 837   626   34%   43%  
 
                         
Turnover 9 436   (857 ) 8 579   10 467   (18)%   (10)%  
 
Operating profit BEIA 990   (73 ) 917   845   9%   17%  
Exceptional items (81 ) 17   (64 ) (200 )        
Amortisation – goodwill and intangible assets (17 ) –   (17 ) (18 )        
 
Operating profit 892   (56 ) 836   627   33%   42%  
 
Operating margin 9.5%       9.7%   6.0%          
Operating margin BEIA 10.5%       10.7%   8.1%          
 

 

Turnover and underlying sales growth 2002  
(at constant 2001 rates) vs 2001  
Underlying sales growth (%) 0.8  
Effect of acquisitions (%) 2.0  
Effect of disposals (%) (12.2 )
Turnover growth (%) (9.8 )

Turnover fell by 18% at current rates of exchange, with currency movements contributing an 8% decline. Operating profit grew by 33% and operating profit BEIA grew by 9%, with currency movements contributing reductions of 9% and 8% respectively. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

In 2002, underlying sales grew by 0.8% and operating margin BEIA improved by 2.4%, through the benefit of our savings programmes. Growth was driven by Radiant, Snuggle and Comfort.

Around the world in 2002, we repositioned Omo, our top-performance washing detergent, as a brand for parents and their families. This strategy was driven by the message that getting dirty is all part of the experience children need to learn and

develop. It helped to consolidate the leading position of Omo in Brazil and South Africa and to achieve market share gains in such countries as Morocco and Thailand.

In Morocco, Omo overtook its rivals to become the market leader. In Thailand, new innovations helped the brand to extend its leadership, while in South Africa it maintained its strong leadership position in a growing market.

To reinforce our position in the sector, we launched Persil Aloe Vera. This successfully introduced new customers to the brand. During 2002, Persil achieved its highest market share for 10 years.

On 3 May 2002 we completed the sale of our DiverseyLever business to Johnson Professional Holdings Inc., leading to a 9.8% reduction in turnover, despite underlying sales growth of 0.8%.


 

42 Unilever Annual Report & Accounts and Form 20-F 2003

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Operating review by category – Home & Personal Care
Personal care


At current exchange rates


At current exchange rates


At current exchange rates


 

2003 results compared with 2002 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2003 at   rate   2003 at   2002 at   actual   constant  
  2002 rates   effects   2003 rates   2002 rates   current rates   2002 rates  
 
 
Group turnover 12 773   (1 630 ) 11 143   12 236   (9)%   4%  
Group operating profit 2 157   (299 ) 1 858   2 045   (9)%   5%  
 
 
                         
Turnover 12 784   (1 631 ) 11 153   12 245   (9)%   4%  
 
 
Operating profit BEIA 2 283   (319 ) 1 964   2 210   (11)%   3%  
Exceptional items (111 ) 17   (94 ) (149)          
Amortisation – goodwill and intangible assets (14 ) 2   (12 ) (13)          
 
 
Operating profit 2 158   (300 ) 1 858   2 048   (9)%   5%  
 
 
Operating margin 16.9%       16.7%   16.7%           
Operating margin BEIA 17.9%       17.6%   18.1%           
 
 
                         
                         
Turnover and underlying sales growth 2003  
(at constant 2002 rates) vs 2002  
 
Underlying sales growth (%) 5.4  
Effect of acquisitions (%) 0.1  
Effect of disposals (%) (1.0 )
Turnover growth (%) 4.4  
 

 

Turnover fell by 9% at current rates of exchange, with currency movements contributing a 13% decline. Operating profit fell by 9% and operating profit BEIA fell by 11%, with currency movements contributing 14% in both cases. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Our leading personal care brands, which include Axe, Dove, Lux, Pond’s, Rexona and Sunsilk, grew underlying sales by 6%. Turnover increased by 4.4% and operating margin increased by 0.2%.

Dove, our largest personal care brand, grew underlying sales more than 20% in 2003. Growth of the core range was driven by the launch of the Dove exfoliating bar in more than 30 countries around the world. We also continued to extend Dove into new categories in North America with the launch of Dove face care and Dove shampoo and conditioner.

Our global hair business grew underlying sales by 8%. This growth was driven both by the continued success of Dove shampoo and conditioner and by our largest hair care brand, Sunsilk. The lively approach to women and how they really feel about their hair by Sunsilk has helped re-introduce the brand successfully into Europe. Sunsilk also continued to grow strongly in Latin America with the introduction of new variants and full

roll-out of colorants in Brazil. A relaunch of the brand in China (under the name Hazeline) has nearly doubled the rate of sale.

Unilever remains the world leader in deodorants and antiperspirants and our deodorant category grew underlying sales by over 12% behind the strength of Axe and Rexona. Axe has developed innovative approaches to talking to young men throughout the world. The brand is carving out a strong position in the North American male deodorant market on the basis of this deep consumer understanding. The launch of new fragrances and antiperspirants, along with improved product efficacy, has translated into outstanding growth.

Rexona for Men continued to grow with the relaunch of the range in Europe and launch of the 24 Hour Deo Fresh range in Latin America. New formulations also supported the core range with improved efficacy to offer longer freshness and the launch of the low residue Crystal range in Europe.

Our prestige fragrance business declined amid weak category performance and weak economic conditions in key markets. The sale of the Valentino licence also contributed to the decline in turnover. Innovation in 2003 included the launch of Purple Orchid (Eternity), Truth for Men in Europe and Nautica Competition in the Americas.


 

Unilever Annual Report & Accounts and Form 20-F 2003
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Operating review by category – Home & Personal Care
Personal care (continued)

2002 results compared with 2001 € million   € million   € million   € million   %   %  
      Exchange           Change at   Change at  
  2002 at   rate   2002 at   2001 at   actual   constant  
  2001 rates   effects   2002 rates   2001 rates   current rates   2001 rates  
 
 
Group turnover 13 265   (1 029 ) 12 236   12 307   (1)%   8%  
Group operating profit 2 235   (190 ) 2 045   2 135   (4)%   5%  
 
 
                         
Turnover 13 273   (1 028 )  12 245   12 310   (1)%   8%  
 
 
Operating profit BEIA 2 416   (206 ) 2 210   2 194   1%   10%  
Exceptional items (166 ) 17   (149 ) (46 )        
Amortisation – goodwill and intangible assets (12 )  (1 ) (13 ) (11 )        
 
 
Operating profit 2 238   (190 ) 2 048   2 137   (4)%   5%  
 
 
Operating margin 16.9%       16.7%   17.4%          
Operating margin BEIA 18.2%       18.1%   17.8%          
 
 
                         
                         
Turnover and underlying sales growth 2002  
(at constant 2001 rates) vs 2001  
 
Underlying sales growth (%) 9.0  
Effect of acquisitions (%) –  
Effect of disposals (%) (1.1 )
Turnover growth (%) 7.8  
 

 

Turnover fell by 1% at current rates of exchange, with currency movements contributing a 9% decline. Operating profit fell by 4% and operating profit BEIA rose by 1%, with currency movements contributing reductions of 9% in both cases. The underlying performance of the business after eliminating these exchange translation effects is discussed below at constant exchange rates.

Our leading brands, which include Axe, Dove, Lux, Pond’s, Rexona, Signal and Sunsilk saw underlying sales growth of 10% in 2002. Turnover rose by 8%, with operating margin BEIA increasing to 18.2%.

From New York to New Delhi, image and beauty are important to millions of people. To meet their desire for attractive, healthy hair we continued to focus on Dove and Sunsilk during 2002.

The Dove hair range reached the number one position in its initial launch market of Korea and Taiwan and number two in Japan, where it was launched in 2001. During the year, we rolled out Dove shampoo and conditioners across more than 30 countries in Europe, Latin America and South East Asia.

In 2002, the underlying sales growth of Sunsilk was strong, with good performances in Brazil and Mexico and new market entries in Algeria and Central America. In Ghana and South Africa we launched our new Afro Hair range. We further drove the growth of Sunsilk with the launch of new products, such as permanent colourant Pro-Color in Argentina and Brazil.

In Canada, we are migrating Pears to the highly successful North American brand Suave.

Washing away the everyday grime that builds up on skin is a daily ritual for countless people. In Brazil, although around 70 million consumers have black or mulatto skin, there had never been a mass-market soap specially designed for them. To meet their aspirations we launched a Lux variant specifically for this skin type during 2002.

In 2002, the growth of Axe was 17%, driven by powerful innovation in the core body spray range, including the launch of a new longer-lasting 24-hour formulation. We launched Axe in North America with a campaign targeting young men between 14 and 24 – a group that spends around $8 billion a year on personal grooming products.

Rexona enjoyed strong growth with the best performance coming from our antiperspirant deodorant for men. Rexona for Men grew by 30% in the core regions of Europe and Latin America.

A clean, bright smile can say more than words, whatever language you speak. In 2002, we sought to reinforce the strength of our Signal brand through a strong competitive position in the electric toothbrush market. We launched the first electric toothbrush to offer the choice of two heads – for cleaning and whitening.


 

44 Unilever Annual Report & Accounts and Form 20-F 2003

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Risk management

The following discussion about risk management activities includes ‘forward-looking’ statements that involve risk and uncertainties. The actual results could differ materially from those projected. See the ‘Cautionary Statement’ on page 3.

Unilever’s system of risk management is outlined on page 71. Particular risks and uncertainties that could cause actual results to vary from those described in forward-looking statements within this document, or which could impact on our ability to meet our published targets under the Path to Growth strategy – which consists of focusing resources on leading brands, closing manufacturing sites and reorganising or divesting under-performing businesses – include the following:

Our brands:
A key element of our strategy is the development of a small number of global leading brands. Any adverse event affecting consumer confidence or continuity of supply of such a brand would have an impact on the overall business.

Innovation:
Our growth depends in large part on our ability to generate and implement a stream of consumer-relevant improvements to our products. The contribution of innovation is affected by the level of funding that can be made available, the technical capability of the research and development functions, and the success of operating management in rolling out quickly the resulting improvements.

Developing our managers:
Unilever’s performance requires it to have the right calibre of managers in place. We must compete to obtain capable recruits for the business, and then train them in the skills and competencies that we need to deliver growth.

Economic conditions in developing countries:
About a third of Unilever’s turnover comes from the group of developing and emerging economies. We have long experience in these markets, which are also an important source of our growth. These economies are more volatile than those in the developed world, and there is a risk of downturns in effective consumer demand that would reduce the sales of our products.

Customer relationships and distribution:
Unilever’s products are generally sold through its sales force and through independent brokers, agents and distributors to chain, wholesale, co-operative and independent grocery accounts, food service distributors and institutions. Products are distributed through distribution centres, satellite warehouses, company-operated and public storage facilities, depots and other facilities. Sales to large customers or sales via specialised distribution channels are significant in some of our businesses.

The loss of a small number of major customers or a major disruption of a specialised distribution centre or channel could have an adverse effect on the Group’s business and results of operations.

Price and supply of raw materials and commodities contracts: Unilever’s products are manufactured from a large number of diverse materials. Unilever has experience in managing fluctuations in both price and availability. However, movements outside the normal range may have an impact upon margins.

Some of our businesses, principally edible fats companies in Europe, may use forward contracts over a number of oils to hedge future requirements. We purchase forward contracts in bean, rape, sunflower, palm, coconut and palm kernel oils, almost always for physical delivery. We may also use futures contracts to hedge future price movements; however, the amounts are not material. The total value of open forward contracts at the end of 2003 was €292 million compared with €417 million in 2002.

In addition, our plantations businesses may use forward contracts for physical delivery of palm oil and tea under strictly controlled policies and exposure limits. Outstanding forward contracts at the end of 2003 were not material.

Managing restructuring and reorganisation programmes:
Unilever is engaged in a wide-ranging business transformation programme, Path to Growth, which has the potential temporarily to disrupt normal business operations. Through our change management expertise and detailed execution plans, we have experienced no material disruption during the first four years of Path to Growth.

Reputation:
Unilever has a good corporate reputation and many of our businesses, which operate in some 100 countries around the world, have a high profile in their region. Unilever products carrying our well-known brand names are sold in over 150 countries. Should we fail to meet high product safety, social, environmental and ethical standards in all our operations and activities, Unilever’s corporate reputation could be damaged, leading to the rejection of our products by consumers, devaluation of our brands and diversion of management time into rebuilding our reputation. Examples of initiatives to manage key social and environmental risks are mentioned on pages 11 and 12.

Borrowings:
The Group had gross borrowings totalling €15 900 million at the end of 2003. Any shortfalls in our cash flow to service these borrowings could undermine our credit rating and overall investor confidence. Market, interest rate and foreign exchange risks to which the Group is exposed are described on page 46.

Pensions and similar obligations:
Pension assets and liabilities (pre-tax) of €12 918 million and €17 870 million respectively are held on the Group’s balance sheet as at 31 December 2003. Movements in equity markets, interest rates and life expectancy could materially affect the level of surpluses and deficits in these schemes, and could prompt the need for the Group to make additional pension contributions in the future. The key assumptions used to value our pension liabilities are set out in note 17 on page 99.


 

Unilever Annual Report & Accounts and Form 20-F 2003
45

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Risk management

Treasury risks:
Unilever Treasury manages a variety of market risks, including the effects of changes in foreign exchange rates, interest rates and credit spreads. Other risks managed include liquidity, country and counterparty risks.

Unilever has an interest rate management policy aimed at optimising net interest cost and reducing volatility. This is achieved by modifying the interest rate exposure of debt and cash positions through the use of interest rate swaps. Further details on the fixing levels of the projected net debt are given in note 15 on page 97.

Unilever’s foreign exchange policy requires that operating companies hedge trading and financial foreign exchange exposures. This is achieved primarily through the use of forward foreign exchange contracts. Some flexibility is permitted within overall exposure limits. Business groups monitor compliance with this policy. At the end of 2003, there was no material exposure from companies holding assets and liabilities other than in their functional currency.

Unilever conducts business in many foreign currencies but publishes its financial statements and measures its performance in euros. As a result, it is subject to exchange risk due to the effects that exchange rate movements have on the translation of the results and underlying net assets of its foreign subsidiaries. Unilever aims to reduce its foreign exchange exposure in operating companies by borrowing in the local currency, except where inhibited by local regulations, lack of local liquidity or local market conditions. An exception may also be made where the economic value of the net assets locally is considered substantially to exceed their book value. From time to time, currency revaluations will trigger exchange translation movements in our balance sheet as a result of these exceptions. In 2003, the significant weakening of the US dollar against the euro has had a negative impact on our results, but has had a positive impact on our debt and equity, when reported in euros.

Counterparty exposures are minimised by restricting dealing counterparties to a limited number of financial institutions that have secure credit ratings, by working within agreed counterparty limits, by obtaining collateral for outstanding positions and by setting limits on the maturity of exposures. Counterparty credit ratings are closely monitored and concentration of credit risk with any single counterparty is avoided. There was no significant concentration of credit risks with any single counterparty as at the year end.

As a result of the share option plans for employees, we are exposed to movements in our own share price. In recent years we have hedged this risk through buying Unilever shares in the market when the share option is granted and holding these shares until the share option is exercised or lapses. In 2001, we also entered into a contract with a bank for the forward purchase of Unilever shares, further details of which are given in note 15 on page 98. At the year end, 93% of all outstanding employee share options were hedged; based on Unilever’s experience with the exercise level of options we consider this position as being fully hedged.

The analysis below presents the sensitivity of the fair value of the financial and derivative instruments the Group held at 31 December 2003, to the hypothetical changes described below

Interest rate sensitivity:
The fair values of debt, investments and related hedging instruments are affected by movements in interest rates. The analysis shows the sensitivity of the fair value of interest rate sensitive instruments to a hypothetical 10% change in the interest rates across all maturities as at 31 December 2003.

Foreign exchange rate sensitivity:
The values of debt, investments and hedging instruments, denominated in currencies other than the functional currency of the entities holding them, are subject to exchange rate movements. The analysis shows the sensitivity of these values to a hypothetical 10% change in foreign exchange rates as at 31 December 2003.

Fair value changes:        
  Sensitivity to a  
  hypothetical 10% change in  
  rates as at 31 December  
  € million   € million  
  2003   2002  
 
Interest rate risk 175   218  
Foreign exchange rate risk 5   1  
 

The above-mentioned interest rate sensitivity relates to financial and derivative instruments with fair values amounting to €16 411 million at the end of 2003 (2002: €20 854 million). For further information on fair values see note 15 on page 98. The above-mentioned foreign exchange rate risk relates to a value of financial instruments and derivatives of €46 million at the end of 2003 (2002: €10 million).

Further details on derivatives, foreign exchange exposures and other related information on financial instruments are given in note 15 on pages 97 and 98.

In addition, as a multinational group, Unilever’s businesses are exposed to varying degrees of risk and uncertainty related to other factors including competitive pricing, consumption levels, physical risks, legislative, fiscal, tax and regulatory developments, terrorism and economic, political and social conditions in the environments where we operate. All of these risks could materially affect the Group’s business, our turnover, operating profit, net profit, net assets and liquidity. There may also be risks which are unknown to Unilever or which are currently believed to be immaterial.


 

46 Unilever Annual Report & Accounts and Form 20-F 2003

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Corporate governance

 

Organisational structure of Unilever
NV and PLC are the two parent companies of the Unilever Group of companies. NV was incorporated under the name Naamlooze Vennootschap Margarine Unie in the Netherlands in 1927. PLC was incorporated under the name Lever Brothers Limited in Great Britain in 1894.

Since 1930 when the Unilever Group was formed, NV and PLC together with their group companies have operated, as nearly as is practicable, as a single entity. They have the same directors, adopt the same accounting principles, and are linked by a series of agreements. The Equalisation Agreement, which regulates the mutual rights of the two sets of shareholders, is particularly important. It makes the position of the shareholders of both companies, as far as possible, the same as if they held shares in a single company.

NV and PLC are separate companies, with separate stock exchange listings and different shareholders. You cannot convert or exchange the shares of one for shares of the other and the relative share prices on the various markets can, and do, fluctuate. This happens for a number of reasons, including changes in exchange rates. However, over time the prices of NV and PLC shares do stay in close relation to each other, in particular because of our equalisation arrangements.

NV and PLC are holding and service companies. Our businesses are carried out by our group companies around the world. The holding companies have agreed to co-operate in all areas, to exchange all relevant business information and to ensure all group companies act accordingly. Usually, shares in the group companies are held ultimately by either NV or PLC, with the main exception being that the US companies are owned by both and, as a result of the legal integration of Bestfoods into Unilever, a number of the group companies are partly held by Unilever United States, Inc. These group companies are therefore also ultimately owned jointly by NV and PLC.

These arrangements are designed to create a balance between the funds generated by the NV and PLC parts of the Group.

See pages 142 to 145 for a listing of the Group’s principal subsidiaries and also Control of Unilever on page 152.

Legal structure of the Group

Corporate governance developments
The text that follows describes Unilever’s corporate governance arrangements throughout 2003. This text should be read in the light of the proposals that will be put to the NV and PLC shareholders for consideration at the Annual General Meetings in 2004 to change those arrangements. The principal change is to make individuals who are currently Advisory Directors formal, non-executive members of the Boards of NV and PLC, with full entitlement to vote at meetings and responsibility for the actions of the Boards. Full information on these proposed changes can be found on the Unilever website at www.unilever.com/investorcentre/.

These and other changes are being proposed in order to maintain Unilever’s high standards of corporate governance in response to the latest developments in Europe and the US. Subject to acceptance of these proposals by shareholders, fuller details of Unilever’s changed corporate governance arrangements will be placed on Unilever’s website at www.unilever.com/investorcentre/.

Directors
The Chairmen and all of the Directors are full-time executives and directors of both NV and PLC and, as well as holding specific management responsibilities, they are responsible for the conduct of the business as a whole.

The Chairmen of NV and PLC are the principal executive officers of Unilever.

Our operations are organised into two global divisions – Foods and Home & Personal Care – headed by Division Directors. Reporting to their respective Division Directors are the Foods and the Home & Personal Care Business Presidents, responsible for the profitability of their regional and global businesses. For details of the Division Directors and Business Presidents, see pages 52 to 53.

The Directors have set out a number of areas for which the Boards have direct responsibility for decision making. They meet at least five times a year to consider the following corporate events and actions:

• Agreement of quarterly results announcements 
• Approval of the Annual Report and Accounts and Form 20-F 
• Declaration of dividends
• Convening of shareholders’ meetings
• Approval of corporate strategy 
• Authorisation of major transactions 

All other matters are delegated to committees whose actions are reported to and monitored by the Boards.

Board meetings are held in London and Rotterdam and chaired by the Chairmen of NV and PLC. The Chairmen are assisted by the Joint Secretaries, who ensure the Boards are supplied with all the information necessary for their deliberations. Information is normally supplied a week prior to each meeting.

Directors are elected by shareholders at the Annual General Meetings of NV and PLC, to hold office until the end of the next Annual General Meetings. For details of the nomination procedure for Directors, see Control of Unilever on page 152. All the Directors submit themselves for re-election each year and


 

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Corporate governance

 

retire at the latest by the age of 62. They are executive officers, and cease to hold executive office on ceasing to be directors. We appoint our other executive officers, who are full time, for an indefinite period. These other executive officers are the corporate officers listed on page 53. None of our Directors or executive officers are elected or appointed under any arrangement or understanding.

All of our Directors have been with Unilever full time for at least five years, and in most cases for most of their business careers. For details see pages 52. There are no family relationships between any of our Directors or executive officers.

A procedure is in place to enable Directors, if they so wish, to seek independent professional advice. On election, Directors are briefed thoroughly on their responsibilities and updates on corporate governance developments are a frequent item at board meetings. The Directors regularly visit Unilever’s operations around the world and the Business Presidents routinely give presentations to the Boards.

The Joint Secretaries are appointed and removed by the Boards.

Advisory Directors
The Advisory Directors have hitherto been the principal external presence in the governance of Unilever. The role of an independent Advisory Director involves giving advice to the Boards in general, and to the Executive Committee in particular, on corporate governance, business, social and economic issues. They serve on certain key Board committees, the roles and membership of which are described below.

The appointment of Advisory Directors is provided for in the Articles of Association of both parent companies, although they are not formally members of the Boards. They are therefore not entitled to vote at meetings of the Boards and bear no legal responsibility for the Boards’ actions. Their terms of appointment, role and powers are enshrined in resolutions of the Boards. As well as Board committee meetings, they attend the quarterly Directors’ meetings, other Directors’ conferences, and other meetings with the Chairmen. In addition, the Advisory Directors may meet as a body, at their discretion, and appoint a senior member as their spokesman.

Our Advisory Directors are chosen for their broad experience, international outlook and independence. They are appointed by resolutions of the Boards, normally for an initial term of three to four years and thereafter for terms of three years.

Their remuneration is determined by the Boards and it, and any other financial relationships, are reported on page 67. All appointments and re-appointments are based on the recommendations of the Nomination Committee.

In the context of Unilever’s unique arrangements for corporate governance, all the Advisory Directors are considered to be independent of Unilever. The report on pages 59 and 67 describes the relationships between the Advisory Directors and Unilever.

The position of Advisory Director will cease if shareholders accept the proposals being put to the NV and PLC shareholders at the Annual General Meetings in 2004. See page 47.

Board Committees
The Directors have established the following committees:

Executive Committee
The Executive Committee comprises the Chairmen of NV and PLC and five other members: the two Division Directors for Foods and for Home & Personal Care; the Corporate Development Director; the Financial Director; and the Personnel Director. Members of the Executive Committee are appointed by all of the Directors for one year at a time. The Executive Committee is responsible for agreeing priorities and allocating resources, setting overall corporate targets, agreeing and monitoring divisional strategies and plans, identifying and exploiting opportunities created by Unilever’s scale and scope, managing external relations at the corporate level and developing future leaders. The Executive Committee generally meets formally at least monthly and is chaired, alternately, by the Chairmen of NV and PLC. The Committee is supplied with information by the Executive Committee Secretariat.

Audit Committee
The Audit Committee comprises a minimum of three Advisory Directors. The Committee met five times in 2003. It is chaired by Hilmar Kopper, and its other members are Oscar Fanjul and Claudio X Gonzalez. The Boards have satisfied themselves that all the members of the Committee are competent in financial matters and that, for the purposes of the US Sarbanes-Oxley Act of 2002, Hilmar Kopper is the Committee’s financial expert. The Committee’s meetings are attended by the Financial Director, the General Counsel, the Controller, the Chief Auditor and our external auditors. The Audit Committee assists the Boards in fulfilling their oversight responsibilities in respect of the integrity of Unilever’s financial statements, risk management and internal control arrangements, compliance with legal and regulatory requirements, the performance, qualifications and independence of the external auditors and the performance of the internal audit function. The Committee is directly responsible, subject to local laws regarding shareholder approval, for the nomination, compensation and oversight of the external auditors. The Chief Auditor ensures that the Committee is supplied with necessary information. Both the Chief Auditor and the external auditors have direct access to the Audit Committee separately from other management.

See page 69 for the Report of the Audit Committee to the shareholders.

The Committee’s terms of reference, including its full responsibilities, can be read on the Unilever website at
www.unilever.com/investorcentre/.

Corporate Risk Committee
The Corporate Risk Committee currently comprises the Financial Director, the Foods Director, the Home & Personal Care Director, the Personnel Director, the General Counsel, the Chief Auditor and the Controller. It meets at least four times a year. The objective of the Committee is to assist the Boards to carry out their responsibilities to ensure effective risk management and systems of internal control. It reports to the Boards, the Executive Committee and, as relevant, to the Audit Committee. The Committee is supplied with information by the Controller.


 

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External Affairs and Corporate Relations Committee
The External Affairs and Corporate Relations Committee currently comprises four Advisory Directors and normally meets four times a year. It is chaired by Lady Chalker, and its other members are Lord Brittan, Senator George J Mitchell and Professor Wim Dik. Charles R Shoemate retired as a member in 2003. The Committee oversees the Code of Business Principles, advises on external matters of relevance to the business – including issues of corporate social responsibility – and reviews our corporate relations strategy. The Committee is supplied with necessary information by the Corporate Development Director.

Nomination Committee
The Nomination Committee comprises a minimum of three Advisory Directors and the Chairmen of NV and PLC and meets at least once a year. It was chaired by Frits Fentener van Vlissingen until his retirement at the 2003 Annual General Meeting and thereafter by Bertrand Collomb. Its other members are Antony Burgmans, Niall FitzGerald, Lord Simon and Jeroen van der Veer. It recommends to the Boards candidates for the positions of Director, Advisory Director and Executive Committee member. The Committee is supplied with information by the Joint Secretaries. The Committee’s terms of reference are on our website at www.unilever.com/investorcentre/.

Remuneration Committee
The Remuneration Committee currently comprises three Advisory Directors and meets at least three times a year. It was chaired by Frits Fentener van Vlissingen until his retirement at the 2003 Annual General Meeting and thereafter by Bertrand Collomb. Its other members are Lord Simon and Jeroen van der Veer. It reviews executive Directors’ remuneration and is responsible for the executive share-based incentive plans. The Committee determines specific remuneration packages for each of the Directors. The Committee is supplied with information by J A A van der Bijl, Joint Secretary of Unilever.

The detailed report to shareholders on Directors’ remuneration is on pages 54 to 68. The Committee’s terms of reference are on our website at www.unilever.com/investorcentre/.

Other committees
The Boards and the Board Committees are assisted by:

• a Code Compliance Committee, that is responsible for monitoring and reporting on compliance with the Code of Business Principles. The Joint Secretaries are responsible for the operation of this Committee; and 
• a Disclosures Committee, that is responsible for helping the Boards ensure that information that ought to be disclosed publicly is disclosed and that the information that is disclosed is complete and accurate. The Controller is responsible for the operation of this Committee. 

Committees are also set up to conduct routine business as and when they are necessary. They comprise any two of the Directors and certain senior executives and company officers. They administer certain matters previously agreed by the Boards or the Executive Committee. The Joint Secretaries are responsible for the operation of these committees.

All these committees are formally set up by Board resolution with carefully defined remits. They report regularly and are responsible to the Boards of NV and PLC.

Requirements – general
Unilever is subject to corporate governance requirements in the Netherlands, the United Kingdom and the United States. A vital factor in the arrangements between NV and PLC is their having the same directors. The concept of the non-executive director, as recognised in the United Kingdom, was, until recently, not a feature of corporate governance in the Netherlands, and the supervisory board, as recognised in the Netherlands, is hitherto unknown in the United Kingdom. It is also the case that the role of the board differs in certain key respects between the UK and the US. Nevertheless, Unilever’s Advisory Directors have long provided a strong independent element, performing many of the functions of supervisory and non-executive directors. The Audit, External Affairs and Corporate Relations and Remuneration Committees consist exclusively of Advisory Directors and the majority of the members of the Nomination Committee are Advisory Directors. See page 52 for details. It had hitherto not been considered practicable to appoint supervisory or non-executive directors who could serve on both Boards. However, as indicated above, following a review in 2003, proposals to change this aspect of Unilever’s corporate governance arrangements will be put to shareholders for adoption in 2004.

Requirements – the Netherlands
In December 2003, the Corporate Governance Committee (Tabaksblat Committee) published the definitive version of the Dutch Corporate Governance Code (‘Dutch Code’) which replaces the 1997 ’Recommendations on Corporate Governance in the Netherlands’ of the Peters Committee. The Dutch legislature will provide the Dutch Code with a legal basis, and is expected to apply the Dutch Code to all companies, such as NV, whose registered office is in the Netherlands and whose shares or depositary receipts are officially listed on a recognised stock exchange with effect from financial years starting on or after 1 January 2004.

Unilever’s compliance at present with the Dutch Code should be considered in the light of the proposals that will be put to the NV shareholders for consideration and approval at the Annual General Meeting of 2004. Unilever has taken the Dutch Code into account when making the changes to its governance arrangements that will become effective, subject to shareholder approval, as from the NV Annual General Meeting of 2004. In this meeting we will discuss our corporate governance structure and arrangements with the NV shareholders. The notice for the Meeting will address Unilever’s main departures from the Dutch Code.

As from the 2004 financial year onwards, Unilever will fully disclose in its Annual Report & Accounts and Form 20-F its compliance with the Dutch Code, as well as any non-application of provisions of the Dutch Code and an explanation. Unilever expects to comply with the Dutch Code to a substantial extent. However, due to our structure, we may have to depart in certain respects from the provisions of the Dutch Code. In line with the recommendation made in the Dutch Code, NV intends to discuss its compliance with the Dutch Code at the Annual General Meeting of 2005.


 

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Requirements – the United Kingdom
PLC is required, as a company that is incorporated in the United Kingdom and listed on the London Stock Exchange, to state how it has applied the principles and how far it has complied with the provisions set out in Section 1 of the Combined Code issued in 1998 (‘the Combined Code’) appended to the United Kingdom Listing Rules.

As already explained, the Boards exercise control through the Executive Committee. Responsibilities are shared by the Chairmen of NV and PLC, while the Advisory Directors perform many of the functions of the supervisory board members or non-executive directors, although they were not formally members of the Boards in 2003. For the purposes of the Combined Code, the Boards had not appointed a senior independent director during 2003, on the basis that issues for the Boards can be raised with whichever Advisory Director is the Chairman of the relevant Board Committee and the Advisory Directors are entitled to meet as a body and appoint a senior member as their spokesman. A senior independent director will be appointed as a consequence of the proposals put to the Annual General Meetings in 2004.

Unilever’s remuneration policy is contained within the report on the directors’ remuneration and interests on pages 54 to 68. This also deals with aspects of non-compliance with the Combined Code in this area. Members of the Audit, Remuneration and Nomination Committees will be available to answer questions at the Annual General Meetings of both NV and PLC. The members attending each meeting will not necessarily include the Chairman of the Committee, since these meetings take place at about the same time in Rotterdam and London respectively.

A description of Unilever’s compliance with ‘Internal Control – Guidance for Directors on the Combined Code’ is given on page 71.

NV and PLC are separate legal entities, each subject to its own national traditions and practices and each with responsibilities to different sets of shareholders. Unilever has, since its inception, adopted the principle that it is good practice that the most senior roles in NV and PLC are shared and not concentrated in one person. As a consequence it is a principal tenet of its governance philosophy, which finds expression in two people who each combine the roles of Chairman and Chief Executive and who meet regularly for joint decision making. This carefully balanced arrangement has served Unilever’s unique constitutional arrangements very well for many years and the Boards believe that to separate these roles would only introduce undesirable and unnecessary complexity.

In all other respects, PLC has complied with the Combined Code throughout 2003.

For Unilever, the revisions made to the Combined Code in 2003 apply as from 1 January 2004. Unilever has had the new requirements in mind in making the changes in its corporate governance arrangements that will, subject to shareholder approval, be effective from the Annual General Meetings in 2004. See page 47. It will therefore report formally on its compliance in next year’s Annual Report & Accounts and Form 20-F. Before then, further information will be placed on Unilever’s website www.unilever.com/investorcentre/.

Requirements – the United States
Both NV and PLC are listed on The New York Stock Exchange and must therefore comply with such of the requirements of US legislation, such as The Sarbanes-Oxley Act of 2002, SEC regulations and the Listing Rules of The New York Stock Exchange as are applicable to foreign listed companies. In some cases the requirements are mandatory and in other cases the obligation is to ‘comply or explain’.

Unilever has complied with these requirements concerning corporate governance that were in force during 2003. Attention is drawn in particular to the Report of the Audit Committee on page 69. Actions taken to ensure compliance that are not specifically disclosed elsewhere or otherwise clear from reading this document include:

• the issue of a Code of Ethics for senior financial officers; 
• the issue of instructions restricting the employment of former employees of the audit firm; and 
• establishment of standards of professional conduct for US attorneys. 

In each of these cases, existing practices have been revised and/or documented in such a way as to conform to the new requirements.

The Code of Ethics applies to the senior executive, financial and accounting officers and comprises the standards prescribed by the SEC, and a copy has been posted on Unilever’s website at www.unilever.com/investorcentre/. The Code of Ethics comprises an extract of the relevant provisions of Unilever’s Code of Business Principles and the more detailed rules of conduct that implement it. The only amendment to these pre-existing provisions and rules that was made in preparing the Code of Ethics was made at the request of the Audit Committee and consisted of a strengthening of the explicit requirement to keep proper accounting records. No waiver from any provision of the Code of Ethics was granted to any of the persons falling within the scope of the SEC requirement in 2003.

Unilever has also taken into account the US requirements taking effect in 2004 and 2005 applicable to both foreign and US listed companies in preparing the changes in its corporate governance arrangements that will be effective from the NV and PLC Annual General Meetings on 12 May 2004. Further information will be placed on Unilever’s website at www.unilever.com/investorcentre/ following those meetings, and will be reported in the Annual Report & Accounts and Form 20-F for 2004.

Auditors
Subject to the annual appointment of auditors by the shareholders and in addition to our ongoing process of monitoring the auditors’ performance, we undertake a formal review every three years. The most recent review was completed in November 2002 and resulted in the re-appointment of PricewaterhouseCoopers. On the recommendation of the Audit Committee, the Directors will be proposing the re-appointment of PricewaterhouseCoopers at the Annual General Meetings on 12 May 2004 (see pages 148 and 151).


 

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Both the Executive Committee and the auditors have for many years had safeguards to avoid the possibility that the auditors’ objectivity and independence could be compromised. In overview, our procedures in respect of services provided by PricewaterhouseCoopers are:

• Statutory audit – Procedures in respect of statutory audit services are detailed on page 50. This category includes fees for the statutory audit of Unilever’s financial statements and those of its subsidiaries. 
   
• Other audit services – This is audit and similar work that regulations or agreements with third parties require the auditors to undertake. These services include formalities relating to borrowings, shareholder and other circulars and various other regulatory reports. 
   
• Audit-related services – This is work that, in their position as the auditors, they are best placed to undertake. It includes internal control reviews, other reports and work in respect of acquisitions and disposals. 
   
• Tax services – In cases where they are best suited, we use the auditors. All other significant tax consulting work is put to tender. 
   
• General consulting and other services – Since early 2002, our policy has been that our external auditors may not tender for any new general consulting work. We use our auditors to perform a limited number of other services, including risk management advisory work and training, where these are compatible with their work and subject to the appropriate level of pre-approval. 

The Audit Committee has approved a policy regarding the above three non-audit categories. This lists in detail the particular services which PricewaterhouseCoopers is and is not permitted to provide. In the case of the types of work which PricewaterhouseCoopers is allowed to perform, the policy provides that they are only appointed to an assignment if proper consideration has been given to other potential service providers, there must be bona fide advantages in using PricewaterhouseCoopers, and, in addition, if the fee is over €100 000, the engagement must be specifically approved in advance by the Chairman of the Audit Committee.

Potential engagements for any services not already covered by this policy must be referred to the Chairman of the Audit Committee for specific pre-approval (to be ratified at the next meeting of the Audit Committee) before PricewaterhouseCoopers can be appointed.

The policy is regularly reviewed and updated in the light of internal developments, external developments and best practice.

The external auditors report to the Directors and the Audit Committee on the actions they take to comply with the professional and regulatory requirements and best practice designed to ensure their independence from Unilever, including, for example, the periodic rotation of key team