UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM20-F
(Mark one)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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 DECEMBER 31, 20172019
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report
For the transition period from to
Commission file number001-04547
UNILEVER N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
Weena 455, 3013 AL, Rotterdam, The Netherlands
(Address of principal executive offices)
R. Sotamaa, Chief Legal Officer and Group Secretary
Tel: +44(0)2078225252, Fax: +44(0)2078225464
100 Victoria Embankment, London EC4Y 0DY UK
(Name, telephone number, facsimile number and address of Company Contact)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbols | Name of each exchange on which registered | ||
Ordinary shares, nominal value of€0.16 per share | UNA | New York Stock Exchange* | ||
N.V. New York registry shares each representing one ordinary share of nominal amount of€0.16 each | UN | New York Stock Exchange | ||
|
*Not for trading, but only in connection with the registration of the N.V. New York registry shares pursuant to the requirements of the Securities and Exchange Commission.
2.1% Notes due 2020
1.8% Notes due 2020
4.25% Notes due 2021
1.375% Notes due 2021
2.2% Notes due 2022
2.6% Notes due 2024
3.1% Notes due 2025
2.0% Notes due 2026
2.9% Notes due 2027
5.9% Notes due 2032
4.8% Notes due 2019
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered or to be registered pursuant to Section 12(g) of the Act:None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
Title of each class | ||||
2.1% Notes due 2020 1.8% Notes due 2020 2.75% Notes due 2021 4.25% Notes due 2021 1.375% Notes due 2021 3.0% Notes due 2022 2.2% Notes due 2022 3.125% Notes due 2023 3.25% Notes due 2024 2.6% Notes due 2024 3.1% Notes due 2025 3.375% Notes due 2025 2.0% Notes due 2026 2.9% Notes due 2027 3.5% Notes due 2028 2.125% Notes due 2029 5.9% Notes due 2032 |
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
The total number of outstanding shares of the issuer’s capital stock at the close of the period covered by the annual report was:1,714,727,7001,460,714,804 ordinary shares
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes☒ No☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934:
Yes☐ No☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes☐☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer,” “large accelerated filer,” and “emerging growth company” inRule 12b-2 of the Exchange Act.
Large Accelerated filer ☒ | Accelerated filer ☐ | Non-accelerated filer ☐ | Emerging Growth Company ☐ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards* provided pursuant to Section 13(a) of the Exchange Act. ☐
*The term ‘‘new or revised financial accounting standard’’ refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP☐ | International Financial Reporting Standards as issued by the International Accounting Standards Board☒ | Other ☐ |
If ‘Other’ has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ☐ Item 18 ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act):
Yes ☐ No ☒
CAUTIONARY STATEMENT
This document may contain forward-looking statements, including ‘forward-looking statements’ within the meaning of the United States Private Securities Litigation Reform Act of 1995. Words such as ‘will’, ‘aim’, ‘expects’, ‘anticipates’, ‘intends’, ‘looks’, ‘believes’, ‘vision’, or the negative of these terms and other similar expressions of future performance or results, and their negatives, 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 Unilever Group (the ‘Group’). They are not historical facts, nor are they guarantees of future performance.
Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. Among other risks and uncertainties, the material or principal factors which could cause actual results to differ materially are: Unilever’s global brands not meeting consumer preferences; Unilever’s ability to innovate and remain competitive; Unilever’s investment choices in its portfolio management; inability to find sustainable solutions to support long-term growth; the effect of climate change on Unilever’s business; Unilever’s ability to find sustainable solutions to its plastic packaging; significant changes or deterioration in customer relationships; the recruitment and retention of talented employees; disruptions in our supply chain;chain and distribution; increases or volatility in the cost of raw materials and commodities; the production of safe and high quality products; secure and reliable IT infrastructure; successful execution of acquisitions, divestitures and business transformation projects; economic, social and political risks and natural disasters; financial risks; failure to meet high and ethical standards; and managing regulatory, tax and legal matters.
These forward-looking statements speak only as of the date of this document. Except as required by any applicable law or regulation, the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Further details of potential risks and uncertainties affecting the Group are described in the Group’s filings with the London Stock Exchange, Euronext Amsterdam and the US Securities and Exchange Commission, including in the Annual Report on Form20-F 2019 and the Unilever Annual Report and Accounts 2017.2019.
MAKING
SUSTAINABLE LIVING
COMMONPLACE
ANNUAL REPORT ON
FORMAnnual Report on Form20-F 20172019
ANNUAL REPORT ON
FORM20-F 2017
This document is made up of the Strategic Report, the Governance Report, the Financial Statements and Notes, and Additional Information for US Listing Purposes.
The Unilever Group consists of Unilever N.V. (NV) and Unilever PLC (PLC) together with the companies they control. The terms “Unilever”, the “Group”, “we”, “our” and “us” refer to the Unilever Group.
Our Strategic Report, pages 1 to 33,46, contains information about us, how we create value and how we run our business. It includes our strategy, business model, market outlook and key performance indicators, as well as our approach to sustainability and risk. The Strategic Report is only part of the Annual Report and Accounts 2017.2019. The Strategic Report has been approved by the Boards and signed on their behalf by Ritva Sotamaa – Group Secretary.
Our Governance Report, pages 3447 to 7677 contains detailed corporate governance information, our Committee reports and how we remunerate our Directors.
Our Financial Statements and Notes are on pages 7778 to 155.142.
Pages 1 to 157162 constitute the Unilever Annual Report and Accounts 20172019 for UK and Dutch purposes, which we may also refer to as ‘this Annual Report and Accounts’ throughout this document.
The Directors’ Report of PLC on pages 3447 to 46, 7759, 78 (Statement of Directors’ responsibilities), 108 (Dividends on ordinary capital), 121 to 126127 (Treasury Risk Management), 145 (branch disclosure)148 and 151 and 155152 (Post balance sheet event)events) and 160 (Branch disclosure) has been approved by the PLC Board and signed on its behalf by Ritva Sotamaa – Group Secretary.
The Strategic Report, together with the Governance Report, constitutes the report of the Directors within the meaning of SectionArticle 2:391 of the Dutch Civil Code and has been approved by the NV Board and signed on its behalf by Ritva Sotamaa – Group Secretary.
Pages 158163 to 179178 are included as Additional Information for US Listing Purposes.
ONLINEOnline
You can find more information about Unilever online at
www.unilever.com |
For further information on the Unilever Sustainable Living Plan (USLP)our sustainability activities and performance visit
www.unilever.com/sustainable-living |
The Annual Report on Form20-F 2017 2019 along with other relevant documents can be downloaded at
www.unilever.com/ |
Strategic Report
How our strategy is delivering value for our stakeholders
At a glance | ||||
2 | ||||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
Our strategy | ||||
8 | ||||
9 | ||||
10 | ||||
Our stakeholders | ||||
16 | ||||
18 | ||||
19 | ||||
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Governance Report
How we’re running a responsible and effective business
Financial Statements
Our full financial results and notes for the year
Purpose-driven performance
One in three people around the world use our brands every day. With this reach comes responsibility – and opportunity. That’s why we’ve made it our purpose to make sustainable living commonplace. To help people live well within the limits of the planet. This isn’t just something we say – it steers our decisions and shapes our actions, at every level of the business.
Our focus on purpose goes back to the days of one of our founders, William Lever, well over 100 years ago. It’s part of Unilever history, and it’s integral to our future. This is why we want all our brands to take a stand, and act, on the big social and environmental issues facing the world. We believe we’ll be a better and more successful business by following this path.
To truly make sustainable living commonplace, we have to be fit for the future. This means anticipating the significant changes which are shaping our industry. Becoming fully digitised, lower cost, faster acting and more agile. Using our scale and influence to create positive change well beyond Unilever. Expanding into high-growth markets with superior products that are good for both people and the planet. And continuing to attract the very best people into a diverse, inclusive and flexible working culture.
Purpose-led,future-fit
As one of the world’s largest and oldest consumer goods businesses, we’re on a mission to make sustainable living commonplace.
A truly global business | ||
Our brands are available in over 190 countries. | ||
2.5 billion people use our products every day | ||
25 million retail sales outlets in our distribution chain | ||||
of turnover in | ||||
emerging markets |
Using our scale for | ||||
We have ambitious time-bound sustainability goals which are delivering significant impact. | ||||
1.3 billion people helped to improve their health and hygiene since 2010 | ||||
of agricultural | ||||
sustainably sourced |
renewable grid electricity in 5 continents | ||
Read more about society and the planet on pages 18 to 19.
Strong brands with purpose | ||||
Our 400+ household brands help people feel good, look good and get more out of life. | ||||
A growing portfolio of brands with purpose | 12 brands with turnover of more than €1 billion in the year |
13of the top 50 | 84% of brands in top 1 or 2 market positions | |||
FMCG brands* | ||||
Read more about our brands and consumers on pages 14 to 15. | ||||
Powered by our people | ||||
Our purposeful and inclusive culture attracts and keeps the very best. | ||||
150 thousand employees | 51/49 gender balance in management (female/male)** | |||
90% of our leaders are local | Number 1 FMCG graduate employer of choice in 52 markets |
AT A GLANCE
UNILEVER IS ONE OF THE WORLD’S LEADING CONSUMER GOODS COMPANIES, MAKING AND SELLING AROUND 400 BRANDS IN MORE THAN 190 COUNTRIES.
Every day, 2.5 billion people use our products to feel good, look good and get more out of life. Our range of world-leading, household-name brands includes Lipton, Knorr, Dove, Axe, Hellmann’s and Omo. Thirteen of the world’s top 50 brands are owned by Unilever, up from twelve the previous year, with our nearest competitor owning just five, according to Kantar’s brand footprint report in May 2017.
In 2017 we had 13 billion euro brands. In addition our portfolio also includes trusted and iconic local brands designed to meet the specific needs of consumers in their home market such as Bango in Indonesia, Pureit in India and Suave in the United States. Our geographic reach gives us an unparalleled global presence, including a unique position in emerging markets which generate 58% of our turnover.
During 2017, Unilever operated across four categories. The largest was Personal Care, followed by Foods, Home Care and Refreshment. Each one is discussed in more detail on pages 11 and 12. In April 2017, we announced our intention to combine our Foods and Refreshment categories (which took effect on 1 January 2018) and the divestment of our Spreads business, which we expect to complete inmid-2018 after a€6.825 billion offer from KKR in December 2017. These changes will accelerate our strategy of long-term, sustainable shareholder value creation. In this Annual Report and Accounts, we report the performance of Foods and Refreshment separately because they were separate categories for the reporting period. They will be reported together from 2018 onwards.
Our business activities span a complex global value chain. See page 9 for more details. At the heart of our business is a workforce of 161,000 people who are driven by our Purpose and empowered to excel in our fast-changing markets. Unilever’s Code of Business Principles (the Code), and the 24 policies that support it (Code Policies), set out the standards required from all our employees. The Code Policies cover a number of areas, including countering corruption (eg anti-bribery), respecting people (eg respect, dignity and fair treatment) and safeguarding information. Together, the Code and Code Policies help us put our values of Integrity, Respect, Responsibility and Pioneering into practice. See page 16 for more on our Code and Code Policies.
Our employees are supported by a management team with representatives from around 90 countries. In emerging markets, more than 70% of our country leadership teams are local. It is this combination of global strength and deep local expertise which lies at the heart of our success in developing strong, consumer-relevant innovation.
To harness these global and local advantages we have changed the way we are organised. Central to this strategy is the accelerated implementation of Connected 4 Growth (C4G), the largest change programme Unilever has undergone in the last ten years to create a faster, simpler organisation. Our new C4G organisation is now fully operational. We expect the benefits of C4G to be realised progressively during 2018 and 2019. C4G’s strategic role is explained in more detail on page 10.
A further change to make Unilever a simpler and more flexible business has been a review by the Boards of our dual-headed legal structure. The review by the Boards is continuing and the outcome will be announced in due course.
OUR PURPOSE
UNILEVER HAS A CLEAR PURPOSE – TO MAKE SUSTAINABLE LIVING COMMONPLACE. WE BELIEVE THIS IS THE BEST WAY TO DELIVER LONG-TERM SUSTAINABLE GROWTH.
As the pace of change accelerates in our markets, we are creating a stronger, simpler and more agile business. These changes will help us to deliver our Purpose and our Vision to grow our business, whilst decoupling our environmental footprint from our growth and increasing our positive social impact.
However volatile and uncertain the world becomes, Unilever’s Purpose and Vision will remain because we believe that managing for the long term is the best way for us to grow. We are well placed to deliver long-term value through our strategy, category strategies and the Unilever Sustainable Living Plan (USLP), launched in 2010. These are supported by a transformational change agenda which combines our own actions with a stakeholder approach to external advocacy and public policy. Our scale and reach mean we are well placed to capture the economic opportunities presented by the United Nations Sustainable Development Goals (SDGs). Find out more about how we are creating value from the SDGs on page 15.
The USLP is a value driver in its own right. Our commitment to the USLP’s three big goals of improving health and well-being for more than 1 billion people by 2020, halving our environmental footprint by 2030, and enhancing livelihoods for millions by 2020 has delivered growth for the business. In 2016, 18 of our top 40 brands qualified as Sustainable Living brands, growing 50% faster than the rest of the business, while delivering more than 60% of Unilever’s growth. Their success is driven by the growing consumer demand for brands that have purpose at their core. Our 2017 Sustainable Living brands will be announced in May 2018 once the analysis is complete. Find outRead more about our Sustainable Living brandspeople on pages 1116 to 13.17.
The USLP also delivers lower costs through reduced waste, energy and packaging. It lowers risks in our supply chain by securing a sustainable supply of critical raw materials such as palm oil and tea. And it also increases trust in our business - particularly among consumers, employees, investors and governments.
We work in partnership with governments and other organisations to drive transformational change across society with initiatives to help realise the SDGs. These are themselves opportunities to grow our business by addressing unmet challenges while alleviating major social and environmental issues, such as climate change and deforestation, creating more opportunities for women and enhancing livelihoods, promoting health and well-being and championing sustainable agriculture and food security.
Our track record over the past eight years proves our multi-stakeholder model of long-term, compounding, sustainable growth is working for shareholders. See page 18 for more details. At the same time, we have helped more than 601 million people improve their health and hygiene. We have enabled 1.6 million small-scale retailers and 716,000 smallholder farmers to access initiatives aiming to increase their incomes or improve their agricultural practices. And we have sourced 56% of our agricultural raw materials sustainably.
This Annual Report and Accounts provides further detail on our performance during the year and how our business model is delivering accelerated returns for shareholders and a more sustainable way of doing business for the benefit of all our stakeholders. Find out more about our performance on pages 6 and 7.
* | Based on market penetration and consumer interactions (Kantar Brand Footprint report). |
** | Based on a total management population of 15,028 Unilever employees. |
2 | Annual Report on Form 20-F 2019 |
Strategic Report |
Financial highlights | ||
What we stand for: Making sustainable living commonplace. | €52.0 billion | |
turnover | ||
What we offer: Beauty & Personal Care, Foods & Refreshment, Home Care | €6.1 billion free cash flow* | |
Read more about our brands and consumers on pages 14 to 15. | €4.2 billion | |
dividends paid | ||
19.1% | ||
underlying operating margin* | ||
16.8% | ||
operating margin |
Beauty & Personal Care | ||
What we stand for: | ||
Beauty that cares for people, society and our planet. | €21.9 billionturnover | |
Our largest categories: Deodorants, Haircare, Skin care, Skin cleansing | 42%of total turnover | |
A selection of our brands: | ||
Axe, Clear, Dove, Lifebuoy, Lux, Pond’s, Rexona, | 52%of total operating profit |
Foods & Refreshment | ||
What we stand for: | ||
Taste good. Feel good. Force for good. | €19.3 billionturnover | |
Our largest categories: | ||
Ice cream, Savoury, Dressings, Tea | 37% of total turnover | |
A selection of our brands: | ||
Ben & Jerry’s, Breyers, Brooke Bond, Heart (Wall’s), Hellmann’s, Knorr, Lipton, Magnum, Pukka, Sir Kensington’s, Unilever Food Solutions | 32%of total operating profit |
Home Care | ||
What we stand for: | ||
Making your home a better world. Making our world a better home. | €10.8 billionturnover | |
Our largest categories: Fabric solutions, Home and hygiene | 21%of total turnover | |
A selection of our brands: Cif, Dirt is Good (Omo, Persil), Domestos, Seventh | 16%of total operating profit |
Read more about our Divisions on pages 14 to 15.
* | Free cash flow and underlying operating margin arenon-GAAP measures. For further information about these measures, and the reasons why we believe they are important for an understanding of the performance of the business, please refer to our commentary onnon-GAAP measures on page 27. |
Annual Report on Form 20-F |
Our new Chairman reflects on a year of positive value creation, changes to the Board and the steps being taken to accelerate growth in 2020 and beyond.
As we look backHaving served on 2017, it is quite clear that the consumer goods sector is going throughBoard for five years, I am already well aware of Unilever’s reputation as a vast amount of changepurpose-driven company, one founded on strong values, wonderful brands and disruption. Increasingly fragmented media channelsa talented and routescommitted workforce. It was an honour therefore to market are transforming the shopper experiencehave been asked to become your Chairman in November 2019 and leaving the way open for many more new playerssince then I have continued to enter our markets. Consumers’ own behaviour is also changing,work with a much higher importance being placed today on products that satisfy a growing desire for naturalness and authenticity.
It all makes this a very exciting time to be in consumer goods and while change on this scale brings its own challenges, there are many more opportunities in my view, especially for companies able to respond with the kind of speed and agility that today’s environment demands.
For Unilever, the organisational changes of recent years - with a much greater focus on front-line empowerment - combined with the steady strengthening and sharpening of our portfolio, mean that the Group is well placed to take advantage of these changing market dynamics. There is also no doubt, in my view, that Unilever’s unflinching commitment to sustainable and equitable growth, as reflected in the Unilever Sustainable Living Plan, has growing resonance among consumers the world over.
These factors certainly contributed to another strong year for Unilever, with solid revenue growth, strong profitability and good cash flow performances. These results capped what has been an eventful year for the Group, which included – in February – an unexpected takeover attempt.
The Board had no hesitation in rejecting the offer for all the shares of Unilever N.V. and PLC, which we believed was without any financial or strategic merit. Even though the offer was quickly withdrawn, it did highlight further opportunities to capture the value we see in Unilever at a faster rate.
To that end, the Board and management undertookthe Unilever Leadership team to support the Group’s ambitions. On behalf of the Board, I would like to thank my predecessor, Marijn Dekkers, for his strong leadership as Chairman and for his support in helping to ensure a thorough review on howseamless transition.
2019 Performance
Unilever delivered another year of positive value creation in 2019, driven by a continuing balance of underlying sales growth, improved profitability and strong cash generation.
Underlying sales growth fell slightly short of the company’s targeted range of3-5%, which while disappointing, could be explained in part by a significant slowdown in some of Unilever’s high-growth markets. Some of these economic headwinds will continue throughout 2020, but clear plans are in place – which the Board has reviewed – to accelerate sustainable shareholder value creation, building on the Group’s successful long-term compoundingrate of Unilever’s growth model. A wide-ranging package of measures announced in April was well received and by the end of the year the Group was able to report strong progress towards those goals.
At the heart of the review was an acceleration of the Group’s existing strategy, including faster implementation of the successful Connected for Growth change programme, first introduced in 2016, as well as the further sharpening and strengthening of the portfolio. No fewer than twelve acquisitions were announced or completed in 2017. Significantly, the Group also announced in December the sale of the Spreads business to KKR.
As part of the review the Group also announced the setting of a long-term goal towards an underlying operating margin target of 20% by 2020 and beyond.
Board composition and succession
The Board appointed Alan Jope to the completionrole of CEO on 1 January 2019 and Alan was duly elected as an Executive Director at the 2019 AGMs. The Board fully endorses the strategy Alan has set out to ensure that Unilever ispurpose-led andfuture-fit, a strategy that at its heart believes sustainable business drives superior performance, creating long-term value for our stakeholders.
I was delighted that you also elected Susan Kilsby as a€5 billion sharebuy-backNon-Executive programme. Another important outcomeDirector at the 2019 AGMs in May, with her appointment taking effect on 1 August 2019. Susan has extensive Board experience as anon-executive in global consumer goods, financial and pharmaceutical sectors, and possesses deep international banking, financial and M&A experience.
Sadly, on 31 August 2019, Mary Ma, one of ourNon-Executive Directors, passed away after a short illness. Mary was a commitment to simplifyhighly committed and capable Director who put her expertise and experience at the Group’s capital structure, and hence provide Unilever with the flexibility for further – and bigger – portfolio change if deemed necessary in the future. The review of the dual-headed structure is progressing well, and while no decisions have yet been taken, the Board considers that unification with a single share class would be in the best interestsservice of Unilever and itsis greatly missed.
Remuneration
During 2019 we continued to consult with shareholders as a whole.on our Remuneration Policy, particularly for the Executive Directors, and set in motion the consultation process for implementing our Remuneration Policy in 2020.
WhateverWith the outcomeaim of maintaining the high levels of support from shareholders at the 2019 AGMs for the implementation of our Remuneration Policy, we continued constructive engagement with both our investors and proxy voting agencies on how we intend to evolve the implementation of our Directors’ Remuneration Policy.
Corporate Governance
Recent revisions of Corporate Governance Codes applicable to Unilever expanded on the long-standing requirements for directors to remain mindful of the dual-headed structure review,duties they have to consider the many stakeholders who have an interest in our business.
A particular stakeholder focus for the Board is determinedduring the year was our workforce. As a result, NEDs conducted a number of workforce engagement events to assess employee sentiment. Fourface-to-face events were held in Brazil and the UK, allowing for open discussions on issues important to our people. The Board believes that an open, authentic and agile culture at all levels of Unilever fuels personal and business growth. The Board will remaintherefore continuously monitor the culture within the organisation, whether during Board visits, through workforce engagements or by continuing to engage regularly with the Unilever Leadership Executive and other Unilever managers. Further information on our engagement with Unilever’s employees can be found on page 48.
In 2019, we took further steps in our commitment to be at the forefront of good corporate governance and to that end we have already announced that it would be our intention to maintain listings inby cancelling the Netherlands,NV preference shares. We also initiated the United Kingdom andtermination of the United States, and continue to apply bothdepositary receipt structure for the UK and Dutch corporate governance codes.NV ordinary shares which took effect on 28 June 2019.
These are important matters, but the Board also remains firmly focussed on the Group’s number one priority of continued outperformance over both the medium and the long-term. The events of this year havere-affirmed our confidence that Unilever has both the quality of management and the clarity of strategy needed to deliver on this objective.
During the review earlier in the year, I met with investors in Europe and North America as part of a consultation exercise involving 50 of the Group’s top shareholders and other investors. The meetings were valuable in confirming the widespread support among shareholders for Unilever’s long-term compounding growth model, whilst also helping to identify opportunities to accelerate value creation.
We also conducted a separate consultation on our proposed new Remuneration Policy for the Executive Directors. At the 2017 AGMs you provided your strong support to the implementation of a reward framework that encourages and enhances the strong performance culture that Paul Polman has built at Unilever by enabling managers within Unilever to have an even stronger personal commitment to Unilever share ownership. The proposed new Remuneration Policy will be put to shareholders to be voted upon at the 2018 AGMs in May to enable this. Further information on our proposals can be found in the Compensation Committee’s report on pages 47 to 76.
EVALUATIONEvaluation
Our Board evaluation in 20172019 was externally facilitated and the results were discussed at the April 2017January 2020 Board meeting. The Board continues to perform effectively with good leadershipoperate in an effective manner overall, and competent and engaged members, and has the appropriate focus on bothin-year performance and strategy for the future. Reflectingreflecting on the lessons learnt by the Board in the previous year the Board agreed, in particular, in the evaluation discussions to:
Each Board Committee also performed its own self-evaluation, agreeing areas where it could enhance its effectiveness further. These are described within each Committee Report.
Looking ahead
The Board fully supports the strategy Unilever is following, including the strategic review of the tea business, and emerging risks duringis confident that everything possible is being done to help acceleratetop-line growth in 2020. The Board’s confidence also derives from the yearhigh calibre of Unilever’s management. We look forward to working with Alan Jope and his team in addition to the deep focus on strategy once a year;
During its various visits last year to Unilever’s strategy. In this regardoperations, including in Brazil and the United States, the Board welcomedwas able to witness first-hand the skillspassion and capabilities matrix developed by the Nominating and Corporate Governance Committee as a tool to help enhance Board succession discussions; and,
Further detail on the evaluation process this year, together with the Board’s remit, operations and the topics the Board regularly discusses and debates can be found in the Governance section on pages 34 to 76.
BOARD COMPOSITION AND SUCCESSION
During the year, we saw the departure of Professor Louise Fresco who I would like to thank for her outstanding contribution to Unilever. The Board remains truly diverse in their nationality, experience and gender, with the proportion of femaleNon-Executive Directors in 2017 at 45%.
LOOKING AHEAD
Confidence in our outlook was reflected earlier in the year when we announced a 12% increase in the dividend for the 2017 financial year. Despite the fact trading conditions are likely to remain challenging in 2018, the Board remains confident in the outlook and in the strategy for the Group.
Finally, onhard-working employees. On behalf of the Board, I would likewant to thank our many stakeholders as well asall of the 161,000 hardworking150,000 employees of Unilever for their continuedefforts in 2019, and also acknowledge our appreciation for the continuing support and commitment.
MARIJN DEKKERS
CHAIRMANof the Group’s shareholders.
4 | Annual Report on Form 20-F 2019 |
Alan Jope answers questions on our performance in 2019, our Compass strategy, and other highlights and challenges of the year.
How do you see the current state of the world and the impact on Unilever’s markets?
There’s no doubt that conditions are challenging right now. Sluggish economies and a high degree of geopolitical uncertainty are inevitably impacting consumer confidence and spending, which in turn is intensifying competition in the retail sector. However, Unilever has now been around for 90 years and so we are very accustomed to operating through downturns and periods of uncertainty like this, and indeed emerging stronger. Moreover, all our competitors – big and small – face the same challenges.
The key in this environment is to remain relevant to the consumers you serve. For us, that comes down to two things. First, earning trust by operating a responsible, multi-stakeholder business model. And second, harnessing advances in science and technology – and especially digital – in ways that allow us to reach and delight consumers in new and ever more inventive ways. We are firmly focused on both.
The recent outbreak of Coronavirus(COVID-19) is clearly concerning and we are monitoring developments very closely. The safety and well-being of our people has been the overriding priority. We are also doing all we can to ensure business continuity and our teams are working tirelessly to help mitigate the risks. Inevitably, however, there will be an adverse impact on the business although the extent is not yet clear.
As you look back, how do you reflect on Unilever’s business performance in 2019?
It was a mixed performance. Our profitability was good with a healthy improvement in underlying operating margin, strong free cash flow delivery of more than€6.1 billion and cash flow from operating activities of€10.6 billion. This is important because our model is predicated on being able tore-invest in the long-term health of the business, while also paying out a competitive annual dividend.
On the flip side, growth is also a key driver of value creation and our underlying sales growth performance fell slightly short of expectations, at 2.9%, which was naturally disappointing. Turnover increased 2.0% to€52.0 billion. While growth was hindered by a marked slowdown in some of Unilever’s high growth markets like South Asia and West Africa, these markets all remain very attractive long-term prospects for us. We are
confident therefore of restoring underlying sales growth to Unilever’s3-5% multi-year range.
What were the highlights for you of 2019?
A strong performance in the emerging markets – growing at over 5% – was an undoubted highlight. We also grew across each of our three global Divisions, which was encouraging and reflects the inherent strengths of our brands and our portfolio. Our Home Care Division had a particularly strong year, growing by more than 6%, driven by some great innovations and an intensifying focus around ‘green cleaning’. The performance of our recently acquired prestige beauty brands – which grew double-digit – was also a highlight, further establishing Unilever as an important player in this highly attractive and fast-growing segment of the market.
We have set out some very ambitious goals for Unilever. We want, for example, to be a global leader in sustainability; to be the world’s best marketing company; and to be an organisation that stands as a beacon for diversity and inclusion. Seeing Unilever recognised in 2019, therefore, as a leader in multiple external benchmarks, including the GlobeScan Sustainability Leaders Survey (for the ninth consecutive year); the World’s Most Effective Marketing Company; and as recipient of the prestigious Catalyst Award (for the company which has done most to accelerate the progress of women through workplace inclusion), were all special moments – as well as a spur to increase our efforts still further in these important areas.
Where do you feel the company could have done better?
In markets as dynamic and fast-moving as ours, speed is essential, both in seizing opportunities to meet changing consumer preferences but also in responding when our business is under competitive challenge. While we do this well on many occasions and in many parts of the world, we haven’t yet developed the consistency of response that I am looking for everywhere, and this was apparent in 2019. We made some important organisational changes during the year – including flattening our market structure under a newly created Chief Operating Officer position – which I am confident will help to make Unilever a faster and even more operationally effective business.
As far as our global Divisions are concerned, while it was an excellent year as mentioned for Home Care, our Beauty & Personal Care and Foods & Refreshment Divisions both fell short of expectation – with underlying sales growth at 2.6% and 1.5% respectively – and so this is where we will be looking to accelerate growth most specifically in 2020.
In the area of diversity, we reached an important milestone in 2019 on our journey to become a gender-balanced organisation. Our management population is now made up of just over 50% women. Pleasing as this is, the overall figure masks the fact we haven’t yet made the progress we want at the most senior levels of the company, where women are still under-represented. This is very much a job half-done therefore and something I intend to make a personal priority in 2020.
What steps are you taking to accelerate growth?
We’re doing a lot. I’ve already mentioned speed. There are two other areas I would highlight. First, we are putting a heightened level of focus around some proven growth fundamentals, which we are confident will accelerate ourtop-line performance. These include making our innovations even more impactful; building our presence in faster-growing retail channels, likee-commerce; ensuring that more and more of our brands have a clearly articulated purpose that resonate with consumers; and driving our savings programmes further to help fuel the many growth opportunities we have.
The second relates to our portfolio. We have made significant changes over recent years, acquiring businesses in new parts of the market and disposing of businesses such as Spreads. The overall effect has been to improve Unilever’s exposure to faster growing markets, those that offer better long-term prospects for value creation. We will continue that process, evaluating our portfolio rigorously against a range of exacting criteria. It is in that context that we have announced a strategic review of our global tea business, which has a large footprint in the slower growing black tea segment and a history of being dilutive to Unilever’s overall growth and margin. We will explore all options, with an open mind and with the intention of sharing the conclusions of the review by the middle of 2020.
How are you planning to take forward Unilever’s commitment to social and environmental sustainability?
Under the Unilever Sustainable Living Plan (USLP) we have developed an enviable reputation for leadership on these issues. We now mean to build on that, not least because many of the challenges the world faces – like the climate crisis or growing inequality – are becoming ever more pressing.
We will do this by embedding sustainability in a newpurpose-led,future-fit Unilever Compass strategy, and in two principal ways. First, we will continue to use our size and scale to help drive change through our extended value chain. A great example last year was the ambitious commitment we made to address the issue of plastic packaging by halving our use of virgin plastic and by helping to collect and process more plastic packaging than we sell, both by 2025.
Second, we will make our product brands even more prominent vehicles for driving social and environmental change. Many of our brands already do this, to great effect, but we now intend to make it an integral feature of every brand. We know that it works and that it also helps to drive growth. Last year, our most purposeful brands grew faster than the rest of the portfolio. Unilever’s brands touch the lives of two and a half billion people every day so the opportunity for us to influence behaviour and drive positive change is enormous.
I am very proud of all the women and men of Unilever – and the millions more we partner with throughout the value chain – who work so hard every day to bring these commitments to life and who are determined to show that Unilever can remain a force for good in the world.
6 | Annual Report on Form 20-F 2019 |
We operate in a complex and volatile world. Our strategy is constantly evolving to adapt to the trends and forces shaping our markets and impacting our stakeholders.
Overview of our industry
As a leading global consumer goods company, we’re part of one of the world’s largest, most competitive and fast-moving industries. Yet, these are volatile and uncertain times. According to the World Bank, global growth decelerated markedly in 2019, with continued weakness in global trade and investment affecting both developed and developing and emerging economies. Geopolitical tensions and climate concerns are increasing the uncertainty. Conditions like these create challenges for companies and brands of all types.
Amongst the economic uncertainty, new technologies are changing the landscape of the consumer goods market, bringing opportunities to brands and consumers alike. Consumers are shopping through more diverse channels and smaller local brands are increasingly meeting shoppers’ needs.
As the global economy and the channel landscape evolve, we must be agile and responsive to capitalise on the opportunities. And by staying close to consumers and their needs we can ensure our business continues to grow, while having a positive impact on people and the planet.
The key trends affecting our stakeholders and our markets are outlined below.
Environment and society under stress | Digital and technology revolution | |||
We’re in the midst of an environmental crisis. Our planet is heating, species are dying out at an unprecedented rate, and our rivers and oceans are filling with plastic. Global heating is placing an increasing strain on food, water and other resources – and rising migration is expected to put new pressures on cities, people, societies and governments. As both younger and older generations call for businesses and politicians to do more, only internationalco-operation and bold action from businesses and brands will start to create the systemic change needed to protect our planet. The cost of inaction far outweighs the cost of action. Related principal risks: Climate change, Plastic packaging, Ethical (pages 36 and 39) For more on our response see pages 18 to 19. | Technology continues to change the fabric of life and business. Enhanced AI, robotics and the internet of things (IoT) are reshaping how people live, work and interact with the world – and with brands. Intelligent technologies are optimising manufacturing and agriculture, connecting global businesses like ours inside and out, and changing how people shop. Digital channels bring opportunities for more targeted marketing, deeper engagement and stronger connections between brands and consumers all over the world. Yet, with access to richer data and more intelligent analytics come risks and concerns around data security and privacy – businesses need to collect and use data in responsible ways. Related principal risks: Business transformation, Supply chain, Customer, Systems and information (pages 36 to 38) For more on our response see page 15. | |||
Living differently | The future of work | |||
Societies are becoming more diverse and fragmented. We’re seeing, for example, growing splits between generations, socio-economic groups and political affiliations. As people increasingly interact with each other and with businesses online, consumers are making more decisions based on their values. They’re also using bothon- and offline channels to find better, more personalised products and services more easily and quickly. In this new digital media and retail landscape, brands have to be visible, convenient and part of the conversation – taking a stand and action on the issues people care about. The fragmentation of consumer expectations and retail channels creates both challenges and opportunities for companies like Unilever. Related principal risks: Brand preference, Economic and political instability, Portfolio management (pages 35 and 38) For more on our response see pages 14 to 15. | The pace of change is affecting not only how people live, but how they work. Businesses of all types are becoming less hierarchical, more automated and more digital. As new roles and ways of working emerge, people increasingly need different skills – and they’re also demanding more flexibility from employers. Companies that offer more varied types of employment can therefore attract the best people, while being more agile. But alongside flexibility, employees of all ages are increasingly looking for a fair, inclusive and purposeful place to work where they can be themselves and continue to learn. Related principal risks: Talent, Business transformation (pages 37 to 38) For more on our response see pages 16 to 17. |
8 | Annual Report on Form 20-F |
A belief that sustainable business drives superior performance lies at the heart of the Unilever Compass – our strategy to create long-term value for our stakeholders.
OVERVIEW OF EXECUTIVE &NON-EXECUTIVE DIRECTORS
MARIJN DEKKERS Chairman
Previous experience: Bayer AG (CEO); Thermo Fisher Scientific Inc. (CEO).
Current external appointments: Novalis LifeSciences LLC (Founder and Chairman); General Electric Company (NED); Quanterix Corporation (Director); Georgetown University (member Board of Directors).
Annual Report on Form 20-F 2019 | 9 |
Strategic Report |
Annual Report on Form 20-F 2019 | 11 |
Stakeholders are at the heart of our strategy and business model. Engaging with them helps us to understand their evolving needs and informs our strategic decision-making.
Our multi-stakeholder model
We’ve identified six stakeholder groups critical to our future success: consumers, our people, society (including suppliers), the planet, customers and shareholders. The stakeholder review on pages 14 to 21 provides an overview of how we’ve created value for our stakeholders in 2019 and some of the benefits we’ve gained as a business from nurturing these vital relationships.
Unilever has a dual-headed structure and is subject to Dutch, UK and US governance requirements as set out in the Governance Report on pages 47 to 78. Under the Dutch requirements, directors are responsible for weighing up the interests of stakeholders, with a view to ensuring long-term value creation and the continuity of the company. Under section 172 of the UK Companies Act 2006 (‘Section 172’) directors must act in the way that they consider, in good faith, would be most likely to promote the success of their company. In doing so, our Directors must have regard to stakeholders and the other matters set out in Section 172. Pages 12 and 13 comprise our Section 172 statement, which describes how the Directors have had regard to these matters when performing their duty.
In light of our purpose and our strategy to create long-term value as set out on page 9, our Directors take steps to understand the needs and priorities of each stakeholder group and do so via a number of mediums, including by direct engagement or via their delegated committees and forums. The relevance of each stakeholder may change depending on the matter at hand. In line with the Dutch requirements and the UK Companies Act 2006, below we provide a high-level summary of the concerns of our stakeholders and how our Directors engaged with them and had regard to their interests when setting Unilever’s strategy and taking decisions concerning the business in 2019.
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NON-EXECUTIVE DIRECTORS
MARIJN | NILS | LAURA | VITTORIO | ANN | JUDITH | MARY | STRIVE | YOUNGME | JOHN | FEIKE | ||||||||||||
DEKKERS | ANDERSEN | CHA | COLAO | FUDGE | HARTMANN | MA | MASIYIWA | MOON | RISHTON | SIJBESMA | ||||||||||||
Age | 60 | 59 | 68 | 56 | 66 | 48 | 65 | 57 | 53 | 60 | 58 | |||||||||||
Gender | Male | Male | Female | Male | Female | Female | Female | Male | Female | Male | Male | |||||||||||
Nationality | Dutch / American | Danish | Chinese | Italian | American | Austrian | Chinese | Zimbab- wean | American | British | Dutch | |||||||||||
Appointment date | April 2016 | April 2015 | May 2013 | July 2015 | May 2009 | April 2015 | May 2013 | April 2016 | April 2016 | May 2013 | November 2014 | |||||||||||
Committee membership* | CC, NCGC | AC | NCGC | CC | CC (Chairman) | AC | CC | CRC (Chairman) | CRC | AC (Chairman) | CRC, NCGC (Chairman) | |||||||||||
Leadership of complex global entities | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||
Finance | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Consumer / FMCG insights | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||
Digital insights | ✓ | ✓ | ||||||||||||||||||||
Sales & marketing | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||||
Science & technology | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||||||
Attendance at planned Board Meetings | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | |||||||||||
Attendance at ad hoc Board Meetings | 8/8 | 8/8 | 6/8 | 7/8 | 5/8 | 6/8 | 8/8 | 7/8 | 7/8 | 5/8 | 7/8 | |||||||||||
Tenure as at 2017 AGMs | 1 | 2 | 4 | 2 | 8 | 2 | 4 | 1 | 1 | 4 | 3 | |||||||||||
Interests and concerns | How we engaged in 2019 | Considerations and outcomes |
A CHALLENGING BACKDROP TO THE YEAR
2017 was another challenging year for the world economy, and in particular for the consumer goods industry. Consumer confidence continued to be hit by a combination of stagnating wages, recessionary pressures and widespread political and economic uncertainty. While the economic system is working for some, the benefits are still not widely felt, and inequality is rising in most countries. That’s not good for the consumer goods industry. Climate change is also becoming an increasing risk factor for most sectors, making our own mitigating actions even more important.
At the same time, our industry experienced unprecedented levels of disruption last year, driven by the accelerating pace of technology. When combined with significant changes in consumer behaviour, these events are causing manufacturers and retailers alike to rethink fundamentally how they reach, serve and – ultimately – delight consumers in markets that are more dynamic and open to entry than ever before.
THE IMPORTANCE OF CONSISTENT PERFORMANCE
Delivering consistent, market-beating performance in such volatile and fast-changing markets is increasingly challenging. Not many companies achieve it. In fact, a McKinsey & Co study found that over a thirty-year period only 40% of nonfinancial companies then in the S&P 500 survived. “It’s grow or go” they concluded and “60% have gone” (‘Why it’s a world of grow or go’. McKinsey & Co). By contrast, those companies that can deliver consistent performance in a responsible way get rewarded.
Judged against these criteria, it is not difficult to see why Unilever finds itself one of the best performing companies in our sector, with a total shareholder return over the last nine years of close to 300%. In that time the Group has also delivered consistent top and bottom line progress. This goes to the heart of our responsible long-term compounding growth model - based on continuously high levels ofre-investment - which has served Unilever well for many years. Indeed, it is worth noting that one pound invested in Unilever in the FTSE in 1986 would have generated a return four times higher than the market average.
A GOOD YEAR
2017 saw a continuation of this trend. Underlying sales excluding spreads, which we have agreed to sell, grew 3.5% (3.1% including spreads), representing a good performance in largely subdued markets. Growth was broad-based – across all our categories – and of good quality, supported by high levels of brand and marketing investment.
There was excellent progress on absolute profitability and on underlying operating margin – by 110 basis points – helped by strong delivery against the key savings and efficiency programmes behind our Connected for Growth (C4G) change programme, which started in 2016.Two-thirds of the more than€2 billion of savings generated in 2017 werere-invested behind growing our brands in line with our long-term model. The increase in underlying operating profit also contributed to a record free cash flow delivery at€5.4 billion, an improvement of€0.6 billion.
By any measure, this represents a good,all-round performance, as well as further evidence of the transformation of Unilever to a sustainable growth company. In this environment, we continue to believe that a long-term focus on multiple stakeholders, behind a purpose-driven sustainable business model, is the best guarantee of future success.
LOOKING AHEAD WITH CONFIDENCE
Although the global economy is showing signs of improvement, we can expect 2018 to be another challenging year, with further rapid and wide-ranging disruption to our markets. In addressing these challenges, we are benefiting, I believe, from having started early in anticipating – and responding to – many of the trends and developments we currently seere-shaping our markets.
By anticipating, for example, the desire of consumers for more natural and authentic products – and for brands that serve a deeper purpose – the relevance and impact of our Unilever Sustainable Living Plan, introduced in 2010, has increased steadily. Last year we reported
that the growth of our sustainable living brands was outstripping other brands and accounted for 60% of Unilever’s growth.
The leadership role Unilever has played more widely in pioneering responsible business models was also further acknowledged last year. Indeed, for the seventh consecutive year Unilever topped the GlobeScan/SustainAbility ranking of 1,000 sustainability experts around the world – the longest-running and most extensive survey of its kind. The study identified integrating sustainability into the heart of the business, demonstrating executive leadership, strong performance in supply chain management, and commitment to the Sustainable Development Goals (SDGs), as among key reasons behind the Group’s leadership, concluding that “Unilever continues to be seen as the global leader on sustainability”.
We are also benefiting from the company-wide implementation of Connected for Growth. By streamlining the Group and by empowering our front-line operators, C4G is providing the combination of resilience and agility that today’s trading environment demands. We are already seeing the benefits, with employees reporting a significant improvement in the speed of decision-making and a greater ‘bias for action’.
A key measure of C4G’s longer term success will be our ability toroll-out bigger and more impactful innovations even quicker, both globally and locally. Again, there is evidence of improved performance. The number of local launches was substantially up in 2017. Our key emphasis, however, remains on our core, global brands and on developing strategic, global launches based on larger projects with more consumer benefits. We already see some great examples of this, including in 2017 with the launch of Magnum Pints, providing the ultimateice-cream and chocolate experience in a tub; theroll-out of Baby Dove to a further 19 countries; the relaunch of the Hellmann’s brand with strengthened naturalness claims in 28 markets, as well as theroll-out of Hellmann’s organic variants in both Europe and North America; and the continuedroll-out of the incredibly successful Domestos toilet blocks, now in 33 countries, helping to drive double-digit growth for the brand. It is a further measure of the strength of our brands that more of them appear in the annual Kantar Global Ranking of Most Chosen Consumer Brands than those of our competitors.
In the spirit of the C4G changes, we also announced last year the bringing together of our Foods and Refreshment categories into a single division, based in Rotterdam. The work for this was completed in 2017. We believe the new Foods & Refreshment division can become an even stronger global powerhouse, benefiting from the scale and efficiencies that the integration will bring.
We have also moved decisively in recent years to reshape our portfolio in anticipation of changing consumer trends and to help maximise new and burgeoning growth opportunities. Over the last three years, we have made – or announced – 22 acquisitions. Twelve of these came last year alone as we accelerated our portfolio transformation further, making 2017 one of the most active acquisition periods in the company’s history.
These new businesses strengthen our portfolio in a variety of ways. Some give us access to fast-growing segments of markets in which we are already active but currently under-represented, such as Carver Korea, which will enable us to leverage the growing demand for Korean skin care products. Others will enable us to expand in complementary, adjacent categories, such as colour cosmetics (Hourglass) and air purification (Blue Air). Some give us greater regional scale in existing categories, as is the case with the acquisition of the Quala home and personal care business in Latin America and EAC in Myanmar. And others bring skills and capabilities in new, rapidly emerging segments, including subscription anddirect-to-consumer models (e.g. Dollar Shave Club and our Prestige beauty businesses).
Having announced earlier in the year the intention to divest our spreads business, 2017 also ended with the announcement of the sale of the business to KKR for a little over€6.8 billion.
This combination of an increasingly relevant Unilever Sustainable Living Plan, a C4G change model that supports the kind of speed, agility and organisational resilience needed to compete in today’s markets; and a sharper portfolio better weighted to higher growth categories and geographies, gives us the confidence that we can go on delivering consistent, market-beating performance.
We are also particularly well placed, I believe, to capture the opportunities of the digital revolution - and the unprecedented explosion in data – which are transforming our markets and our ways of operating. Again, we started early. Our digital marketing capabilities, for example, have frequently been recognised as among the best in the industry and the online sales of our brands increased by a further 80% last year, making it a€1.7 billion business for us. However, this area is moving fast. The amount of data in the world is more than doubling every two years. Our ambition is to build a billionone-to-one consumer relationships, leveraging ourin-house People Data Centres and the opportunity they give us to connect with consumers in a meaningful way through real-time analytics. We need to continue driving this critical agenda, which is why we are investing heavily in digital, experimenting with a range of new,direct-to-consumer business models and embarking on an enterprise wide digital transformation programme.
THE POWER OF OUR PEOPLE
Ultimately, Unilever’s success will come down to its ability to attract and retain the most talented individuals and to motivate and inspire them with a mission and a purpose that speaks to the long-term aims and values of the company.
Here, again, we start from a strong base. A remarkable 90% of employees’ express pride in working for Unilever, well above the industry average. And last year the number of countries in which Unilever was named ‘most desired employer’ rose to 44 of the 52
markets in which we recruit - a more than 25% increase on the year before and a remarkable testament to the attractiveness of our employer proposition and our purpose-driven model.
At the heart of our people agenda is a focus on creating a balanced and inclusive workforce. This focus not only underpins Unilever’s longstanding values – especially tolerance and respect - but also guarantees the diversity of thought and ideas on which our business depends. We made further strides again in 2017, not least in the area of gender balance, with the proportion of female managers rising to 47% of our total management population.
DELIVERING FOR ALL OUR STAKEHOLDERS
In conclusion, let me thank all of the wonderful people of Unilever – and the many more we partner with around the world – who worked so hard to make 2017 such a strong and positive year for the Group. It was a year in which our long-term compounding growth model was questioned by some, but was ultimately shown to be a model that unequivocally delivers in the interests of Unilever and its multiple stakeholders, including shareholders.
PAUL POLMAN
CHIEF EXECUTIVE OFFICER
UNILEVER LEADERSHIP EXECUTIVE (ULE) OVERVIEW
FOR PAUL POLMAN AND GRAEME PITKETHLY SEE PAGE 3
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Interests and concerns | How we engaged in 2019 | Considerations and outcomes | ||
Our employee surveys tell us that Unilever people tend to have a sense of personal purpose and believe they can live their purpose at work – helping them to go the extra mile. While most employees think we have the right strategy in place to win, they also want to see faster action and decision-making across the business. Our people would also like a continued push towards diversity, particularly at the most senior levels. | Our annual UniVoice survey, available in 48 languages, gives employees at all levels the chance to share views with line managers, colleagues and leadership. In 2019, we had an 82% response rate. Every month we also run smaller pulse surveys to collect real-time insights on key issues. | In an October meeting, our Board discussed how best to nurture a more flexible, agile culture. The Board looks at the UniVoice findings each year, and reviewed this year’s in November. We also held a series of meetings with a cross-section of employees, wherenon-executive Board members talk about important topics from the UniVoice survey. In 2019, there were two meetings in the UK and two in Brazil to discuss purpose, talent development and sustainability. For more on people see pages 16 to 17 and 48. |
Society We depend on people and communities all over the world to help source, make and sell our products. |
Interests and concerns | How we engaged in 2019 | Considerations and outcomes | ||
Equality and inclusion, human rights within our operations and supply chain, and health and wellbeing are important issues for our stakeholders. Water scarcity and climate change are also challenges for many people in developing and emerging markets – reflecting the interconnectivity between the environment and society. | Our leadership engage with NGOs and policymakers to drive system change. Our ULE members, including those on the Board, each own relationships and advocacy around key issues. Our Chief Supply Chain Officer, for example, is part of the World Economic Forum (WEF) community focused on supply chains. This year, as part of our issues prioritisation (materiality) process, we evaluated a range of inputs from stakeholders to understand the most pressing societal issues and where we can make a difference. | The Board’s Corporate Responsibility Committee (see pages 56 to 57) meets four times a year to discuss sustainability issues of strategic importance. Our USLP Advisory Council – seven independent external specialists in sustainability – also guide and critique the development of our strategy. They met with members of the ULE during the year to share insights on supply chain and human rights. For more on society see page 18. |
12 | Annual Report on Form 20-F |
Strategic Report |
GROWING THE BUSINESS | 2017 | 2016 | 2015 | |||||||||
GROUP | ||||||||||||
TURNOVER GROWTH | ||||||||||||
Turnover growth averaged 1.0% over five years | 1.9% | (1.0%) | 10.0% | |||||||||
UNDERLYING SALES GROWTH* | ||||||||||||
Underlying sales growth averaged 3.6% over five years | 3.1%^ | 3.7% | 4.1% | |||||||||
UNDERLYING VOLUME GROWTH* | ||||||||||||
Underlying volume growth averaged 1.5% over five years | 0.8% | 0.9% | 2.1% | |||||||||
OPERATING MARGIN | ||||||||||||
Operating margin averaged 15.4% over five years | 16.5% | 14.8% | 14.1% | |||||||||
UNDERLYING OPERATING MARGIN* | ||||||||||||
Underlying operating margin has steadily increased over five years from 15.1% to 17.5% | 17.5% | 16.4% | 15.6% | |||||||||
FREE CASH FLOW* | ||||||||||||
Unilever has generated free cash flow of€22.0 billion over five years | €5.4 billion | €4.8 billion | €4.8 billion | |||||||||
CATEGORIES | ||||||||||||
PERSONAL CARE | ||||||||||||
Turnover | €20.7 billion | €20.2 billion | €20.1 billion | |||||||||
Turnover growth | 2.6% | 0.5% | 13.2% | |||||||||
Underlying sales growth | 2.9%^ | 4.2% | 4.1% | |||||||||
Operating margin | 19.8% | 18.4% | 18.1% | |||||||||
Underlying operating margin | 21.1% | 20.0% | 19.7% | |||||||||
HOME CARE | ||||||||||||
Turnover | €10.6 billion | €10.0 billion | €10.2 billion | |||||||||
Turnover growth | 5.6% | (1.5%) | 10.9% | |||||||||
Underlying sales growth | 4.4 %^ | 4.9% | 5.9 % | |||||||||
Operating margin | 10.8% | 9.5% | 7.3% | |||||||||
Underlying operating margin | 12.2% | 10.9% | 8.4% | |||||||||
FOODS | ||||||||||||
Turnover | €12.5 billion | €12.5 billion | €12.9 billion | |||||||||
Turnover growth | (0.1%) | (3.1%) | 4.5% | |||||||||
Underlying sales growth | 1.0%^ | 2.1% | 1.5% | |||||||||
Operating margin | 18.2% | 17.4% | 17.8% | |||||||||
Underlying operating margin | 19.7% | 19.1% | 19.1% | |||||||||
REFRESHMENT | ||||||||||||
Turnover | €9.9 billion | €10.0 billion | € | 10.1 billion | ||||||||
Turnover growth | (0.8%) | (1.1%) | 10.3% | |||||||||
Underlying sales growth | 4.9%^ | 3.5% | 5.4 % | |||||||||
Operating margin | 13.5% | 9.7% | 8.3% | |||||||||
Underlying operating margin | 12.7% | 11.1% | 10.2% |
Planet We rely on nature for many ingredients and raw materials. |
Interests and concerns | How we engaged in 2019 | Considerations and outcomes | ||
Awareness of the environmental impact of human activity on the planet is growing. Top concerns include plastic waste, climate change and water scarcity. Loss of biodiversity is also rising up the agenda. We’re seeing growing movements for change around the world, as well as a real desire for businesses to limit their use of plastic and take bold action on climate. | Our Board and ULE members have responsibility for key environmental issues: our CEO works with the Ellen MacArthur Foundation and the WEF on driving the circular economy, for example. Our ULE members attend meetings, sit on boards, sponsor key workstreams and make sure we have strong and mutually beneficial relationships with our partner organisations. This year, our CEO attended the UN General Assembly’s Climate Week in New York. As part of our issues prioritisation (materiality) process, we analysed insights from stakeholders to make sure we’re focusing on the most important environmental issues. | The Board’s Corporate Responsibility Committee and USLP Advisory Council (see Society on page 18) discuss key environmental issues. In 2019 the USLP Advisory Council met with members of the ULE to share insights on plastic. Environmental issues form part of our boardroom and ULE discussions and decision-making. Our ambitious new goals around plastic are a good example: our leadership will oversee how these are being delivered, both across our business and through our partnerships. During 2019, there were a number of discussions around the development of our Compass strategy, including our climate goals. For more on the planet see page 19. |
Customers We depend on many types of retail partners all around the world to sell our products. |
Interests and concerns | How we engaged in 2019 | Considerations and outcomes | ||
In developing and emerging markets, the small retailers we partner with are increasingly seizing the opportunities ofe-commerce. And our larger retail partners are looking to become more competitive in online channels, as well as against discount stores offering convenience and very low prices. Retailers want products that are suitable for each sales channel, whether premium or online. They also want more sustainable products that will help them differentiate their offering. | Our larger retail partners have direct channels into us. We actively manage these relationships through our specialist Customer Development team. In 2019, we discussed a range of sustainability issues with our customers. Through Unilever’s digitale-commerce apps, we receive direct feedback from the smaller local stores we partner with to help improve our service to them. | Our Board and ULE were involved in approving the strategy to digitise small stores and related investments. In a number of markets, such as India and Indonesia, we’ve introduced smartphone apps so that retailers can place product orders directly – and we’re refining these based on user needs. In response to customer feedback, we’ve introduced retail programmes around the world focused on reducing plastic and food waste. We’re also designing products appropriate for each channel, which will help our customers differentiate themselves. For more on customers see page 20. |
Shareholders As owners of our company and providers of capital, shareholders are instrumental to our growth. |
Interests and concerns | How we engaged in 2019 | Considerations and outcomes | ||
As well as ongoing interest in our performance and growth, we’ve been having conversations with shareholders around our acquisitions and disposals strategy, our corporate structure, capital allocation and our use of plastic and palm oil – reflecting a growing interest in sustainability issues. | We speak directly to shareholders through investor events, meetings and calls with shareholders, quarterly results broadcasts and conference presentations. Our ULE members attend investor events, and senior leaders and our Board speak directly to shareholders at investor meetings on a broad range of issues. This year, we had focused meetings with shareholders on remuneration, held a sustainability event for investors and issued a webcast on palm oil. | Shareholder feedback – particularly around dividends, our merger and acquisitions strategy and our corporate structure – forms a part of boardroom conversations. After each quarterly market update, our CEO shares feedback with the Board. In 2019, Vittorio Colao, Chair of the Compensation Committee, discussed shareholder concerns around remuneration with the Board and wrote to shareholders explaining subsequent changes to remuneration. These were published in our remuneration report and put to shareholders for voting. For more on shareholders see page 21. |
Annual Report on Form 20-F 2019 | 13 |
Stakeholder reviewcontinued
Consumers | ||
We know that people value price, quality, convenience – and increasingly sustainability – when it comes to the things they buy. |
Understanding people’s needs
Consumer preferences are constantly changing. To make sure we’re ahead of the curve, we listen for signals that predict the next ‘big thing’ using data and advanced analytics. In our 30 People Data Centres around the world, we analyse millions of enquiries our Consumer Carelines receive each year and the conversations about our brands online. The insights we get drive the innovation and marketing of our 400+ brands – and, above all, help us give people the products they want.
We know that people want healthier and more natural products for themselves and their families, with fewer chemicals. At the same time, concerns around waste, plastic and climate change are growing – consumers are looking foreco-friendly products that are easy to buy and use, yet still effective. Alongside concern for the planet, people are increasingly shopping through multiple channels and, in pursuit of convenience, buying more online.
So we’re continuing to make our products healthier and more sustainable, as we have done for years. This means innovating existing brands, developing new brands and sometimes adding to our portfolio through acquisitions. Here we explain how each of our three Divisions worked to meet consumer needs in 2019.
Beauty & Personal Care
We believe in beauty that cares for people, society and our planet.
Caring for people
Demand for more natural and holistic approaches to beauty and wellness continues to grow, and so too does our portfolio meeting these needs. Love Beauty and Planet, for example, which first launched in North America in 2018, is now widely available across Europe, Asia and Latin America. Consumers in Europe can now also enjoy Schmidt’s Naturals, a recently acquired US personal care brand. Many of our established brands are also offering more natural products. Lifebuoy now has soap bars with green tea, charcoal and sea minerals, and Signal toothpaste has a new Natural Elements range.
We’re also creating more effective products using ground-breaking innovations. In 2019, Rexona brought out a Clinical Protection range that’s three times stronger than ordinary antiperspirants and can last for over 96 hours. It’s now available in four markets. We expanded our therapeutics offering to consumers in 2019, by acquiring Fluocaril and Parogencyl, well-known oral care brands endorsed by health professionals which are sold primarily in pharmacies in France and Spain.
Our prestige brands continue to meet the growing demand for premium beauty. In 2019, we added two new brands to our portfolio: Garancia, a French derma-cosmetic brand offering 38 premium facial and body skincare products, and Tatcha, a leading prestige skincare brand in North America, which is inspired by Japanese beauty rituals.
Consumers are increasingly looking for personalised experiences and products. All Things Hair, our online resource for hair inspiration and styling tips, now gives US consumers personalised recommendations based on digital consultations using AI. And St Ives launched a face mist range with fragrance designed to boost mood, with a marketing campaign delivering audio messaging relevant to the time of day.
Caring for society
Our Beauty & Personal Care brands are taking a stand and acting on social issues all over the world. Take Sunsilk, our haircare brand, which is on a mission to open up possibilities for young women. Its Together We Rock movement is designed to inspire women between 16 and 24 to support each other and feel more able to pursue their dreams. Meanwhile, Dove launched project #ShowUs to shatter beauty stereotypes by building the world’s largest photo library created by women andnon-binary people – in partnership with Getty Images, Girlgaze and women everywhere. More than 5,000 images are already in the library, presenting a more inclusive vision of beauty to advertisers and media of all types.
CLEAR introduced a cutting-edge resilience programme, the Resilience Bootcamp, aimed at helping young people overcome social anxiety and unlock their full potential. And Dove Men+Care and Promundo are working together to improve men’s access to and uptake of paternity leave.
Caring for our planet
Plastic is a growing concern for consumers, and we’re working hard to make our products use less, better or no plastic. Dove, for example, announced ambitious plans for doing all three across its product range, including moving to 100% recycled bottles by the end of 2019 (see page 44 for more details). All Things Hair successfully piloted refill stations for shampoo and conditioner in the Philippines, and Signal launched our first sustainable bamboo toothbrush. We pioneered a new technology which has made our black TRESemmé and Axe bottles recyclable in most markets. At the World Economic Forum, we announced that six of our brands – Dove, Rexona, Axe, Love Beauty and Planet, REN Skincare and Signal – will begin to use the new global Loop system by TerraCycle, for refilling and reusing containers.
We’re creating products that are better for the planet in other ways. We’ve brought out a new‘no-rinse’ conditioner in the US, the good stuff, which saves 420 litres of water per bottle. And after certifying Dove as cruelty-free in 2018, animal rights organisation People for the Ethical Treatment of Animals (PETA) has now certified three more of our brands: Love Beauty and Planet, St Ives and Simple.
There’s still much to do as we expand our portfolio ofeco-friendly products. But we are taking steps in the right direction.
Foods & Refreshment
We have a responsibility to make brands that not only taste and feel good, but that are a force for good.
Our newstate-of-the art Global Foods Innovation Centre located at Wageningen University in the Netherlands – the leading global agri-food research hub – is helping us to quicken the pace of innovation to improve the health of both people and the planet. Through our partnerships in this ‘Silicon Valley of food’ and around the world, we’re encouraging the wider food chain to become healthier and more sustainable, faster.
Plant-based foods
In 2019, we stepped up the availability of our plant-based products including Magnum Vegan, Ben & Jerry’s Dairy-free, Cornetto Vegan, Hellmann’s Vegan Mayonnaise and Sir Kensington’s Vegan range. To help improve biodiversity, Knorr joined forces with the World Wildlife Fund on a global campaign to promote Future 50 Foods, and offered new plant-based recipes to consumers around the world. We also partnered with Burger King to launch the new Rebel Whopper featuring vegan Vegetarian Butcher patties in more than 25 countries across Europe, the Middle East and Africa. Thanks in part to these efforts, investor network FAIRR ranked Unilever as among the best prepared companies for the shift towards plant-based proteins.
Better for people and the planet
This year, we further reduced the salt, sugar and calories in our products, and added even more fortified ingredients (see page 18 for more on this work). We also continued to increase the amount of sustainable ingredients in our brands: as of 2019, 98% of the key vegetables and herbs we buy (around 90% by volume) used in Knorr and other brands were sustainably sourced.
Reducing plastic packaging and food waste continues to be an important priority. We were the first major foods brand to introduce 100% recycled plastic packaging in Hellmann’s jars in Mexico and Bango bottles in Indonesia. Hellmann’s in the US has also committed to use recycled plastic materials for all its mayonnaise and mayonnaise plastic dressing containers by 2020. We were the first major ice cream brand to use compostable ice cream tubs in Italy and piloted the first ever ‘wrapperless’ ice cream on Solero multipacks. We also expanded our range of biodegradable teabags and introduced the first 100% recyclable Knorr soup pouches in Turkey.
Anytime, anywhere
We’re also making our brands more widely available. Our Unilever Food Solutions business – serving professional customers and restaurant operators – continued to grow, serving chefs around the world. IceCreamNow, our instant ice cream delivery service in partnership with a host of online delivery companies, expanded to 35 countries around the world.
14 | Annual Report on Form 20-F 2019 |
Strategic Report |
Almost half of our Division’s sales are now in emerging markets, where we’re working to meet the needs of people at all income levels. In 2019, we saw more and more consumers buying our products in India, China, Indonesia and the Philippines.
Every brand a movement
Our mission goes beyond providing delicious, healthy and sustainable products – we want our brands to take a stance and real action on the things that really matter.
In 2019, Ben & Jerry’s continued their long tradition of climate activism, joining theyouth-led climate strike in September. The brand also launched Justice ReMix’d to fight for criminal justice reform in the US, and continued to campaign for refugee and LGBTQ rights. Lipton Tea launched its global You.Me.Tea.Now campaign to combat loneliness by encouraging more quality connections in people’s daily lives.
Hellmann’s, with its Real Taste, Less Waste programme, has been running educational campaigns to rescue leftover food from being wasted. In Canada, for example, its Real Food Rescue project is redistributing surplus food to people in need, as well as encouraging consumers to reduce their own food waste and to recycle. And Unilever Food Solutions’ Fair Kitchens programme continued to inspire a new kitchen culture, where staff happiness is just as important as diners’ satisfaction.
Activities like these don’t just benefit people and the environment, they raise the profile of our brands among consumers. For instance, the markets in which Brooke Bond activated its campaign around mental health and disability grew faster than those where it was not activated in 2019. And in the wake of Knorr’s Future 50 Foods campaign in Belgium, we saw a 10% rise in sales.
Home Care
We want to make people’s homes a better world, and to make our world a better home.
Serving the changing consumer
People increasingly want cleaning products that are better for them, their home and the planet – without sacrificing quality or convenience. Across our R&D centres, including our Materials Innovation Factory at the University of Liverpool, we’re working with innovation partners to develop cutting-edge cleaning technologies. Our aim is to create a portfolio of brands that are sustainable by design – fit for a water-scarce,low-carbon world. This means more biodegradable products that are milder on skin while better at cleaning, and that use renewable or recycled ingredients. It also means moreeco-friendly products with fewer chemicals, as well as more concentrated products that have a lower carbon footprint due to less water being transported.
Take the relaunch of Omo in Brazil which was one of the highlights of our year. This relaunch included the arrival of our new formulation of Omo Perfect Wash which is more compact, concentrated and effective, leaving no residue on clothes. Bottles now contain 15% recycled plastic, and the smaller box size for the same number of washes means a reduced carbon footprint. In 2019, we also introduced Seventh Generation’s Ultra Concentrated detergent: eight times more concentrated than the original formula, and in a 100% recycled bottle with an exact dose technology in the cap. And we rolled out Love Home and Planet in the US and China: plant-based, independently certified cruelty-free and vegan home care products, including a dry wash spray for clothes that helps minimise energy and water use.
In 2019, we rolled out other new packaging formats to help reduce our use of plastic, including refills. Cif ecorefill, for example, is a 10x concentrated cleaner made with 75% less plastic that consumers attach to their Cif spray bottles and dilute at home. This means they can use a single bottle for life. In Chile, people can get refills of Omo detergent and Quix dishwashing liquid from dispensers in electric tricycles that deliver in Santiago neighbourhoods. Quix, which launched in July, uses a world-first technology to create a new cleaning agent that is 100% biodegradable and renewable, while being ultra-mild on hands.
Making our world a better home
Our Home Care brands stepped up theirpurpose-led activities in 2019. Cif createdclean-up campaigns both online and on the streets, leading neighbourhood activities across Italy, Poland, Hungary and Romania. Seventh Generation continued its campaign against climate change by working with the Sierra Club to increase the uptake of renewable energy across US cities. The brand also closed its US office to join the global climate strike in September and donated its advertising airtime
We’re innovating
within existing brands,
developing new brands
and adding to our
portfolio through
acquisition.
during the week to help amplify the movement’s message. And Domestos has built on its partnership with Unicef, which helped more than 11 million people (between 2012 and 2019) access better sanitation and hygiene.
Designing for channel
We’re working to make sure we’re offering our products to consumers in the right places.E-commerce is a key channel so we’re designing our products for home delivery – making sure our packaging fits through a letter box, for example. And we’re expanding our Home Care offerings for growing markets such as DIY stores andmid-sized professional cleaning firms. In Brazil, Omo continued to free people from doing their laundry with its Omo Express pick and wash service.
The Cif online engagement across Europe is just one example of how we’re using digital channels and content to reach more people in more places and better understand our consumers. There’s also Cleanipedia, our online resource for cleaning tips, which attracts over 63 million visitors per year. And in Brazil, Comfort sponsored a13-part TV series encouraging people to get more from their clothes and support more sustainable fashion. By growing our digital marketing capacity, we’re sharing more relevant and meaningful content with consumers, having more conversations with them and using the insights we gather to enhance our activities and brands.
Innovations and activities like these are just some examples of how, in all three of our Divisions, we’re meeting changing consumer demands. To see how the divisions performed in the year, see pages 23 to 25.
Annual Report on Form 20-F 2019 | 15 |
Stakeholder reviewcontinued
Our people | ||
As the world of work changes, we’re determined to be a company where talented people with purpose can grow both themselves and our business. |
The changing world of work
There are many facets to today’s evolving workplace. With automation and digital transformation, employees have opportunities to reinvent themselves and learn new skills. People want and need more flexibility from employers – freelance and remote working is on the rise, and jobs for life are increasingly rare. The combination of an ageing population and reduced retirement provision means that people are working for longer. And more and more people of every age want a meaningful job that chimes with their values.
As we make our business fit for growth now and in the future, there’s no more important place to start than with our own people. Put simply, the quality of our people and the quality of our business are one and the same.
The belief that people with purpose thrive is at the heart of our business strategy. So we’re creating a workplace and culture that will make it easier for our employees – all 150,000 of them around the world in factories, R&D labs, offices and tea plantations – to work in ways that suit their individual lives and values. Here we outline how we’re adapting to these changes, while ensuring a safe workplace and afuture-fit culture.
Reshaping how we work
To meet people’s changing needs and continue to attract the best, we’re moving beyond traditional employment models and ways of working. In doing so, we need to make sure our people stay safe, healthy and fulfilled at work. In 2019, we’ve taken some big steps forward.
More flexible and agile working
Continuing to be an industry-leading business and employer means moving to faster, smarter ways of working at all levels of our company. So we’re evolving our culture to encourage more agility and accountability.
Our new Flex Experiences platform offers employees the chance to share their talent and experience with people on other teams and in other countries. Live in 20 business areas, so far it has reached over 40,000 people in more than 100 countries and unlocked over 100,000 hours of new career experiences and learning. We’re also changing how we manage performance – encouraging employees to set goals throughout the year to encourage more innovative, entrepreneurial ways of working.
In 2019, we had 30 agile teams on pilot projects around the business. So far, the results have been positive: working in this way not only improves people’s speed and agility but helps them to feel more engaged. So, we’ll be taking what we learn from these pilots to the wider business.
We believe that allowing people to work flexibly will help us continue to attract talented employees and future leaders – as well as people in the open talent economy such as contractors, consultants and independent project workers. It will also make us a more
inclusive employer – giving more options to people with disabilities, family commitments or other time pressures. By moving beyond the typical 9 to 5 employment model, we’re opening up, enhancing and future-proofing Unilever.
Lifelong learning
Learning is another critical aspect of people’s fulfilment and Unilever’s long-term commercial success. Ongoing learning is particularly important as we move to more digitally enabled and agile ways of working. We’re aiming to become an organisation where learning is baked into every role – and where relevant and effective training is available to people when they need and want it.
We’re using digital platforms to give people control of their own learning. In 2019, more than 54,000 employees used Degreed, our online learning platform which holds over two million pieces of content in a variety of formats and in 20 languages. And over 18,000 employees learned new digital skills like agile methods, data analytics and sustainability through our Power Up programme.
Digitalisation, automation and the changing world of work affect people in different ways, depending on their roles. We see it as our duty to make sure our people, wherever they work, are equipped for the future. In 2019, for example, we committed to working with the European Works Council on a Framework for the Future of Work. Every employee will be invited to draw up an upskilling, reskilling or an employability plan, so that they are ready to adapt to the changing shape of work in the years ahead. Where we make changes resulting in job losses, we ensure that our people are similarly equipped. For example, we put in place a major programme, including support for setting up small businesses, to ensure the people affected by automation in our tea plantations in Kericho, Kenya could successfully move from job to job.
Listening to our people
To continue to be an attractive employer, we need to understand how our employees experience Unilever every day – and, crucially, to turn these insights into action. So we gather real-time data on topical issues through monthly pulse surveys and other crowdsourcing tools. More than 22,000 people gave feedback in 2019.
Alongside this, we run a more extensive survey, UniVoice, once a year. This year, 82% of those invited to respond did so, reaching around 90,000 employees, including plantation workers, for the first time. Encouragingly, we saw improvements in our scores across the board. Overall engagement – the headline key metric in the survey – was up 2%, at 77%. Pride in Unilever (87%), our approach to diversity and inclusion (79%), business integrity (81%) and sustainability (77%) stood out as strengths. There was also a 10% increase in the number of people who believe Unilever cares about their wellbeing, to 73%. And 78% of our employees also said we have the right strategy to win.
The survey also highlighted areas to improve. For example, while our scores on how quickly we respond to changes in the market have improved, half of employees think our competitors are faster. Clearly this is a priority as we develop a growth culture, supported by more agile ways of working. Furthermore, one third of respondents were doubtful that anything would happen as a result of their feedback to the survey. To address this, we have asked the head of each business unit to review their own results and commit to a clear action plan.
As an external benchmark, we also look at how people rate us on Glassdoor, a jobs and recruitment site. December 2019 figures show that 84% would recommend us to a friend and 93% approve of our CEO. Our rating remains well above the site average.
Our people have opportunities at townhall meetings and webcasts to ask management about the financial and economic factors affecting our performance. At these regular events, the ULE discusses our quarterly performance and strategy, among other things.
Acting with integrity
One other essential aspect of listening to our employees is giving them a platform for reporting concerns around business integrity, such as anti-bribery and corruption which we simply do not tolerate. We have clearly defined principles around ethics and integrity (our Code Policies) that apply to all of our employees – and we communicate these each year through mandatory online training modules and a business integrity pledge.
We do all we can to help people feel comfortable and secure in reporting breaches of business integrity and offer a24-hour whistleblowing line over the phone or online. In 2019, we received 1,575 reports from whistleblowers. Of these, we closed 1,410 and confirmed 733 as breaches, which led to 413 people leaving the business. Please see page 33 for more on how we manage risks around business integrity.
82%
response rate to our
2019 UniVoice survey
Safety at work
The safety of our people and those who work with us is paramount. Our Total Recordable Frequency Rate (TRFR) was up in 2019 (1 October 2018 to 30 September 2019) to 0.76 accidents per million hours worked, from 0.69 in 2018. Our 2019 TRFR includes for the first time all
16 | Annual Report on Form 20-F 2019 |
Strategic Report |
acquisitions which operate as decentralised business units, as we now have processes in place to collect the data. After a spike in the first six months, when injury rates went up partly due to the inclusion of decentralised business units, the following six months showed substantial incident rate reduction, in line with ouryear-on-year declining trend. This trend reinforces the confidence that our leadership, programmes and systems will drive further improvement in the years to come. We’re committed to achieving our ‘vision zero’ strategy and will continue to seek improvements that make people safer.
During the same reporting period, regrettably there were four fatalities at work in Latin America involving two employees and two contractors. Two of these were traffic accidents and two happened in factories. This year we introduced aone-hour stand-down across all of Unilever’s operations globally for fatalities which happen while at work, with a ULE member or country General Manager travelling to the location of the fatality to review the case and learnings. We also held safety events involving all third parties – in manufacturing, logistics and distribution – to ensure stronger implementation and monitoring of safety standards. These efforts run alongside the regular communications and reinforcement of our safety standards at all levels of our company.
Evolving our culture
We’re working to build a more open, authentic and agile culture at all levels of Unilever, to fuel personal and business growth.
Purpose first
We believe that if people feel they can be true to their purpose while working with us, we’ll be able to achieve more together. Through our People with Purpose programme, we’re aiming to work with every employee to help them define their purpose and find a way to reach it in their working life. More than 48,000 people have discovered their purpose since 2015. And it’s making a difference: our UniVoice survey showed that 92% of people who have been through the programme feel they can put more into work because they understand their purpose.
Fit for the future
To become a more agile organisation, we need to simplify and flatten our internal structures – and to work in more networked ways. We also need to encourage people to make smarter decisions faster, and with customers and consumers front of mind. The tone set by our leaders is important. The ULE is using tools like Yammer to have real – and real-time – conversations with employees. And when we launched our new strategy, we asked our entire organisation for ideas for how to bring the strategy to life. More than 47,000 employees from 80 countries contributed 2,100 ideas, with over 17,000 people voting for their favourites. Three of these ideas have received investment and are now being explored.
We also recognise that to evolve our culture, our leaders need a more empowering mindset. So we’ve rolled out new Standards of Leadership which define the expected behaviours of our people in all our countries. In 2019, we put almost 3,000 people through an intensive self-reflective leadership programme. We’re also working on personalised development plans for our next generation of potential ULE members.
One of the biggest validations of our focus on culture and purpose is the simple fact that people want to work with us. In 52 markets, we’re the number one FMCG graduate employer of choice. And more than eight million people follow us on LinkedIn, making us the most followed FMCG employer.
Our belief that people with purpose thrive is underpinned by our values set out on page 9. Our Board is responsible for assessing and monitoring these values and our culture. To gain insight, aspects of culture and our values are regularly analysed by the Board using multiple sources, including the results of the UniVoice survey, the main way in which we monitor our culture, business integrity reports (see page 56), interaction with senior management and workforce and health and safety data. At meetings in October and November 2019 respectively, the Board discussed with members of the ULE how best to nurture a culture of flexibility and agility and the results of the UniVoice survey.
A workplace for everyone
Becoming a truly diverse and inclusive organisation – one where everyone feels they can bring their whole self to work – is a priority for us. This is not just the right thing to do. It also benefits business, as diversity leads to better innovation and performance.
We’re making good progress at management level. Women held 51% of our managerial roles as of December 2019 and our efforts have been recognised – we were featured in the Bloomberg Gender Equality Index in 2019. Despite this, there is still work to be done to ensure a balanced representation of women at senior management level and above. Among the various initiatives to address this, we have two targeted programmes to develop our senior women and create a healthy pipeline of talent.
We’re encouraging gender equality in other ways. For example, we have deeply embedded flexible ways of working across the organisation. Recognising the importance of supporting parents, we have a global paid maternity leave policy of 16 weeks and a global paid paternity leave policy of three weeks.
We’re committed to gender equality and fairness in the workplace, based on equal pay for equal work and achieving greater gender balance. Pay and overall reward is gender neutral, with any differences between employees in similar jobs reflecting performance and skill. Gender pay gaps can develop where there is a representational imbalance between genders. Our Framework for Fair Compensation has been instrumental in helping us review the average pay differences between genders at both a country level, and at each work level within each country. We continue to improve our gender balance, and relevant gender pay gaps, at various levels and in various countries throughout the business. As part of our Framework’s living wage element, we are committed to pay a living wage to all our direct employees. We are already paying at or above a certified living wage in most places and are actively working through the small number of remaining issues which are in areas with complex pay arrangements.
Becoming a more attractive workplace to people with disabilities is another priority. We’re focusing on building accessibility and breaking down barriers in this area, as well as on creating an inclusive culture. To show our commitment, we’ve set ourselves a target for people with disabilities to represent 5% of our workforce by 2025.
We’ve also been working to remove limiting stereotypes from our culture so that employees can be themselves at work. Building on our efforts to break down stereotypes in advertising, our #Unstereotype the workplace initiative has been running for two years. Since 2018, we have been rolling out #Unstereotype bootcamps and customised training to minimise unconscious bias and how to break down stereotypes in 40 countries.
Our aim is simple: to be a diverse and inclusive workplace where people with purpose thrive.
2019 | 2018 | |||||||||||||||
Gender statistics | Female | Male | Female | Male | ||||||||||||
Board | 5 | 8 | 5 | 8 | ||||||||||||
(38% | ) | (62% | ) | (38% | ) | (62% | ) | |||||||||
Unilever Leadership Executive | 4 | 8 | 4 | 7 | ||||||||||||
(ULE)* | (33% | ) | (67% | ) | (36% | ) | (64% | ) | ||||||||
Senior management | 15 | 59 | 17 | 64 | ||||||||||||
(reporting in to ULE) | (20% | ) | (80% | ) | (21% | ) | (79% | ) | ||||||||
Management | 7,620 | 7,408 | 7,336 | 7,552 | ||||||||||||
(51% | ) | (49% | ) | (49% | ) | (51% | ) | |||||||||
Total workforce | 53,469 | 96,398 | 53,465 | 101,383 | ||||||||||||
(36% | ) | (64% | ) | (35% | ) | (65% | ) |
*As | at 20 February 2020 (the latest practicable date for inclusion in this |
Note: Employees who are statutory directors of the corporate entities included in this Annual Report and Accounts: 493 (68%) males and 232 (32%) females (see pages 154 to 160).
Annual Report on Form 20-F 2019 | 17 |
Stakeholder reviewcontinued
Society | ||
Businesses that serve society today will be those that thrive in the future. Our scale give us an opportunity to create a better world and a stronger business. |
Creating positive change
Our impact on society starts, of course, with our contributions as an employer, taxpayer and buyer of goods and services – amounting to around€34 billion in 2019. But we both need and want to do more. Our Unilever Sustainable Living Plan (USLP) gives us a framework to better the health, wellbeing and livelihoods of millions around the world. Progress against our key 2020 targets is on page 22, and we’re currently developing goals beyond 2020.
We can improve people’s lives directly through our products. We can create broader change by putting our influence and resources behind things that matter, often in partnership with others such as projects supporting the UN Sustainable Development Goals (SDGs). And our household name brands are changing things for the better.
Better health and wellbeing
One of our big goals is to help more than one billion people improve their health and wellbeing by 2020. Many of our brands do this directly, while others do it through partnerships working to make it easier for people to live healthy lives.
Improving hygiene and sanitation
Around 2.3 billion people still have no access to basic sanitation, while 844 million are without safe drinking water. Diarrhoeal diseases are the third leading cause of child mortality globally and around half of the world’s population suffers from untreated tooth decay. We’re working hard to change these numbers. By the end of 2019, we’d reached 1.3 billion people through our activities to encourage behaviours like handwashing with soap and better oral care, and to create better access to clean toilets and safe drinking water.
Since 2010, for example, Lifebuoy has reached over 1 billion people in its efforts to improve handwashing habits, including 587 million through TV reach. We’re working in partnership with organisations such as Gavi to promote vaccination and handwashing, and the Power of Nutrition to give women in rural India advice through their mobile phones about their children’s health, including handwashing. In India, we opened two more Suvidha centres in partnership with HSBC to give people access to clean water, sanitation and laundry facilities bringing the total to three, with two more under development. And, both through its partnership with Unicef and the Cleaner Toilets Brighter Futures programme, Domestos is improving access to toilets for school children (see page 15).
Healthier eating
The world’s food system carries a double burden: almost two billion people are overweight, while 821 million people are malnourished. ‘Big food’ is seen by many as the problem. We’re determined to be part of the solution.
So we’re continuing to reduce the sugar, salt and saturated fats in our foods – 56% of our portfolio (out of our target of 60% by 2020)
meets our Highest Nutritional Standards based on globally recognised dietary recommendations. We’re also putting clearer nutrition labelling on our products. In 2019, 98% of our Foods & Refreshment portfolio had full nutrition labelling in line with our product labelling criteria (based on global sales from 1 April 2019 to 30 June 2019), and we’re working towards 100%. And, our brands are offering more fortified foods as part of our wider ambition to provide 200 billion servings by 2022 that contain at least one of the following key micronutrients: iron, iodine, zinc, vitamin A or D.
We believe that plant-based diets are essential for a sustainable food system and will be critical for slowing global heating. So we expanded our range of vegan and vegetarian options in 2019, including the newly acquired Vegetarian Butcher (see page 14 for more). And, through a three-year partnership with the World Wildlife Fund launched in 2019, Knorr is promoting 50 plant-based foods (see page 14).
Improving physical and mental health
We have a responsibility not just to help our employees improve their health and wellbeing (see page 16), but to encourage people everywhere to look after their physical and mental health. Dove’s Self-Esteem Project, for example, has reached over 60 million young people in 142 countries – including 21 million through a specially commissioned cartoon series designed to improve body confidence, which was aired in 12 markets. Lipton Tea launched its new Quality Connections programme in 2019, while Brooke Bond continues its campaign to break stereotypes around mental health and disability. And Clear, our anti-dandruff haircare brand, is tackling social anxiety and building young people’s resilience.
Enhancing livelihoods
Our activities touch the lives of millions, both directly and indirectly. We have a responsibility to protect their rights and help them live well.
Championing human rights
Our Responsible Sourcing Policy sets standards on human and labour rights for our suppliers. In 2019, 70% of our procurement spend was through suppliers meeting these requirements. We have due diligence procedures to identify human rights risks in the supply chain including third-party audits. We aim to support suppliers to find solutions to identified issues, especially where these affect workers’ human and labour rights.
To further embed a culture of respect and promote human rights, in 2019 we created and began to roll out an internal business and human rights training programme. We also carried out external, independent Human Rights Impact Assessments in Guatemala, Thailand and Turkey. We continued to partner with UN Women, publishing Implementation Guidance for the Global Safety Framework
We’re creating broad change by putting our influence and resources behind projects that support the UN SDGs.
and working with our tea suppliers in Kenya, Tanzania and India to improve women’s safety. And we continued to focus on the rights of migrant workers, including no payment of recruitment fees, by taking part in multi-stakeholder initiatives such as the Consumer Goods Forum, Leadership Group for Responsible Recruitment and Responsible Labour Initiative. We also published a full list of our tea suppliers in 21 countries to help consumers make more informed choices about the products they buy.
A fairer world for women
One of the most powerful ways to improve the livelihoods, health and wellbeing of everyone is to create more opportunities for women. So we’re investing in women across our value chain – employees, farmers, small retailers – giving them business opportunities and access to training, finance and technologies.
We put our influence as an advertiser behind the #Unstereotype initiative to encourage a move away from unhelpful portrayals of gender. Many of our brands are pushing for greater gender equality through their brand purpose and partnerships, such as Sunsilk and Girl Rising in Indonesia, Philippines and Argentina, Sunlight and UN Women in Indonesia, and TRESemmé and ICRW in the UK. We’re also continuing to partner with UN Women to improve the safety of women in agriculture, especially on our tea plantations.
More inclusive business
We want to unlock the potential of the millions around the world who help source, make and sell our products – growing our business and theirs. For example, through the CEO Partnership, we have projects in Kenya, India and Pakistan with credit and insurance providers such as Mastercard, AXA and Telenor to deliver digital credit and payment services to small retailers. And we continue to expand our Shakti programme, which gives women in rural communities in countries such as India and Nigeria the opportunity to earn an income by selling our brands.
Our work also extends to the smallholder farmers we depend on for key crops. For example, in Madagascar, Wall’s is working with NGOs to help families earn a sustainable living from vanilla farming. Across all our smallholder programmes, we’ve helped more than 793,000 smallholder farmers access initiatives aiming to improve agricultural practices.
18 | Annual Report on Form 20-F 2019 |
Strategic Report |
Planet | ||
We’re living in a climate emergency. As the planet continues to heat, we need to protect the natural resources we depend on to grow our business. |
Business needs a healthy world
To create the change needed to counter the rapid warming and degradation of the environment, we have to radically overhaul entire systems. Our activities (see pages 10 to 11) impact the environment, mainly through the use of water, energy and land as well as the production of waste and greenhouse gas emissions. Taking action on these issues is not only the right thing to do – it also helps our business as consumers choose brands which align with their values and concerns. Our Environmental Policy outlines our responsibilities to the environment and is, among other things, implemented through the USLP.
Our environmental targets were ground-breaking when we set them in 2010, because they considered the wider value chain, including consumer use. In some areas of the wider value chain, such as lessening consumer waste, we’ve made good progress – in others, such as reducing consumer greenhouse gas and water use, we haven’t done so well. This is disappointing, but we’re using what we’ve learned to refine our strategy. Having launched new goals for plastics in October 2019 (described below), we’re in the process of setting new sustainability goals for beyond 2020. These will both challenge us and, we hope, encourage others to act faster. As we’ve learnt from the last nine years of the USLP, partnerships are key.
Tackling climate change
This year we reaffirmed our science-based commitments through the UN’s Business Ambition for 1.5°C campaign. We’re taking action across our value chain.
Reducing carbon emissions
We’ve made significant progress in our own operations. Reducing emissions means reducing energy. By the end of 2019 we had reduced energy from our factories by 29% per tonne of production compared to 2008, avoiding costs of around€733 million in the process. We continue to use an internal price on carbon to fund energy projects. See page 40 for more details. Since 2008 we’ve reduced CO2 emissions from energy per tonne of production by 65%. We’re also finding ways to replace fossil fuel energy with renewable energy. As of September 2019, 100% of our grid electricity was from renewables across five continents. And 24 manufacturing sites achieved carbon neutral status. We’re now using solar power in 20 countries and are pushing for regulatory changes to move more swiftly away from fossil fuels.
However, around 65% of our carbon footprint comes from consumers using our products. So halving our total emissions footprint depends on two main things: changes in consumer behaviour and renewable energy becoming more widely available. We’ve made some progress by influencing behaviour through product design, but we need to go faster. So we’re developing our products to use less carbon – introducing more concentrated liquids for example – and joining the RE100 global campaign for better access to renewable energy for all.
Where water is becoming scarcer, we’re developing products which use less water, while encouraging people to do laundry on shorter cycles.
Ending deforestation
In 2010, as a member of the Consumer Goods Forum, we committed to achieving zero net deforestation associated with our four most important deforestation risk commodities by 2020: paper and board, palm oil, beef and soy. For these commodities, we use additional verification on top of our existing sustainability certifications to address the environmental and social issues associated with these particular crops. Specifically, our accelerated activities will include: enhancing our efforts around traceability and transparency using advancements in technology; inclusion of smallholders in our value chain particularly in countries such as Indonesia to help them increase crop productivity and diversify income; and simplifying our approach to sourcing.
Despite our efforts over the past decade, commodity-driven deforestation remains a serious challenge in many parts of the world. We cannot solve deforestation without wholesale transformation of supply chains towards more sustainable models of production. This is why we are working with governments, other businesses, civil society and local communities to tackle the causes of deforestation.
Rethinking plastic
While plastic does have a role to play in the economy, it does not belong in the environment. Its impact has rightly become a huge concern. With consumer expectations and legislation changing fast, we have to rethink both the design of our products and our business model to build a circular economy – one where we not only use less plastic, but where the plastic we do use can be reused, recycled or composted.
Since 2010, our total waste footprint per consumer use has reduced by 32% – partly through better product design and recycling infrastructure. But we need to do more, and more quickly. So in October 2019, we announced a new ambition to halve the use of virgin plastic in our packaging by 2025 and to collect and process more plastic packaging than we sell by 2025. This will mean exploring new product designs that use more refills, recycled materials, or no plastic at all. And it will mean continuing to invest in infrastructure – expanding our partnerships with waste management companies like Veolia and with household recycling services like Wecyclers in Nigeria.
We’re already making progress. In 2019, nine of our brands registered their interest in participating in a pilot of the TerraCycle Loop refill and reuse scheme in the US and France, with five already launched on the platform. And, we’re bringing more recycled plastic into more of our product packaging, while exploring other options such as glass jars for Knorr soups and sustainable paper for Carte d’Or ice creams.
100%
grid electricity from
renewables on 5 continents
Innovation with others, plays a big part. For example, we’re working with Ioniqa, a Dutchstart-up, to develop a technology that breaks down plastic to make it more recyclable. And we’re investing in solutions – through Circulate Capital’s Ocean Fund, for example, which is working to reduce plastic pollution in South and South East Asia.
Protecting nature through sustainable sourcing
We use many different raw materials to make our products. Sustainable sourcing and sustainable agriculture are vital to maintaining the supply of these natural resources while also feeding the world’s growing population.
Our Sustainable Agriculture Code lays out standards for the suppliers of our biggest commodities such as palm oil, soy, paper and board – as well as crops such as sugar, tea and vegetables – to farm in ways that sustain the soil, use less water and fertiliser, protect biodiversity and improve people’s livelihoods. In 2010 we set a target to source all our raw materials sustainably. 62% of all agricultural raw materials were sustainably sourced in 2019, compared to 14% in 2010. For the 12 key ingredients that make up aroundtwo-thirds of our total volume of agricultural raw materials, 88% were sustainably sourced.
Pushing for system change
The radical changes needed can only be made throughco-operation – across borders and between boardroom tables. So we’re working closely with organisations such as the Ellen MacArthur Foundation to push towards a circular economy. And we’re lending our voice to calls for connected approaches, such as the Nature Based Solutions Manifesto for natural solutions to climate change. We are all in this together, and we still have much to do.
See page 22 for details on our progress against key USLP targets and pages 40 to 45 for more on how we manage risks and opportunities from climate change and plastic packaging.
Annual Report on Form 20-F 2019 | 19 |
Stakeholder reviewcontinued
Customers | ||
With our many customers, frome-commerce marketplaces to family-owned stores, we’re pioneering new ways of selling to grow both our business and theirs. |
The changing world of our customers
We partner with 25 million retail sales outlets in our distribution chain in over 100 countries, with 60% in developing and emerging markets. We work closely with our customers to grow both their sales and ours while spreading the positive impact of ourpurpose-led brands. This could mean collaborating on a new product launch or purpose campaign, or recommending the right range of products based on our consumer insights.
The retail world is changing fast. People no longer just shop in one place – they’re using a variety of channels, both online and off, and expect a seamless experience throughout. In developing and emerging markets, we’re seeing a move towardse-commerce and convenience stores – and in the developed world, towards these as well as discount channels. So, it’s becoming even more important to adopt a successful multi-channel approach – offering the right products at the right prices in the right places.
Reinventing retail
We’re evolving how we sell to make sure we have the right presence in growing channels such as health & beauty, out of home ande-commerce. We’re also partnering with small and larger retailers to create more growth opportunities.
Growinge-commerce
The forecast for globale-commerce growth was 20% for 2019. Unilever’se-commerce sales grew 30%, accounting for 6% of our turnover (including sales to consumers both by Unilever and by retailers via theire-commerce platforms). While this pace is fast compared to the market, we need to go faster, partnering with customers who share our aim to grow acrosse-commerce channels. This year we worked closely with Alibaba, JD.com and other online retailers as part of theone-day Double 11 Chinese shopping gala. Among other things, this involved an interactiveon- and offline shopping experience promoting premium products such as Love Home and Planet and Lux botanical shower gels.
We’re also partnering with large retailers like Tesco, Carrefour and Walmart on omnichannel – across channel – sales models to make sure they reach consumers, however they choose to buy. Our aim is to build a balancede-commerce model that includese-commerce retailers, bricks and mortar online sales, anddirect-to-consumer businesses.
Partnering for growth
Supporting our big box retail partners to develop betterin-store experiences and more digital options is a key part of our approach. We’re partnering with retailers such as Woolworths (Australia) and Target (US) to create more inspiring shopping experiences through more personalised and effective promotions – developing a newin-store experience for Target’s beauty offering, for example. And we’re creating joint business plans, for example with Coles (Australia) we’ve developed our offer of protein, low calorie, vegan and natural ice creams to focus on these high-growth markets.
Empowering small retailers
Digitising the sales value chain so that small retailers can order our products 24/7 is key to building direct relationships, providing growth opportunities for us and our customers.
In Indonesia for example, we’ve introduced a self-ordering smartphone app and phone ordering option for small stores. In Brazil, we’ve developed a small retailere-commerce platform for buying our products, and have 200,000 registered stores so far. And in India, we launched the Shikar app so that traders can place orders without waiting for distributors to visit their stores. We’re also exploring new finance models such as micro-credit partnerships – with Mastercard in Kenya and Telenor in Pakistan – that help smaller retailers access loans to buy stock (see page 18).
Selling with purpose
We work with our customers to make our brands with purpose more visible – wherever shoppers are. We want to engage consumers on all shopping channels to inspire them to buy, consume and act more sustainably – which also leads to more sales and income for our customers. One way we do this is by bringing our brands to life in stores. We’ve partnered with Walmart in the US and Puregold in the Philippines, for example, to educate people on recycling and plastics reduction to help drive behavioural change through Unilever brands.
Part of selling with purpose is expanding our reach through last-mile and micro distribution models. Programmes like Shakti, through which more than 100,000 women are selling direct to homes and in villages in rural areas of 5 countries, and I’m Wall’s, which has created new livelihoods for thousands of micro-entrepreneurs in over 20 countries, are helping us expand our reach and make a difference to people’s lives. For more on small-scale retailer programmes see page 18.
We’re also making a difference to the planet through a raft of initiatives to reduce and reuse plastics in stores. We’re trialling refill stations with customers in the US and Europe, for example, and are working to expand these programmes. For more on how we’re tackling plastic packaging, see page 19.
25m
retail sales outlets in our distribution chain
Fitter for the future
Alongside working with our customers to help them become more fit for the future, we’re adapting our own ways of working. By becoming more integrated and digital, we’re finding ways to make our operations smarter and quicker. We’re assessing and refining our key processes and are using AI to become more efficient and effective with our customers – for example, through more dynamic resource planning and better promotion.
By relentlessly focusing on customers, consumers and channels, we can make sure our distribution platforms are primed for the evolving shopping habits of people all over the world.
20 | Annual Report on Form 20-F 2019 |
Strategic Report |
Shareholders | ||
We’re working to create sustainable long-term value for our shareholders by evolving our portfolio to higher growth segments and transforming our business. |
Our performance in 2019
We delivered underlying sales growth of 2.9%, balanced between price and volume. As we announced in our sales update in December, this means that we fell slightly short of delivering within our multi-year range of3-5%.
Our underlying sales growth was driven by a strong overall performance in our emerging markets, up 5.3% and with a good balance between volume and price. Our businesses in South East Asia, particularly Philippines, Indonesia and Vietnam, performed well, as did North Asia. Latin America returned to growth and our Brazilian business also grew well, in an environment which is improving but remains challenging. These gains were, however, offset by difficulties in other emerging markets, including an economic slowdown in South Asia and tough trading conditions in West Africa and the Middle East.
Delivering strong growth continues to challenge us in developed markets, where we see low consumer confidence and a deflationary retail environment. Sales growth in our European business decreased by 0.6%, while in North America we saw modest growth, helped by a good performance in Deodorants and some good momentum in the second half from Dressings.
In our Divisions, Beauty & Personal Care grew
2.6%, led by strong, double-digit growth from Prestige. Deodorants and Skin Care performed well, but growth was weak in Hair Care. It was another good year for Home Care, growing by 6.1% with strong contributions from Fabric Solutions, Fabric Sensations and Home & Hygiene. Foods & Refreshment delivered growth of 1.5%, in a year which saw subdued demand for black tea, and a significant slowdown in the European ice cream market.
Our bottom-line performance was good, with underlying operating margin progressing 50 basis points to 19.1%. The improvement was driven by higher gross margins, a result of strong delivery from our 5S savings programme. In addition, free cash flow was up€0.7 billion to€6.1 billion, thanks to an improvement in underlying operating profit.
Purpose-led performance
As well as expecting consistent financial returns, shareholders today are increasingly interested in the environmental, social and governance (ESG) aspects of business that are so essential to delivering value. Our long-term commitment to ESG is encapsulated in the Unilever Sustainable Living Plan. Our focus and progress on becoming a more sustainable business helped us once again come top of our sector in the Dow Jones Sustainability Index in 2019.
We’re more determined than ever to show that our purposeful approach to business fuels strong performance. The numbers prove it – over the last few years we’ve seen significantly higher growth from our brands with purpose.
2.9%
underlying sales growth in 2019
That’s why we’re working to ensure that each of our brands has a clear purpose. As well as our brands taking a stand on issues, we’re setting bold goals and taking action on the many environmental and social challenges faced by society, such as plastic and climate change. See page 19 for more.
Accelerating our growth
As we strengthen our foundations to deliver long-term superior value, accelerating growth is our top priority. We’re doing this by evolving our portfolio of brands to higher growth segments. This means renovating our existing brands to meet emerging trends, creating new brands (such as Love Home and Planet), and making acquisitions in fast-growing segments like plant-based foods and prestige beauty. Over the last five years we’ve acquired over 30 businesses, including nine in 2019. In January 2020 we announced that we will be conducting a strategic review of our global tea business as we continue to evolve our portfolio to higher growth spaces.
Many of our recent acquisitions are growing in double digits, including our Prestige portfolio, Seventh Generation and Sir Kensington’s. However, some, such as Blueair, haven’t performed as expected in recent years. The aquisition of Horlicks is likely to complete in the first half of 2020.
We’re also capitalising on market potential. With 60% of our business in developing and emerging markets, we have an unmatched footprint in high-growth markets. In 2019, 19 of our emerging markets delivered more than€100 million in turnover, with 17 delivering more than€500 million. We’re also building a strong presence in markets of the future, such as Ethiopia and Myanmar. The key to winning in many of these places – and indeed in all our markets – is digitising our route to market and having a strong presence in channels such ase-commerce, as discussed on page 20.
Sustainable growth is fuelled by our savings initiatives. We have an everyday commitment to running the business efficiently, using savings to invest in growth areas of the future and in better products and brands. This, in turn, increases our margins. Our three main savings programmes – ZBB, 5S and our Change Programme – have delivered over€6 billion of savings since 2017.
Transforming for success
Our new leadership team is driving our transformation for future success: cementing purpose at the heart of our business strategy, while simplifying our organisational structure. To help us shape a faster, more responsive business, we’ve reinstated the Chief Operating Officer role and simplified our structures in Europe, South East Asia and Australasia. These actions are all part of building a culture of growth at Unilever: becoming a more agile organisation that makes smarter decisions faster, and with consumers and customers front of mind – see pages 14 and 20 for more.
The transformation is underpinned by technology, which is making a difference at every stage of our operations. It’s helping to improve our sourcing of raw materials, for example we’re exploring the potential of AI to calculate ideal harvest times and increase productivity at our tea plantations in Kenya. And it’s creating new efficiencies in our manufacturing operations – at the end of 2019, 31 of our sites were streaming live data using a ‘digital twin’, which tracks physical conditions and uses machine learning to analyse data and optimise processes, reducing both waste and energy used. We plan to connect another 40 sites in 2020.
We’re also building digital relationships with our customers and creating better, more cost-effective models of service – for more on this, see page 20. We’re getting even closer to consumers by using advanced analytics to understand trends on social channels and through our Consumer Carelines. The insights we gain are enabling us to be in the right places at the right times with the right products. Digital activities like these make our investments more effective, help us develop more powerful innovation capabilities and ensure we are more responsive to consumer trends.
In summary, we are focused on accelerating growth while continuously transforming our organisation to befuture-fit. Our purpose-led business model remains key to delivering superior long-term value.
>€6bn
cost savings since 2017
Annual Report on Form 20-F 2019 | 21 |
We measure our success by tracking bothnon-financial and financial key performance indicators that reflect our strategic priorities.
Non-financial performance
Target | 2019 | 2018 | 2017 | |||||||||||||
Improving health & wellbeing Big Goal: By 2020 we will help more than a billion people take action to improve their health and wellbeing. See page 18. |
| |||||||||||||||
Health & hygiene Target: By 2020 we will help more than a billion people to improve their health and hygiene. This will help reduce the incidence of life-threatening diseases like diarrhoea. | 1 billion | | On ground reach: 615 million |
| | On ground reach: 570 million | D | | On ground reach: 523 million |
| ||||||
|
TV reach: 710 million |
* |
|
TV reach: 670 million |
* | | TV reach: 78 million | * | ||||||||
Nutrition Target: By 2020 we will double (i.e. up to 60%) the proportion of our portfolio that meets the highest nutritional standards, based on globally recognised dietary guidelines. This will help hundreds of millions of people to achieve a healthier diet. | 60% | 56% | † | 48% | 39% | ◇ | ||||||||||
Reducing environmental impact Big Goal: By 2030 our goal is to halve the environmental footprint of the making and use of our products as we grow our business. See page 19. |
| |||||||||||||||
Greenhouse gases Target: Halve the greenhouse gas impact of our products across the lifecycle (from the sourcing of the raw materials to the greenhouse gas emissions linked to people using our products) by 2030 (greenhouse gas impact per consumer use).+ | (50%) | 2% | † | 6% | 9% | ◇ | ||||||||||
Target: By 2020 CO2 emissions from energy from our factories will be at or below 2008 levels despite significantly higher volumes (reduction in CO2 from energy per tonne of production since 2008).** | £145.92 | 50.76 | † | 70.46 | D | 76.77 | ◇ | |||||||||
Water Target: Halve the water associated with the consumer use of our products by 2020 (water impact per consumer use). | (50%) | 1% | † | (2%) | (2%) | ◇ | ||||||||||
Target: By 2020 water abstraction by our global factory network will be at or below 2008 levels despite significantly higher volumes (reduction in water abstraction per tonne of production since 2008).** | £2.97 | 1.58 | † | 1.67 | D | 1.80 | ◇ | |||||||||
Waste Target: Halve the waste associated with the disposal of our products by 2020 (waste impact per consumer use). | (50%) | (32%) | (31%) | D | (29%) | |||||||||||
Target: By 2020 total waste sent for disposal will be at or below 2008 levels despite significantly higher volumes (reduction in total waste per tonne of production since 2008).** | £7.91 | 0.30 | † | 0.23 | D^ | 0.18 | ◇ | |||||||||
Sustainable sourcing Target: By 2020 we will source 100% of our agricultural raw materials sustainably (% of tonnes purchased). | 100% | 62% | 56% | 56% | ||||||||||||
Enhancing livelihoods Big Goal: By 2020 we will enhance the livelihoods of millions of people as we grow our business. See page 18. |
| |||||||||||||||
Fairness in the workplace Target: By 2020 we will advance human rights across our operations and extended supply chain, by: |
| |||||||||||||||
• Sourcing 100% of procurement spend from suppliers meeting the mandatory requirements of the Responsible Sourcing Policy (% of spend of suppliers meeting the Policy). | 100% | 70% | 61% | ‡D | 55% | ‡◇ | ||||||||||
• Reducing workplace injuries and accidents (Total Recordable Frequency Rate of workplace accidents per million hours worked)**. | 0.76 | ¤† | 0.69 | D | 0.89 | ◇ | ||||||||||
Opportunities for women Target: By 2020 we will empower 5 million women, by: |
| |||||||||||||||
• Promoting safety for women in communities where we operate. • Enhancing access to training and skills (number of women). • Expanding opportunities in our value chain (number of women). | | 5 million |
| | 2.34 million | ± | | 1.85 million | D | | 1.26 million | ◇ | ||||
• Building a gender-balanced organisation with a focus on management | 50% | 51% | 49% | D | 47% | ◇ | ||||||||||
Inclusive business Target: By 2020 we will have a positive impact on the lives of 5.5 million people by: |
| |||||||||||||||
• Enabling small-scale retailers to access initiatives aiming to improve their income (number of small-scale retailers). | | 5 million |
| | 1.81 million | †± | | 1.73 million |
| | 1.60 million |
| ||||
• Enabling smallholder farmers to access initiatives aiming to improve their agricultural practices (number of smallholder farmers). | | 0.5 million |
| | 0.79 million | †± | | 0.75 million |
| | 0.72 million | ◇ |
Baseline 2010 unless otherwise stated
** | KeyNon-Financial Indicators. |
† | PricewaterhouseCoopers assured in 2019. For details and 2019 basis of preparation seewww.unilever.com/investor-relations/annual-report-and-accounts/ |
D | PricewaterhouseCoopers assured in 2018. For details and 2018 basis of preparation seewww.unilever.com/sustainable-living/our-approach-to-reporting/reports-and-publications-archive |
◇ | PricewaterhouseCoopers assured in 2017. For details and 2017 basis of preparation seewww.unilever.com/sustainable-living/our-approach-to-reporting/reports-and-publications-archive |
* | The number of people reached through TV advertisements and programmes aimed at encouraging health and hygiene behaviour change (‘TV reach’) was only measured for our Oral Care brands in 2017. Lifebuoy and Dove started measuring TV reach in 2018 and 2019 respectively. |
‡ | During 2017 and 2018 we amended how we assessed compliance with the Responsible Sourcing Policy, henceyear-on-year data is not comparable. |
± | Around 568,000 women have accessed initiatives under both the Inclusive Business and the Opportunities for Women pillars in 2019. |
( ) | Brackets around environmental targets indicate that our aim is to reduce our greenhouse gas, waste and water footprints. Brackets around the corresponding actuals indicate that we have reduced our footprints by the numbers quoted. |
+ | Target approved by the Science Based Targets Initiative. |
^ | Restated from 0.20 kg/tonne of production due to a classification error during the data reporting process. |
¤ | 2019 Total Recordable Frequency Rate (TRFR) includes for the first time all acquisitions which operate as decentralised business units, as we now have processes in place to collect the data. Had we included these acquisitions in 2017 and 2018, our reported TRFR would have been approximately 6% higher in each year. |
22 | Annual Report on Form 20-F 2019 |
Strategic Report |
Financial performance
2019 | 2018 | 2017 | ||||||||||
(Restated | )(a) | (Restated | )(a) | |||||||||
Group
| ||||||||||||
Turnover growth Turnover growth averaged 1.6% over five years | 2.0% | (5.1% | ) | 1.9% | ||||||||
Underlying sales growth* Underlying sales growth averaged 3.3% over five years | 2.9% | 3.2% | 2.8% | |||||||||
Underlying volume growth* Underlying volume growth averaged 1.4% over five years | 1.2% | 1.9% | 0.8% | |||||||||
Operating margin
| 16.8% | 24.8% | 16.7% | |||||||||
Underlying operating margin*
| 19.1% | 18.6% | 17.7% | |||||||||
Free cash flow*
| | €6.1 billion |
| | €5.4 billion |
| | €5.8 billion |
| |||
Cash flow from operating activities | | €10.6 billion |
| | €9.6 billion |
| | €10.0 billion |
| |||
Cash flow (used in)/from investing activities | | (€2.2 billion | )
| | €4.6 billion |
| | (€5.9 billion | )
| |||
Cash flow (used in)/from financing activities | | (€4.7 billion | )
| | (€12.1 billion | )
| | (€2.0 billion | )
| |||
Divisions
| ||||||||||||
Beauty & Personal Care Turnover | | €21.9 billion |
| | €20.6 billion |
| | €20.7 billion |
| |||
Turnover growth | 6.0% | (0.3% | ) | 2.6% | ||||||||
Underlying sales growth | 2.6% | 3.4% | 2.9% | |||||||||
Operating margin | 20.7% | 20.2% | 20.0% | |||||||||
Underlying operating margin | 22.7% | 22.0% | 21.3% | |||||||||
Foods & Refreshment Turnover | | €19.3 billion |
| | €20.2 billion |
| | €22.4 billion |
| |||
Turnover growth | (4.6% | ) | (9.9% | ) | (0.4% | ) | ||||||
Underlying sales growth | 1.5% | 2.2% | 2.1% | |||||||||
Operating margin | 14.6% | 36.0% | 16.3% | |||||||||
Underlying operating margin | 17.5% | 17.7% | 16.8% | |||||||||
Home Care Turnover | | €10.8 billion |
| | €10.1 billion |
| | €10.6 billion |
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Turnover growth | 6.9% | (4.2% | ) | 5.6% | ||||||||
Underlying sales growth | 6.1% | 4.7% | 4.4% | |||||||||
Operating margin | 12.7% | 11.7% | 11.0% | |||||||||
Underlying operating margin | 14.8% | 13.3% | 12.4% |
(a) | Restated following adoption of IFRS 16, see note 1 and note 24 for further details, and the change in treatment of hyperinflationary economies in underlying sales growth, |
* | Key Financial Indicators. |
Underlying sales growth, underlying volume growth, underlying operating margin and free cash flow arenon-GAAP measures. In order to provide a clear picture of our performance against the objectives set out in our strategic review we report underlying operating margin, which excludes restructuring costs, in place of the previously reported core operating margin. For further information about these measures, and the reasons why we believe they are important for an understanding of the performance of the business, please refer to our commentary onnon-GAAP measures on page 22.pages 27 to 32.
UNILEVER SUSTAINABLE LIVING PLAN
2017 | 2016 | 2015 | ||||||||||
IMPROVING HEALTH & WELL-BEING | ||||||||||||
BIG GOAL: By 2020 we will help more than a billion people take action to improve their health and well-being. See page 13 | ||||||||||||
HEALTH & HYGIENE | ||||||||||||
Target: By 2020 we will help more than a billion people to improve their health and hygiene. This will help reduce the incidence of life-threatening diseases like diarrhoea. | 601 million | 538 million | f | 482 millionr | ||||||||
NUTRITION | ||||||||||||
Target: By 2020 we will double the proportion of our portfolio that meets the highest nutritional standards, based on globally recognised dietary guidelines. This will help hundreds of millions of people to achieve a healthier diet. | 39% | ◇ | 35% | 34%r | ||||||||
REDUCING ENVIRONMENTAL IMPACT | ||||||||||||
BIG GOAL: By 2030 our goal is to halve the environmental footprint of the making and use of our products as we grow our business. See pages 13 and 14 | ||||||||||||
GREENHOUSE GASES | ||||||||||||
Target: Halve the greenhouse gas impact of our products across the lifecycle by 2030 (greenhouse gas impact per consumer use). | 9% | ◇ | 8% | 7%q | ||||||||
Target: By 2020 CO2emissions from energy from our factories will be at or below 2008 levels despite significantly higher volumes (reduction in CO2from energy per tonne of production since 2008).**+ | (47%) | ◇ | (43%)f | (39%)r | ||||||||
WATER | ||||||||||||
Target: Halve the water associated with the consumer use of our products by 2020 (water impact per consumer use). | (2%) | ◇ | (7%) | (1%)r | ||||||||
Target: By 2020 water abstraction by our global factory network will be at or below 2008 levels despite significantly higher volumes (reduction in water abstraction per tonne of production since 2008).** | (39%) | ◇ | (37%)f | (37%)r | ||||||||
WASTE | ||||||||||||
Target: Halve the waste associated with the disposal of our products by 2020 (waste impact per consumer use). | (29%) | (28%)f | (26%)q | |||||||||
Target: By 2020 total waste sent for disposal will be at or below 2008 levels despite significantly higher volumes (reduction in total waste per tonne of production since 2008).** | (98%) | ◇ | (96%)f | (97%)r | ||||||||
SUSTAINABLE SOURCING | ||||||||||||
Target: By 2020 we will source 100% of our agricultural raw materials sustainably (% of tonnes purchased). | 56% | 51% | 60%^ | |||||||||
ENHANCING LIVELIHOODS | ||||||||||||
BIG GOAL: By 2020 we will enhance the livelihoods of millions of people as we grow our business. See page 14 | ||||||||||||
FAIRNESS IN THE WORKPLACE | ||||||||||||
Target: By 2020 we will advance human rights across our operations and extended supply chain, by: | ||||||||||||
• Sourcing 100% of procurement spend from suppliers meeting the mandatory requirements of the Responsible Sourcing Policy (% of spend of suppliers meeting the Policy) | 55% | ‡ | - | - | ||||||||
• Reducing workplace injuries and accidents (Total Recordable Frequency Rate of workplace accidents per million hours worked)** | 0.89 | ◇ | 1.01f | 1.12r | ||||||||
OPPORTUNITIES FOR WOMEN | ||||||||||||
Target: By 2020 we will empower 5 million women, by: | 1,259,000 | ◇ | 920,000 | 806,000 | ||||||||
• Promoting safety for women in communities where we operate | 7,000 | ◇ | 7,000 | 6,000 | ||||||||
• Enhancing access to training and skills (number of women) | 1,175,000 | ◇ | 836,000 | 730,000 | ||||||||
• Expanding opportunities in our value chain (number of women) | 77,000 | ◇ | 77,000 | 70,000 | ||||||||
• Building a gender-balance organisation with a focus on management (% of managers that are women)** | 47% | ◇ | 46% | 45% | ||||||||
INCLUSIVE BUSINESS | ||||||||||||
Target: By 2020 we will have a positive impact on the lives of 5.5 million people by: | ||||||||||||
• Enabling small-scale retailers to access initiatives aiming to improve their income | 1.6 millio | n | 1.5 million | 1.8 million | ||||||||
• Enabling smallholder farmers to access initiatives aiming to improve their agricultural practices | 716,000 | ◇ | 650,000 | 600,000 |
Baseline 2010 unless otherwise stated
Annual Report on Form 20-F |
2019 performance
The Group generated turnover of€52.0 billion, operating profit of€8.7 billion and net profit of€6.0 billion.
Turnover growth at 2.0% was lower than underlying sales growth of 2.9% reflecting a negative impact of the spreads disposal partially offset by a positive impact from currency.
Emerging markets performed well with underlying sales growth of 5.3% but developed markets declined by 0.5% mainly as a result of difficult and deflationary conditions in Europe. Overall underlying sales growth was slightly below expectation due to slow down experienced in the last quarter. Price growth decelerated in the fourth quarter as a result of pricing reductions in India and low inflation in Turkey. Africa declined due challenges in West Africa where there were distributor stock resets in Ghana and Nigeria.
Argentina’s and Venezuela’s hyperinflationary conditions persisted during 2019 and Zimbabwe also became hyperinflationary during the year. In our calculation of underlying sales growth we exclude price growth in excess of 26% in hyperinflationary economies. See pages 28 to 29 for more details.
Nine business acquisition deals were completed during the year spanning across all Divisions and the global Alsa baking and dessert business was sold in the first half of the year. More details on acquisitions and disposals are in note 21 on pages 134 to 136.
Withinnon-underlying costs, during the year the Group spent€1,159 million (2018:€914 million) on restructuring; both supply chain optimisation projects to improve gross margin and organisational change projects to reduce overheads. Supply chain activities were concentrated in the manufacturing and logistics networks, particularly in Europe and the Americas. Change projects in the markets were focused on transforming the organisation to make itfuture-fit and digitally enabled, as well as reducing the overhead base in businesses impacted by the spreads disposal.
Highlights for the year ended
Beauty & Personal Care
| Foods & Refreshment
| Home Care
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2019 | 2018 (Restated)(a) | 2019 | 2018 (Restated)(a) | 2019 | 2018 (Restated)(a) | 2019 | 2018 (Restated)(a) | |||||||||||||||||||||||||||||||||||||
Turnover (€ million) | 21,868 | 20,624 | 19,287 | 20,227 | 10,825 | 10,131 | 51,980 | 50,982 | ||||||||||||||||||||||||||||||||||||
Underlying sales growth^ (%) | 2.6 | 3.4 | 1.5 | 2.2 | 6.1 | 4.7 | 2.9 | 3.2 | ||||||||||||||||||||||||||||||||||||
Underlying volume growth (%) | 1.7 | 2.5 | (0.2 | ) | 1.3 | 2.9 | 2.3 | 1.2 | 1.9 | |||||||||||||||||||||||||||||||||||
Underlying price growth^ (%) | 0.9 | 0.9 | 1.7 | 0.9 | 3.1 | 2.4 | 1.6 | 1.2 | ||||||||||||||||||||||||||||||||||||
Operating profit (€ million) | 4,520 | 4,165 | 2,811 | 7,287 | 1,377 | 1,187 | 8,708 | 12,639 | ||||||||||||||||||||||||||||||||||||
Underlying operating profit (€ million) | 4,960 | 4,543 | 3,382 | 3,576 | 1,605 | 1,344 | 9,947 | 9,463 | ||||||||||||||||||||||||||||||||||||
Operating margin (%) | 20.7 | 20.2 | 14.6 | 36.0 | 12.7 | 11.7 | 16.8 | 24.8 | ||||||||||||||||||||||||||||||||||||
Underlying operating margin (%) | 22.7 | 22.0 | 17.5 | 17.7 | 14.8 | 13.3 | 19.1 | 18.6 | ||||||||||||||||||||||||||||||||||||
Return on assets (%) | 124 | 117 | 61 | 58 | 99 | 86 | 89 | 82 |
(a) | Restated following adoption of IFRS 16 and the change in treatment of hyperinflationary economies in underlying sales growth. See note 1, note 24 and pages 28 to 29 for further details. |
^ | Wherever referenced in this announcement, underlying sales growth and underlying price growth do not include price growth in excess of 26% per year in hyperinflationary economies. See pages 28 to 29 onnon-GAAP measures for more details. |
UNILEVER OPERATES IN THE FAST-MOVING CONSUMER GOODS (FMCG) INDUSTRY, ONE OF THE LARGEST AND MOST COMPETITIVE INDUSTRIES IN THE WORLD.
The top 25 global FMCG players generate sales of over€24500 billion in markets characterised by their highly dynamic nature. Rapid change is now a constant, caused by fragmentation throughout the value chain, requiring fast, innovative and profitable responses in areas such as supply chain, customer development, marketing and brand innovation.
In response we have taken a number of strategic actions including the sale of our Spreads business, the integration of our Foods and Refreshment categories, the announcement or completion of 12 acquisitions in faster growing segments and channels, and the acceleration of our Connected 4 Growth (C4G) change programme. Launched in 2016 to create a faster, simpler organisation, we are realising C4G’s benefits through digitally connectedend-to-end marketing, R&D and supply chain, and a more agile organisation leveraging our global scale and local expertise.
FASTER PACE OF CHANGE
There is no doubt that the business environment is changing at a faster pace than ever. These changes bring challenges but also significant opportunity. We see changes in a number of areas, notably in consumer preferences,route-to-market channels, media and brand communication and the competitive landscape.
Consumers are taking radically different paths when purchasing brands, often combining both offline and online channels where influencers are a growing force. Younger consumers are prioritising meaning over materialism, demanding brands with a point of view and more authenticity, transparency and sustainability. More people moving into the global workforce, especially in emerging markets, is resulting in long-term shifts in demand for products with greater convenience and time-saving attributes, notably in Foods and Home Care, but without sacrificing quality or sustainability benefits. The trend of growing middle classes continues, albeit challenged by incomes rising only slowly in some emerging markets and inequality increasing globally.
Channels to reach consumers are also fragmenting, with less reliance on ‘big box’ retailers ase-commerce continues to grow, driven in part bydirect-to-consumer models. The global FMCGe-commerce channel continues to grow by 30% a year according to the latest industry reports. Specialist channels, such as drug stores, continue to grow in significance as do discount and convenience stores.
The proliferation of diverse digital and social media channels has led to significant media fragmentation. Digital advertising is playing an increasingly important role in brand advertising – now around 40% of the total advertising market. However, tackling viewability standards and fraud in digital advertising through verification of views – and demonstrating the value of digital advertising spend – are ongoing challenges for the industry.
Responses to change are predicated on the need for efficiency and margin improvement as competition intensifies. Some global players are adopting models prioritising cost-cutting over long-term investment.
Local players present a growing challenge. They react swiftly with innovations meeting local trends, one reason why responses, such as Unilever’s C4G programme, are critical in marrying the benefits of global scale, in areas such as marketing and R&D, with entrepreneurial country teams empowered to lead launches that meet local trends.
A MIXED ECONOMIC OUTLOOK
This pace of change comes as market conditions across many of our markets remain challenging. There are, however, grounds for optimism as local currencies are stabilising and real wages are making a recovery. We are starting to see signs of improvement in some of the large emerging markets such as India and China but others, notably Brazil, are suffering economic problems with consumers spending less. This requires further rapid, local responses from brands.
In Europe, the industry is seeing high promotion levels keeping prices down. Volumes are slowly picking up in certain markets. Consumers, while remaining cost conscious, are also seeking occasions to buy more premium and prestige products in return for economising on some of their routine household shopping. In North America, although GDP performance is positive, this has not translated into significant growth in our markets.
LONGER-TERM MACRO FORCES
Our markets are also shaped by systemic macro forces which impact at a different pace. We periodically review these trends to ensure our strategy and plans are fit for the future. Based on our latest macro forces analysis, we believe there are four distinct but overlapping trends that will shape the world over the next ten years: the multipolar world, the environment under stress, digital and technology revolution and people living differently (see pages 10 to 18 for our response).
Slow global growth is accentuating the financial and political polarisation within countries. Nationalist and protectionist tendencies are rising, threatening the progress of globalisation and free trade in recent decades.
Strains on the natural environment are intensifying with the impacts of climate change and water scarcity increasingly visible. Momentum is gathering globally to tackle climate change following the Paris Agreement, which came into force in 2016, aiming to limit temperature rise this century to below 2 degrees Celsius abovepre-industrial levels. Concerns about the planet and society are matched by concerns about our own health. Obesity kills more people than hunger, while many populations struggle to find sufficient nourishment in their diets, presenting opportunities to meet these growing consumer needs.
Companies continue with the rapid development of new technologies. These include artificial intelligence, robotics, voice technology and virtual reality to engage with consumers in new ways. Data, and the Internet of Things, are disrupting traditional business models using technologies such as blockchain and increasingly sophisticated smart devices. Digitisation also comes with risk, at an individual, government and company level, over data privacy and security as well as brand safety.
Consumers are now living in communities that are becoming more diverse with fragmented identities. Younger generations, especially Millennials and Generation Z, are having a powerful influence on cultural norms such as diversity and gender. Older generations will exert a strong economic influence with the number of people aged 80 and over expected to triple by 2050. Migration is having a profound effect on national identity. Today, one in 30 people are international migrants living abroad, a 40% rise since 2000. People are encouraged to move, in part, by the rise of global megacities of ten million-plus inhabitants. These will rise from 31 to 41 by 2030. Such urbanisation is expected to create an additional 500 millionone-person households between 2016 and 2030.
Annual Report on Form 20-F |
Strategic Report |
UNILEVER HAS A PROVEN BUSINESS MODEL THAT SUPPORTS LONG-TERM, COMPOUNDING GROWTH AND SUSTAINABLE VALUE CREATION.
Our business activities span a complex, global value chain. Starting with consumer insights, we track changing consumer sentiment through our 25 People Data Centres around the world. Through close collaboration between marketing and R&D, we use our insights to inform product development, leveraging our€900 million annual R&D spend.
We work with thousands of suppliers and spend around€34 billion on goods and services, including approximately€13 billion on ingredients and raw materials for our products. Our global manufacturing operations across more than 300 factories in 69 countries turn these materials into products.
Our products are then distributed via a network of more than 400 globally coordinated warehouses to 25 million retail stores,
Divisional review
Beauty & Personal Care
TURNOVER grew by 6.0% coming from large supermarkets, hypermarkets, wholesalers and cash and carry, to small convenience stores, as well as other fast-growing channels such ase-commerce,out-of-home anddirect-to-consumer. We work in close partnership with customers to ensure our brands are always available and properly displayed.
We are the second largest advertiser in the world, based on media spend. Alongside more conventional advertising, we create an increasing amount of tailored content ourselves to market our brands, using digital channels that are better targeted, more personalised and provide more accurate consumer insights. And in doing so, our value chain cycle repeats itself.
Underlying our value chain is a set of defining strengths which set us apart from our competitors: our portfolio of global brands and local jewels; a presence in more than 190 countries with 58% of our turnover in emerging markets; deep distribution capability through
ever more complex channels and a talent pool of local management – 70% of our leaders are local.
Our strategy (see page 10) and our category strategies (see pages 11 and 12) harness these strengths to deliver competitive top and bottom line growth, and capital efficiency which in turn drives underlying earnings per share, free cash flow and return on invested capital – and ultimately attractive returns for shareholders. To respond further to the increasing pace of change and the need to go further and faster in value creation, we are accelerating our C4G programme of organisational change to create a faster, simpler organisation. For more on C4G see page 10.
Combined with C4G, in April 2017, we set out financial targets to further accelerate shareholder value. These include underlying sales growth ahead of our markets, which in current market conditions we expect to translate into underlying sales growth of 2.6%, a favourable currency related impact of 2.4% and a positive contribution of 0.9% from acquisitions.
3-5%Deodorants delivered strong, broad-based growth, supported by double digit growth from Dove. The Rexona Clinical range, with patented anti-perspirant technology to better serve consumer needs, and Dove’s zero aluminium range performed well. Growth in skin cleansing was muted by price reductions as a result of lower commodity prices. Dove’s growth in skin cleansing was supported by microbiome-friendly innovations. Growth was weak in hair care with high competitive intensity in the US and continued pressure from local players in China. Japan and Europe also underperformed. In skin care, Pond’s and Vaseline continued to perform well, withon-trend each year upinnovations such as Pond’s Glow Up cream. We expanded into white space markets with our Simple brand, which is now in 30 markets, including Turkey and the Gulf region. Oral care grew slightly and natural variants such as charcoal, aloe and clove drove growth in Smile.
Prestige brands continued to 2020, projected savings ofdeliver double digit growth, with strong performances from brands such as Dermalogica, Hourglass and Living Proof. Carver Korea and Sundial had a more challenging year. We added to our prestige portfolio by acquiring Garancia, a French derma-cosmetic brand, and Tatcha, a modern skincare brand rooted in classical Kyoto rituals.
UNDERLYING OPERATING PROFIT increased by€6 billion by 2019417 million to€4,960 million. Turnover growth and an expansion of underlying operating margin improvement added€274 million and€143 million respectively. Underlying operating margin improvement of 70bps was driven by efficiencies in brand and marketing investment and overheads from 16.4%thezero-based budgeting programme.Non-underlying costs of€440 million were slightly higher than last year; most were related to 20%the ongoing restructuring programme. Operating Profit increased by 2020. Return on Invested Capital is expected to be sustained€355 million.
Foods & Refreshment
TURNOVER declined by 4.6% reflecting the disposal of the spreads business in the high teenssecond half of 2018. The net impact of acquisitions and dividends will continuedisposals on revenue was a reduction of 6.9% whilst underlying sales growth was 1.5% and currency movements had a favourable impact of 1.0%.
Ice cream grew, however volumes declined due to rise, reflecting increased confidencea strong comparator from a particularly good European summer in the outlookprior year. Growth was supported by plant based and ‘better for you’ offerings, including Magnum vegan and Ben & Jerry’s lighter Moophoria variants. Tea also hadprice-led growth with declining volume due to subdued consumer demand for black tea in developed markets. Premium black tea, black tea in emerging markets and fruit and herbal variants, including our premium herbal brand Pukka, performed well. In dressings, Hellmann’s grew, with the US business returning to growth in the second half of the year. The Hellmann’s vegan mayonnaise variant is now on shelves in over 20 countries while Sir Kensington’s premium ranges of mayonnaise and salad dressings grew strongly in the US, with the brand now more than doubled in size since the acquisition.Price-led growth in savoury was supported by Knorr’s portfolio in scratch cooking and the launch of snacking ranges which address the convenience trend. Savoury declined in Europe, most notably in Germany as a result of the loss of a key customer for a period of time, sales to this customer have now resumed The newly-acquired brand The Vegetarian Butcher entered a partnership with Burger King® to offer the Rebel Whopper® across 25 countries in Europe.
UNDERLYING OPERATING PROFIT decreased by€194 million to€3,382 million. Turnover and underlying operating margin decline contributed€166 million and€28 million respectively. Underlying operating margin decreased by 20bps as a result of a lower gross margin from weak pricing and higher supply chain costs. Thenon-underlying costs of€571 million in the year were related to additional restructuring within the business following the spreads disposal in 2018. Operating Profit decreased by€4,476 million which was primarily due to last year’s operating profit growth and cash generation.including a€4,331 million profit arising from the sale of the spreads business.
Sustainable value creation also means investing for the long term, which is why the Unilever Sustainable Living Plan (USLP) is at the heart of our business model and Vision to grow our business, whilst decoupling our environmental footprintHome Care
TURNOVER grew by 6.9% largely coming from our growth and increasing our positive social impact, in turn contributing to the United Nations Sustainable Development Goals (see page 15).
Our strategy and business model continue to deliver growth that is consistent, competitive, profitable and responsible. Between 2009 and 2017 it has delivered underlying sales growth of 4.3%6.1% and a year whilefavourable currency impact of 0.4%.
Home and hygiene performed well, benefitting from products such as Cif surface sprays with natural cleaning ingredients. Hand dish wash saw continued growth momentum, with good performance from Sunlight with recycled packaging, as well as white space launches in Brazil with Brilhante and in China with Omo. Format premiumisation continued to be a growth driver in fabric, with good growth in liquids and capsules. Laundry brand Seventh Generation, based on renewable plant-based ingredients, grew strongly. Fabric performance was supported by ongoing market development driven growth in India, where we also launched premium detergent brand Love & Care. In China we successfully launched Love Home & Planet. Home Care turnover in Africa was lower than expected and declined driven by a reduction in both volume and price.
UNDERLYING OPERATING PROFIT increased by€261 million to€1,605 million. Turnover growth and underlying operating margin expandedimprovement added€92 million and€169 million respectively. Underlying operating margin improvement of 150bps was driven by 390 basis pointsa strong gross margin improvement and lower overheads. Gross margin improved due to 16.5%. In 2017 free cash flowstrong pricing and positive mix.Non-underlying costs of€228 million primarily related to restructuring programmes. Operating Profit increased to overby€5 billion while return on invested capital was 19.2%. Longer term, Unilever has grown dividends by an average of 8% per year over the last 37 years, with no reductions.
190 million.
Annual Report on Form 20-F |
GROWING THE CORE, EVOLVING THE PORTFOLIO AND DEVELOPING CHANNELS ARE AT THE HEART OF OUR STRATEGY TO DELIVER LONG-TERM, COMPOUNDING GROWTH AND SUSTAINABLE VALUE CREATION.
Our strategy helps us deliver top and bottom line growth in a fast-changing world. It is underpinned by Connected 4 Growth (C4G), a significant organisational change programme which aims to create a faster, simpler organisation while creating a culture of empowerment, collaboration and experimentation. We expect the benefits of C4G to be realised progressively during 2018 and 2019.
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Meeting the needs of consumers is at the heart of our value creation model and strategy. We reach them through our four categories.
PERSONAL CARE
OUR PERSONAL CARE CATEGORY GENERATED TURNOVER OF€20.7 BILLION, ACCOUNTING FOR 39% OF UNILEVER’S TURNOVER AND 46% OF OPERATING PROFIT.
The category is our largest and includes five brands with turnover of€1 billion or above, Axe, Dove, Lux, Rexona and Sunsilk and other household names such as TRESemmé, Signal, Lifebuoy and Vaseline. Personal Care has leading global positions in hair, skin cleansing and deodorants, and strong local positions in skin care and oral care. Its prestige range leads in premiumising our brand portfolio with turnover of€425 million from brands such as Dermalogica.
Personal Care’s strategy is to deliver competitive growth in its core, while evolving the overall portfolio in response to market trends. It has four markets generating turnover of more than€1 billion: US, India, Brazil and Indonesia, highlighting its emerging market strengths which generated€12.5 billion of turnover. Underlying sales growth in the category during 2017 was 2.9%, a slowdown from 2016, while operating margin rose 140 basis points to 19.8%.
Growing the core and evolving areas such as naturals, prestige and baby was a key focus of innovation and investment in 2017. The Simple sensitive skin care range was rolled out to new markets, while several brands such as Dove and Sunsilk launched natural extensions. In India, Lever Ayush, a brand formulated using ayurvedic ingredients was launched and offers a range of skin, hair and oral care products. Hijab Fresh, a hand and body lotion specifically developed for Muslim consumers, was launched in Indonesia. Other launches included KJU Perfumed by Lux in China, capitalising on the appeal of Korean beauty, and Signal’s White Now Correction range in Europe. North America launched two brands: the millennial-focused hair care and skin cleansing brand, Love Beauty & Planet and ApotheCARE Essentials, a range of apothecary-inspired haircare products.
The business faced pressure in two of its largest markets, Brazil and Indonesia, due to difficult economic conditions which affected volumes. North America saw growth increase in hair care and skin cleansing while in Europe, consumers remain cost conscious and the retail environment challenging.
Several acquisitions were completed in line with the category’s strategy. Carver Korea was bought to strengthen our footprint in skin care in China, Japan and South Korea. Hourglass, a luxury colour cosmetics brand, Schmidt’s Naturals deodorant brand and Sundial Brands, a US hair care and skin care company serving multicultural and millennial consumers were acquired in 2017. An agreement was also announced in 2017 to acquire the home care and personal care business of Quala S.A., adding hair and male grooming brands in north Latin America.
The category has several Sustainable Living brands such as Axe, Dove, Rexona, Lifebuoy and Smile (Signal and Pepsodent) which are central to the ambitions of the USLP. Dove, Lifebuoy and Signal have programmes to achieve Unilever’s goal of improving health and well-being for more than one billion people by 2020. Dove launched the Real Beauty Pledge in 2017 which promises that Dove will: always feature real women, never models, in campaigns; will portray women as they are in real life and will help girls build body confidence and self-esteem to realise their potential. Axe’s positioning, which embraces the individuality of real, modern men, supported Unilever’s work on Unstereotype.
The media landscape continues to fragment, requiring efficiencies in producing marketing content and more efficient use of existing assets. This approach helped Personal Care meet savings targets fromzero-based budgeting, expanding margins. Low volume growth and short-term volatility are risks but Personal Care is well-positioned to
respond to local competition, and remains a highly attractive growth and margin opportunity in an ever more connected world where its emerging market footprint is a major asset.
HOME CARE
OUR HOME CARE CATEGORY GENERATED TURNOVER OF€10.6 BILLION, ACCOUNTING FOR 20% OF UNILEVER’S TURNOVER AND 13% OF OPERATING PROFIT.
Home Care includes two global brands with turnover of€1 billion or more, namely Dirt is Good (Omo and Persil) and Surf. Other leading brands include Comfort, Domestos, Sunlight, Cif, Pureit, the water purification brand and Blueair, the air purification business.
Home Care’s strategic role is to grow profitability and it made good progress during 2017, generating underlying sales growth of 4.4% and increasing operating margin by 130 basis points to 10.8%. Its emerging markets footprint, accounting for 80% of turnover, and its leading brands delivered leadership positions in seven of its top ten markets. This resilience came against a slowdown in several key markets, combined with commodity inflation and currency fluctuations. However, premiumisation, portfolio evolution and expansion in new geographies all contributed to strong growth in South Asia, Africa and the region of North Africa, Middle East, Turkey, Russia, Ukraine and Belarus.
In more challenging European, South East Asian and some Latin American markets, investment in core brands resulted in growth for Radiant in Brazil, Comfort in China and Sunlight in Indonesia. This was complemented by successful launches of Surf laundry detergents and Sunlight Dishwashing tablets in Central & Eastern Europe, combined with the continued success of Domestos toilet blocks in Europe and liquid laundry detergents in South East Asia. Future growth markets have been strengthened by the announcement to purchase the home care and personal care business of Quala S.A. in 2017 which will add brands in north Latin America, and Unilever’s joint venture to form EAC Unilever Myanmar Company Limited.
Consistent with Unilever’s Connected 4 Growth programme, Home Care met changing consumer trends with local innovations launched at speed. The Italian Cif team identified the potential for nozzles to deliver either a spray or a foam and launched within seven months. Comfort Sakura, a millennial-inspired cherry blossom fragrance in Japan and China, was launched in five months.
Global innovations also accelerated. Capitalising on the increased penetration of dishwash machines, Sun dishwasher tablets with improved performance, were launched within 12 months. The category continued its innovation in laundry by launching Persil Powergems, a revolutionary format with a new concentrated formula which both lowers our greenhouse gas footprint and delivers high performance.
Home Care’s innovations responded quickly to consumers’ desires for hygiene, natural ingredients and products that care for sensitive skin. Seventh Generation, a US acquisition in 2016 and a pioneer of plant-based products, grew by double digits. Sensitive, a growing segment addressing skin sensitivity, saw the launch of Dirt is Good Sensitive (Persil, Omo) in 24 countries while Neutral, another 2016 acquisition, is now in 11 countries.
The category continued to help consumers improve their health and livelihoods notably through its Sustainable Living brands such as Cif, Dirt is Good, Domestos, Radiant and Surf. Domestos, with double digit growth in 2017, helped more than ten million people gain improved access to a toilet while the Domex brand in India launched alow-cost toilet cleaner for low income groups. SmartFoam, a new rinse-efficient, water-saving technology already available in South Africa under the Sunlight brand, was incorporated into the Rin (Radiant) detergent bar in India while Rin also grew its Career Ready Academy, a programme to help young people and women shine in their chosen career through language, presentation and entrepreneurial training.
Home Care’s priority in the year ahead is to remain agile and continue to reinvest savings from its 5S programme (see page 10), ensuring continued resilience to persistent competitive pressures and economic headwinds.
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FOODS
OUR FOODS CATEGORY GENERATED TURNOVER OF€12.5 BILLION, ACCOUNTING FOR 23% OF UNILEVER’S TURNOVER AND 26% OF OPERATING PROFIT.
Our two global Foods brands with turnover of€1 billion or above - Knorr and Hellmann’s – account for almost two thirds of the category turnover (excluding Spreads). The rest of the turnover is generated by smaller brands including local jewels such as Bango in Indonesia, Maizena in Latin America, Kissan in India, and Robertsons in South Africa. In December 2017, we signed an agreement to dispose of our global Spreads business. Completion is expectedmid-2018. More details on page 18.
Foods enjoyed a good year with continued consistent and profitable growth with underlying sales up 1.0% and operating margin increasing 80 basis points to 18.2%. Strong growth was delivered in emerging markets, which account for 46% of turnover with a compound annual growth rate of about 7% based on the last three years. The broad-based growth was particularly driven by Indonesia, Philippines, China, Mexico, Argentina, Nigeria, South Africa, India, Pakistan and Turkey. The performance was driven by core businesses such as cooking products, meal makers, and mayonnaise while benefiting from innovation and renovations and a focus on accessibility through our channels. Brazil had a challenging year because of recession, although there were signs of improving trends in the second half led by Hellmann’s portfolio relaunch and Knorr’s ‘Know Me Better’ campaign launch promoting itsall-natural seasonings.
In developed markets conditions were more challenging, however progress was made on portfolio modernisation, where consumer demand continues to focus on greater naturalness and authenticity. Unilever has responded with new Knorr Sides launches in the US and natural, organic, vegetarian and ‘free from’ Knorr offerings in Europe. Hellmann’s launched itspurpose-led ‘On the Side of Food’ campaign along with a new visual identity. This global brand activity was supported by local jewels such as Unox, Conimex and Pot Noodle enteringon-trend segments including plant based, snacking and chilled.
Digital activation continues to be a strategic focus for Foods, with innovations and advertising campaigns based on a digital and mobile-first approach. Both Hellmann’s ‘On the Side of Food’ and Knorr’s ‘Know Me Better’ campaigns were designed to engage consumers in conversations on sustainable nutrition. Unilever Food Solutions, which directly supplies restaurant operators and distributors, had another year of impressive growth. It generated turnover of€2.7 billion and is well placed to capitalise on risingout-of-home food consumption. It delivered broad based growth, including double digit underlying sales growth in China, its biggest market.
Our Sustainable Nutrition strategy, launched in 2016, is central to our strategic ambition to be recognised as a progressive foods company. It was spearheaded by Hellmann’s and Knorr, which are both Sustainable Living brands. Knorr continued to deliver sustainable sourcing and fortification programmes and maintained its commitment to raising animal welfare standards, while Hellmann’s made significant progress in shifting to sustainably sourced oils and cage-free eggs, with the latter delivered into the US three years ahead of the original commitment. Hellmann’s ketchup introduced a variant sweetened with honey and another made with red and green tomatoes, reducing food waste. Additionally, 39% of our Foods and Refreshment portfolio, based on sales volume, is compliant with Unilever’s highest nutritional standards, that are aligned with World Health Organization criteria. Our recently acquired businesses – Sir Kensington’s in the US and Mãe Terra in Brazil – are well aligned to our Sustainable Nutrition strategy.
Unilever’s Connected 4 Growth initiative means Foods is better placed to take advantage of local insights at increased speed. A third of Foods’ regional and local innovations reached the market in less than seven months. At the same time, the category’s strong global presence also provides critical scale, for example Hellmann’s relaunch was undertaken in more than 25 markets.
REFRESHMENT
OUR REFRESHMENT CATEGORY GENERATED TURNOVER OF€9.9 BILLION, ACCOUNTING FOR 18% OF UNILEVER’S TURNOVER AND 15% OF OPERATING PROFIT.
Refreshment includes three brands with turnover of€1 billion or above, Heartbrand (eg Wall’s), Magnum and Lipton, alongside household names including Brooke Bond and Ben & Jerry’s. Its premium positioned brands includes T2, Pure Leaf and Taj Mahal in tea, and Grom and Talenti in ice cream. Refreshment’s strategic role is to deliver growth and cash while generating margin improvement. Performance was strong, with the highest growth in half a decade, driven by an acceleration of growth in tea and ice cream.
The category’s underlying sales growth increased 4.9% reflecting strengthened emerging market performance resulting from continued focus on core brands, portfolio evolution and addressing key consumer trends. These include premiumisation, health and wellness, andout-of-home consumption. Profitability grew with operating margins increasing 380 basis points to 13.5%. Margins were boosted byzero-based budgeting, C4G and future finance savings. Ice cream benefited from improved channel mix and its cash contribution has more than doubled over four years. Nearly all our markets had growth with China, India and Turkey delivering double-digit performances, while Europe enjoyed a fourth year of growth in ice cream. North America remained challenging in a competitive context, but strengthened as the year progressed.
In Ice Cream, performance was fuelled by premium andon-trend innovation. Magnum delivered double-digit growth, driven by Magnum Doubles and the launch into premium pints, sitting alongside our premium brands such as Talenti and Grom Gelato. Ben & Jerry’s expanded‘on-the-go’ with the launch of the Pint Slices format in the US, while the ‘Wich range continued growth in Europe. In the ‘free-from’ segment, Unilever continued its growth of the Ben & Jerry’snon-dairy range and expanded Swedish Glace into new markets.
Premiumisation of tea saw the acquisition of Pukka Herbs, the fastest growing organic tea brand, and Tazo in North America, responding to demand for speciality teas. These join Refreshment’s premium Tea portfolio of Sir Thomas Lipton, T2, which continues its roll out, and the Pure Leaf brand. Innovation in health and wellness included the launch of a range of Liptonbenefit-led teas, entering new premium segments.
Refreshment continued to build a stronger and more agile business. More than half of Refreshment innovation projects were regionally led. Breyers Delights, our response to the low calorie, high protein trend in North America reached the market in under six months. Turnover momentum came through developing channels.On-the-go continues strongly in markets with .com delivery service and platforms providing new access to consumers. Premium tea brands gave access to premium restaurants, hotels and department stores as well as partnerships with retailers.
The category has several Sustainable Living brands including Ben & Jerry’s, Breyers, Brooke Bond and Lipton. Markets featuring Brooke Bond’spurpose-led advertising, centred on finding common ground over tea, grew almost three times faster than others. Our ‘I am Wall’s’ programme continued to employ micro entrepreneurs across 25 countries while our purchase of climate-friendly ice cream freezer cabinets continued, increasing to around 2.6 million. Responsible nutrition was another strategic driver for Refreshment with 90% of our packaged ice cream by volume containing 250 calories or fewer per portion (calculated based on 87% of global ice cream sales volume).
THE UNILEVER SUSTAINABLE LIVING PLAN IS OUR BLUEPRINT FOR SUSTAINABLE AND INCLUSIVE GROWTH.
We want our growth to reward shareholders but we want society to benefit too. Our 161,000 employees received€5.4 billion in pay in 2017, and our retailers and distributors who sell our products in more than 190 countries generated income and employment. Our suppliers also benefited from the€34 billion we spent on goods and services in 2017. The taxes we pay are another important contribution. Total taxes borne by Unilever in 2017 were€3.9 billion, of which€2.2 billion was corporation tax. Unilever fully complies with the tax laws in the countries where we operate. Where tax law is unclear, or has not kept pace with modern business practice, we interpret our obligations in a responsible way, guided by our Tax Principles. Our website has further details.
Our vision of inclusive growth which delivers value for multiple stakeholders, is encapsulated in the Unilever Sustainable Living Plan (USLP). The USLP represents a simple idea – that business should put itself at the service of society. By doing so it will generate consistent and profitable growth. The USLP has three big goals: improving the health and well-being of more than one billion people by 2020; halving our environmental footprint by 2030; and enhancing livelihoods for millions by 2020. These goals, detailed below, are supported by a transformational change agenda. This combines our own actions and our partnership approach to external advocacy, with public policy goals, to create change on a systemic scale which contributes to the 17 United Nations Sustainable Development Goals (see page 15 for more). Our Sustainable Living Report is available on our website and contains extensive disclosure on our activities and actions across all USLP commitments.
THE BUSINESS CASE
The USLP drives value for Unilever, generating more growth, lower costs, less risk and more trust in the business. Our Sustainable Living brands, which combine a powerful purpose with products contributing to the USLP, are a key differentiator in this regard. In 2016, 18 of our top 40 brands were Sustainable Living brands including Ben & Jerry’s, Dove and Signal. Our Sustainable Living brands grew 50% faster than our other brands, and accounted for 60% of total growth.
Business benefits are also delivered through product innovation which responds to environmental issues such as water scarcity and greenhouse gas emissions at the same time as helping consumers. For example, Sunlight’s breakthrough SmartFoam technology, delivering superior performance, less suds and half the amount of water needed, continues to grow in South Africa and expanded to more formats in India. It provides a critical benefit for water-stressed areas and contributes to our USLP target of halving the water associated with consumer use of our products by 2020.
The USLP delivers significant benefits to our business. For example, by using less energy we have avoided energy costs in our factories of over€490 million since our baseline year of 2008; and by using fewer materials and producing less waste we have avoided costs of over€260 million over the same period.
The USLP responds directly to a number of macro forces (see page 8) that are both risks and opportunities in our markets – such as a lack of access to water and sanitation, strains on the food system and the climate and the environment, and rising inequality. Sustainability is one of our principal risks. Another one of our principal risks is climate change (see pages 32 and 33) and mitigating its physical impacts is critical because we depend on raw materials sourced from countries that are particularly vulnerable to rising seas and temperatures and changing weather patterns. We have performed high-level assessments on our business of 2°C and 4°C global warming scenarios which show that without action, both scenarios represent financial risks by 2030, mainly arising from higher costs. That said, in managing these financial risks our business model would not require material change. See pages 32 to 33.
Trust is essential for any business, but it must be earned. The USLP is a key driver of trust among our employees and potential recruits. We
are number one FMCG graduate employer of choice in 44 countries where we recruit. We have been ranked first in the annual Globescan survey of sustainability leaders for seven years.
IMPROVING HEALTH & WELL-BEING
Our activities impact the health and well-being of millions of people – throughbrand-led health and hygiene, and nutrition interventions. Significant progress has been made against our first USLP goal of helping more than one billion people improve their health and well-being by 2020. By the end of 2017, we had reached 601 million people, making a significant contribution to the Sustainable Development Goal on Clean Water and Sanitation (SDG6).
Lifebuoy leads with one of the world’s largest handwashing behaviour change programmes. Since 2010, its programme has reached 426 million people through schools, health clinics and community outreach. Lifebuoy currently only counts those people reached throughon-ground programmes. However, we have long believed the totality of our marketing efforts contribute to changing handwashing behaviour, including mass scale TV advertising. To test this, we ran a study in our biggest market, India, to assess the effectiveness of specific Lifebuoy TV adverts with the same methodology used to evaluate ouron-ground programmes. The study showed a significant increase in frequency of handwashing with soap after watching the adverts. The result shows mass media can impact health behaviours at scale, giving Lifebuoy the opportunity to reach millions more people and potentially bringing us closer to our 2020 target of reaching 1 billion people. As a next step, we are progressing peer review publication and aim to include TV reach in our Health & Well-being performance figures for 2018 alongside ouron-ground programme reach.
Our Vaseline brand is helping to heal the skin of people affected by poverty or emergencies. The Vaseline Healing Project, in partnership with Direct Relief, is providing dermatological care, skin health training, Vaseline Jelly and other medical supplies. Its ambition is to help heal the skin of five million people by 2020 and has reached over two and a half million people since 2015. Marketing activities featuring the Vaseline Healing Project have had measurable, positive impacts on sales growth and brand equity. In 2017 the programme sent dermatologists to Syrian refugee camps in Jordan and conducted healing missions in India, the US, Philippines, Thailand and Mexico.
The second pillar of our Health & Well-being goal is our commitment on nutrition: to double the proportion of our portfolio that meets the highest nutritional standards, based on globally recognised dietary guidelines. This will help hundreds of millions of people to achieve a healthier diet, a key part of the Global Goal on Zero Hunger (SDG2). So far 39% of our products have reached this standard and are on track to meet our 2020 commitment. In support of our Code Policy on Responsible Marketing, in 2017 94% of our Foods and Refreshment portfolio had full nutrition labelling on pack that aligned with Unilever’s product labelling criteria (based on 97% of global sales from 1 April 2017 to 30 June 2017).
REDUCING ENVIRONMENTAL IMPACT
Our activities impact the environment, principally through the use of water, energy and land as well as the production of waste and greenhouse gas emissions, largely as a result of consumer use.
In 2016 we stopped buying GreenPalm certificates for palm oil which resulted in a temporary dip in our overall sustainable sourcing performance compared to 2015. By the end of 2017, the total volume of our agricultural raw materials that were sustainably sourced increased to 56%. We are one of the major buyers of palm oil in the world and it is one of the most significant raw materials we source by volume. Our goal to source 100% of our palm oil sustainably from physical, certified sources by 2019 is on track with 56% of our palm oil volumes already physically certified in 2017. As part of the agreement to dispose of our global Spreads business to KKR, they will
continue to work towards the goal of sourcing 100% sustainable palm oil by 2019.
We believe that growth cannot come at the expense of the planet. That is why our goal by 2030 is to halve the environmental footprint of the making and use of our products as we grow our business. This is a challenging target requiring action across our value chain on waste, water and greenhouse gas emissions. In doing so we will contribute to a number of the Sustainable Development Goals, principally Climate Action (SDG13) and Responsible Consumption & Production (SDG12).
Our manufacturing operations have seen a reduction in total waste disposed to landfill, or incineration without energy recovery, of around 98% per tonne of production since 2008. We maintained zeronon-hazardous waste to landfill across our global factory network during 2017. We are more than half way towards meeting our 2020 commitment to reduce waste associated with the disposal of our products. This has reduced by about 29% since 2010 due to increases in consumer recycling and changes in our portfolio.
In 2017, we made a further commitment on waste, ensuring that all our plastic packaging will be fully reusable, recyclable or compostable by 2025. Our investment in innovative technologies such as CreaSolv is key. This technology makes it possible to recycle small, multi-layered sachets in which many of our products are sold, especially in emerging markets. If our initial pilot proves commercially viable, we will open source the technology.
We have made significant reductions in the water used in manufacturing – 39% per tonne of production since 2008. Our biggest water impact occurs when consumers shower, bathe and clean clothes with our products. Our target is to reduce by half the amount of water per consumer use by 2020. We have reduced water use by 2% through innovations such as low rinse laundry products. However, this has been offset by the growth of products with higher water use in the portfolio, including conventional laundry products.
We are committed to implementing the recommendations of the Task Force on Climate-related Financial Disclosures on the risks and opportunities faced by Unilever (see pages 32 and 33 for more). Our carbon reduction targets, officially approved by the Science-Based Targets Initiative (a partnership between CDP, UN Global Compact, WRI and WWF) are a key part of our climate risk disclosures.
Since 2008, we have cut CO2 from energy in our manufacturing by 47% per tonne of production. As with water, our biggest greenhouse gas impact comes through consumer use. The greenhouse gas impact of our products across their lifecycle continues to edge up and has now increased by about 9% since 2010. The acquisition of some skin cleansing and hair care brands which have a higher greenhouse gas impact per consumer use, remains the main reason for this. See pages 7, 32 to 33 and 39 for more climate-related disclosures.
Our efforts on the environment have received external recognition. CDP, thenon-profit global environmental disclosure platform, has awarded Unilever with a place on the 2017 A Lists for Climate, Water, Forests and Supplier Engagement. This recognises our actions in the last year to tackle climate change and the associated challenges of water scarcity, sustainable agriculture and sustainable energy use across our value chain.
ENHANCING LIVELIHOODS
Our activities have the potential to impact the livelihoods of not only our employees, but the millions of people who are involved in our value chain – notably smallholder farmers and small-scale retailers. By 2020, we aim to enhance the livelihoods of millions of people as we grow our business.
In 2017, we made steady progress across the three pillars of our Enhancing Livelihoods goal. We believe that women’s empowerment is the single greatest enabler of human development and economic growth. We are building a gender-balanced organisation (page 16) while promoting safety for women by working with UN Women in
Assam, India, and developing employment opportunities through the Shakti programme.
By 2017, we had enabled about 1,175,000 women to access initiatives aiming to develop their skills. Radiant, our laundry detergent brand, has formed a Career Academy initiative in India and Brazil to equip aspiring women with the skills to realise their potential.
As well as directly creating wealth and jobs, our business supports millions of people who source, make and sell our products – we call this inclusive business. In 2017, we enabled about 716,000 smallholder farmers and around 1.6 million small-scale retailers to access initiatives to improve agricultural practices or increase incomes. The Philippines Kabisig programme, for example, trains both retailers and their suppliers in stock control, financial management, sales and customer service – increasing the earning potential of small-scale retailers at the same time as growing turnover for Unilever. See page 17 for more.
Our Responsible Sourcing Policy (RSP) is at the heart of our ambition to source 100% of procurement spend responsibly and through suppliers that meet our RSP requirements. In 2017, we relaunched our RSP programme to strengthen our approach and to drive an increase in the number of suppliers committing to the programme. The relaunch includes improved verification and remediation requirements, and anti-bribery and corruption compliance processes. We are focusing on addressing high risk issues in our supply chain and building capacity for our procurement function and our suppliers. In 2017, 55% of procurement spend was through suppliers who were assessed as meeting the mandatory requirements of the RSP.
We continue to focus on the eradication of forced labour in global supply chains through supplier awareness raising and training events, and have made progress on the removal of worker recruitment fees through the Leadership Group for Responsible Recruitment and Consumer Goods Forum. As part of our global Framework for Fair Compensation, we brought forward our ambition for no direct Unilever employee to earn less than a living wage, to the end of 2018. We joined the Ethical Tea Partnership to drive improvements for tea workers and farmers. We have also created Global Land Rights Principles and Guidance policy.
We continued to embed human rights with a focus on our eight salient issues (ie those at risk of the most severe negative impact through Unilever’s activities or business relationships) as described in our Human Rights Report. This report was updated at the end of 2017 to include disclosure on our human rights issues activities and due diligence processes. Human rights risks are included as part of our sustainability and ethical principal risks (see pages 28 and 30).
DRIVING TRANSFORMATIONAL CHANGE
While we are on track to achieve most of our USLP commitments, we are also aware that the biggest challenges facing the world cannot be addressed by one company alone. We are changing ourselves as a business but we want to help change the system in which business is done. We want to act as catalysts for change more broadly, as convenors to facilitate progressive discussion and bring others together, and as collaborators in partnerships to deliver positive business, social and environmental impact at scale. By being part of the solution to the world’s challenges, businesses have the opportunity to win the trust of consumers while helping create societies and economies in which they can grow and succeed.
We aim to use our scale and influence to help bring about transformational change in four areas where we can make the biggest difference and which represent the biggest market opportunities for Unilever: Climate Change & Forests; Sustainable Agriculture, Land Use & Livelihoods; Health & Well-Being and Women’s Empowerment. To understand the challenges that are preventing society and our ecosystems from thriving, and to find ways to help address them, we take a multi-stakeholder approach. We engage with shareholders, governments, NGOs and civil society organisations and we shape the business landscape through advocacy. By leveraging our partnerships, blended finance, digital and new business models, we believe transformational change is possible.
REALISING THE BUSINESS OPPORTUNITY FROM THE SUSTAINABLE DEVELOPMENT GOALS
OUR SCALE AND REACH MEAN WE ARE WELL PLACED TO CAPTURE VALUE FROM THE GLOBAL GOALS.
The Sustainable Development Goals (SDGs) are fundamental to future economic and business growth. The Business & Sustainable Development Commission,co-founded by Unilever, concluded that
successful delivery of the SDGs will create market opportunities of at least $12 trillion a year. We are working to make progress across many of the SDGs through the USLP, which is our blueprint for sustainable growth. In doing so, we are unlocking new markets and investing in brands with purpose and innovation. Below we provide four examples where we are taking action. The interdependence and mutuality of the goals ensures that progress against one leads to progress against others. More details and examples of our approach and how we are benefiting from the SDGs can be found on our website.
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DELIVERING LONG-TERM VALUE FOR OUR STAKEHOLDERSCONTINUED
WE ARE CREATING AN ORGANISATION AND CULTURE WHERE OUR EMPLOYEES ARE EMPOWERED TO ACT LIKE ENTREPRENEURS AND BUSINESS OWNERS.
We are helping our people develop new skills, new ways of working and new entrepreneurial leadership qualities within a culture that values diversity in all its forms. In turn this helps us attract and retain the best talent which is vital to accelerate long-term value creation.
The macro forces described on page 8 have a fundamental impact on the workplace. Competition for talent is intensifying. The workforce is increasingly freelance and a job for life is no longer the norm. Once employed, people require continuous learning to reinvent themselves and they expect more flexibility in working practices. The growth of artificial intelligence and robotics is disrupting work in ways that are still being understood. Anxiety at work is on the rise and the composition of the workforce is changing. Millennials will be 60% of Unilever’s own workforce by 2020. At the same time the workforce is ageing and five generations may be working together in the same company in the18-80 workforce. In short, aone-size-fits-all human resource strategy no longer works.
Our strategic approach to managing our workforce is: more simple, more human, more impact. We want to reduce complexity, understand our people as individuals, not by job titles or work levels, and personalise interventions to build the right leaders and teams. We are taking action across a number of areas to make this happen.
DEVELOPING AN OWNER’S MINDSET
C4G, our largest organisational change programme in more than a decade, was fully implemented during 2017 with the benefits to be realised progressively during 2018 and 2019. C4G encourages and equips people to adopt an owner’s mindset by giving them more control through a simplified organisational and reward structure. An owner’s mindset means more ownership and collaboration, clarity of purpose, more test and learn, embracing failure to gain insight, and an obsession with customers and consumers – ultimately driving long-term value creation and financial rewards for our employees. This mindset hands teams in local markets responsibility for business results. They are encouraged to treat resources as if they were their own, helping ensure we maintain the highest levels of efficiency.
Our C4G programme is the platform through which people are now empowered to deploy ourzero-based budgeting approach to allocating resources and our 5S programme of supply chain margin improvement (see page 10). This drives simplification, partnerships with third parties, and smarter pricing policies in our channels. Part of developing an owner’s mindset, and coping with the quicker pace of change in our markets, is adopting an ‘always on’ learning culture. Learning and building capability is critical in a hyper-connected world. In 2017, we launched ‘My Learning’ powered by Degreed, a social learning platform with a daily feed of materials customised to individual profiles, combining Unilever content with external sources including TED Talks and MIT.
Behavioural change requires the right incentives. For 2,872 senior management employees, incentives have been simplified to include fixed pay, a bonus as a percentage of fixed pay and a long-term managementco-investment plan (MCIP) linked to financial and USLP performance (see pages 6 and 7). In addition, the long-term MCIP will be rolled out to the remainder of management employees in 2018. Fornon-management employees, we have a share purchase scheme so that everyone can have a stake in Unilever’s long-term success.
GENDER DIVERSITY AND INCLUSION
We are developing an inclusive culture, promoting gender balance and respecting the contribution of all employees regardless of gender, age, race, disability or sexual orientation. Consistent with our Code Policy on Respect, Dignity & Fair Treatment, Unilever aims to ensure that applications for employment from everyone are given full and fair consideration and that everyone is given access to training, development and career opportunities.
The USLP sets out clear targets for expanding opportunities and enhancing access to skills and training for women in our value chain. It also sets out our ambition to build a gender-balanced workforce within Unilever, with 50% of women in management positions by 2020. Our Opportunities for Women white paper, published in 2017, contains more details on these targets. We run programmes across Unilever aimed at attracting, retaining and developing female talent. This includes developing candidates for potential future roles, maintaining balanced slates, and practical help such as a minimum 16 weeks’ paid maternity leave as a global standard – more than the regulatory requirement in over 50% of countries where we operate.
Pay and overall reward is intended to be gender neutral, with any differences between employees in similar jobs reflecting performance and skill. Unilever has a long-standing commitment to gender equality and fairness in the workplace based on equal pay for equal work and achieving greater gender balance, particularly at management levels. Gender pay gaps develop where there is a representational imbalance between genders. Our Framework for Fair Compensation reviews average pay differences between genders at each work level.
By the end of 2017, 47% of total management were women, up from 46% in 2016. Among the top 93 executives, 22% were women (22% in 2016). If you include employees who are statutory directors of the corporate entities whose financial information is included in the Group’s 2017 consolidated accounts in this Annual Report and Accounts, the number increases to 510 males and 192 (27%) females. 38% (five out of 13) of the Board is female, compared with 43% (six out of 14) in 2016. Of our total workforce of 160,566, 107,064 (67%) were male and 53,502 (33%) were female at the end of 2017.
SAFETY
We continue our efforts to achieve our Vision Zero strategy: Zero Fatalities; Zero Injuries; Zero Motor Vehicle Accidents; Zero Process Incidents; and Zero Tolerance of Unsafe Behaviour and Practices. This vision is supported by our Code Policy on Occupational Health & Safety. Unilever reports safety data from October to September. Our Total Recordable Frequency Rate (TRFR) from 1 October 2016 to 30 September 2017 went from 1.01 accidents per 1 million hours worked to 0.89, as a result of the continuous focus on safety in high risk areas. In manufacturing, we focused on process safety through standards and enhanced individual qualifications as well as through our partner programme, Safety to Win. As a result of these initiatives, we achieved a 46% reduction in process safety incidents versus prior years. On our construction sites, we have focused on a global Work at Heights training programme. We continue to promote safe driving with the help of our new standards on safe travel to help mitigate road related risks.
BUSINESS INTEGRITY
We communicate our Code and Code Policies internally and externally. Our employees must undertake mandatory annual training on our Code and Code Policies via online training modules as well as making an annual business integrity pledge. The Code and Code Policies reflect our desire to fight corruption in all its forms. We are committed to being ano-bribe business and eradicating any practices or behaviours in this regard. Thiszero-tolerance policy extends to our employees, contractors, third parties, new acquisitions and joint-ventures. In 2017 we deployed new mandated interactive training on anti-bribery for all employees. Our Business Integrity guidelines include clear processes for managing Code breaches. In 2017, we closed 1,654 incidents across all areas of our Code and Code Policies, with 709 confirmed breaches. In 2017, we terminated 279 employees. Business integrity risks are included as part of our ethical and legal and regulatory principal risks (see page 31).
Unilever also requires its third-party business partners to adhere to business principles consistent with our own. These expectations are set out in our Responsible Sourcing Policy (RSP) and Responsible Business Partner Policy, which underpin our third-party compliance programme. We identify high risk partners who undergo specific due diligence via our third-party compliance programme. In 2017, we closed 85 key incidents across all areas of our RSP.
STAKEHOLDER ENGAGEMENT AND PARTNERSHIP IS ESSENTIAL TO GROW OUR BUSINESS AND TO REACH THE AMBITIOUS TARGETS SET OUT IN THE USLP.
Our Code of Business Principles and Code Policies guide how we interact with our partners – among others suppliers, customers, governments,Non-Governmental Organisations (NGOs) and trade associations. Only authorised and appropriately trained employees or representatives can engage with these groups and a record should be kept of all interactions. All engagement must be conducted: in a transparent manner with honesty, integrity and openness; in compliance with local and international laws and in accordance with Unilever’s values (see page 1).
SUPPLIERS
Delivering Unilever’s Vision of growing our business, whilst decoupling our environmental footprint from our growth and improving our positive social impact, is not something we can achieve on our own. Every day, we work with thousands of suppliers who are helping us achieve success in the countries where our products are sold. Our suppliers help us innovate, create value, capacity and capability, deliver quality and service and drive market transformation with responsible and sustainable living.
A significant portion of our growth comes from innovation, delivering leading-edge products into the marketplace. We anticipate that around 70% of our innovations are linked to working with our strategic suppliers. That’s why we invest in long-term mutually beneficial relationships with our key suppliers through our Partner to Win programme, so we can share capabilities andco-innovate for shared growth. Partner to Win is about shaping the next horizon together and is a unique opportunity to unlock value for Unilever and our partners. It helps us strengthen supplier and customer collaboration, it enables improved overallend-to-end operational efficiency and mutual capability building and sharing.
CUSTOMERS
In a fragmented channel landscape, those companies that best serve their shoppers and customers with bespoke solutions will benefit most. Unilever serves consumers through ten different channels: hyper and supermarkets,e-commerce, out of home, drug stores, small stores, discounters, Food Solutions, Unilever International, prestige channel and global retail. We serve around 25 million retail stores globally of which we cover eight million directly and another 17 million indirectly through wholesale and cash & carry. Unilever has had a historic competitive advantage through its distributor network covering around seven million stores, which contribute to approximately 20% of our turnover.
Hyper and supermarkets represent around 50% of our current turnover and are under growth and margin pressure with shoppers moving to discounters ande-commerce. Experiential concepts play an important role to ensure that Unilever brands enjoy the best positioning and visibility in store. To respond to these challenges in Europe, in partnership with our customer Carrefour, we created the ‘Aisle of Joy’ concept which is currently in over 1,000 stores and driving ice cream growth. Similarly, our ‘What’s for dinner’ programme has approximately 190,000 touchpoints in Europe and ensures proximity of Unilever food products with relevant ingredients.
We are rolling out a technology solution to connect retailers to distributors. We are also upskilling small-scale retailers by professionalising their store operations. For instance, our Kabisig Summits in the Philippines train both retailers and their suppliers in stock control, financial management, sales and customer service. To date, over 87,000 owners have attended summits, delivering a significant uplift in our turnover.
In Kenya, we have formed a partnership with Mastercard to offer a low risk credit solution for the purchase of Unilever products. This not only increases the earnings potential of retailers, but ensures that our
products are stocked and available. If the pilot is successful we hope to roll the partnership out to other markets where we have a large number of small-scale retailers.
E-commerce remains a key and growing channel. Our online business is now close to delivering 4% of Unilever turnover. We are actively drivinge-commerce sales in 39 markets. Our focus is to build a balancede-commerce business model, growing acrosse-retailers, bricks and mortar online sales anddirect-to-consumer businesses. We continue to roll out our Perfect Store concept to online channels, ensuring shoppers can find variants of Unilever brands quickly and easily, regardless of screen size or device.
GOVERNMENTS
Weco-operate with and engage with governments, regulators and legislators, both directly and through trade associations, in the development of proposed legislation and regulation which may affect our business interests. All employees involved in political engagement must promote our corporate principles and comply with our Code of Business Principles and Code Policies. We do not support or fund political parties or candidates or any groups that promote party interests. No political contributions were made in 2017. Our participation in policy discussions is varied, covering macro topics like climate change, through to detailed product safety standards. We engage with stakeholders directly as Unilever or through membership of representative organisations, including trade associations.
TRADE ASSOCIATIONS
We are members of and support a number of trade associations and similar organisations which help us to advance our public policy interests. We keep a record of our trade association memberships and membership fees, which is regularly updated. We also engage with peer companies, both individually and in coalitions, on issues of mutual interest. This includes working together to implement sustainable business strategies and drive change.
These associations reflect our global scale and presence across several product categories. We list our major global memberships in the ‘Engaging with Stakeholders’ section on our website. We are registered in the Transparency Register of the European Union. Our trade association memberships in the US can be found on the FAQ section of the Unilever USA website.
Our businesses are active at a local level participating in trade associations in our markets and contributing to public policy and interest group debates in areas such as safety and environmental impact, sustainable sourcing and nutrition. They do so in clear alignment with global priorities and closely follow local laws and Unilever’s Code of Business Principles and Code Policies.
NON-GOVERNMENTAL ORGANISATIONS
We are building transformational partnerships in collaboration with NGOs and other stakeholders who share our vision for a more sustainable future. These partnerships are instrumental in improving the quality of people’s lives, achieving our USLP targets and driving the growth of our business.
In collaboration with NGOs, we build programmes on the ground to implement our brands’ social missions in addition to advancing our efforts in areas such as sustainable sourcing and distribution – often in partnership with governments and other private sector organisations. We drive scale through new business models, digital technologies and external financing.
We recognise that our actions alone cannot achieve the system change necessary to overcome the world’s major challenges, such as climate change and poverty. Our leadership engages with stakeholders through platforms such as the World Economic Forum, UN Global Compact, the World Business Council for Sustainable Development and the Consumer Goods Forum, championing a more inclusive model of capitalism and the pursuit of long-term value creation for the benefit of multiple stakeholders. Partnerships with NGOs are crucial to deliver the United Nations Sustainable Development Goals (see page 15).
DESPITE CONTINUED VOLATILITY IN OUR MARKETS, OUR PROVEN MODEL OF LONG-TERM COMPOUNDING GROWTH AND SUSTAINABLE VALUE CREATION ENSURED ANOTHER GOOD YEAR FOR SHAREHOLDERS.
Underlying sales growth for 2017 was up 3.1% and underlying operating margin was 17.5%, a rise of 110 basis points. Turnover growth for 2017 was 1.9% and operating margin was 16.5%. Underlying earnings per share was€2.24 a rise of 10.7% and dividends were increased 12%, reflecting Unilever’s confidence in future profit growth and cash generation. Diluted earnings per share was€2.15. For information on ournon-GAAP measure, see pages 22 to 24.
Over the last three years, our sustainable value creation model has continued to deliver for shareholders. Between 2015 and 2017, average underlying sales growth rose 3.6% a year and underlying operating margin rose 190 basis points to 17.5%. Turnover grew an average of 3.6% a year and underlying earnings per share was up 7.8% a year. During this period, we generated€15 billion of free cash flow while a high-teens return on capital was maintained. Dividends rose an average of 8% a year and our share price has risen 58% for PLC shareholders and 46% for NV shareholders.
Over the past three years total shareholder returns have increased 49%, reflecting Unilever’s enduring strengths: a portfolio ofpurpose-led global and local brands, a presence in more than 190 countries with 58% of turnover generated from emerging markets, deep penetration and expertise in channels reaching 2.5 billion consumers every day, and a talent pool of local management – over 70% of our leaders are local.
Generating growth ahead of our markets remains a principal objective for our categories across most of our geographies. While overall market growth remains subdued, especially in developing markets, conditions are starting to pick up in many emerging markets. The implementation of C4G and the steps we have taken to drive efficiency gains and margin expansion, means we have the resources to invest behind our brands to continue to deliver top and bottom line growth (see page 28 for risks).
DEVELOPMENTS IN 2017
With this track record in mind, the Boards undertook a detailed and comprehensive review of options to accelerate sustainable value creation. The review, announced in February 2017 and completed by early April 2017, highlighted the quickened pace of change in our markets and the opportunity to unlock more shareholder value, at a faster pace over the next three years by accelerating our C4G change programme and driving targeted savings throughzero-based budgeting and, in the supply chain, our 5S programme (see page 10).
Targets for value creation were announced as part of the review. These include underlying sales growth (USG) ahead of our markets, which in current market conditions is expected to translate into USG of3-5%. Overall underlying operating margin is targeted to expand to 20% in 2020 compared to 17.5% in 2017, supported by an increase in expected cumulative savings during the three-year period 2017-2019 from€4 billion to€6 billion. Balance sheet leverage is targeted at 2.0x Net Debt to EBITDA consistent with a credit rating of at least A/A2. A€5 billion share buyback was completed in 2017 and further returns to shareholders will be assessed versus the opportunity to undertake value-enhancing acquisitions. Meanwhile a high-teens return on invested capital is targeted as well as sustainable, attractive and growing dividends.
Having embedded C4G, we also started to combine our Foods and Refreshment categories to create a world-leading business with turnover of more than€20 billion. The category will unlock future growth more quickly and result in faster margin progression and took effect from 1 January 2018. It is headquartered in the Netherlands where we are also establishing a Global Foods Innovation Centre.
As previously announced, the Boards are conducting a review of the dual-headed legal structure. This review is progressing well and the Boards consider that unification with a single share class would be in the best interests of Unilever and its shareholders as a whole, providing greater ongoing strategic flexibility for value-creating portfolio change. The review by the Boards is continuing and the outcome will be announced in due course. Whatever the outcome, upon any unification, the Boards intend to: maintain listings in the Netherlands, United Kingdom and United States; continue to apply both the UK and Dutch corporate governance codes and terminate the NV preference shares.
EVOLVING OUR PORTFOLIO
Our brand portfolio continues to evolve to match our categories’ strategic priorities, resulting in the sale of assets that no longer fit our growth model or the acquisition of assets that take us into new market segments and build new market positions. This active portfolio management means that in the past eight years we have sold€5.8 billion of turnover (excluding Spreads), mainly in the lower growth Foods businesses. During that same period, we have acquired approximately€4.7 billion of turnover. With the exception of brands launched in countries where they were not previously sold, acquisitions and disposals only contribute to underlying sales growth from 12 months after completion. The acquisitions and disposals made or announced since 2015 are expected to add one percentage point to our ongoing underlying sales growth rate from 2019.
Our acquisitions approach identifies brands that provide Unilever with a position in higher growth segments, some of which could become the€1 billion brands of the future. These include Personal Care (eg Carver Korea) and prestige businesses (eg Living Proof) as well as premium price brands in mass markets (eg Sir Kensington’s), new channels (eg Dollar Shave Club) and naturals segments (eg Seventh Generation). The acquired businesses are often run using flexible business models, preserving their entrepreneurial culture.
During 2017, we announced the acquisition of Carver Korea for€2.28 billion, the fastest growing skincare business in South Korea giving access to the North Asian skincare markets. Hourglass was acquired as a luxury colour cosmetics brand, a high growth category driven by social media and channel diversity, that joins our growing prestige range built from previous acquisitions in recent years, such as Dermalogica and Murad. Meanwhile, we announced an agreement to acquire the personal care and home care business of Quala S.A. in 2017 which will bring leading local brands to Unilever in north Latin America in haircare, oral care, male grooming and fabric conditioners.
In Foods and Refreshment, we announced the acquisition of Brazilian natural and organic foods business Mãe Terra - popular with increasingly health-conscious consumers. We also acquired Pukka Herbs, the world’s fastest growing organic tea brand, to continue the process of premiumising our tea portfolio. Sir Kensington’s, another acquisition during the year, is a US condiments business in the organic and naturals segment with a strong millennial consumer base that complements Unilever’s sustainable sourcing policies and further modernises the Foods portfolio. We also added to our ice cream brands with the acquisition in Australia of Weis which uses locally sourced, natural and high quality ingredients.
In 2017 we announced the disposal of our Spreads business to KKR for€6.825 billion on a cash-free, debt-free basis. The offer is subject to certain regulatory approvals and employee consultation in certain jurisdictions. Completion is expectedmid-2018. We intend to return the net cash realised to shareholders, unless more value-creating acquisition alternatives arise. During 2017 we also announced the sale of the South Africa spreads business to Remgro and completed the sale of AdeS in Latin America to Coca Cola FEMSA and The Coca Cola Company for US$575 million.
FINANCIAL OVERVIEW 2017
CONSOLIDATED INCOME STATEMENT
Turnover increased by 1.9% to€Financial review53.7 billion including an unfavourable currency impact of 2.1% (2016: 5.1% unfavourable currency impact) mainly due to strengthening of the euro. Underlying sales growth was 3.1%^ (2016: 3.7%), with a positive contribution from all categories. Underlying volume growth was 0.8% (2016: 0.9%) and underlying price growth was 2.3% (2016: 2.8%). Acquisitions and disposals had a favourable contribution of 0.9% (2016: 0.6%) reflecting recent acquisitions including Blueair, Living Proof and Carver Korea. Emerging markets contributed 58% of total turnover (2016: 57%) with underlying sales growth of 5.9% (2016: 6.5%) coming from price growth of 4.2% and volume growth of 1.6%. Developed markets underlying sales declined by 0.6% evenly balanced between price and volume.
Underlying operating margin improved by 1.1 percentage points to 17.5%. Gross margin improved by 0.4 percentage points driven by positive mix and theroll-outcontinued of the‘5-S’ savings programme that more than offset increases in commodity costs. The absolute level of brand and marketing investment was flat in local currencies versus the prior year, as savings from advertising production werere-invested in increased media spend. As a percentage of turnover, brand and marketing investment was down by 0.6 percentage points. Overheads reduced by 0.1 percentage points, driven by a further reduction in the cost base partially offset by investment in capabilities including new business models ande-commerce.
Operating profit was up 13.5% to€8.9 billion (2016:€7.8 billion) including€543 million ofnon-underlying items.Non-underlying items within operating profit are€638 million restructuring costs, acquisition and disposal-related costs of€159 million andone-off costs of€80 million partly offset by gain on disposal of group companies of€334 million.
Highlights for the year ended 31 December
2017 | 2016 | % change
| ||||||||||
Turnover (€ million)
|
| 53,715
|
|
| 52,713
|
|
| 2
|
| |||
Operating profit (€ million)
|
| 8,857
|
|
| 7,801
|
|
| 14
|
| |||
Underlying operating profit (€ million)*
|
| 9,400
|
|
| 8,624
|
|
| 9
|
| |||
Profit before tax (€ million)
|
| 8,153
|
|
| 7,469
|
|
| 9
|
| |||
Net profit (€ million)
|
| 6,486
|
|
| 5,547
|
|
| 17
|
| |||
Diluted earnings per share (€)
|
| 2.15
|
|
| 1.82
|
|
| 18
|
| |||
Underlying earnings per share (€)*
|
| 2.24
|
|
| 2.03
|
|
| 11
|
|
Net finance costs increased by€314 million to€877 million (2016:€563 million) as they included aone-off finance charge of€382 million relating to the book premium paid on the buyback of preference shares in Unilever N.V. The net cost of financing borrowings was€399 million,€70 million lower than prior year. The decrease was due to a lower average interest rate of 2.7% compared to 3.5% in 2016, and to lower other interest costs fromone-off credits in Brazil. Pension financing was a charge of€96 million compared to€94 million in the prior year.
The effective tax rate was 20.8% versus 26.2% in the prior year. The change was mainly due to the impact of US tax reform that led to aone-off tax benefit coming from restating deferred tax balances at the new lower federal tax rate, partially offset by the tax impact of the AdeS business disposal.
Net profit from joint ventures and associates was up 22% at€155 million, an increase coming from growth in profits from the Pepsi Lipton joint venture and profit from disposal of an investment in a joint venture in India. Other income fromnon-current investments was€18 million compared to€104 million in the prior year which included a gain of€107 million from the sale of financial assets.
Diluted earnings per share increased by 18.4% to€2.15 reflecting improved operating margins,€578 million US tax reform and a€309 million gain on disposal of the AdeS business. Underlying earnings per share increased by 10.7% to€2.24. This measure excludes the post tax impact ofnon-underlying items (see page 23 for explanation ofnon-underlying items).
The independent auditors’ reports issued by KPMG Accountants N.V. and KPMG LLP on the consolidated results of the Group, as set out in the financial statements, were unqualified and contained no exceptions or emphasis of matter. For more details see pages 78 to 85.
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and IFRS as issued by the International Accounting Standards Board. The critical accounting policies and those that are most significant in connection with our financial reporting are set out in note 1 on pages 90 to 93 and are consistent with those applied in 2016.
Cash flow
Cash flow from operating activities was up by€1.0 billion mainly driven by working capital improvement in 2019 compared to the prior year which was impacted by the disposal of spreads. Gross margin improvement had a favourable contribution a result of strong delivery from5-S savings programmes. Overheads and brand and marketing efficiencies also had a favourable contribution as a result of ourzero-based-budgeting programme.
€ million 2019 | € million 2018 (Restated)(a) | |||||||
Operating profit | 8,708 | 12,639 | ||||||
Depreciation, amortisation and impairment | 1,982 | 2,216 | ||||||
Changes in working capital | (9 | ) | (793 | ) | ||||
Pensions and similar obligations less payments | (260 | ) | (128 | ) | ||||
Provisions less payments | 7 | 55 | ||||||
Elimination of (profits)/losses on disposals | 60 | (4,313 | ) | |||||
Non-cash charge for share-based compensation | 151 | 196 | ||||||
Other adjustments | 2 | (260 | ) | |||||
Cash flow from operating activities | 10,641 | 9,612 | ||||||
Income tax paid | (2,532 | ) | (2,294 | ) | ||||
Net capital expenditure | (1,429 | ) | (1,424 | ) | ||||
Net interest and preference dividends paid | (548 | ) | (461 | ) | ||||
Free cash flow* | 6,132 | 5,433 | ||||||
Net cash flow (used in)/from investing activities | (2,237 | ) | 4,644 | |||||
Net cash flow (used in)/from financing activities | (4,667 | ) | (12,113 | ) |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
* | Certain measures used in our reporting are not defined under IFRS. For further information about these measures, please refer to the commentary onnon-GAAP measures on pages |
FINANCIAL REVIEWCONTINUED
PERSONAL CARE
2017 | 2016 | % change | ||||||||||
Turnover (€ million) | 20,697 | 20,172 | 2.6 | |||||||||
Operating profit (€ million) | 4,103 | 3,704 | 10.8 | |||||||||
Underlying operating profit (€ million) | 4,375 | 4,033 | 8.5 | |||||||||
Operating margin (%) | 19.8 | 18.4 | 1.4 | |||||||||
Underlying operating margin (%) | 21.1 | 20.0 | 1.1 | |||||||||
Underlying sales growth (%) | 2.9 | 4.2 | ||||||||||
Underlying volume growth (%) | 1.4 | 1.6 | ||||||||||
Underlying price growth (%) | 1.5 | 2.6 |
KEY DEVELOPMENTS
HOME CARE
2017 | 2016 | % change | ||||||||||
Turnover (€ million) | 10,574 | 10,009 | 5.6 | |||||||||
Operating profit (€ million) | 1,138 | 949 | 19.9 | |||||||||
Underlying operating profit (€ million) | 1,288 | 1,086 | 18.6 | |||||||||
Operating margin (%) | 10.8 | 9.5 | 1.3 | |||||||||
Underlying operating margin (%) | 12.2 | 10.9 | 1.3 | |||||||||
Underlying sales growth (%) | 4.4 | 4.9 | ||||||||||
Underlying volume growth (%) | 2.1 | 1.3 | ||||||||||
Underlying price growth (%)
| 2.3 | 3.6 |
KEY DEVELOPMENTS
FOODS
2017 | 2016 | % change | ||||||||||
Turnover (€ million) | 12,512 | 12,524 | (0.1 | ) | ||||||||
Operating profit (€ million) | 2,275 | 2,180 | 4.4 | |||||||||
Underlying operating profit (€ million) | 2,471 | 2,394 | 3.2 | |||||||||
Operating margin (%) | 18.2 | 17.4 | 0.8 | |||||||||
Underlying operating margin (%) | 19.7 | 19.1 | 0.6 | |||||||||
Underlying sales growth (%) | 1.0 | 2.1 | ||||||||||
Underlying volume growth (%) | (0.7 | ) | (0.5 | ) | ||||||||
Underlying price growth (%)
| 1.7 | 2.6 |
KEY DEVELOPMENTS
REFRESHMENT
2017 | 2016 | % change | ||||||||||
Turnover (€ million) | 9,932 | 10,008 | (0.8 | ) | ||||||||
Operating profit (€ million) | 1,341 | 968 | 38.5 | |||||||||
Underlying operating profit (€ million) | 1,266 | 1,111 | 14.0 | |||||||||
Operating margin (%) | 13.5 | 9.7 | 3.8 | |||||||||
Underlying operating margin (%) | 12.7 | 11.1 | 1.6 | |||||||||
Underlying sales growth (%) | 4.9 | ^ | 3.5 | |||||||||
Underlying volume growth (%) | 0.4 | 1.0 | ||||||||||
Underlying price growth (%)
| 4.5 | ^ | 2.6 |
KEY DEVELOPMENTS
CASH FLOW
Free cash flow increased by€0.6 billion to€5.4 billion despite aone-off contribution of€0.6 billion to our pension funds. Cash flow from operatinginvesting activities was€9.5 billion, an increase of€0.22.2 billion compared to the prior year. The increase was driven by higher operating profit and lower capital expenditure, which was 3.0%an inflow of turnover compared to 3.6% of turnover€4.6 billion in the prior year partially offset bywhich included€7.1 billion from theone-off disposal of spreads business. contribution to pension funds.
€ million 2017 | € million 2016 | |||||||
Operating profit | 8,857 | 7,801 | ||||||
Depreciation, amortisation and impairment | 1,538 | 1,464 | ||||||
Changes in working capital | (68 | ) | 51 | |||||
Pensions and similar obligations less payments | (904 | ) | (327 | ) | ||||
Provisions less payments | 200 | 65 | ||||||
Elimination of (profits)/losses on disposals | (298 | ) | 127 | |||||
Non-cash charge for share-based compensation | 284 | 198 | ||||||
Other adjustments | (153 | ) | (81 | ) | ||||
Cash flow from operating activities | 9,456 | 9,298 | ||||||
Income tax paid | (2,164 | ) | (2,251 | ) | ||||
Net capital expenditure | (1,621 | ) | (1,878 | ) | ||||
Net interest and preference dividends paid | (316 | ) | (367 | ) | ||||
Free cash flow* | 5,355 | 4,802 | ||||||
Net cash flow (used in)/from investing activities | (5,879 | ) | (3,188 | ) | ||||
Net cash flow (used in)/from financing activities | (1,433 | ) | (3,073 | ) |
Net outflow from investing activities was€5.9 billion (2016:€3.2 billion) reflecting an increase in acquisitions during the year (see note 21).
Net outflow in financing activities was€1.44.7 billion compared to€3.112.1 billion in the prior year. The decrease relates2018 included€6.0 billion relating to higherrepurchase of shares. In 2019 borrowings during the year partlyoff-set by investment in acquisitions and the share buyback programmenet of€5 billion.
BALANCE SHEET
At 31 December 2017, Unilever’s combined market capitalisation repayments was€127.91.4 billion compared with€110.2 billion athigher than the end of 2016.prior year.
Balance sheet
€ million 2019 | € million 2018 (Restated)(a) | |||||||
Goodwill and intangible assets | 31,029 | 29,493 | ||||||
Othernon-current assets | 17,347 | 16,140 | ||||||
Current assets | 16,430 | 15,478 | ||||||
Total assets | 64,806 | 61,111 | ||||||
Current liabilities | 20,978 | 20,150 | ||||||
Non-current liabilities | 29,942 | 28,844 | ||||||
Total liabilities | 50,920 | 48,994 | ||||||
Shareholders’ equity | 13,192 | 11,397 | ||||||
Non-controlling interest | 694 | 720 | ||||||
Total equity | 13,886 | 12,117 | ||||||
Total liabilities and equity | 64,806 | 61,111 |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details |
Goodwill and intangible assets increased by€1.0 billion mainly coming from the acquisitions of Carver Korea and Sundial Brands, partly offset by goodwill relating to the Spreads business which has been classified as held for sale. All material goodwill and indefinite-life intangible assets have been tested for impairment with no charge recognised during the year.
Othernon-current assets remained flat at€15.0 billion. This includes pension assets for funded schemes in surplus amounting to€2.231.0 billion compared to(2018:€0.7 billion in 2016. The increase was driven by strong investment returns and29.5 billion) mainly as aone-off cash injection result of€0.6 billion.
€ million 2017 | € million 2016 | |||||||
Goodwill and intangible assets | 28,401 | 27,433 | ||||||
Othernon-current assets | 14,901 | 15,112 | ||||||
Assets held for sale | 3,224 | 206 | ||||||
Other current assets | 13,759 | 13,678 | ||||||
Total assets | 60,285 | 56,429 | ||||||
Liabilities held for sale | 170 | 1 | ||||||
Other current liabilities | 23,007 | 20,555 | ||||||
Non-current liabilities | 22,721 | 18,893 | ||||||
Total liabilities | 45,898 | 39,449 | ||||||
Shareholders’ equity | 13,629 | 16,354 | ||||||
Non-controlling interest | 758 | 626 | ||||||
Total equity | 14,387 | 16,980 | ||||||
Total liabilities and equity | 60,285 | 56,429 |
Assets held for sale of€3.2 billion and liabilities held for sale of€0.2 billion primarily relate to the Spreads business acquisitions which we have signed an agreement to sell. Other current assets were€13.7 billion which is the same level as in the prior year.
Other current liabilities were€23.0 billion (2016:€20.6 billion) andnon-current liabilities were€22.7 billion (2016:€18.9 billion) The increase in borrowings reflects the share buyback of€5 billion and the cost of acquisitions.
On 30 January 2017 we issued £0.35 billion 1.125% fixed rate notes due February 2022. On 9 February 2017 we issued acontributed€1.2 billion bond, equally split between 0.375% fixed rate notes due February 2023 and 1.0% fixed rate notes due February 2027. On 2 May 2017 we issued a quadruple-tranche $3.15 billion bond, comprising of fixed rate notes of $0.8 billion at 1.8% due May 2020, $0.85 billion at 2.2% due May 2022, $0.5 billion at 2.6% due May 2024 and $1.0 billion at 2.9% due May 2027. On 31 July 2017 we issued a triple-tranche€1.9 billion bond, comprising of fixed rate notesfavourable currency impact of€0.5 billion at 0%driven by strengthening of the US Dollar and Pound Sterling.
In current assets, cash and cash equivalents increased by€1.0 billion. The increase is primarily due July 2021,to strong cash delivery in several countries which will be used to repay short term debt in due course.
Current andnon-current financial liabilities increased by€0.651.5 billion at 0.875% due July 2025as a result of commercial paper issue and bank borrowings.
The net pension plan deficit was lower than prior year by€0.750.7 billion at 1.375% due July 2029. On 15 September 2017 we issued a £0.5 billion bond, equally split between 1.375% fixed rate notes due September 2024 and 1.875 % fixed rate notes due September 2029.as gains from investment performance exceeded the increase in liabilities.
Movement in net pension liability
The table below shows the movement in net pension liability during the year. The reductiondecrease from€3.20.9 billion at the beginning of the year to€0.60.2 billion at the end of 20172019 was primarily due to stronggood investment returns and company contributions to defined benefit plans, mainlyperformance offsetting an increase in the UK. Cash expenditure on pensions was€liabilities as interest rates fell.1.3 billion (2016:€0.7 billion).
€ million 2019 | ||||
1 January | ( | ) | ||
Current service cost | ( | ) | ||
Employee contributions | ||||
Actual return on plan assets (excluding interest) | ||||
Net interest cost | ( | ) | ||
Actuarial loss | ) | |||
Employer contributions | ||||
Currency retranslation | ||||
Other movements(a) | ||||
31 December | ( | ) |
(a) | Other movements relate to special termination benefits, changes in asset ceiling, past service costs including losses/(gains) on curtailment, settlements and |
26 | Annual Report on Form 20-F 2019 |
Strategic Report |
FINANCE AND LIQUIDITY
Finance and liquidity
Approximately€1.01 billion (or 31%24%) of the Group’s cash and cash equivalents are held in the parent and central finance companies, for ensuring maximum flexibility. These companies provide loans to our subsidiaries that are also funded through retained earnings and third party borrowings. We maintain access to global debt markets through an infrastructure of short and long-term debt programmes. We make use of plain vanilla derivatives, such as interest rate swaps and foreign exchange contracts, to help mitigate risks. More detail is provided in notes 16, 16A, 16B and 16C on pages 121 to 126.127.
The remaining€2.33.2 billion (69%(76%) of the Group’s cash and cash equivalents are held in foreign subsidiaries which repatriate distributable reserves on a regular basis. For most countries, this is done through dividends free of tax. This balance includes€206146 million (2016:(2018:€240154 million, 2015:2017:€284206 million) of cash that is held in a few countries where we face cross-border foreign exchange controls and/or other legal restrictions that inhibit our ability to make these balances available in any means for general use by the wider business. The cash will generally be invested or held in the relevant country and, given the other capital resources available to the Group, does not significantly affect the ability of the Group to meet its cash obligations.
We closely monitor all our exposures and counter-party limits. Unilever has committed credit facilities in place for general corporate purposes. The undrawn bilateral committed credit facilities in place on 31 December 20172019 were US$ 7,865$7,865 million. Further details are given in note 16A. In addition, Unilever had undrawn revolving
364-dayContractual obligations at 31 December 2019 bilateral credit facilities in aggregate of€4,000 million.
€ million
Total | € million Due within 1 year | € million Due in 1-3 years | € million Due in 3-5 years | € million Due in over 5 years | ||||||||||||||||
Long-term debt | 26,095 | 4,074 | 4,902 | 4,394 | 12,725 | |||||||||||||||
Interest on financial liabilities | 3,677 | 494 | 802 | 673 | 1,708 | |||||||||||||||
Lease liabilities | 2,279 | 432 | 694 | 433 | 720 | |||||||||||||||
Other lease commitments | 223 | 69 | 74 | 37 | 43 | |||||||||||||||
Purchase obligations(a) | 361 | 213 | 118 | 29 | 1 | |||||||||||||||
Other long-term commitments | 1,137 | 578 | 453 | 84 | 22 | |||||||||||||||
Other financial liabilities | 206 | 125 | 24 | 57 | - | |||||||||||||||
Total | 33,978 | 5,985 | 7,067 | 5,707 | 15,219 |
FINANCIAL REVIEWCONTINUED
CONTRACTUAL OBLIGATIONS AT 31 DECEMBER 2017
€ million
Total | € million Due within 1 year | € million Due in 1-3 years | € million Due in 3-5 years | € million Due in over 5 years | ||||||||||||||||
Long-term debt
|
| 23,876
|
|
| 7,688
|
|
| 3,752
|
|
| 3,911
|
|
| 8,525
|
| |||||
Interest on financial liabilities
|
| 2,847
|
|
| 392
|
|
| 593
|
|
| 434
|
|
| 1,428
|
| |||||
Operating lease obligations
|
| 2,454
|
|
| 418
|
|
| 705
|
|
| 545
|
|
| 786
|
| |||||
Purchase obligations(a)
|
| 595
|
|
| 484
|
|
| 96
|
|
| 15
|
|
| -
|
| |||||
Finance leases
|
| 206
|
|
| 20
|
|
| 35
|
|
| 33
|
|
| 118
|
| |||||
Other long-term commitments
|
| 1,645
|
|
| 790
|
|
| 614
|
|
| 210
|
|
| 31
|
| |||||
Other financial liabilities
|
| 177
|
|
| 177
|
|
| -
|
|
| -
|
|
| -
|
| |||||
Total
|
|
31,800
|
|
|
9,969
|
|
|
5,795
|
|
|
5,148
|
|
|
10,888
|
|
(a) | For raw and packaging materials and finished goods. |
Further details are set out in the following notes to the consolidated financial statements: note 10 on pages 111 and 112, note 15C on pagepages 119 and 120, note 16 on pages 121 to 120,123 and note 20 on pages 131 and 132.page 133. Unilever is satisfied that its financing arrangements are adequate to meet its working capital needs for the foreseeable future. In relation to the facilities available to the Group, borrowing requirements do not fluctuate materially during the year and are not seasonal.
AUDIT FEES
Non-GAAP measures
Included within operating profit is€20 million (2016:€15 million) paid to the external auditor, of which€14 million (2016:€14 million) related to statutory audit services.
NON-GAAP MEASURES
Certain discussions and analyses set out in this Annual Report and Accounts (and the Additional Information for US Listing Purposes) include measures which are not defined by generally accepted accounting principles (GAAP) such as IFRS. We believe this information, along with comparable GAAP measurements, is useful to investors because it provides a basis for measuring our operating performance, and our ability to retire debt and invest in new business opportunities. Our management uses these financial measures, along with the most directly comparable GAAP financial measures, in evaluating our operating performance and value creation.Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP. Wherever appropriate and practical, we provide reconciliations to relevant GAAP measures.
CHANGE IN REPORTING OF PERFORMANCE MEASURES
Following our strategic review earlier this year, we announced that we would be accelerating savings programmesExplanation and being more active in the developmentreconciliation of our portfolio, including exiting from our Spreads business. This will mean spending significant funds on restructuring costs. In order to provide a clear picture of our performance against the objectives set out in the announcement of the outcome of the review, where relevant, ournon-GAAP measures will now exclude restructuring costs, the change from our previous measure of core operating profit is the additional exclusion of restructuring costs that are not related to acquisitions and disposals.
Ournon-GAAP measures have therefore changed from ‘core operating profit’, ‘core operating margin’, ‘core earnings per share’, ‘core effective tax rate’ and ‘constant core earnings per share’ to ‘underlying operating profit’, ‘underlying operating margin’, ‘underlying earnings per share’, ‘underlying effective tax rate’ and ‘constant underlying earnings per share’ respectively. These measures are explained further on the following pages.
EXPLANATION AND RECONCILIATION OFNON-GAAP MEASURES
Unilever uses ‘constant rate’ and ‘underlying’ measures primarily for internal performance analysis and targeting purposes. We present certain items, percentages and movements, using constant exchange rates, which exclude the impact of fluctuations in foreign currency exchange rates. We calculate constant currency values by translating both the current and the prior period local currency amounts into euro using the prior periodyear average exchange rates.rates into euro, except for the local currency of entities that operate in hyperinflationary economies. These currencies are translated into euros using the prior year closing exchange rate before the application of IAS 29.
The table below shows exchange rate movements in our key markets.
Annual average rate in 2017 | Annual average rate in 2016 | Annual average rate in 2019 | Annual average rate in 2018 | |||||||||||||
Brazilian real (€1 = BRL) | 4.367 | 4.282 | ||||||||||||||
Chinese yuan (€1 = CNY) | 7.725 | 7.807 | ||||||||||||||
Indian rupee (€1 = INR) | 78.812 | 80.730 | ||||||||||||||
Indonesia rupiah (€1 = IDR) | 15863 | 16831 | ||||||||||||||
Philippine peso (€ 1 = PHP) | 58.112 | 62.379 | ||||||||||||||
UK pound sterling (€1 = GBP) | 0.880 | 0.884 | ||||||||||||||
US dollar (€1 = US$) | 1.123 | 1.111 | 1.120 | 1.185 | ||||||||||||
Indian rupee (€1 = INR) | 73.258 | 74.588 | ||||||||||||||
Brazilian real (€1 = BRL) | 3.573 | 3.889 | ||||||||||||||
UK pound sterling (€1 = GBP) | 0.876 | 0.815 | ||||||||||||||
Indonesia rupiah (€1 = IDR) | 15011 | 14770 | ||||||||||||||
Chinese yuan (€1 = CNY) | 7.608 | 7.355 | ||||||||||||||
Argentine peso (€ 1 = ARS) | 18.401 | 16.292 |
In the following sections we set out our definitions of the followingnon-GAAP non- GAAP measures and provide reconciliations to relevant GAAP measures:
UNDERLYING SALES GROWTH
Annual Report on Form 20-F 2019 | 27 |
Financial reviewcontinued
Underlying sales growth
Underlying Sales Growth (USG) refers to the increase in turnover for the period, excluding any change in turnover resulting from acquisitions, disposals, and changes in currency.currency and price growth in excess of 26% in hyperinflationary economies. Inflation of 26% per year compounded over three years is one of the key indicators within IAS 29 to assess whether an economy is deemed to be hyperinflationary. We believe this measure provides valuable additional information on the underlying sales performance of the business and is a key measure used internally. The impact of acquisitions and disposals is excluded from USG for a period of 12 calendar months from the applicable closing date. Turnover from acquired brands that are launched in countries where they were not previously sold is included in USG as such turnover is more attributable to our existing sales and distribution network than the acquisition itself. We believe this measure provides valuable additional information
Previously, USG was calculated on thea different basis as explained on treatment of hyperinflationary economies in underlying sales performancegrowth section below. 2018 and 2017 comparative numbers have been restated for the new basis.
The reconciliation of USG to changes in the business andGAAP measure turnover is a key measure used internally. Also excluded is the impact of price growth from countries where inflation rates have escalated to extreme levels, and where management forecast that such a situation will continue for an extended period of time; at least one year.as follows:
2019 vs 2018 (%) | Beauty & Personal Care | Foods & Refreshment | Home Care | Total Group | ||||||||||||
Turnover growth(a) | 6.0 | (4.6 | ) | 6.9 | 2.0 | |||||||||||
Effect of acquisitions | 0.9 | 0.6 | 0.3 | 0.7 | ||||||||||||
Effect of disposals | - | (7.5 | ) | - | (3.0 | ) | ||||||||||
Effect of currency-related items, | 2.4 | 1.0 | 0.4 | 1.5 | ||||||||||||
of which: | ||||||||||||||||
Exchange rate changes | 1.7 | (3.5 | ) | (0.3 | ) | (0.7 | ) | |||||||||
Extreme price growth in hyperinflationary markets(b) | 0.6 | 4.7 | 0.7 | 2.2 | ||||||||||||
Underlying sales growth(b) | 2.6 | 1.5 | 6.1 | 2.9 | ||||||||||||
2018 vs 2017 (%) | ||||||||||||||||
Turnover growth(a) | (0.3 | ) | (9.9 | ) | (4.2 | ) | (5.1 | ) | ||||||||
Effect of acquisitions | 3.9 | 0.8 | 0.5 | 2.0 | ||||||||||||
Effect of disposals | – | (7.2 | ) | (0.2 | ) | (3.0 | ) | |||||||||
Effect of currency-related items, | (7.2 | ) | (5.8 | ) | (8.8 | ) | (7.0 | ) | ||||||||
of which: | ||||||||||||||||
Exchange rate changes | (8.1 | ) | (47.7 | ) | (9.1 | ) | (29.4 | ) | ||||||||
Extreme price growth in hyperinflationary markets(b) | 1.0 | 79.1 | 0.4 | 31.7 | ||||||||||||
Underlying sales growth(b) | 3.4 | 2.2 | 4.7 | 3.2 | ||||||||||||
2017 vs 2016 (%) | ||||||||||||||||
Turnover growth(a) | 2.6 | (0.4 | ) | 5.6 | 1.9 | |||||||||||
Effect of acquisitions | 1.8 | 0.2 | 3.1 | 1.3 | ||||||||||||
Effect of disposals | (0.1 | ) | (0.8 | ) | (0.2 | ) | (0.4 | ) | ||||||||
Effect of currency-related items, | (1.9 | ) | (1.8 | ) | (1.7 | ) | (1.8 | ) | ||||||||
of which: | ||||||||||||||||
Exchange rate changes | (1.9 | ) | (4.3 | ) | (1.7 | ) | (2.8 | ) | ||||||||
Extreme price growth in hyperinflationary markets(b) | - | 2.5 | - | 1.1 | ||||||||||||
Underlying sales growth(b) | 2.9 | 2.1 | 4.4 | 2.8 |
The reconciliation of USG to changes in the GAAP measure turnover is as follows:
|
| |||||||
TOTAL GROUP | 2017 vs 2016 | 2016 vs 2015 | ||||||
Turnover growth (%)(a) | 1.9 | (1.0 | ) | |||||
Effect of acquisitions (%) | 1.3 | 0.8 | ||||||
Effect of disposals (%) | (0.4 | ) | (0.2 | ) | ||||
Effect of exchange rates (%)(b) | (2.1 | ) | (5.1 | ) | ||||
Underlying sales growth (%)(b)
|
|
3.1
|
|
|
3.7
|
| ||
PERSONAL CARE
| 2017 vs 2016 | 2016 vs 2015 | ||||||
Turnover growth (%)(a) | 2.6 | 0.5 | ||||||
Effect of acquisitions (%) | 1.8 | 1.7 | ||||||
Effect of disposals (%) | (0.1 | ) | (0.3 | ) | ||||
Effect of exchange rates (%) | (1.9 | ) | (4.9 | ) | ||||
Underlying sales growth (%)
|
|
2.9
|
|
|
4.2
|
| ||
FOODS
| 2017 vs 2016 | 2016 vs 2015 | ||||||
Turnover growth (%)(a) | (0.1 | ) | (3.1 | ) | ||||
Effect of acquisitions (%) | 0.1 | – | ||||||
Effect of disposals (%) | (0.1 | ) | (0.3 | ) | ||||
Effect of exchange rates (%) | (1.1 | ) | (4.7 | ) | ||||
Underlying sales growth (%)
|
|
1.0
|
|
|
2.1
|
| ||
HOME CARE | 2017 vs 2016 | 2016 vs 2015 | ||||||
Turnover growth (%)(a) | 5.6 | (1.5 | ) | |||||
Effect of acquisitions (%) | 3.1 | 0.6 | ||||||
Effect of disposals (%) | (0.2 | ) | (0.2 | ) | ||||
Effect of exchange rates (%) | (1.7 | ) | (6.5 | ) | ||||
Underlying sales growth (%)
|
|
4.4
|
|
|
4.9
|
| ||
REFRESHMENT | 2017 vs 2016 | 2016 vs 2015 | ||||||
Turnover growth (%)(a) | (0.8 | ) | (1.1 | ) | ||||
Effect of acquisitions (%) | 0.3 | 0.2 | ||||||
Effect of disposals (%) | (1.7 | ) | (0.1 | ) | ||||
Effect of exchange rates (%)(b) | (3.9 | ) | (4.6 | ) | ||||
Underlying sales growth (%)(b)
|
|
4.9
|
|
|
3.5
|
|
(a) | Turnover growth is made up of distinct individual growth components, namely underlying sales, currency impact, acquisitions and disposals. Turnover growth is arrived at by multiplying these individual components on a compounded basis as there is a currency impact on each of the other components. Accordingly, turnover growth is more than just the sum of the individual components. |
(b) | Underlying price growth in |
UNDERLYING VOLUME GROWTH
28 | Annual Report on Form 20-F 2019 |
Strategic Report |
Treatment of hyperinflationary economies in underlying sales growth
Previously Underlying Sales Growth (USG) excluded all price growth from countries where the impact of consumer price inflation (CPI) rates had escalated to extreme levels. There were two countries where we had determined extreme levels of CPI existed. Price growth in Venezuela has been excluded from USG since Q4 2017 and price growth in Argentina has been excluded from USG since Q3 2018. This approach was adopted for Argentina in 2018 as it was considered that hyperinflationary conditions would only exist for a short while and thus all price movements would be related to hyperinflation.
Following a review during 2019, we now consider that hyperinflationary conditions are likely to persist for some time and thus price growth will represent both hyperinflationary price growth plus normal pricing actions. As a result, our definition of USG has been updated to include price growth in markets deemed to be hyperinflationary economies, up to a maximum of 26% per year (equivalent to approximately 2% per month compounded). Inflation of 26% per year compounded over three years is one of the key indicators within IAS 29 to assess whether an economy is deemed to be hyperinflationary.
The change is intended to ensure our reporting provides a more realistic representation of underlying performance. Price increases in hyperinflationary economies reflect normal pricing actions that relate to fluctuations in demand, changes in commodity and other operating costs and tactical steps to drive competitiveness, in addition to the exceptional pricing actions taken to respond to hyperinflationary conditions. The new USG definition aims to include these normal pricing actions but excludes the exceptional pricing actions that give rise to the extreme impact that results from hyperinflation.
Also, as a consequence of this change, we are providing a breakdown of the impact of currency-related items on turnover. Whilst previously the devaluation of the currency and all price growth in hyperinflationary economies were grouped under “exchange rate” (now called “currency-related items”), we are now breaking this down between:
exchange rate changes (including the devaluation of hyperinflationary currencies); and
extreme price growth in hyperinflationary economies (i.e. price growth that is not included in underlying price growth).
The table below show the impact of this change on USG, UPG and currency-related items on the previously reported numbers:
2018 | 2017 | |||||||||||||||||||||||||||||||||||
Underlying sales growth and underlying price growth (%)
| Beauty & Personal Care | Foods & Refresh- ment | Home Care | Total | Beauty & Personal Care | Foods & Refresh- ment | Home Care | Total | ||||||||||||||||||||||||||||
Previously reported | ||||||||||||||||||||||||||||||||||||
Underlying sales growth | 3.1 | 2.0 | 4.2 | 2.9 | 2.9 | 2.7 | 4.4 | 3.1 | ||||||||||||||||||||||||||||
Underlying price growth | 0.6 | 0.7 | 1.9 | 0.9 | 1.5 | 3.0 | 2.3 | 2.3 | ||||||||||||||||||||||||||||
Restated | ||||||||||||||||||||||||||||||||||||
Underlying sales growth | 3.4 | 2.2 | 4.7 | 3.2 | 2.9 | 2.1 | 4.4 | 2.8 | ||||||||||||||||||||||||||||
Underlying price growth | 0.9 | 0.9 | 2.4 | 1.2 | 1.5 | 2.3 | 2.3 | 2.0 | ||||||||||||||||||||||||||||
Currency related changes (%)
| ||||||||||||||||||||||||||||||||||||
Previously reported | ||||||||||||||||||||||||||||||||||||
Currency related items | (7.0 | ) | (5.6 | ) | (8.3 | ) | (6.7 | ) | (1.9 | ) | (2.4 | ) | (1.7 | ) | (2.1 | ) | ||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Exchange rate changes | ||||||||||||||||||||||||||||||||||||
Extreme price growth in hyperinflationary markets | ||||||||||||||||||||||||||||||||||||
Restated | ||||||||||||||||||||||||||||||||||||
Currency related items | (7.2 | ) | (5.8 | ) | (8.8 | ) | (7.0 | ) | (1.9 | ) | (1.8 | ) | (1.7 | ) | (1.8 | ) | ||||||||||||||||||||
Of which: | ||||||||||||||||||||||||||||||||||||
Exchange rate changes | (8.1 | ) | (47.4 | ) | (9.1 | ) | (29.4 | ) | (1.9 | ) | (4.3 | ) | (1.7 | ) | (2.8 | ) | ||||||||||||||||||||
Extreme price growth in hyperinflationary markets | 1.0 | 79.1 | 0.4 | 31.7 | - | 2.5 | - | 1.1 |
Annual Report on Form 20-F 2019 | 29 |
Financial reviewcontinued
Underlying price growth
Underlying price growth (UPG) is part of USG and means, for the applicable period, the increase in turnover attributable to changes in prices during the period. UPG therefore excludes the impact to USG due to (i) the volume of products sold; and (ii) the composition of products sold during the period. In determining changes in price we exclude the impact of price growth in excess of 26% per year in hyperinflationary economies as explained in USG above.
Underlying volume growth
Underlying volume growth (UVG) is part of USG and means, for the applicable period, the increase in turnover in such period calculated as the sum of (i) the increase in turnover attributable to the volume of products sold; and (ii) the increase in turnover attributable to the composition of products sold during such period. UVG therefore excludes any impact on USG due to changes in prices.
UNDERLYING PRICE GROWTH
Underlying price growth (UPG) is part of USG and means, for the applicable period, the increase in turnover attributable to changes in prices during the period. UPG therefore excludes the impact to USG due to (i) the volume of products sold; and (ii) the composition of products sold during the period. In determining changes in price we exclude the impact of price changes arising in countries where consumer price inflation (CPI) rates have escalated to extreme levels of 1,000% or more and where management forecast that this situation is going to continue for an extended period of time; at least one year. This happens very rarely but in the fourth quarter of 2017 the actual and forecast inflation rates for Venezuela triggered such an exclusion. This treatment will be kept under regular review, but will not be revised until the fourth quarter of 2018 at the earliest.
The relationship between USG, UVG and UPG is set out below:
2017 vs 2016 | 2016 vs 2015 | |||||||
Underlying volume growth (%) | 0.8 | 0.9 | ||||||
Underlying price growth (%)(a) | 2.3 | 2.8 | ||||||
Underlying sales growth (%) | 3.1 | 3.7 |
The adjustment made at total Group level in the above table in respect of Q4 price growth in Venezuela was 0.8%. Prior to this adjustment being made, price growth at total Group level would have been 3.1% and exchange rate impact would have been (2.9)%. The corresponding adjustment for Refreshment was 4.4%. There is no adjustment in the other categories.
2019 vs 2018 | 2018 vs 2017 | 2017 vs 2016 | ||||||||||
Underlying volume growth (%) | 1.2 | 1.9 | 0.8 | |||||||||
Underlying price growth (%) | 1.6 | 1.2 | 2.0 | |||||||||
Underlying sales growth (%) | 2.9 | 3.2 | 2.8 |
Refer to page 2024 for the relationship between USG, UVG and UPG for each of the categories.
NON-UNDERLYINGNon-underlying ITEMSitems
Severalnon-GAAP measures are adjusted to exclude items defined asnon-underlying due to their nature and/or frequency of occurrence.
Refer to note 3 for details ofnon-underlying items.
UNDERLYING EARNINGS PER SHAREUnderlying operating profit and underlying operating margin
Underlying operating profit and underlying operating margin mean operating profit and operating margin before the impact ofnon-underlying items within operating profit. Underlying operating profit represents our measure of segment profit or loss as it is the primary measure used for making decisions about allocating resources and assessing performance of the segments.
The Group reconciliation of operating profit to underlying operating profit is as follows:
€ million 2019 | € million 2018 (Restated)(a) | € million 2017 | ||||||||||
Operating profit | 8,708 | 12,639 | 8,957 | |||||||||
Non-underlying items within operating profit (see note 3) | 1,239 | (3,176 | ) | 543 | ||||||||
Underlying operating profit | 9,947 | 9,463 | 9,500 | |||||||||
Turnover | 51,980 | 50,982 | 53,715 | |||||||||
Operating margin | 16.8% | 24.8% | 16.7% | |||||||||
Underlying operating margin | 19.1% | 18.6% | 17.7% |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
Further details ofnon-underlying items can be found in note 3 on page 96 of the consolidated financial statements.
Refer to Note 2 on page 94 for the reconciliation of operating profit to underlying operating profit by Division. For each Division operating margin is computed as operating profit divided by turnover and underlying operating margin is computed as underlying operating profit divided by turnover.
Underlying earnings per share
Underlying earnings per share (underlying EPS) is calculated as underlying profit attributable to shareholders’ equity divided by the diluted combined average number of share units. In calculating underlying profit attributable to shareholders’ equity, net profit attributable to shareholders’ equity is adjusted to eliminate thepost-tax impact ofnon-underlying items. This measure reflects the underlying earnings for each share unit of the Group.
Refer to note 7 on page 107 for reconciliation of net profit attributable to shareholders’ equity to underlying profit attributable to shareholders’ equity.
FINANCIAL REVIEWCONTINUEDUnderlying effective tax rate
UNDERLYING OPERATING PROFIT AND UNDERLYING OPERATING MARGIN
Underlying operating profit and underlying operating margin mean operating profit and operating margin before the impact ofnon-underlying items within operating profit. Underlying operating profit represents our measure of segment profit or loss as it is the primary measure used for making decisions about allocating resources and assessing performance of the segments.
The reconciliation of operating profit to underlying operating profit is as follows:
€ million 2017 | € million 2016 | |||||||
Operating profit
|
|
8,857
|
|
|
7,801
|
| ||
Non-underlying items within operating profit (see note 3)
|
| 543
|
|
| 823
|
| ||
Underlying operating profit
|
| 9,400
|
|
| 8,624
|
| ||
Turnover
|
| 53,715
|
|
| 52,713
|
| ||
Operating margin
|
| 16.5
| %
|
| 14.8
| %
| ||
Underlying operating margin
|
| 17.5
| %
|
| 16.4
| %
|
Further details ofnon-underlying items can be found in note 3 on page 96 of the consolidated financial statements.
UNDERLYING EFFECTIVE TAX RATE
The underlying effective tax rate is calculated by dividing taxation excluding the tax impact ofnon-underlying items by profit before tax excluding the impact ofnon-underlying items and share of net profit/(loss) of joint ventures and associates. This measure reflects the underlying tax rate in relation to profit before tax excludingnon-underlying items before tax and share of net profit/(loss) of joint ventures and associates.
Tax impact onnon-underlying items within operating profit is the sum of the tax on eachnon-underlying item, based on the applicable country tax rates and tax treatment.
The reconciliation of taxation to taxation before tax impact ofnon-underlying items This is as follows:shown in the table:
€ million 2017 | € million 2016 | € million 2019 | € million 2018 (Restated)(a) | |||||||||||||
Taxation
|
|
1,667
|
|
|
1,922
|
| 2,263 | 2,572 | ||||||||
Tax impact of:
| ||||||||||||||||
Non-underlying items within operating profit(a)
|
| 77
|
|
| 213
|
| ||||||||||
Non-underlying items not in operating profit but within net profit(a)
|
| 578
|
|
| -
|
| ||||||||||
Taxation before tax impact ofnon-underlying items
|
| 2,322
|
|
| 2,135
|
| ||||||||||
Non-underlying items within operating profit(b) | 309 | (259 | ) | |||||||||||||
Non-underlying items not in operating profit but within net profit(b) | (196 | ) | (29 | ) | ||||||||||||
Taxation before tax impact ofnon-underlying | 2,376 | 2,284 | ||||||||||||||
Profit before taxation
|
| 8,153
|
|
| 7,469
|
| 8,289 | 12,360 | ||||||||
Non-underlying items within operating profit before tax(a)
|
| 543
|
|
| 823
|
| ||||||||||
Non-underlying items not in operating profit but within net profit before tax(a)
|
| 382
|
|
| -
|
| ||||||||||
Non-underlying items within operating profit before tax(b) | 1,239 | (3,176 | ) | |||||||||||||
Non-underlying items not in operating profit but within net profit before tax(c) | (32 | ) | (122 | ) | ||||||||||||
Share of net (profit)/loss of joint ventures and associates
|
| (155
| )
|
| (127
| )
| (176 | ) | (185 | ) | ||||||
Profit before tax excludingnon-underlying items before tax and share of net profit/(loss) of joint ventures and associates
|
| 8,923
|
|
| 8,165
|
| 9,320 | 8,877 | ||||||||
Underlying effective tax rate
|
|
26.0
|
%
|
|
26.1
|
%
| 25.5% | 25.7% |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
(b) | Refer to note 3 for further details on these items. |
(c) | Excludes€3 million (2018:€32 million) gain on disposal of spreads business by the joint venture in Portugal which is included in the share of net profit/(loss) of joint ventures and associates line. Including the gain, total non-underlying items not in operating profit but within net profit before tax is€35 million (2018:€154 million). See note 3. |
CONSTANT UNDERLYING EARNINGS PER SHAREConstant underlying earnings per share
Constant underlying earnings per share (constant underlying EPS) is calculated as underlying profit attributable to shareholders’ equity at constant exchange rates and excluding the impact of both translational hedges and Q4 price growth in Venezuelaexcess of 26% per year in hyperinflationary economies divided by the diluted combined average number of ordinary share units. This measure reflects the
underlying earnings for each ordinary share unit of the Group in constant exchange rates.
30 | Annual Report on Form 20-F 2019 |
Strategic Report |
The reconciliation of underlying profit attributable to shareholders’ equity to constant underlying earnings attributable to shareholders’ equity and the calculation of constant underlying EPS is as follows:
€ million 2017 | € million 2016 | € million 2019 | € million 2018 (Restated)(a) | |||||||||||||
Underlying profit attributable to shareholders’ equity(a)
|
|
6,315
|
|
|
5,785
|
| ||||||||||
Impact of translation of earnings between constant and current exchange rates and translational hedges
|
| 310
|
|
| 194
|
| ||||||||||
Impact of Q4 2017 Venezuela price growth(b)
|
| (153
| )
|
| -
|
| ||||||||||
Underlying profit attributable to shareholders’ equity(b) | 6,688 | 6,345 | ||||||||||||||
Impact of translation from current to constant exchange rates and translational hedges | 13 | 46 | ||||||||||||||
Impact of price growth in excess of 26% per year in hyperinflationary economies(c) | (108 | ) | (10 | ) | ||||||||||||
Constant underlying earnings attributable to shareholders’ equity |
|
6,472 |
|
|
5,979 |
| 6,593 | 6,381 | ||||||||
Diluted combined average number of share units (millions of units)
|
|
2,814.0
|
|
|
2,853.9
|
| 2,626.7 | 2,694.8 | ||||||||
Constant underlying EPS (€)
|
|
2.30
|
|
|
2.10
|
| ||||||||||
Constant underlying EPS (€) | 2.51 | 2.37 |
(a) | Restated following adoption of IFRS16. See note |
(b) | See note 7. |
(c) | See pages |
In calculating the movement in constant underlying EPS, the constant underlying EPS for 2017 is compared to the underlying EPS for 2016 as adjusted for the impact of translational hedges, which was€Free cash flow2.07.
FREE CASH FLOW
Within the Unilever Group, freeFree cash flow (FCF) is defined as cash flow from operating activities, less income taxes paid, net capital expendituresexpenditure and net interest payments and preference dividends paid.payments. It does not represent residual cash flows entirely available for discretionary purposes; for example, the repayment of principal amounts borrowed is not deducted from FCF. FCF reflects an additional way of viewing our liquidity that we believe is useful to investors because it represents cash flows that could be used for distribution of dividends, repayment of debt or to fund our strategic initiatives, including acquisitions, if any.
The reconciliation of net profit to FCF is as follows:
€ million 2017 | € million 2016 | |||||||
Net profit
|
|
6,486
|
|
|
5,547
|
| ||
Taxation
|
| 1,667
|
|
| 1,922
|
| ||
Share of net profit of joint ventures/associates and other income fromnon-current investments
|
| (173
| )
|
| (231
| )
| ||
Net finance costs
|
| 877
|
|
| 563
|
| ||
Depreciation, amortisation and impairment
|
| 1,538
|
|
| 1,464
|
| ||
Changes in working capital
|
| (68
| )
|
| 51
|
| ||
Pensions and similar obligations less payments
|
| (904
| )
|
| (327
| )
| ||
Provisions less payments
|
| 200
|
|
| 65
|
| ||
Elimination of (profits)/losses on disposals
|
| (298
| )
|
| 127
|
| ||
Non-cash charge for share-based compensation
|
| 284
|
|
| 198
|
| ||
Other adjustments
|
| (153
| )
|
| (81
| )
| ||
Cash flow from operating activities
|
| 9,456
|
|
| 9,298
|
| ||
Income tax paid
|
| (2,164
| )
|
| (2,251
| )
| ||
Net capital expenditure
|
| (1,621
| )
|
| (1,878
| )
| ||
Net interest and preference dividends paid
|
| (316
| )
| (367 | ) | |||
Free cash flow
|
|
5,355 |
|
|
4,802 |
| ||
Net cash flow (used in)/from investing activities
|
|
(5,879
|
)
|
|
(3,188
|
)
| ||
Net cash flow (used in)/from financing activities
|
| (1,433
| )
|
| (3,073
| )
|
€ million 2019 | € million 2018 (Restated)(a) | € million 2017 (Restated)(a) | ||||||||||
Net profit | 6,026 | 9,788 | 6,456 | |||||||||
Taxation | 2,263 | 2,572 | 1,670 | |||||||||
Share of net profit of joint ventures/associates and other income fromnon-current investments | (176 | ) | (207 | ) | (173 | ) | ||||||
Net monetary gain arising from hyperinflationary economies | (32 | ) | (122 | ) | - | |||||||
Net finance costs | 627 | 608 | 1,004 | |||||||||
Depreciation, amortisation and impairment | 1,982 | 2,216 | 2,025 | |||||||||
Changes in working capital | (9 | ) | (793 | ) | (68 | ) | ||||||
Pensions and similar obligations less payments | (260 | ) | (128 | ) | (904 | ) | ||||||
Provisions less payments | 7 | 55 | 200 | |||||||||
Elimination of (profits)/losses on disposals | 60 | (4,313 | ) | (298 | ) | |||||||
Non-cash charge for share-based compensation | 151 | 196 | 284 | |||||||||
Other adjustments | 2 | (260 | ) | (153 | ) | |||||||
Cash flow from operating activities | 10,641 | 9,612 | 10,043 | |||||||||
Income tax paid | (2,532 | ) | (2,294 | ) | (2,164 | ) | ||||||
Net capital expenditure | (1,429 | ) | (1,424 | ) | (1,621 | ) | ||||||
Net interest payments | (548 | ) | (461 | ) | (420 | ) | ||||||
Free cash flow | 6,132 | 5,433 | 5,838 | |||||||||
Net cash flow (used in)/from investing activities | (2,237 | ) | 4,644 | (5,879 | ) | |||||||
Net cash flow (used in)/from financing activities | (4,667 | ) | (12,113 | ) | (2,020 | ) |
(a) | ||||
Restated following adoption of IFRS16. See note 1 and note 24 |
RETURN ON ASSETS
Return on assets is a measure of the return generated on assets for each category. This measure provides additional insight on the performance of the categories and assists in formulating long term strategies with respect to allocation of capital, across categories. Category return on assets is calculated as underlying operating profit (UOP) after tax for the Category divided by the annual average of: property, plant and equipment, net assets held for sale (excluding goodwill and intangibles), inventories, trade and other current receivables, and trade payables and other current liabilities, for each category. The annual average is computed by adding the amounts at the beginning and the end of the calendar year, divided by two.
€ million | € million | € million | € million | € million | € million | |||||||||||||||||||
Personal | Home | Home Care and | Foods and | |||||||||||||||||||||
2017 | Care | Care | Personal Care | Foods | Refreshment | Refreshment | ||||||||||||||||||
Underlying Operating Profit before tax | 4,375 | 1,288 | 5,663 | 2,471 | 1,266 | 3,737 | ||||||||||||||||||
Tax on underlying operating profit | (1,139 | ) | (335 | ) | (1,474 | ) | (643 | ) | (329 | ) | (972 | ) | ||||||||||||
Underlying Operating Profit after tax | 3,236 | 953 | 4,189 | 1,828 | 937 | 2,765 | ||||||||||||||||||
Property plant and equipment | 3,520 | 1,787 | 5,307 | 1,835 | 3,269 | 5,104 | ||||||||||||||||||
Net assets held for sale | 1 | - | 1 | 741 | 1 | 742 | ||||||||||||||||||
Inventories | 1,590 | 735 | 2,325 | 694 | 943 | 1,637 | ||||||||||||||||||
Trade and other receivables | 2,018 | 1,032 | 3,050 | 1,203 | 969 | 2,172 | ||||||||||||||||||
Trade payables and other current liabilities | (4,984 | ) | (2,836 | ) | (7,820 | ) | (2,960 | ) | (2,646 | ) | (5,606 | ) | ||||||||||||
Period end assets (net) | 2,145 | 718 | 2,863 | 1,513 | 2,536 | 4,049 | ||||||||||||||||||
Average assets for the period (net) | 2,122 | 778 | 2,900 | 1,560 | 2,641 | 4,201 | ||||||||||||||||||
Category Return on assets | 152 | % | 122 | % | 144 | % | 117 | % | 35 | % | 66 | % | ||||||||||||
2016 | ||||||||||||||||||||||||
Underlying Operating Profit before tax | 4,033 | 1,086 | 5,119 | 2,394 | 1,111 | 3,505 | ||||||||||||||||||
Tax on underlying operating profit | (1,054 | ) | (284 | ) | (1,338 | ) | (626 | ) | (291 | ) | (917 | ) | ||||||||||||
Underlying Operating Profit after tax | 2,979 | 802 | 3,781 | 1,768 | 820 | 2,588 | ||||||||||||||||||
Property plant and equipment | 3,537 | 1,940 | 5,477 | 2,691 | 3,505 | 6,196 | ||||||||||||||||||
Net assets held for sale | 8 | 4 | 12 | 16 | 79 | 95 | ||||||||||||||||||
Inventories | 1,680 | 732 | 2,412 | 875 | 991 | 1,866 | ||||||||||||||||||
Trade and other receivables | 1,952 | 969 | 2,921 | 1,212 | 969 | 2,181 | ||||||||||||||||||
Trade payables and other current liabilities | (5,078 | ) | (2,807 | ) | (7,885 | ) | (3,187 | ) | (2,799 | ) | (5,986 | ) | ||||||||||||
Period end assets (net) | 2,099 | 838 | 2,937 | 1,607 | 2,745 | 4,352 | ||||||||||||||||||
Average assets for the period (net) | 1,938 | 777 | 2,715 | 1,562 | 2,638 | 4,200 | ||||||||||||||||||
Category Return on assets | 154 | % | 103 | % | 139 | % | 113 | % | 31 | % | 62 | % |
NET DEBTNet debt
Net debt is a measure that provides valuable additional information on the summary presentation of the Group’s net financial liabilities and is a measure in common use elsewhere.
Prior to this quarter, all financial asset derivatives were current financial assets and so reduced net debt. Following a recent review we now also have financial asset derivatives that arenon-current in nature. As all of these derivatives relate to financial liabilities, we continue to exclude them for the purposes of our net debt calculation and have expanded our definition to reflect this.
Net debt is now defined as the excess of total financial liabilities, excluding trade payables and other current liabilities, over cash, cash equivalents and other current financial assets, excluding trade and other current receivables. It is a measurereceivables, andnon-current financial asset derivatives that provides valuable additional information on the summary presentation of the Group’s netrelate to financial liabilities and is a measure in common use elsewhere.
The reconciliation of total financial liabilities to net debt is as follows:liabilities.
€ million 2019 | € million 2018 (Restated)(a) | |||||||||||||||
€ million 2017 | € million 2016 | |||||||||||||||
Total financial liabilities
|
| (24,430
| )
|
| (16,595
| )
| (28,257 | ) | (26,738 | ) | ||||||
Current financial liabilities | (7,968 | ) | (5,450 | ) | (4,691 | ) | (3,613 | ) | ||||||||
Non-current financial liabilities | (16,462 | ) | (11,145 | ) | (23,566 | ) | (23,125 | ) | ||||||||
Cash and cash equivalents as per balance sheet
|
| 3,317
|
|
| 3,382
|
| 4,185 | 3,230 | ||||||||
Cash and cash equivalents as per cash flow | 3,169 | 3,198 | ||||||||||||||
Cash and cash equivalents as per cash flow statement | 4,116 | 3,090 | ||||||||||||||
Add bank overdrafts deducted therein | 167 | 184 | 69 | 140 | ||||||||||||
Less cash and cash equivalents held for sale | (19 | ) | - | |||||||||||||
Other current financial assets | 770 | 599 | 907 | 874 | ||||||||||||
Non-current financial assets derivatives that relate to financial liabilities | 114 | – | ||||||||||||||
Net debt |
|
(20,343 |
) |
|
(12,614 |
) | (23,051 | ) | (22,634 | ) |
RETURN ON INVESTED CAPITAL
(a) | Restated following adoption of IFRS16. See note 1 and note 24 for further details. |
Return on invested capital
Return on invested capital (ROIC) is a measure of the return generated on capital invested by the Group. The measure provides a guide rail for long-term value creation and encourages compounding reinvestment within the business and discipline
around acquisitions with low returns and long payback. ROIC is calculated as underlying operating profit after tax divided by the annual average of: goodwill, intangible assets, property, plant and equipment, net assets held for sale, inventories, trade and other current receivables, and trade payables and other current liabilitiesliabilities.
€ million 2017 | € million 2016 | € million 2019 | € million 2018 (Restated)(a) | |||||||||||||
Underlying operating profit before tax | 9,400 | 8,624 | 9,947 | 9,463 | ||||||||||||
Tax on underlying operating profit(b) | (2,446 | ) | (2,255 | ) | ||||||||||||
Tax on underlying operating profit(c) | (2,536 | ) | (2,432 | ) | ||||||||||||
Underlying operating profit after tax | 6,954 | 6,369 | 7,411 | 7,031 | ||||||||||||
Goodwill | 16,881 | 17,624 | 18,067 | 17,341 | ||||||||||||
Intangible assets | 11,520 | 9,809 | 12,962 | 12,152 | ||||||||||||
Property, plant and equipment | 10,411 | 11,673 | 12,062 | 12,088 | ||||||||||||
Net assets held for sale | 3,054 | 205 | 81 | 108 | ||||||||||||
Inventories | 3,962 | 4,278 | 4,164 | 4,301 | ||||||||||||
Trade and other current receivables | 5,222 | 5,102 | 6,695 | 6,482 | ||||||||||||
Trade payables and other current liabilities | (13,426 | ) | (13,871 | ) | (14,768 | ) | (14,457 | ) | ||||||||
Period-end invested capital | 37,624 | 34,820 | 39,263 | 38,015 | ||||||||||||
Average invested capital for the period | 36,222 | 33,231 | 38,639 | 38,749 | ||||||||||||
Return on average invested capital(c) | 19.2 | % | 19.2 | % | ||||||||||||
Return on average invested capital | 19.2% | 18.1% |
(a) | Restated following adoption of IFRS16. See note 1 and note 24 for further details. |
(b) | See reconciliation of operating profit to underlying operating profit on page |
Tax on underlying operating profit is calculated as underlying operating profit before tax multiplied by underlying effective tax rate of |
Annual Report on Form 20-F |
Financial reviewcontinued
Return on assets
Return on assets is a measure of the return generated on assets for each division. This measure provides additional insight on the performance of the divisions and assists in formulating long-term strategies with respect to allocation of capital across divisions. Division return on assets is calculated as underlying operating profit after tax for the division divided by the annual average of: property, plant and equipment, net assets held for sale (excluding goodwill and intangibles), inventories, trade and other current receivables, and trade payables and other current liabilities for each division. The annual average is computed by adding the amounts at the beginning and the end of the calendar year and dividing by two.
2019 | € million Beauty & | € million Foods & | € million Care | € million
Total | ||||||||||||
Underlying operating profit before tax | 4,960 | 3,382 | 1,605 | 9,947 | ||||||||||||
Tax on underlying operating profit | (1,265 | ) | (862 | ) | (409 | ) | (2,536 | ) | ||||||||
Underlying operating profit after tax | 3,695 | 2,520 | 1,196 | 7,411 | ||||||||||||
Property plant and equipment | 4,382 | 5,336 | 2,344 | 12,062 | ||||||||||||
Net assets held for sale | 5 | 63 | 10 | 78 | ||||||||||||
Inventories | 1,793 | 1,698 | 673 | 4,164 | ||||||||||||
Trade and other receivables | 2,817 | 2,484 | 1,394 | 6,695 | ||||||||||||
Trade payables and other current liabilities | (5,941 | ) | (5,588 | ) | (3,239 | ) | (14,768 | ) | ||||||||
Period end assets (net) | 3,056 | 3,993 | 1,182 | 8,231 | ||||||||||||
Average assets for the period (net) | 2,985 | 4,146 | 1,204 | 8,335 | ||||||||||||
Division return on assets | 124% | 61% | 99% | 89% | ||||||||||||
2018 (Restated)(a) | ||||||||||||||||
Underlying operating profit before tax | 4,543 | 3,576 | 1,344 | 9,463 | ||||||||||||
Tax on underlying operating profit | (1,168 | ) | (919 | ) | (345 | ) | (2,432 | ) | ||||||||
Underlying operating profit after tax | 3,375 | 2,657 | 999 | 7,031 | ||||||||||||
Property plant and equipment | 4,336 | 5,473 | 2,279 | 12,088 | ||||||||||||
Net assets held for sale | 1 | 25 | - | 26 | ||||||||||||
Inventories | 1,736 | 1,762 | 803 | 4,301 | ||||||||||||
Trade and other receivables | 2,319 | 3,024 | 1,139 | 6,482 | ||||||||||||
Trade payables and other current liabilities | (5,478 | ) | (5,984 | ) | (2,995 | ) | (14,457 | ) | ||||||||
Period end assets (net) | 2,914 | 4,300 | 1,226 | 8,440 | ||||||||||||
Average assets for the period (net) | 2,887 | 4,564 | 1,155 | 8,606 | ||||||||||||
Division return on assets | 117% | 58% | 86% | 82% |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
2018 financial review
The financial review for the year ended 31 December 2018 can be found on pages 20 to 26 of our Annual Report and Accounts on Form20-F filed with the United States Securities and Exchange Commission on 11 March 2019.
Accounting standards and critical accounting policies
The consolidated financial statements have been prepared in accordance with IFRS as adopted by the EU and IFRS as issued by the International Accounting Standards Board. The accounting policies are consistent with those applied in 2018 except for the recent accounting developments as set out in note 1 on pages 92 to 93. The critical accounting estimates and judgements and those that are most significant in connection with our financial reporting are set out in note 1 on pages 91 to 92.
Auditors report
The independent auditors’ report issued by KPMG Accountants N.V. and KPMG LLP on the consolidated results of the Group, as set out in the financial statements, were unqualified and contained no exceptions or emphasis of matter. For more details see pages 79 to 86.
Annual Report on Form 20-F 2019 |
Strategic Report |
OUR RISK APPETITE AND APPROACH TO RISK MANAGEMENTOur risk appetite and approach to risk management
Risk management is integral to Unilever’s strategy and to the achievement of Unilever’s long-term goals. Our success as an organisation depends on our ability to identify and exploit the opportunities generated by our business and the markets we are in. In doing this we take an embedded approach to risk management which puts risk and opportunity assessment at the core of the BoardBoards agenda, which is where we believe it should be.
Unilever adopts a risk profile that is aligned to our Vision to grow our business, whilst decoupling our environmental footprint from our growth and increasing our positive social impact. OurUnilever’s appetite for risk is driven by the following:
Our approach to risk management is designed to provide reasonable, but not absolute, assurance that our assets are safeguarded, the risks facing the business are being assessed and mitigated and all information that may be required to be disclosed is reported to Unilever’s senior management including, where appropriate, the Chief Executive Officer and Chief Financial Officer.
ORGANISATIONOrganisation
The Boards assume overall accountability for the management of risk and for reviewing the effectiveness of Unilever’s risk management and internal control systems.
The Boards have established a clear organisational structure with well defined accountabilities for the principal risks that Unilever faces in the short, medium and long-term.long term. This organisational structure and distribution of accountabilities and responsibilities ensure that every country in which we operate has specific resources and processes for risk reviewreviews and risk mitigation. This is supported by the Unilever Leadership Executive, which takes active responsibility for focusing on the principal areas of risk to Unilever. The Boards regularly review these risk areas, including consideration of environmental, social and governance matters, and retain responsibility for determining the nature and extent of the significant risks that Unilever is prepared to take to achieve its strategic objectives.
FOUNDATION AND PRINCIPLESFoundation and principles
Unilever’s approach to doing business is framed by our Purpose and values (see page 1)9). Our Code of Business Principles sets out the standards of behaviour that we expect all employees to adhere to.Day-to-day responsibility for ensuring these principles are applied throughout Unilever rests with senior management across categories, geographies and functions. A network of Business Integrity Officers and Committees supports the activities necessary to communicate the Code, deliver training, maintain processes and procedures (including support lines) to report and respond to alleged breaches, and to capture and communicate learnings.
We have a framework of Code Policies that underpinunderpins the Code of Business Principles and setsets out thenon-negotiable standards of behaviour expected from all our employees.
For each of our principal risks we have a risk management framework detailing the controls we have in place and who is responsible for managing both the overall risk and the individual controls mitigating that risk. Our assessment of risk considers both short and long term risks, including how these risks are changing, together with emerging risk areas. These are reviewed on an ongoing basis, and formally by senior management and the Boards at least once a year.
Unilever’s functional standards define mandatory requirements across a range of specialist areas such as health and safety, accounting and reporting and financial risk management.
PROCESSESProcesses
Unilever operates a wide range of processes and activities across all its operations covering strategy, planning, execution and performance management. Risk management is integrated into every stage of this business cycle. These procedures are formalised and documented and are increasingly being centralised and automated into transactional and other information technology systems.
ASSURANCE ANDAssurance andRE-ASSURANCEre-assurance
Assurance on compliance with the Code of Business Principles and all of our Code Policies is obtained annually from Unilever management via a formal Code declaration. In addition, there are specialist awareness and training programmes which are run throughout the year and vary depending on the business priorities. These specialist compliance programmes supplement the Code declaration. Our Corporate Audit function plays a vital role in providing to both management and the Boards an objective and independent review of the effectiveness of risk management and internal control systems throughout Unilever.
BOARDS’ ASSESSMENT OF COMPLIANCE WITH THE RISK MANAGEMENT FRAMEWORKSBoards’ assessment of compliance with the risk management frameworks
The Boards, advised by the Committees where appropriate, regularly review the significant risks and decisions that could have a material impact on Unilever. These reviews consider the level of risk that Unilever is prepared to take in pursuit of the business strategy and the effectiveness of the management controls in place to mitigate the risk exposure.
The Boards, through the Audit Committee, have reviewed the assessment of risks, internal controls and disclosure controls and procedures in operation within Unilever. They have also considered the effectiveness of any remedial actions taken for the year covered by this Annual Report and Accounts and up to the date of its approval by the Boards.
Details of the activities of the Audit Committee in relation to this can be found in the Report of the Audit Committee on pages 4154 to 42.55.
Further statements on compliance with the specific risk management and control requirements in the Dutch Corporate Governance Code, the UK Corporate Governance Code, the US Securities Exchange Act (1934) and the Sarbanes-Oxley (2002) Act can be found on pages 39 to 40.page 53.
Annual Report on Form 20-F | 33 |
Our riskscontinued
VIABILITY STATEMENT
Viability statement
The Directors have reviewed the long-term prospects of the Group in order to assess its viability. This review incorporated the activities and key risks of Unilever,the Group together with the factors likely to affect itsthe Group’s future development, performance, the financial position, of Unilever, its cash flows, liquidity position and borrowing facilities areas described on pages 1 to 25.32. In addition, we describe in notes 15 to 18 on pages 115116 to 130 Unilever’s132 the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit and liquidity risk.
ASSESSMENTAssessment
In order to report on the long-term viability of Unilever,the Group, the Directors reviewed the overall funding capacity and headroom available to withstand severe events and carried out a robust assessment of the principal risks facing Unilever,the Group, including those that would threaten its business model, future performance, solvency or liquidity. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks.principal risk. The risksrisk factors are summarised on pages 2835 to 31.39.
The viability assessment has twothree parts:
First, the Directors considered the period over which they have a reasonable expectation that Unileverthe Group will continue to operate and meet its liabilities;
Second, they considered the current debt facilities and debt headroom over the viability period, assuming that any debt maturing can bere-financed at commercially acceptable terms; and
Third, they considered the potential impact of severe but plausible scenarios over this period, including:
assessing scenarios for each individual principal risk, for example the termination of our relationships with the three largest global customers; the loss of all material litigation cases; a major IT data breach, reputational damage from not progressing against our plastic packaging commitments, and the destruction of three of our largest sourcing units;lost cost and growth opportunities from not keeping up with technological changes; and
assessing scenarios that involve more than one principal risk such as:including the following multi risk scenarios:
Multi risk scenarios modelled | Level of severity reviewed | Link to principal risk | ||
Contamination issue with one of our products leading to |
• Safe and high-quality products • Brand preference • Supply chain | ||||
Major global incident affecting one or more of the Group’s key locations resulting in an outage for a year in a key |
• Economic and political instability • Supply chain • Climate change | ||||
Lack of progress against our plastic packaging ambitions and the loss of our three largest customers. | Significant reputational damage was considered with the impact of losing our three key customers. | • Plastic packaging • Brand preference • Customer |
FINDINGSFindings
A
Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by Unilever’s ongoingthe strategic planning;plan and it enables a high level of confidence in assessing viability, even in extreme adverse events, due to a number of factors such as:
the Group has considerable financial resources together with established business relationships with many customers and suppliers in countries throughout the world;
high cash generation by Unilever’s operations;the Group’s operations and access to the external debt markets;
flexibility of cash outflow with respect to significant marketing programmes and capital expenditure projects which usually have a2-3 two to three year horizon; and
the Group’s diverse product and geographical activities which are impacted by continuously evolving technology and innovation.
Secondly, the Group’s debt headroom and funding profile has been assessed:
the Group has a healthy balance of short-term and long-term debt programmes, with repayment profiles ensuring short-term commercial paper maturities do not exceed€0.5 billion in any given week and long-term debt maturities do not exceed€4 billion in any given year; and
the Group has $7.865 billion of committed credit facilities with a maturity of 364 days which are used for backing up our commercial paper programmes.
Thirdly, for each of our 14 principal risks, worst case plausible scenarios have been assessed together with multiple risk scenarios. None of the scenarios reviewed, either individually or in aggregate would cause Unilever to cease to be viable.
Taking into account Unilever’s current position and plans, the Directors believe that there is no plausible scenario that would threaten our business model, future performance, solvency or liquidity over the next three years.
CONCLUSIONConclusion
On the basis described above, the Directors have a reasonable expectation that Unileverthe Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
34 | Annual Report on Form 20-F 2019 |
Strategic Report |
PRINCIPAL RISK FACTORS
Principal risk factors
Our business is subject to risks and uncertainties. On the following pages we have identified the risks that we regard as the most relevant to our business. These are the risks that we see as most material to Unilever’s business and performance at this time. There may be other risks that could emerge in the future.
All the Our principal risks include risks that could impact our business withinin the short-term (i.e. the next two yearsyears), medium term (i.e. short-term risks), or could impact our business over the next three to five years (i.e. medium-term risks). Some principal risks, such as climate change, could also impactten years) or over the longer-termlonger term (i.e. beyond 5ten years).
The most significant emerging risk is the ongoing outbreak of the Coronavirus(COVID-19). We are monitoring the situation carefully as it evolves to understand the potential impact on our people and our business. Based on the current position there will be a significant impact on the short-term performance of our Chinese business in 2020, in particular our food service business. There may also be impacts in other countries although the extent is not yet clear. We are taking all necessary steps to protect our people and mitigate the risk to our business.
Our principal risks have not fundamentally changed this year. We no longer show Sustainability as a specific standalone risk reflecting the ongoing integration of sustainability into our business and a realisation over the last couple of years that we need to be more granular in explaining what is meant by a sustainability risk and have updated the descriptions of several ofhence separated out specific sustainability risks, notably Climate Change and Plastic Packaging. This year we are also separating out a risk with respect to Inequality, which was previously included in our principal risks to reflect the significant impact that technological changes are having onoverarching Sustainability risk and is now included within our consumers, customers and operations.Ethical risk. In addition, we have made specific reference withinreassessed our Financial risks and believe our principal risk in this area should focus more on the changing global tax landscape and its impact on our business, transformationand less on the risks related to our pension liabilities as we have made progress in ensuring stability in our pension funding and do not consider the current risk level to the initiatives announced in April 2017 to ‘accelerate sustainable shareholder value creation’.be material at this time.
As well as identifying the most relevant risks for our business we reflect on whether we think the level of risk associated with each of our principal risks is increasing or decreasing. There are fourthree areas where we believe there is an increased level of risk which are:risk:
Plastic Packaging: the pressure to reduce the use of plastic, particularlysingle-use plastic, continues to gain traction with both our brand equity risk is increasingconsumers and changing in nature as technology impacts bothcustomers, coupled with the speed at which consumer trends changerise of countries considering taxes on plastic packaging;
Customers: the retail landscape continues to evolve with a significant proportion of category growth coming frome-commerce and other new channels, so we need to adapt our brand communication models;
Business Transformation: this risk has increased asthe pressure to digitise our business to generate efficiencies and to allow our people to focus on driving growth continues; a result of the scale of the initiatives announced in April 2017significant transformation programme is underway and our ability to further accelerate shareholders’ value.effectively manage these transitions is a key short-term risk.
If the circumstances in these risks occur or are not successfully mitigated, our cash flow, operating results, financial position, business and reputation could be materially adversely affected. In addition, risks and uncertainties could cause actual results to vary from those described, which may include forward-looking statements, or could impact on our ability to meet our targets or be detrimental to our profitability or reputation.
Nature of risk |
Brand preference
Our success depends on the value and relevance of our brands and products to consumers around the world and on our ability to innovate and remain competitive.
Consumer tastes, preferences and behaviours are changing more rapidly than ever before. We see a growing trend for consumers preferring brands which both meet their functional needs and have an explicit social purpose.
Technological change is disrupting our traditional brand communication models. Our ability to develop and deploy the right communication, both in terms of messaging content and medium is critical to the continued strength of our brands.
We are dependent on creating innovative products that continue to meet the needs of our consumers and getting these new products to market with speed.
Risk change since last year:No change
Portfolio management
Unilever’s strategic investment choices will affect the long-term growth and profits of our business.
Unilever’s growth and profitability are determined by our portfolio of divisions, geographies and channels and how these evolve over time. If Unilever does not make optimal strategic investment decisions, then opportunities for growth and improved margin could be missed.
Risk change since last year:No change
Annual Report on Form 20-F |
RISKS
CONTINUEDOur riskscontinued
|
|
|
|
|
Climate change
Climate change and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products.
Climate change is occurring around the world which may impact our business in various ways. It could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. It could also lead to an increase in raw material and packaging prices or reduced availability. Governments may take action to reduce climate change such as the introduction of a carbon tax or zero net deforestation requirements which could impact our business through higher costs or reduced flexibility of operations.
Increased frequency of extreme weather (storms and floods) could cause increased incidence of disruption to our manufacturing and distribution network. Climate change could result therefore in making products less affordable or less available for our consumers resulting in reduced growth and profitability.
Risk change since last year:No change
Plastic packaging
We use a significant amount of plastic to package our products. A reduction in the amount of virgin plastic we use, the use of recycled plastic and an increase in the recyclability of our packaging are critical to our future success.
Both consumer and customer responses to the environmental impact of plastic waste and emerging regulation by governments to tax or ban the use of certain plastics requires us to find solutions to reduce the amount of plastic we use; increase recycling post-consumer use; and to source recycled plastic for use in our packaging. We are also dependent on the work of our industry partners to create and improve recycling infrastructures throughout the world.
Not only is there a risk around finding appropriate replacement materials, due to high demand the cost of recycled plastic or other alternative packaging materials could significantly increase in the foreseeable future and this could impact our business performance. We could also be exposed to higher costs as a result of taxes or fines if we are unable to comply with plastic regulations which would again impact our profitability and reputation.
Risk change since last year:Increase
Customer
Successful customer relationships are vital to our business and continued growth.
Maintaining strong relationships with our existing customers and building relationships with new customers who have built new technology-enabled business models to serve changing shopper habits are necessary to ensure our brands are well presented to our consumers and available for purchase at all times.
The strength of our customer relationships also affects our ability to obtain pricing and competitive trade terms. Failure to maintain strong relationships with customers could negatively impact our terms of business with affected customers and reduce the availability of our products to consumers.
Risk change since last year:Increase
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Talent
A skilled workforce and agile ways of working are essential for the continued success of our business.
With the rapidly changing nature of work and skills, there is a risk that our workforce is not equipped with the skills required for the new environment.
Our ability to attract, develop and retain a diverse range of skilled people is critical if we are to compete and grow effectively.
This is especially true in our key emerging markets where there can be a high level of competition for a limited talent pool. The loss of management or other key personnel or the inability to identify, attract and retain qualified personnel could make it difficult to manage the business and could adversely affect operations and financial results.
Risk change since last year:No change
Supply chain
Our business depends on purchasing materials, efficient manufacturing and the timely distribution of products to our customers.
Our supply chain network is exposed to potentially adverse events such as physical disruptions, environmental and industrial accidents, trade restrictions or disruptions at a key supplier, which could impact our ability to deliver orders to our customers.
The cost of our products can be significantly affected by the cost of the underlying commodities and materials from which they are made. Fluctuations in these costs cannot always be passed on to the consumer through pricing.
Changes in trade relationships between Europe and the UK as a result of Brexit could give rise to both a supply and cost issue.
Risk change since last year:No change
Safe and high quality products
The quality and safety of our products are of paramount importance for our brands and our reputation.
The risk that raw materials are accidentally or maliciously contaminated throughout the supply chain or that other product defects occur due to human error, equipment failure or other factors cannot be excluded.
Labelling errors can have potentially serious consequences for both consumer safety and brand reputation. Thereforeon-pack labelling needs to provide clear and accurate ingredient information in order that consumers can make informed decisions regarding the products they buy.
Risk change since last year:No change
Systems and information
Unilever’s operations are increasingly dependent on IT systems and the management of information.
The cyber-attack threat of unauthorised access and misuse of sensitive information or disruption to operations continues to increase. Such an attack could inhibit our business operations in a number of ways, including disruption to sales, production and cash flows, ultimately impacting our results.
In addition, increasing digital interactions with customers, suppliers and consumers place ever greater emphasis on the need for secure and reliable IT systems and infrastructure and careful management of the information that is in our possession to ensure data privacy.
Risk change since last year:No change
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RISKS
CONTINUEDOur riskscontinued
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Business transformation
Successful execution of business transformation projects is key to delivering their intended business benefits and avoiding disruption to other business activities.
Unilever is continually engaged in major change projects, including acquisitions, disposals and organisational transformation, to drive continuous improvement in our business and to strengthen our portfolio and capabilities. Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation.
We have an extensive programme of transformation projects. Failure to execute such initiatives successfully could result in under-delivery of the expected benefits and there could be a significant impact on the value of the business.
Risk change since last year:Increase
Economic and political instability
Unilever operates around the globe and is exposed to economic and political instability that may reduce consumer demand for our products, disrupt sales operations and/or impact the profitability of our operations. Adverse economic conditions may affect one or more countries within a region, or may extend globally.
Government actions such as foreign exchange or price controls can impact on the growth and profitability of our local operations.
Unilever has more than half its turnover in emerging markets which can offer greater growth opportunities but also expose Unilever to related economic and political volatility.
Risk change since last year:No change
Treasury and Tax
Unilever is exposed to a variety of external financial risks in relation to Treasury and Tax.
The relative values of currencies can fluctuate widely and could have a significant impact on business results. Further, because Unilever consolidates its financial statements in euros, it is subject to exchange risks associated with the translation of the underlying net assets and earnings of its foreign subsidiaries.
We are also subject to the imposition of exchange controls by individual countries which could limit our ability to import materials paid in foreign currency or to remit dividends to the parent company.
A material shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and restrict Unilever’s ability to raise funds. In times of financial crisis, there is a further risk that we may not be able to raise funds due to market liquidity.
We are exposed to counter-party risks with banks, suppliers and customers which could result in financial losses.
Tax is a complex and evolving area where laws and their interpretation are changing regularly, leading to the risk of unexpected tax exposures. International tax reform remains a key focus of attention with the OECD’s Base Erosion and Profit Shifting project, and the Digitalising Economy Project, and further potential tax reform in the EU.
Risk change since last year:No change
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Ethical
Unilever’s brands and reputation are valuable assets and the way in which we operate, contribute to society and engage with the world around us is always under scrutiny both internally and externally.
Acting in an ethical manner, consistent with the expectations of customers, consumers and other stakeholders, is essential for the protection of the reputation of Unilever and its brands.
A key element of our ethical approach to business is to reduce inequality and promote fairness. Our activities touch the lives of millions of people and it is our responsibility to protect their rights and help them live well. The safety of our employees and the people and communities we work with is critical. Failure to meet these high standards could result in damage to Unilever’s corporate reputation and business results.
Risk change since last year:No change
Legal and regulatory
Compliance with laws and regulations is an essential part of Unilever’s business operations.
Unilever is subject to national and regional laws and regulations in such diverse areas as product safety, product claims, trademarks, copyright, patents, competition, employee health and safety, data privacy, the environment, corporate governance, listing and disclosure, employment and taxes.
Failure to comply with laws and regulations could expose Unilever to civil and/or criminal actions leading to damages, fines and criminal sanctions against us and/or our employees with possible consequences for our corporate reputation. Changes to laws and regulations could have a material impact on the cost of doing business.
Risk change since last year:No change
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In focus: Climate change
IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIESUnilever advocates for policies that advance the goal of the Paris Agreement on Climate Change to limit the increase in the global average temperature to well below 2°C, and ideally no more than 1.5°C, abovepre-industrial levels by the end of the century. We believe this means achieving a net zero emissions world by 2050.
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES.
As a growing numberTo achieve the goals of investors demand more information on how companies are addressing the effects of climate change, Unilever recognisesParis Agreement, we recognise the importance of disclosing climate-related risks and opportunities. Adoptingopportunities in line with the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling. This will enable market forces to drive efficient allocation of capital and support a smooththe transition to alow-carbon economy.
In this Annual Report and Accounts, we continue to integrate climate-related disclosures throughout the Strategic Report narrative. However, inIn recognition of the growing significance, and our increasing understanding of the impacts of climate change on our business, we have also summarised in this section the key risks and opportunities arising from climate change, andincluding the potential impacts on our response below.business.
Governance
The Boards take overall accountability for the management of climate changeall risks and opportunities, with support fromincluding climate change (see page 33). Our Chief Executive and Executive Board member, Alan Jope, is ultimately responsible for oversight of our climate change agenda. The Boards are supported by the ULE andULE. During 2019, the USLP Steering Team (see page 43). Chaired by Keith Weed,was fully integrated into the USLP Steering Team includes nine membersmain ULE agenda to reflect the integration of thesustainability into our business strategy. The ULE and meets five times a year.meet monthly to discuss key strategic matters. During 2017,2019, there were numerousa number of agenda items on topics related to climate change.change including our climate goals.
A number of other specialist governance groups are in place to support our climate agenda, including:
Remuneration linked to achievement of sustainability and climate change targets is a key part of our governance. For 2,872 senior management employees – up to and including the ULE – incentives include fixed pay, a bonus as a percentage of fixed pay and a long-term managementco-investment plan (MCIP) linked to financial and USLP performance – includingsustainability performance. The Sustainability Progress Index accounts for 25% of the total MCIP award and includes consideration of progress against our manufacturing scope 1 and 2 greenhouse gas and sustainable palm oil targets, which among others, underpin our climate change, waterstrategy. See pages 60 to 77 for more on MCIP including the role of the Board’s Remuneration Committee and sustainable sourcing targets (see page 58). The long-termCorporate Responsibility Committee in determining the MCIP will be rolled out to the remainder ofaward each year.
Strategy and risk management employees in 2018.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever (seewhich has the potential to impact our business in the short, medium and long term. The physical risks and opportinities that we face from climate change include extreme weather and water scarcity. The transition risks and opportunities include changing consumer preferences and future policy and regulation.
The process for assessing and identifying climate-related risks is the same for all principal risks and is described on page 28). 36. For each of our principal risks we have a risk management framework detailing the controls we have in place, who is responsible for managing both the overall risk and the individual controls mitigating it. We monitor risks throughout the year to identify changes in the risk profile.
We regularly carry out climate-related risk assessments at site level, supplier-level, as well as innovation-project level. Management of climate related risks is distributed throughout the organisation depending on where the risk resides. For example, climate risks in relation to commodities in the supply chain are managed by our procurement team who are responsible for buying commodities.
Understanding financial impact: scenario analysis
This section explains how scenario analysis helps us to understand the potential impact of climate change on our business in 2030 to inform our strategy and financial planning.
To further understand the impact that climate change could have on Unilever’s business in the future, we performed a high-level assessment of the impact of 2°C and 4°C global warming scenarios. The 2°C and 4°C scenarios are constructed on the basis that average global temperatures will have increased by 2°C and 4°C in the year 2100. Between today and 2100 there will be gradual changes towards these endpoints andUnilever believes the world should seek to limit global temperatures to 1.5°C abovepre-industrial levels. However, in line with guidance we have looked atmodelled scenarios based on 2°C and 4°C scenarios.
We focused the impactassessment on our business in 2030 assuming that we have the same business activities as we do today. We alsoWhile we understand that policy risk and physical impact can happen simultaneously, we made the following simplifying assumptions:
We identified the material impacts on Unilever’s business arising from each of these scenarios based on existing internal and external data. The impacts were assessed without considering any actions that Unilever might take to mitigate or adapt to the adverse impacts or to introduce new products which might offer new sources of revenue as consumers adjust to the new circumstances.
The main impacts of the 2°C scenario were as follows:
The main impacts of the 4°C scenario were as follows:
Our analysis shows that, without action, both scenarios present financial risks to Unilever by 2030, predominantly due to increased costs. However, while there are financial risks which would need to be managed, we would not have to materially change our business model. The most significant impacts of both scenarios are on our supply chain where costs of raw materials and packaging rise, due to carbon pricing and rapid shift to
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sustainable agriculture in a 2°C scenario and due to chronic water stress and extreme weather in a 4°C scenario. The impacts on sales and our own manufacturing operations are relatively small.
The results of this analysis confirm the importance of doing further workWe have therefore developed and piloted an approach to ensure that we understand the critical dependencies of climate change on our business and to ensure we have action plans in place to help mitigate these risks and thus prepare the business for the future environment in which we will operate. We plan to conduct further analysis onassess the impact of climate change on our agriculturalkey commodities, including soy and black tea.
Assessing the impact on soybean oil
We selected soy based on its importance to Unilever (large purchased volume), it being a high-profile crop in the countries where it is grown and the availability of good historical price data and suitable climate models.
We developed a methodology which combined forecasting future yields and quantifying the impact on commodity prices of soybean oil. The forecasting of future yields was performed using a combination of crop specific and climate change models. The price model used a range of supply and demand drivers to determine the impact of changes in yield from direct risks of climate change, isolating other factors such as acreage and technology on price. Three modelling steps were performed:
Our pilot analysis showed that soybean yields may increase over the 2030 and 2050-time horizon and that subsequent lower prices may then lead to small potential reductions in our procurement spend on soy. While the results may indicate a low financial risk to our business, we need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as extreme weather events or external policy response and adaptation could also have an impact but were not included in our modelling. Furthermore, these pilot results are specific to soy and can’t be applied to other crops.
Assessing the impact on black tea
We are the world’s biggest tea company and buy around 10% of the world’s black tea. We worked with the Potsdam Institute for Climate Impact Research to develop suitable crop models for black tea yield predictions. Our modelling considers a range of scenarios and impacts on crop yield and this drives variability in outcomes that we observe. This enabled us to assess the direct risks from climate change on black tea by following the same approach used for soy in 2018. We similarly sought to isolate the impact of yield changes on prices from other important factors such as acreage, farming technology, tea quality, extreme weather events andman-made factors such as elections, unrest and governmental policy.
However, unlike soy, the black tea market is highly fragmented, lacks liquidity and does not operate as one global market. This required us to conduct an analysis of individual countries to identify the risks Unilever is exposed to in each. We selected our four key black tea sourcing countries for the analysis: Argentina, India, Kenya and Turkey.
The different market dynamics in each country presented separate challenges and risks. Each country has also been affected by different evolutions in acreage growth and farming technologies, which at an overall level, have influenced black tea production and resulted in an overall, global increase in tea yields over time.
Our analysis of the direct effects of climate change showed that yields for each country and scenario range from a predicted decrease to a predicted increase, indicating some exposure to risk. However, on average, yields are predicted to increase. This average increase in yields, however, is much
smaller than the anticipated significant effects of acreage growth and improvements in farming technologies. Associated price reductions are expected in most scenarios over a30-year horizon. The overall risk to Unilever of average, direct climate change impacts is therefore relatively low.
However, there are some specific risks to Unilever. At an individual country level, there is a risk of a reduction in yields in 2030 in a 2°C scenario in Kenya, and in 2050 in a 4°C scenario in Argentina. The plateauing of yields in Kenya is a specific risk to Unilever if additional acreage is not made available as a result of government or land use change policies, which consequently limits future production. There are also some small price risks in Kenya and Argentina.
Our analysis also implied that the impact from climate change on average yields may be less significant than the impact of extreme weather events andman-made factors, which can affect black tea production and prices respectively. These events can result in much larger than average impacts in individual years, but the frequency and nature of these events cannot be accurately predicted.
The quality of black tea, excluded from our analysis, was found to have a larger impact on price than yields, especially in India. The expected water scarcity and temperature stress in 2°C and 4°C scenarios, could change the average black tea quality, leading to potential future price risks. The lack of appropriate substitutes further increases the risk profile surrounding tea. While the overall risk to Unilever of direct climate change impacts on black tea is relatively low, the country specific risks and the uncertainty of impacts from other significant factors will require further analysis and individual action plans to be defined/refined for each country.
Managing physical risks and opportunities
Our scenarios assess the potential impact of climate change over the long term on key commodities. However, we also face physical climate change risks and opportunities in our supply chain and direct operations over the impactshort and medium term – notably from the effects of changingextreme weather patterns (including both persistent effects such as droughtsand water scarcity.
Extreme weather
Unilever’s business depends on purchasing materials, efficient and uninterrupted manufacturing and the temporary effectstimely distribution of storms) on critical marketsproducts to our customers. Both the increased frequency of extreme weather events and manufacturing.
RESPONDING TO RISKS AND OPPORTUNITIES
We are taking actionchanges to address our climate change risks in line with the output from the scenario analysis, as well as benefiting from any opportunities these changesweather systems could presentcause disruption across our value chain. In 2018,While the frequency and extent of extreme weather is hard to predict, we will launch themonitor changing weather patterns on a short-term basis and take action to mitigate any negative affects.
Operating costs and commodity prices can be impacted by extreme weather caused by climate change. To mitigate this we have contingency plans to secure alternative key material supplies at short notice, for example during extreme weather events, to transfer or share production between manufacturing sites and to use substitute materials in our product formulations and recipes. Commodity price risk is actively managed through forward buying of traded commodities and other hedging mechanisms. Trends, including weather patterns, are monitored and modelled regularly and integrated into our forecasting process. Our Sustainable Agriculture Code (SAC) 2017 which gives Unilever, our farmers and suppliers a set of rigorous standards to drive sustainability improvements across our supply chain. The revised SAC incorporates standards on Climate Smart Agriculture. Further risk assessment on individual crops and countries of origin will allow us to focus efforts on implementationpromotes the principles of Climate Smart Agriculture. We areAgriculture to our suppliers and includes practices that sustainably increase the productivity and resilience to extreme weather.
Extreme weather also committed to eliminating the deforestation associated with commodity supply chains, with a particular focus on sustainable palm oil production (see pages 13 and 15).
Our 2030 carbon positive target commits us to eliminating fossil fuels from our manufacturing operations by using only energy from renewable sources and supporting the generation of more renewable energy than we consume, making the surplus available to the communities in which we operate (see page 15). Since 2008, our factories have avoided costs of over€490 million through cumulative energy savings – and in doing so minimising our exposure to future regulatory costs.
Climate change has the potential to impact Unilever operations and assets, including our brands in different ways depending on the raw materials usedinventory of products as well as owned property which could suffer physical damage or loss. We use sustainable building standards such as BREEAM or LEED for new developments to future proof our assets and reduce obsolescence. For instance, our newly opened Foods Innovation Centre in the production of our products and their end use. We are developing product innovations with less greenhouse gases across the value chain and less water in use (see pages 11, 13 and 14). Our categories’ response toNetherlands attained BREEAM outstanding, meaning it met stringent climate change has been guided by a review of the areas where we can have the biggest impact on mitigating climate risk or benefiting from climate opportunity.adaptation measures.
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OurWater stress
Household water scarcity caused by climate change is another physical risk, which is exacerbated by population growth and urbanisation. During periods of drought consumers may reduce their use of certain products including laundry detergents, shampoos and conditioners, and toilet cleaners as they are unable to access water to use them or experience declining water quality which limits their enjoyment and/or efficacy. While the overall impact of water stress on our sales, from both policy and physical impacts, was not found to be significant in our scenario analysis at a global level within the 2030 time horizon evaluated, the impacts we see in the short term tend to be more local.
We are investing in new products and formulations that work just as well with less water, poor quality water or no water, with a particular focus on household cleaning, skin cleansing, oral and hair care. Many of our Beauty & Personal Care category has identified several areas of focus to mitigateand Home Care products now have fast-rinse technology as standard, using less water or low temperature washing. We have also developed dry shampoos (e.g. TRESemmé) and ‘leave in’ conditioners (e.g. Dove).
Managing transition risks and benefitopportunities
The transition to alow-carbon economy presents a number of risks, but also opportunities for Unilever over the short and medium term – notably from opportunities. These include the developmentchanging consumer preferences and future policy and regulation.
Changing consumer preferences
Unilever’s growth and profitability is determined by our portfolio, geographical and channel presence and how these evolve over time in response to consumer demand. Failure topre-empt or respond to changing consumer preferences could impact our growth.
We’re developing our product portfolio to offer products with a lower carbon footprint. For example, we have been shifting our Home Care laundry portfolio towards concentrated liquid laundry detergent formats for a number of compressed deodorants which use 50% less propellant gas and 25% less aluminium in their packaging than standard aerosol deodorants. The category is also investing in water smart product innovationsyears. Brands such as dry shampooPersil, Omo and cleansing conditioner which help consumers use less hot water while also offering relevant benefits such as reduced colour lossSurf Small & Mighty and damage which can arise from frequent washing.
Home Care has focused its efforts in several areas. To mitigate risk, it has removed phosphates from all laundry powders worldwide, resulting inSeventh Generation’s EasyDose enable people to wash their clothes at lower greenhouse gastemperatures, reducing GHG emissions ofby up to 50% per load. Concentrated detergents also mean that we can fit doses for more washes into smaller bottles, reducing the water used at manufacturing facilities and hence the emissions associated with transportation and packaging.
The next portfolio shift, in line with changing consumer use. It is also combining insights in consumer behaviour and water consumption with innovative technology to develop new market opportunities, launching products and formulations that address water scarcity and helppreference, will future proof our consumers save water. Sunlight 2-in-1 Handwashing Laundry Powder, Rin (Radiant) detergent bar and Comfort One Rinse fabric conditioner are examples of successful innovations which are reducing water at point of use (see page 14).
Home Care is also homebrands to three brandsensure they continue to deliver superior cleaning, while being kinder to the environment. This will include, for example, using a new generation of ingredients which deliver superior performance at lower dosage resulting in GHG savings.
Consumers in a number of markets are responding directly to issues related to climate change. Pureit and Qinyuan, our water purification businesses, are providing safe drinking water to millions of people withincreasingly adopting plant-based diets which have a lower carbonGHG footprint than alternatives. Our detailed life cycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair,meat-based diets. According to our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Our Foods category continues to develop its response to the growing trend, and business opportunity, for natural and plant-based food, thereby reducingLifecycle Analysis, our GHG emissions from livestock.animal-based agriculture (including fats and proteins), is relatively low, accounting for around 7.5% of our Foods & Refreshment GHG footprint, and 2.5% of Unilever’s total GHG footprint. A recent FAIRR report also noted that Unilever had the lowest exposure to GHG emissions from animal agriculture in the sector. It also identified us as the best prepared food company for the plant-based boom. We have a range of vegan and vegetarian productsvariants and continue to actively endorse plant-based lifestyles via positive, proactive consumer communication campaigns. By the end of 2017, around 500 Unilever food products in Europe were endorsed by the European Vegetarian Unionpromote vegetarian and our global brands Hellmann’s, Flora (Becel) and Ben & Jerry’s now offer vegan and vegetarian variants. The category is also encouraging more consumers and chefs to cook plant-based meals via our Knorr and Unilever Food Solutions recipe hubs.
In Refreshment, we have prioritised reducing greenhouse gas emissions from ice cream freezers since 2008recipes (see page 12)14). As
To capitalise on the world’sfuture revenue opportunities, our M&A strategy aims to acquire new businesses which serve specific consumer segments such as sustainability conscious consumers. A number of our recent acquisitions, including Pukka Herbs, Sundial, Mae Terra, Seventh Generation, and OLLY Nutrition, are recognised as B Corps – meaning they have met stringent environmental and social criteria as laid out in the B Corp impact assessment. For example, Seventh Generation advocates for renewable energy and is taking action to decarbonise its own business and Pukka Herbs has its own science-based zero carbon goal.
Future policy and regulation
Current and emerging laws and regulations have the potential to impact financial performance as governments may take action, such as the
introduction of carbon taxes or zero net deforestation policies.
Our business is heavily dependent on forests for key commodities. We’re one of the largest producerend-users of ice cream,palm oil in the FMCG sector and we havealso buy other commodities associated with a risk of deforestation, including soy and paper and board. In 2010, together with other organisations in our industry, we committed to acceleratingachieving zero net deforestation associated with four commodities (palm oil, soy, paper and board and beef) by 2020. Despite our efforts over the roll-outpast decade, commodity-driven deforestation remains a serious challenge in many parts of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2017 our total purchase of these cabinets had increased to around 2.6 million. We are working on further innovations to make more improvements in freezer energy efficiency, including investigating the use of renewable energy, such as solar, to power our cabinets.
Unilever supportsworld. We’re taking a number of policy measuressteps to accelerateeliminate deforestation from agricultural commodity supply chains. Firstly, we are transforming our own supply chains by making sure the transitionpalm oil, soy, paper and board, and tea we buy is both traceable and certified as sustainable. Secondly, we are working with governments and other partners to a low-carbon economy, includingensure that deforestation gets the pricingpolitical attention and financial resources it needs. In particular, we are focused on helping reduce deforestation in key regions of carbonSouth-East Asia, South America, and removalWest and Central Africa. We’re also using our networks and relationships to help tropical forest countries access large-scale, performance-based payments for emissions reductions from forests.
We consider the impact of fossil fuel subsidies which act as negative carbon prices. We believe thatpossible future mandatory carbon pricing is a fundamental partin key countries which could result in increases in both manufacturing costs and the costs of the global response to climate changeraw materials such as ingredients and without it, the world is unlikely to meet its greenhouse gas reduction targets. We have publicly supported calls for carbon pricing and are members of The Carbon Pricing Leadership Coalition, hosted by the World Bank. Inpackaging. To mitigate this, in 2016, we implemented an internal price on carbon of€30 per tonne for significant capital expenditure projects as part of the business case appraisal for large capital expenditure projects. This did not change behaviour as we expected since energy costs – and therefore carbon costs – were largely immaterial to the capital costs over the assessed period. As a ‘clean-tech’result we took the decision to end this shadow carbon pricing approach and instead applied a novel approach of internally taxing the notional capital expenditure budgets of our three divisions based on the emissions from the prior year, to raise a clean-tech fund. So far, over€63120 million has been raised byallocated to this fund for energy, waste and water saving projects. InSince January 2018 we increased theour internal price of carbon tofor this fund has been€40 per tonne.
MEASURING AND REPORTING
The USLP includes a numberOur climate targets are one of stretching commitments which relate to climate risksthe ways we mitigate the risk of future policy and opportunitiesregulation. In 2019, we announced that our factories, offices, R&D facilities, data centres, warehouses and distribution centres across our value chain. It includes a target to halve the greenhouse gas impact of our products across the lifecyclefive continents are now powered by 2030100% renewable grid electricity.
Metrics and a commitment to become carbon positive in our operations by 2030. Our water targets include halving the water associated with the consumer use of our products by 2020 and reducing water abstracted at manufacturing sites. Performance against these targets can be found on page 7.
We have been measuring and reporting on our energy and water consumption and carbon emissions since 1995. The USLP includes a number of stretching targets which relate to climate risks and opportunities across our value chain. Performance against key targets can be found on page 22 with commentary on page 18 and 19. Our website contains extensive reporting on our performance as well as more detailed commentary on our USLP targets as well as actions we are taking to achieve them.
For 2017, PwC assured Two of our measurementGHG reduction targets are recognised as science-based:
We’ve created a detailed plan to annually assess the feasibility for Unilever to reach our target to halve the greenhouse gas impact of our products across the lifecycle by 2030, taking both external transitions towards alow-carbon economy as well as the latest available data and assumptions about our GHG footprint into account. See page 22 for our latest progress against these targets and page 19 for commentary. Our ability to meet our climate-related targets partly depends on changes in the energy markets worldwide, such as the rate of installation of renewable electricity in many countries and the availability of purchase power agreements. We are also dependent on countries implementing their Paris commitments and in
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raising the ambition of those commitments. We need policy and regulation which drive decarbonisation at scale, reducing costs, increasing speed and making the ‘well below’ 2 degree scenario more likely. We have a role to play to help shape the policy and regulation required and we are working collaboratively with partners, suppliers and other organisations to achieve our ambition including with organisations such as We Mean Business coalition, the United Nations Global Compact, the World Economic Forum and the World Business Council for Sustainable Development.
GHG emissions by activity
In line with the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 our GHG emissions are set out below. Each year PwC assure selected manufacturing environmental metrics including water abstraction per tonne of production, carbon emissions from energy use and energy use per tonne of production. In 2019 PwC also assured the GHG impact of our products across the lifecycle. The GHG data below relates to emissions during the12-month period from 1 October to 30 September. This period is different from the Strategic Report, Directors’ Report and Financial Statements which are calendar year.
FURTHER CLIMATE CHANGE DISCLOSURES
2019 | 2018 | |||||||
Manufacturing (scope 1 and 2)(a) | ||||||||
Scope 1 (tonnes CO2) | 607,829 | 711,875 | ||||||
Scope 2 (tonnes CO2)(b) | 361,669 | 726,167 | ||||||
Total Scope 1 & 2 (tonnes CO2)(b) | 969,498 | 1,438,042 | ||||||
Intensity ratio (kg CO2per tonne of production)(c) | 50.76 | 70.46 | ||||||
Total energy (MWh) | 6,648,048 | 7,196,599 | ||||||
Non-manufacturing (scope 1 and 2)(a)(d) | ||||||||
Scope 1 (tonnes CO2) | 18,843 | 20,052 | ||||||
Scope 2 (tonnes CO2)(b) | 48,490 | 100,924 | ||||||
Total Scope 1 & 2 (tonnes CO2)(b) | 67,333 | 120,976 | ||||||
Total energy (MWh) | 462,670 | 499,446 | ||||||
Upstream and downstream of Unilever operations (scope 3) | ||||||||
Total scope 3 (tonnes CO2e) | 58,558,031 | 59,250,469 | ||||||
Top 3 scope 3 by emission source: | ||||||||
Consumer use (tonnes CO2e)(e) | 39,730,116 | 39,895,946 | ||||||
Ingredients and packaging use (tonnes CO2e)(f) | 14,448,186 | 14,985,897 | ||||||
Distribution and retail use (tonnes CO2e)(g) | 4,379,729 | 4,368,626 |
(a) | For Scope 1 and 2 we report our CO2 emissions only but not other GHG emissions as these are considered to be not material. For Scope 3 we report our GHG emissions (eg CO2, CH4, N2O) in terms of CO2 equivalents. Carbon emission factors are used to convert energy used in our operations to emissions of CO2. Carbon emission factors for fuels are provided by the Intergovernmental Panel on Climate Change (IPCC). We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol). |
(b) | Carbon emission factors for grid electricity calculated according to the ‘market-based method’ are supplier-specific emissions factors reflecting contractual arrangements with electricity suppliers. Where supplier-specific emissions factors are not available, carbon emissions factors reflect the country where each operation is located and are provided by the International Energy Agency (IEA). |
(c) | For manufacturing we have selected an intensity ratio based on production. This aligns with our long-standing reporting of manufacturing performance. Emissions from the combustion of biogenic fuels (biomass, fuel crops etc) within our operations are reported separately to other Scope 1 and 2 emissions, as recommended by the GHG Protocol, and excluded from our intensity ratio calculation. The data also excludes Scope 3 emissions (including consumer use of our products) which we report as part of our Unilever Sustainable Living Plan. |
(d) | Includes operations, distribution facilities, research laboratories, marketing and sales offices (excludes warehouses and administration offices). |
(e) | We measure the full GHG footprint of our product portfolio and annual sales using an LCA method compliant with the ISO 14040 standard. We measure the consumer use phase using a combination of primary habits data and on pack recommendations of use combined with lifecycle inventory data. We measure a representative sample of products across 14 countries which account for around60-70% of our annual sales volume. |
(f) | We use a combination of external lifecycle inventory databases (secondary data) and supplier specific data (primary data eg for surfactants, perfumes and some of food ingredients) to measure the GHG emissions of purchased ingredients and packaging materials used in the production of our products. |
(g) | Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
Streamlined Energy and Carbon Reporting
We have decided to voluntarily comply with the UK government’s Streamlined Energy and Carbon Reporting (SECR) policy a year early. The table below represents Unilever’s energy use and associated GHG emissions from electricity and fuel in the UK for the 2018 and 2019 reporting years (1 October to 30 September), with scope calculations aligned to the Greenhouse Gas Protocol. The scope of this data includes 8 manufacturing sites and 11non-manufacturing sites based in the UK. The UK accounts for 5% of our global total Scope 1 and 2 emissions, outlined in our mandatory GHG reporting also on this page.
UK operations | 2019 | 2018 | ||||||
Biogas (MWh) | 17,045 | 15,958 | ||||||
Natural gas (MWh) | 238,081 | 278,849 | ||||||
LPG (MWh) | 866 | 1,513 | ||||||
Fuel oils (MWh) | 580 | 648 | ||||||
Coal (MWh) | 0 | 0 | ||||||
Electricity (MWh) | 195,796 | 196,965 | ||||||
Heat and steam (MWh)
|
| 212,482
|
|
| 272,985
|
| ||
Total energy (MWh)(a)
|
| 408,280
|
|
| 469,950
|
| ||
Total Scope 1 emissions (tonnes CO2e)
|
| 48,178
|
|
| 56,533
|
| ||
Total Scope 2 emissions (tonnes CO2e)(b)
|
| 702
|
|
| 3,067
|
|
(a) | Fleet and associated diesel use excluded. Transportation is operated by a third party and accounted for under Scope 3. |
(b) | Carbon emission factors for grid electricity calculated according to the ‘market-based method’ |
For further information on energy efficiency measures taken to reduce our carbon emissions, please see page 19.
Further climate change disclosures
This Annual Report and Accounts contains additional disclosures on our climate change risks and opportunities:
Unilever’sOur website also contains disclosures on our greenhouse gases and water USLPgas targets.
www.unilever.com/sustainable-living/our-sustainable-living-report-hub |
Our CDP Climate submission contains extensive disclosure on our climate risks, opportunities, impacts and mitigating actions.
www.unilever.com/sustainable-living/ |
Annual Report on Form 20-F | 43 |
In focus: Plastic packaging
As a packaged goods company, we are a significant user of plastic packaging for our products. We believe that plastic has a place in the economy but not in the environment. We want to help build a circular economy in which we not only use less plastic, but also ensure the plastic we do use can be reused, recycled or composted.
In this Annual Report and Accounts, we have integrated plastic packaging disclosures throughout the Strategic Report narrative. We have also summarised the key risks and opportunities arising from plastic packaging in this section of the report. We hope that this will raise the standard of reporting on plastic packaging across the industry.
Governance
The Boards take overall accountability for the management of all risks and opportunities, including plastic packaging (see page 33). Our Chief Executive and Executive Board member, Alan Jope, is ultimately responsible for oversight of our plastic packaging agenda. He is supported by the ULE, including our Chief R&D Officer, Richard Slater, who is responsible for driving the plastic strategy, and Divisional Presidents who lead the plastics agenda within their respective Divisions. The ULE meet monthly to discuss key strategic matters, including plastic packaging. In July, the ULE reviewed the key issues on plastics, renewed our commitment to our existing goals and fully endorsed our new 2025 plastic targets.
The Sustainable Packaging Committee steers our strategy and targets on sustainable packaging by understanding stakeholder concerns and bringing in new technologies and partnerships. The Committee meets four times a year, is chaired by our Chief R&D Officer, Richard Slater, and includes senior leaders and plastic packaging specialists from across our Divisions, Markets and Functions.
Plastic packaging is a key part of our sustainability programme. Remuneration linked to achievement of sustainability targets is a key part of our governance. For management employees – up to and including the ULE – incentives include fixed pay, a bonus as a percentage of fixed pay and a long-term managementco-investment plan (MCIP) linked to financial and sustainability performance. The Sustainability Progress Index accounts for 25% of the total MCIP award and next year will include consideration of progress against one of our plastic targets to increase the recycled plastic content in our packaging. See pages 60 to 77 for more on MCIP including the role of the Board’s Remuneration Committee and Corporate Responsibility Committee in determining the MCIP award each year.
Strategy and risk management
Plastic has been identified as a principal risk for the company which has the potential to impact our business in the short, medium and long term. The process for assessing and identifying plastic packaging risk is the same for all principal risks and is described on page 36. For each of our principal risks we have a risk management framework detailing the controls we have in place and who is responsible for managing both the overall risk and the individual controls mitigating it. We monitor risks throughout the year to identify changes in the risk profile.
We have taken decisive action to mitigate the risks and capitalise on the opportunities. In 2017, we were the first company in our industry to commit to ensuring that 100% of our plastic packaging is reusable, recyclable or compostable by 2025. In 2019, we announced two new goals to complement the 2017 commitment:
We also restated our commitment to use at least 25% recycled plastic in our packaging by 2025.
Changing consumer preferences
There has been a significant rise in consumer concern regarding plastic packaging over the last few years. Concern is not universal and takes on different dimensions in different countries depending on the media coverage and government focus. A recent study by Kantar/GfK found that plastic waste is the second biggest concern globally among consumers, behind climate change. The survey also found it was a top concern among consumers in Eastern Europe and Asia and second in Western Europe.
More recycling on its own will not solve the issue of plastic packaging in the environment. It is therefore imperative to address plastic waste at the source. There is a risk that some consumers will stop buying our products if we do not find ways to reduce our use of plastic packaging and increase the amount that is recyclable or reusable. Equally, for companies that are proactive, there is a significant opportunity to attract consumers who want to buy consumer goods products in packaging solutions which use less virgin plastic and are recyclable or reusable.
Our strategy topre-empt changing consumer preferences is organised around our ‘less, better, no plastic’ framework.
Less plastic
We know consumers expect us, first and foremost, to reduce our reliance on plastic packaging. That’s why we committed to reducing our use of virgin plastic in our packaging by 50% by 2025, to no more than 350,000 tonnes. We plan to deliver this firstly by eliminating over 100,000 tonnes of plastic from our packaging by acceleratingmultiple-use packs and reusable, refillable, and no plastic product innovations. We will deliver the remainder by increasing our use of recycled materials, helping keep plastic in the economy and out of the environment by giving plastic a value to ensure it can be collected and processed (see also ‘collecting plastic’ below).
As part of this commitment we aim to avoid unintended consequences when we introduce alternative materials, ensuring limited impact on the environment, including on GHG emissions. We apply a lifecycle assessment approach to inform decisions when shifting to alternative materials in our reuse models.
We are exploring new ways of packaging and delivering products - including concentrates, such as our new CifEco-refill which eliminates 75% of plastic, and new refill stations for shampoo and laundry detergent rolled out across shops, universities and mobile vending in South East Asia. See page 14 to 15 and 19 for more examples of brands that are reducing plastic. Our reduction commitment also encompasses sachets. We are investing in alternative solutions to plastic sachets including paper-based alternatives and refills, such as our Philippines Hair Refillery and our Love Beauty and Planet Refillery in Vietnam.
Better plastic
Our original 2017 target to ensure 100% of our packaging is reusable, recyclable, compostable plastic by 2025, as well as our recycled plastic commitment, both remain a very important part of our approach to ‘better plastic’ and we are already making progress on this commitment across our Divisions and brands.
Our use of recycled plastic has increased significantly in the last year as we have stepped up our purchasing of recycled plastic – and we expect this to increase in the coming years. Dove, for instance has recently committed to launch new 100% recycled plastic bottles where technically feasible, in North America and Europe by the end of 2019, across all ranges (Dove, Dove Men+Care, and Baby Dove). It is also exploring alternative materials and new packaging formats.
Better plastic has led to pioneering innovations such as the new detectable pigment being used by Axe (Lynx) and TRESemmé , which makes black plastic recyclable in most markets, as it can now be seen and sorted by recycling plant scanners. In 2018 we announced a partnership withstart-up company Ioniqa and the largest global producer of PET resin Indorama Ventures to pioneer a new technology which converts PET waste back into virgin grade material for use in food packaging.
44 | Annual Report on Form 20-F 2019 |
Strategic Report |
No plastic
UNILEVER’S STRUCTUREWe are experimenting with new formats that use alternative materials or have no packaging at all. We have already brought to the market innovations including shampoo bars, refillable toothpaste tablets, cardboard deodorant sticks and bamboo toothbrushes. Our partnership with TerraCycle on the Loop platform is exploring new models of delivering and collecting reusable products from consumers’ homes. Premium skincare brand REN Clean Skincare, Hellmann’s, Love Beauty and Planet, Love Home and Planet and Seventh Generation are trialling new reusable packaging made from aluminium and glass. Dove, Rexona and AXE will also test a premium, refillable deodorant stick called minim™ made from stainless steel.
Policy and regulatory risks
There is a growing focus from governments on plastic and the potential for regulatory and tax measures in a number of markets where we operate. In the EU for example, member countries have agreed to the Plastics Strategy set out by the European Commission, which requires that all plastic waste will be recyclable by 2030. This incorporates theSingle-Use Plastics Directive which includes measures to reduce consumption of food containers and beverage cups made of plastic and specific marking and labelling of certain products. The actions described under ‘market risks and opportunities’ are in part a mitigation strategy topre-empt plastic restrictions and regulation.
Policy developments in the area of Extended Producer Responsibility (EPR) are also likely to become more common. We are supportive of EPR regulations which reflect the unique waste management requirements of the market. In developing markets, we are working with governments and other stakeholders to support the development of collection and reprocessing infrastructure before a formal EPR system is designed and adopted. In addition, we support the implementation of comprehensive waste management legislation to build a more effective and efficient waste infrastructure.
Improving waste infrastructure
Over the last five years Unilever has collaborated with many partners to collect plastic packaging, including the United Nations Development Programme, to help segregate, collect and recycle packaging across India. In addition, we have helped to establish almost 3,000 waste banks in Indonesia, offering more than 400,000 people the opportunity to recycle their waste. In Brazil, we have a long-running partnership with retailer Grupo Pão de Açúcar to help collect waste throughdrop-off stations.
In 2019 we introduced a new target to invest and partner to collect and process more plastic packaging than we sell by 2025 to mitigate any potential future regulatory costs associated with EPR. This requires us to help collect and process around 600,000 tonnes of plastic annually by 2025. We will deliver this commitment by: investing and partnering with others to improve waste management infrastructure; purchasing and using recycled plastics in our packaging; and participating in extended producer responsibility schemes where we directly pay for the collection of our packaging.
Advocacy to drive systems change
Across all our plastic targets, we need to continue our advocacy, partnerships and policy approach to drive system-wide change. For example, it is important that we unlock regulatory barriers for PCR use. It is also imperative that there is a favourable policy environment to support sustainable financing for collection as well as financial incentives for the right behaviours.
Human rights risks
We are aware that there are potential human rights issues in emerging markets which do not have formalised waste management infrastructure. Informal waste collection (waste pickers) and recycling is a common way to earn an income and a livelihood. Our responsible sourcing policy contains clear guidance on twelve fundamental principles such as the protection of workers’ health and safety, employing a permitted workforce (age/freedom of movement etc) and fair wages. We have refused to work with waste management companies based on a lack of assurances on human rights, child labour and working conditions. We are developing global standards on ‘formalising’ the informal sector and legitimising waste pickers.
Metrics and targets
We have been measuring and reporting on our manufacturing waste since 1995. Our website contains detailed commentary on our plastic packaging targets as well as actions we are taking to achieve them.
To date we still lack the complete data set necessary to accurately measure our actual performance in accordance with our basis of preparation which outlines our measurement methodology, but are on track to build the required robust and granular reporting systems during 2020.
For the reporting period July 2018 to June 2019, we have accurate data for around 70% of our sales volume from products with plastic packaging and through extrapolation estimate that more than 50% of our plastic packaging was reusable, recyclable or compostable. In 2019 we estimate around 5% (35,000 tonnes) of our total plastic footprint was recycled plastic – a significant increase on our 2018 use of recycled plastic. Our use of recycled plastic will continue to increase in the coming years as we work towards our 25% by 2025 goal. We intend to provide an interim update next year.
Further waste and packaging disclosures
This Annual Report and Accounts contains additional disclosures on our plastic packaging risks and opportunities:
Our website contains disclosures on our waste and packaging targets.
www.unilever.com/sustainable-living/our-sustainable-living-report-hub |
Annual Report on Form 20-F 2019 | 45 |
Non-financial information statement
In accordance with sections 414CA and 414CB of the Companies Act 2006 which outline requirements fornon-financial reporting, the table below is intended to provide our stakeholders with the content they need to understand our development, performance, position and the impact of our activities with regards to specifiednon-financial matters. Further information on these matters can be found in our online Sustainable Living Report and Human Rights Report, as well as policy documents contained on our website.
Non-financial matter and relevant sections | Annual Report page reference | |
Environmental matters | ||
Relevant sections of Annual Report & Accounts: | ||
• Tackling climate change | • Policy: Pages 19 and 40 to 45 | |
• Rethinking plastic | • Position and performance: Pages 19, 22 and 42 to 45 | |
• Protecting nature through sustainable sourcing | • Risk: Page 36 | |
• Pushing for systems change | • Impact: Pages 19 and 40 to 45 | |
• In focus: Climate change | ||
• In focus: Plastic packaging | ||
Social and community matters | ||
Relevant sections of Annual Report & Accounts: | ||
• Better health and wellbeing | • Policy: Pages 16 to 18 | |
• Enhancing livelihoods | • Position and performance: Pages 16 and 22 | |
• Safety and wellbeing | • Risk: Page 37 | |
• Impact: Pages 16 to 18 | ||
Employee matters | ||
Relevant sections of Annual Report & Accounts: | ||
• The changing world of work | • Policy: Pages 16 to 17 | |
• Reshaping how we work | • Position and performance: Pages 16 to 17 and 22 | |
• Safety and wellbeing | • Risk: Page 37 | |
• Evolving our culture | • Impact: Pages 16 to 17 | |
Human rights matters | ||
Relevant sections of Annual Report & Accounts: | ||
• Evolving our culture | • Policy: Pages 16 to 18 | |
• Enhancing livelihoods | • Position and performance: Pages 16 to 18 and 22 | |
• Risk: Pages 37 and 39 | ||
• Impact: Pages 16 to 18 | ||
Anti-corruption and bribery matters | ||
Relevant section of Annual Report & Accounts: | ||
• Acting with integrity | • Policy: Page 16 | |
• Position and performance: Page 16 | ||
• Risk: Pages 37 and 39 | ||
• Impact: Page 16 | ||
46 | Annual Report on Form 20-F 2019 |
Governance Report |
Unilever’s structure
Since its formation in 1930, the Unilever Group has operated as nearly as practicable as a single economic entity. This is achieved by special provisions in the Articles of Association of NV and PLC, together with a series of agreements between NV and PLC which are together known as the Foundation Agreements (described below). These agreements enable Unilever to achieve unity of management, operations, shareholders’ rights, purpose and mission and can be found on our website.
The Equalisation Agreement makes the economic position of the shareholders of NV and PLC, as far as possible, the same as if they held shares in a single company and also regulates the mutual rights of the shareholders of NV*NV and PLC. Under this agreement, NV and PLC must adopt the same financial periods and accounting policies.
The Deed of Mutual Covenants provides that NV and PLC and their respective subsidiary companies shallco-operate in every way for the purpose of maintaining a common operating policy. They shall exchange all relevant information about their respective businesses – the intention being to create and maintain a common operating platform for the Unilever Group throughout the world. This Deed also contains provisions for the allocation of assets within the Unilever Group.
Under the Agreement for Mutual Guarantees of Borrowing between NV and PLC, each company will, if asked by the other, guarantee the borrowings of the other and the other’s subsidiaries. These arrangements are used, as a matter of financial policy, for certain significant borrowings. They enable lenders to rely on our combined financial strength. The borrowing power of NV is not limited by NV’s Articles of Association. PLC Directors have the power to borrow on behalf of PLC up to three times the PLC proportion of the adjusted capital and reserves of the Unilever Group, as defined in PLC’s Articles of Association, without the approval of shareholders (by way of an ordinary resolution).
Each NV ordinary share represents the same underlying economic interest in the Unilever Group as each PLC ordinary share. However, NV and PLC remain separate legal entities with different shareholder constituencies and separate stock exchange listings. Shareholders cannot convert or exchange the shares of one for the shares of the other. More
Under the European Takeover Directive as implemented in the Netherlands and the UK, the UK Companies Act 2006 and rules of the US Securities and Exchange Commission, Unilever is required to provide information on contracts and other arrangements essential or material to the exercisebusiness of votingthe Unilever Group. Other than the Foundation Agreements referred to above we believe we do not have any such contracts or arrangements.
Articles of association
NV’s Articles of Association contain, among other things, the objects clause, which sets out the scope of activities that NV is authorised to undertake. They are drafted to give a wide scope and provide that the primary objectives are: to carry on business as a holding company, to manage any companies in which it has an interest and to operate and carry into effect the Equalisation Agreement. At the 2010 PLC AGM, the shareholders agreed that the objects clause be removed from PLC’s Articles of Association so that there are no restrictions on its objects.
Allocation of profits
Under NV’s Articles of Association, available profits after reserves have been provided for by virtue of law, the Equalisation Agreement or deemed necessary by the Board, are paid first at a rate of 6% and 7% per year to 6% and 7% cumulative preference shareholders respectively when such shares are issued*. The remaining profits are paid to ordinary shareholders in proportion to the nominal value of their holdings.
Distributable profits of PLC are paid first at the rate of 5% per year on thepaid-up nominal capital of 31/9p of the ordinary shares, secondly at a rate of 5% per year on thepaid-up nominal capital of 31/9p of the ordinary shares and then at the rate of 6% per year on thepaid-up nominal capital of the deferred stock of £100,000. The surplus is paid by way of a dividend on the ordinary shares.
Lapse of distributions
The right to cash and the proceeds of share distributions by NV lapses five and 20 years, respectively, after the first day the distribution was obtainable. Unclaimed amounts revert to NV. Any PLC dividend unclaimed after 12 years from the date of the declaration of the dividend reverts to PLC.
Redemption provisions and capital call
Under Dutch law, NV may only redeem treasury shares or shares whose terms permit redemption. Outstanding PLC ordinary shares and deferred shares cannot be redeemed. NV and PLC may make capital calls on money unpaid on shares and not payable on a fixed date. NV and PLC only issue fully paid shares.
Modification of rights can
Modifications to NV’s or PLC’s Articles of Association must be foundapproved by a general meeting of shareholders. Any modification of the NV Articles of Association that prejudices the rights of 6% or 7% cumulative preference shareholders* of NV must be approved by three-quarters of votes cast (excluding treasury shares) at a meeting of affected holders.
Modifications that prejudicially affect the rights and privileges of a class of PLC shareholders require the written consent of three-quarters of the affected holders (excluding treasury shares) or a special resolution passed at a general meeting of the class at which at least two persons holding or representing at least one third of thepaid-up capital (excluding treasury shares) must be present. Every shareholder is
entitled to one vote per share held on a poll and may demand a poll vote. At any adjourned general meeting, present affected class holders may establish a quorum.
* | On 31 December 2019, no 6% or 7% cumulative preference shares were issued. |
Indemnification
The terms of NV Directors’ indemnification are provided for in NV’s andArticles of Association. The power to indemnify PLC Directors is provided for in PLC’s Articles of Association and deeds of indemnity have been agreed with all PLC Directors. Third-party directors’ and officers’ liability insurance was in place for all Unilever Directors throughout 2019 and is currently in force.
In addition, PLC provides indemnities (including, where applicable, a qualifying pension scheme indemnity provision) to the NoticesDirectors of Meetings for our NV and PLC AGMs, allthree subsidiaries each of which can be foundacts, or acted as trustee of a Unilever UK pension fund. Appropriate trustee liability insurance is also in place.
The Governance of Unilever
A comprehensive description of Unilever’s corporate governance arrangements, including further details on the structure of the Unilever Group, is set out in ‘The Governance of Unilever’. It further details the roles and responsibilities of the Chairman, Senior Independent Director/ Vice-Chairman, CEO, CFO and other corporate officers and how our website.Boards effectively operate as one board, govern themselves and delegate their authorities.
The Governance of Unilever also describes the Foundation Agreements, Directors’ appointment, tenure, induction and training, Directors’ ability to seek independent advice at Unilever’s expense and details about Board and Management Committees (including the Disclosure Committee).
www.unilever.com/investor-relations/agm-and-corporate-governance/ |
BOARDSBoards
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, culture, performance and long-term success of our business as a whole. The Boards areone-tier boards, the same people are on both Boards and the responsibility of the Directors is collective, taking into account their respective roles as Executive Directors andNon-Executive Directors. The majority of the Directors areNon-Executive Directors who essentially have a supervisory role.role, providing constructive challenges, strategic guidance and specialist advice. In the normal course Unilever has two Executive Directors, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). On 1 January 2019, Alan Jope, was appointed as CEO. He was appointed as an Executive Director at the 2019 AGMs. Consequently, between 1 January 2019 and the AGMs in May 2019 Unilever only had one Executive Director.
A list of our current Directors their roles on the Boards, their dates of appointment, tenure and their other major appointments is set outcan be found on page 3.49.
Annual Report on Form 20-F 2019 | 47 |
The Boards have delegated the operational running of the Unilever Group to the CEO with the exception of the following matters which are reserved for the Boards: structural and constitutional matters, corporate governance, approval of dividends, approval of overall strategy for the Unilever Group, approval of significant transactions or arrangements in relation to mergers, acquisitions, joint ventures and pensions. The CEO is responsible to the Boards in relation to the operational running of the Group and other powers delegated to him by the Boards. The CEO can delegate any of his powers and discretions, and he does so delegate to members of the Unilever Leadership Executive (ULE) (with power to sub-delegate). The ULE is composed of the CEO, CFO and other senior executives who assist the CEO in the discharge of the powers delegated to the CEO by the Boards. Members of the ULE report to the CEO, and the CEO supervises and determines the roles, activities and responsibilities of the ULE. Whilst ULE members (other than the CEO and the CFO) are not part of the Boards’ decision-making process, to provide the Boards with deeper insights, ULE members often attend those parts of the
Corporate Governancecontinued
Board meetings which relate to the operational running of the Group. The ULE currently consists of the CFO, the Category Presidents, the Presidents for Europe and North America, and the Chief Category Research and Development Officer, Chief HR Officer, Chief Legal Officer and Group Secretary, Chief Marketing and Communications Officer and Chief Supply Chain Officer.
The biographies of ULE members are on page 5.
BOARD COMMITTEEScommittees
The Boards have established four Board Committees: the Audit Committee, the Compensation Committee, the Corporate Responsibility Committee and the Nominating and Corporate Governance Committee. The terms of reference of these Committees can be found on our website and the reports of each Committee, including attendance at meetings in 2017,2019, can be found on pages 4154 to 76.77.
www.unilever.com/investor-relations/agm-and-corporate-governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVERBoard meetings
Further details of the roles and responsibilities of the Chairman, Vice-Chairman, CEO and other corporate officers and how our Boards effectively operate as one board, govern themselves and delegate their authorities are set out in the document entitled ‘The Governance of Unilever’, which can be found on our website.
The Governance of Unilever also describes the Foundation Agreements, Directors’ appointment, tenure, induction and training, Directors’ ability to seek independent advice at Unilever’s expense and details about Board and Management Committees (including the Disclosure Committee).
BOARD EFFECTIVENESS
BOARD MEETINGS
A minimum of fiveface-to-face meetings are planned throughout the calendar year to consider important corporate events and actions, for example, the half-year and full-year results announcements ofannouncements; the Unilever Group; the development of and approval of the overall strategy of the Unilever Group;our strategy; oversight of the performance of the business; review of risks and internalthe risk management and control systems;framework; authorisation of major transactions; declaration of dividends; conveningreview of shareholders’ meetings;the financial plan; succession planning; review of the functioning of the Boards and their Committees; culture; workforce engagement; and review of corporate responsibility and sustainability, in particular the Unilever Sustainable Living Plan.responsibility. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In 20172019 the Boards met physically in January, February,March, April, July, October and November. Meetings of the Boards may be held either in London or in Rotterdam or such other locations as the Boards think fit, with one or twooff-site Board meetings a year. The Chairman leads the Boards and is responsible for its overall effectiveness in directing the Unilever Group. The Chairman sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, promotes and promotes effectivefacilitates constructive relationships and open communication betweeneffective contribution of all the Executive andNon-Executive Directors. Directors, and promotes a culture of openess and debate.
ATTENDANCETheNon-Executive Directors usually meet as a group, without the Executive Directors present, when there is aface-to-face Board meeting. In 2019 they met five times. The Chairman, or in his absence the Senior Independent Director/Vice-Chairman, chairs such meetings.
The table showing the attendance of current Directors at Board meetings in 20172019 can be found on page 3.49. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Louise FrescoMary Ma attended fivethree out of thefour Board meetings she was eligible to attend before retiring from the Boards on 27 April 2017.during 2019.
NON-EXECUTIVE DIRECTOR MEETINGS
The Non-Executive Directors meet as a group, without the Executive Directors present, usually four or five times a year to consider relevant items as agreed by them. In 2017 they met six times. The Chairman, or in his absence the Vice-Chairman/Senior Independent Director, chairs such meetings.
BOARD EVALUATIONBoard evaluation
Each year the Boards formally assess their own performance, including with respect to their composition, diversity and how effectively their members work together, with the aim of helping to improve the effectiveness of both the Boards and the Committees. At least once every three years an independent third party facilitates the evaluation. As the last external evaluation was performed in 2017, the Boards agreed to an external evaluation at the end of 2019 rolling over into 2020. In April 2017 JCA Group Limited (JCA),November 2019 No. 4, an independent third-party consultant, facilitated an external Boardsuch evaluation. JCA has no other connection with the Unilever Group. No questionnaires were used in the evaluation this year given questionnaires were completed for the last Board evaluation in November 2016. The evaluation consisted of individual interviews with the Directors by JCA followed by a Board discussions at both the April and July Board meetings ondiscussion in January 2020, covering both the outcome of the evaluation and the proposed actions to enhance the Board’s effectiveness.effectiveness
of the Boards. The Chairman’s Statementstatement on page 2 describes4 decribes the key actions agreed by the Boards following the evaluation exercise.evaluation.
Committees of the Boards evaluate themselves annually under supervision of their respective Chairs taking into account the views of respective Committee members and the Boards. The key actions agreed by each Committee in the 20172019 evaluations can be found in each Committee Report.
APPOINTMENTBoard appointment
In seeking to ensure that NV and PLC have the same Directors, the Articles of Association of NV and PLC contain provisions which are designed to ensure that both NV and PLC shareholders are presented with the same candidates for election as Directors. Anyone being elected as a Director of NV must also be elected as a Director of PLC and vice versa. Therefore, if an individual fails to be elected to both companies he or she will be unable to take his or her place on either Board.
The report of the Nominating and Corporate Governance Committee (NCGC) on pages 4558 and 4659 describes the work of the NCGC in Board appointments and recommendations forre-election. In addition, shareholders are able to nominate Directors. The procedure for shareholders to nominate Directors is contained within the document entitled ‘Appointment procedure for NV and PLC Directors’ which is available on our website. To do so they must put a resolution to both the NV and PLC AGMs in line with local requirements. Directors are appointed by shareholders by a simple majority vote at each AGM.
www.unilever.com/investor-relations/agm-and-corporate-governance/board-and-management-committees/ |
DIRECTOR INDUCTION AND TRAININGBoard induction and training
All new Directors participate in a comprehensive induction programme when they join the Boards. The Chairman ensures that ongoing training is provided for Directors by way of site visits, presentations and circulated updates at (and between) Board and Board Committee meetings on, among other things, Unilever’s business, environmental, social, corporate governance, regulatory developments and investor relations matters. For example, in 20172019 the Directors received presentations on Corporate Ventures, Marketing, ChannelM&A strategy, sustainable packaging, competitive landscape and Customer Development, the Supply Chaincyber security.
Independence and R&D.conflicts
INDEPENDENCE AND CONFLICTS
As the Non-Executive Directors make up the Committees of the Boards, itIt is important that theytheNon-Executive Directors can be considered to be independent. Each year the Boards conduct a thorough review of theNon-Executive Directors’, and their related or connected persons’, relevant relationships referencing the criteria set out in ‘The Governance of Unilever’ which is derived from the relevant best practice guidelines in the Netherlands, UK and US. The Boards currently consider all ourNon-Executive Directors to be independent of Unilever.
We attach special importance to avoiding conflicts of interest between NV and PLC and their respective Directors. The Boards ensure that there are effective procedures in place to avoid conflicts of interest by Board members. If an actual, apparentA Director must without delay report any conflict of interest or potential conflict arises, the materiality of that conflict will be determined by the Group Secretary. If the conflict exceeds any materiality thresholds set from time to time, the Boards will be asked to consider the conflict and, if determined to be appropriate, authorisation of the conflict will be given by the Boardsinterest to the relevant Director. The authorisation includes conditions relating to keeping Unilever information confidentialChairman and to the Director’s exclusion from receivingother Directors, or, in case any conflict of interest or potential conflict of interest of the Chairman, to the Senior Independent Director/
Vice-Chairman and discussingto the other Directors. The Director in question must provide all relevant information at Board meetings. Conflicts are reviewed annually by the Boards. In between those reviews Directors have a duty to inform the Boards, so that the Boards can decide whether a reported (potential) conflict of anyinterest of a Director qualifies as a conflict of interest within the meaning of the relevant changes to their situation.laws. A Director may not vote on, or be countedtake part in a quorum in relation to, any resolutionthe decision taking process of the Boards in respect of any situation in which he or she has a conflict of interest. The procedures that Unilever has put in place to deal with conflicts of interest operate effectively.
Unilever recognises the benefit to the individual and the Unilever Group of senior executives acting as directors of other companies but, to ensure outside directorships of our Executive Directors do not involve an excessive commitment or conflict of interest, the number of outside directorships of listed companies is generally limited to one per Executive Director and approval is required from the Chairman.Chairman and in case of the Chairman, from the senior Independent Director.
INDEMNIFICATIONEngagement with employees
The termsBoards assessed various options how to best organise the engagement with employees. Considering Unilever’s global footprint and extent of NV Directors’ indemnification are providedoperations, the Boards decided to share the responsibility for workforce engagement among allNon-Executive Directors as a collective point of contact as being the most effective option. We therefore developed a number of initiatives and events to ensure that theNon-Executive Directors can engage with the workforce and get a sense of employee sentiment at all levels, including throughface-to-face meetings. To build further on this, we intend that ourNon-Executive Directors will continue to hold regularface-to-face meetings with the workforce and we will incorporate additional engagement sessions alongside regular Board meetings and Board visits to Unilever sites. These will include the chance to meet and hear from cohorts of employees of all levels and have an open discussion on issues important to our employees.
In 2019,Non-Executive Directors attended fourface-to-face workforce engagement events with a diverse range of the workforce from factory staff and new joiners through to head office staff and people with 25+ years in NV’s Articlesthe company. This method of Association.engagement allowed for discussions, covering a range of topics including: expectations for lifelong learning, the future of work, the USLP, diversity and inclusion, entrepreneurship, pay points, agility and employability. The powerevents have been a success with positive feedback from employees andNon-Executive Directors that attended. OurNon-Executive Directors were more visible to indemnify PLCthe workforce and it encouraged greater engagement, sharing of views and feedback from employees. In addition, through engaging with a broad range of employees, theNon-Executive Directors received a new perspective on the company and our operations. This new perspective has been taken into consideration in their decision making, for example when discussing and agreeing to Unilever’s Future of Work Framework. We therefore consider that sharing responsibility for engagement with the workforce among allNon-Executive Directors is provided for in PLC’s Articles of Association and deeds of indemnity have been agreed with all PLC Directors. Third party directors’ and officers’ liability insurance was in place for all Unilever Directors throughout 2017 and is currently in force.
In addition, PLC provides indemnities (including, where applicable, a qualifying pension scheme indemnity provision) to the Directors of three subsidiaries each of which acts as trustee of a Unilever UK pension fund. Appropriate trustee liability insurance is also in place.an effective arrangement.
48 | Annual Report on Form 20-F 2019 |
Governance Report |
Overview of Executive &Non-Executive Directors
Nils Andersen Chairman
Previous experience: A.P. Moller – Maersk A/S (Group CEO); Carlsberg A/S and Carlsberg Breweries A/S (CEO); European Round Table of Industrialists (Vice-Chairman); Unifeeder S/A (Chairman).
Current external appointments:AKZO Nobel N.V. (Chairman); Faerch Plast (Chairman); Worldwide Flight Services (Chairman). Announced to step down from the Boards of BP Plc and Salling Group A/S in March 2020.
Youngme Moon | Alan Jope | Graeme Pitkethly | Laura Cha | |||
Vice-Chairman/Senior Independent Director | CEO | CFO | ||||
Previous experience: Harvard Business School (Chairman and Senior Associate Dean for the MBA Program); Massachusetts Institute of Technology (Professor); Avid Technology (NED); Rakuten Inc (NED). Current external appointments: Mastercard INC (Board Member); Sweetgreen Inc (Board Member); JAND Inc (Board Member); Harvard Business School (Professor). | Nationality BritishAge 55, Male. Appointed CEO: January 2019. Appointed Director: May 2019. Attended 6/6 planned Board Meetings and 2/2 ad hoc Board Meetings. Previous experience: Beauty and Personal Care Division (President); Unilever Russia, Africa and Middle East (President); Unilever North Asia (President); SCC and Dressings (Global Category Leader); Home and Personal Care North America (President). Current external appointments: Generation Unlimited (Board Member). | Nationality BritishAge 53, Male. Appointed CFO: October 2015. Appointed Director: April 2016. Attended 6/6 planned Board Meetings and 2/2 ad hoc Board Meetings. Previous experience: Unilever UK and Ireland (EVP and General Manager); Finance Global Markets (EVP); Group Treasurer; Head of M&A; FLAG Telecom (VP Corporate Development); PwC. Current external appointments: Pearson Plc (NED); Financial Stability Board Task Force on Climate Related Financial Disclosure (Vice Chair); The 100 Group Main Committee. | Previous experience: Securities and Futures Commission, Hong Kong (Deputy Chairman); China Securities Regulatory Commission (Vice Chairman); China Telecom Corporation Limited (NED); 12th National People’s Congress of China (Hong Kong Delegate). Current external appointments: HSBC Holdings plc (NED); Hong Kong Exchanges and Clearing Ltd(Non-Executive Chairman); Foundation Asset Management Sweden AB (Senior international adviser); Executive Council of the Hong Kong Special Administrative Region(Non-official member). | |||
Vittorio Colao | Marijn Dekkers | Judith Hartmann | Andrea Jung | |||
Previous experience: Vodafone Group plc (CEO); RCS MediaGroup SpA (CEO); McKinsey & Company (Partner); Finmeccanica Group Services SpA (renamed to Leonardo SpA) (NED); RAS Insurance SpA (merged with Allianz AG) (NED). Current external appointments: Verizon (NED); Bocconi University (Executive Board member); Oxford Martin School (Advisor); General Atlantic (Senior Advisor). | Previous experience: Bayer AG (CEO); Thermo Fisher Scientific Inc. (CEO). Current external appointments: Novalis LifeSciences LLC (Founder and Chairman); Quanterix Corporation (Director); Georgetown University (member Board of Directors); Foundation for the National Institutes of Health (Director); Cerevel Therapeutics (NED); Ginko Bioworks (Chairman). | Previous experience: General Electric (various roles); Bertelsmann SE & Co. KGaA (CFO); RTL Group SA (NED); Penguin Random House LLC (NED). Current external appointments: ENGIE Group (Deputy CEO); Suez (NED). | Previous experience: Avon Products Inc (CEO); General Electric (Board Member); Daimler AG (Board Member). Current external appointments: Grameen America Inc (President and CEO); Apple Inc (NED); Wayfair Inc (NED). | |||
Susan Kilsby | Strive Masiyiwa | John Rishton | Feike Sijbesma | |||
Previous experience: L’Occitane International (NED); Keurig Green Mountain (NED); Coca-Cola HBC AG (NED); Goldman Sachs International (NED); Shire Plc (Chair); Mergers and Acquisitions, EMEA - Credit Suisse (Chair). Current external appointments: Diageo Plc (Senior Independent Director); Fortune Brands Home & Security Inc (NED); BHP Plc (NED). | Previous experience: Africa Against Ebola Solidarity Trust(Co-Founder and Chairman); Grow Africa(Co-Chairman); Nutrition International (formerly known as Micronutrient Initiative) (Chairman); Rockefeller Foundation (Trustee). Current external appointments: Econet Group (Founder and Group Executive Chairman); International Advisory Board of Bank of America (Board member); Stanford University Advisory Board (Board member); National Geographic Society (Board member). | Previous experience: Rolls-Royce Holdings plc (CEO); Koninklijke Ahold NV (merged to Koninklijke Ahold Delhaize NV) (CEO, President and CFO); ICA (now ICA Gruppen AB) (NED). Current external appointments: Informa Plc (NED); Serco Group Plc (NED); Associated British Ports Holdings Ltd. (NED); Majid al Futtaim Properties LLC (Board Member). | Previous experience: Supervisory Board of DSM Nederland B.V. (Chairman); Utrecht University (Supervisory Director); Stichting Dutch Cancer Institute/ Antoni van Leeuwenhoek Hospital NKI/AVL) (Supervisory Director). Current external appointments: Koninklijke DSM NV (CEO and Chairman of the Managing Board); De Nederlandsche Bank NV (Member of the Supervisory Board); High Level Leadership Forum on Competitiveness and Carbon Pricing (Chair); Champion of the Carbon Pricing Leadership Coalition(Co-Chair); Trustees of the World Economic Forum (Board member); Climate Leader for the World Bank Group; Board of the Global Center on Adaptation(Co-Chair). | |||
Non-Executive Directors
Nils Andersen | Laura Cha | Vittorio Colao | Marijn Dekkers | Judith Hartmann | Andrea Jung | Susan Kilsby | Strive Masiyiwa | Youngme Moon | John Rishton | Feike Sijbesma | ||||||||||||
Age | 61 | 70 | 58 | 62 | 50 | 60 | 61 | 59 | 55 | 62 | 60 | |||||||||||
Gender | Male | Female | Male | Male | Female | Female | Female | Male | Female | Male | Male | |||||||||||
Nationality | Danish | Chinese | Italian | Dutch / American | Austrian | American / Canadian | American / British | Zimbabwean | American | British | Dutch | |||||||||||
Appointment date | April 2015 | May 2013 | July 2015 | April 2016 | April 2015 | May 2018 | August 2019 | April 2016 | April 2016 | May 2013 | November 2014 | |||||||||||
Committee membership* | CC, NCGC (Chairman) | NCGC | CC (Chairman) | CC, NCGC | AC | CC | AC | CRC (Chairman) | CRC | AC (Chairman) | CRC, NCGC | |||||||||||
Leadership of complex global entities | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Broad Board experience | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||
Geo-political exposure | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Financial expertise | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
FMCG/consumer insights | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Emerging markets experience | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Digital insights | ✓ | ✓ | ||||||||||||||||||||
Marketing and sales expertise | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||||
Science, technology and innovation expertise | ✓ | ✓ | ✓ | ✓ | ||||||||||||||||||
CSR experience | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||||||
HR and remuneration in international firms | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||
Attendance at planned Board Meetings | 6/6 | 5/6 | 6/6 | 6/6 | 6/6 | 5/6 | 2/2 | 6/6 | 6/6 | 6/6 | 6/6 | |||||||||||
Attendance at ad hoc Board Meetings | 2/2 | 1/2 | 2/2 | 2/2 | 2/2 | 2/2 | 2/2 | 2/2 | 2/2 | 1/2 | 1/2 | |||||||||||
Tenure as at 2019 AGMs | 4 | 6 | 4 | 3 | 4 | 1 | 0 | 3 | 3 | 6 | 5 |
* | AC refers to the Audit Committee; CC refers to the Compensation Committee; CRC refers to the Corporate Responsibility Committee; and NCGC refers to the Nominating and Corporate Governance Committee. |
Annual Report on Form 20-F | 49 |
Corporate Governancecontinued
Unilever Leadership Executive (ULE)
The Boards have delegated the operational running of the Unilever Group to the CEO with the exception of the following matters which are reserved for the Boards: structural and constitutional matters, corporate governance, approval of dividends, approval and monitoring of overall strategy for the Unilever Group, approval of significant transactions or arrangements in relation to mergers, acquisitions, joint ventures and pensions. The CEO is responsible to the Boards in relation to the operational running of the Group and other powers delegated to him by the Boards. The CEO can delegate any of his powers and discretions, and he does so delegate to members of the Unilever Leadership Executive (ULE) (with power tosub-delegate). The ULE is composed of the CEO, CFO and other senior executives who assist the CEO in the discharge of the
powers delegated to the CEO by the Boards. Members of the ULE report to the CEO, and the CEO supervises and determines the roles, activities and responsibilities of the ULE. While ULE members (other than the CEO and the CFO) are not part of the Boards’ decision-making process, to provide the Boards with deeper insights, ULE members often attend those parts of the Board meetings which relate to the operational running of the Group. The ULE currently consists of the CEO, CFO, President Foods & Refreshment, President Beauty & Personal Care, President Home Care, President South Asia and Chair and Managing Director Hindustan Unilever, President North America, the Chief Research and Development Officer, Chief HR Officer, Chief Operating Officer, Chief Digital & Marketing Officer, Chief Legal Officer & Group Secretary and Chief Supply Chain Officer.
For Alan Jope and Graeme Pitkethly see previous page
Conny Braams | Marc Engel | Hanneke Faber | Fabian Garcia | |||
Chief Digital & Marketing Officer | Chief Supply Chain Officer | President, Foods & Refreshment | President, North America | |||
Nationality DutchAge 54, Female | Nationality DutchAge 53, Male | Nationality DutchAge 50, Female | Nationality AmericanAge 60, Male | |||
Appointed to ULE January 2020 | Appointed to ULE January 2016 | Appointed to ULE January 2018 | Appointed to ULE January 2020 | |||
Joined Unilever 1990 | Joined Unilever 1990 | Joined Unilever 2018 | Joined Unilever 2019 | |||
Previous Unilever posts include: | Previous Unilever posts include: | Previous posts include: | Previous posts include: | |||
Unilever Middle Europe (EVP); Unilever Benelux (Chair and EVP); Home Care Europe (EVP); Unilever FoodSolutions Asia, Africa and Middle East (EVP); various Unilever marketing and general management roles. Current external appointments: Kröller-Müller Museum (Advisory Board member); Rotterdam School of Management (Advisory Board member); Netherlands Confederation of IndustryVNO-NCW (Vice-Chair); FNLI (Vice-Chair). | Unilever East Africa and Emerging Markets (EVP); Chief Procurement Officer; Supply Chain, Spreads, Dressings and Olive Oil Europe (VP); Ice Cream Brazil (Managing Director); Ice Cream Brazil (VP); Corporate Strategy Group; Birds Eye Wall’s, Unilever UK (Operations Manager). Current external appointments: A. P. Møller Mærsk (Supervisory Board member). | Royal Ahold Delhaize (CEIO & EC member); Royal Ahold (CCO & EC member); P&G (VP & GM). Previous Unilever posts include: Europe (President). Current external appointments: Bayer AG (Supervisory Board member); Food Drink Europe (Board member); Leading Executives Advancing Diversity (LEAD) (Advisory Board member); Pepsi/ Lipton JV (Board member). | Revlon (President and CEO); Colgate Palmolive (COO; President of the Asia/ Pacific Division, EVP Latin America); P&G (President of Asia Pacific, General Manager of Venezuela). Current external appointments: Council of Foreign Relations in the US (member). | |||
Sunny Jain | Sanjiv Mehta | Leena Nair | Nitin Paranjpe | |||
President, Beauty & Personal Care | President, Unilever, South Asia and Chair and Managing Director, Hindustan Unilever | Chief HR Officer | Chief Operating Officer | |||
Nationality CanadianAge 44, Male | Nationality IndianAge 59, Male | Nationality IndianAge 50, Female | Nationality IndianAge 56, Male | |||
Appointed to ULE June 2019 | Appointed to ULE May 2019 | Appointed to ULE March 2016 | Appointed to ULE October 2013 | |||
Joined Unilever 2019 | Joined Unilever 1992 | Joined Unilever 1992 | Joined Unilever 1987 | |||
Previous posts include: | Previous Unilever posts include: | Previous Unilever posts include: | Previous Unilever posts include: | |||
Amazon.com Inc (Head of Core Consumables/FMCG Retail; VP Consumables/FMCG Innovation); P&G US and P&G Canada (various roles in New Business Creation, Marketing, Sales, and Information Technology). Current external appointments: GS1 (Board member). | Unilever North Africa and Middle East (Chair and Chief Executive Officer); Unilever Philippines Inc. (Chair and Chief Executive Officer); Unilever Bangladesh Limited (Chair and Managing Director). Current external appointments: Board of Indian School of Business (Director); Federation of Indian Chambers of Commerce and Industry (Vice-President); Breach Candy Hospital Trust (Member); South Asia Advisory Board of Harvard Business School (Member); Xynteo’s ‘India 2022’ (Chair); Advisory Network to the High Level Panel for a Sustainable Ocean Economy(Co-Chair). | HR Leadership and Organisational Development and Global Head of Diversity (SVP); Hindustan Unilever Limited (Executive Director HR); Hindustan Lever (various roles). Current external appointments: BT Plc (NED) | Foods and Refreshment (President) Home Care (President); Unilever South Asia (EVP) and Hindustan Unilever Limited (CEO); Home and Personal Care India (EVP); Home Care India (VP); senior positions in Laundry and Household Care. | |||
Richard Slater | Ritva Sotamaa | Peter Ter Kulve | ||||
Chief R&D Officer | Chief Legal Officer & Group Secretary | President, Home Care | ||||
Nationality BritishAge 42, Male | Nationality FinnishAge 56, Female | Nationality DutchAge 55, Male | ||||
Appointed to ULE April 2019 | Appointed to ULE February 2013 | Appointed to ULE May 2019 | ||||
Joined Unilever 2019 | Joined Unilever 2013 | Joined Unilever 1988 | ||||
Previous posts include: | Previous posts include: | Previous Unilever posts include: | ||||
GSK (Head of R&D, Consumer Healthcare); Reckitt Benckiser (Head of R&D, Consumer Healthcare); Reckitt Benckiser (Global Group Director / VP R&D Personal Care; Global Director R&D Aircare, Analgesics and New Brands); Boots Healthcare (various roles). | Siemens AG – Siemens Healthcare (GC); General Electric Company – GE Healthcare (various positions including GE Healthcare Systems (GC)); Instrumentarium Corporation (GC). Current external appointments: Fiskars Corporation (NED). | Unilever South East Asia & Australasia (President) and Chief Digital Transformation & Growth Officer; EVP Corporate Transformation; Unilever Benelux (Chair and EVP); Unilever Ice Cream (Global Head & EVP); various Brand and Channel Management roles. | ||||
50 | Annual Report on Form 20-F 2019 |
Governance Report |
CORPORATE GOVERNANCECONTINUED
OUR SHARES
NV SHARESOur shares
SHARE CAPITALNV shares
Share capital
NV’s issued share capital on 31 December 20172019 was made up of:
and each carrying one vote, representing 99.56% of the issued share capital; and
* As at 31 December 2019 8,027,879 ordinary shares were held to satisfy obligations under employee compensation programmes. These shares and the special shares are not voted on.
€62,065,550 split into two classes (6% and 7%) of cumulative preference shares*.
LISTINGSListings
NV has listings of ordinary shares 6% and 7% cumulative preference shares and depositary receipts for such ordinary shares and 7% cumulative preference shares(UNA) listed on Euronext Amsterdam and, a listing ofas US New York Registry Shares* (UN) on the New York Stock Exchange.
* One New York Registry Share represents one NV ordinary share with a nominal value of€0.16. |
VOTING RIGHTS
NV shareholders can cast one vote for each€0.16 nominal capital they holdShare issues and can vote in person or by proxy. The voting rights attached to NV’s outstandingpurchase of shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 81.30 | |||||
2,400 special shares | 6,428,550 | 0.30 | ||||||
123,382 6% cumulative preference shares | 330,485,595 | (b) | 15.67 | |||||
21,438 7% cumulative preference shares | 57,424,094 | (c) | 2.72 |
As at 31 December 2017:
The special shares and the shares under (a), (b) and (c) are not voted on.
SHARE ISSUES AND BUY BACKS
NV may issue shares not yet issued and grant rights to subscribe for shares only pursuant to a resolution of the General Meeting or of another corporate body designated for such purpose by a resolution of the General Meeting. At the NV AGM held on 26 April 20171 May 2019 the Board of NV was designated as the corporate body authorised to:
These authorities expire on the earlier of the conclusion of the 2018 NVNV’s 2020 AGM or the close of business onand 30 June 2018 (the last date by which NV must hold an AGM in 2018). Such2020. Renewal of these authorities are renewed annually. However, it is intended to align the NV and PLC authorities as from the 2018 AGMs. At the 2018 NV AGM, NV will therefore seek shareholder authority to issue new ordinary shares up to 33% of NV’s issued ordinary share capital and to disapply pre-emption rights up to 5% of NV’s issued share capital and an additional 5% authority only in connection with an acquisition or specified capital investment.sought each year.
During 20172019 companies within the Unilever Group purchased 2,260,0001,787,000 NV ordinary shares and 891,000 New York Registry Shares, together representing 0.13%0.18% of the issued ordinary share capital, for€111,205,702.6 and 493,000 NV New York Registry Shares, representing 0.03% of the issued ordinary share capital,
for $26,420,256.143 million. These purchases were made to facilitate grants made in connection with Unilever’s employee compensation programmes. For further details see note 4C to the consolidated accounts on page 103.
In addition, NV conducted a share buy-back programme during 2017 with an aggregate market value of approximately€2.5 billion bought back in the form of 50,250,099 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
By means ofFollowing a public offer Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired approximately 99% of all outstanding 6% cumulative preference shares and 7% cumulative preference shares during 2017. This represents an important stepa subsequent squeeze out procedure in simplifying the capital structure. The offer valued all of the issued 6% and 7% cumulative preference shares that were not held in treasury by NV at€ 448 million.
Since the public offer was declared unconditional, a number of private agreements have been completed regarding the sale and transfer of2018, the 6% and 7% cumulative preference shares to UCHN atwere cancelled on 6 February 2019.
On 27 June 2019, NV cancelled 170,000,000 ordinary shares (at the time still issued as depository receipts, see further explanation below). On 27 November 2019 another 84,012,896 ordinary shares were cancelled as a price equal to the public offer price. UCHN has also initiated statutory buy-out proceedings to acquire the remaining issued 6% and 7% cumulative preference shares. In addition,result of which 1,460,714,804 ordinary shares remained in an announcement on 28 November 2017, Unilever stated the Boards’ intention to terminate the 6% and 7% cumulative preferenceissue.
NV special ordinary shares upon any unification.
Further information on these purchases can be found in note 4C to the consolidated accounts on pages 103 and 104.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisionsholders of NV’s special ordinary shares numbered 1 – 2,400 inclusive have rights within the NVNV’s Articles of Association containingrelating to any changes in the rules forof appointing NV DirectorsDirectors. These rules cannot be changed without the permission of the holders of thethese special ordinary shares numbered 1 – 2,400 inclusive. These NV special ordinary shares may only be transferred to one or more other holders of such shares. The joint holders of these shares are N.V. Elma and United Holdings Limited, which are subsidiaries of NV and PLC respectively. The Boards of N.V. Elma and United Holdings Limited comprise three Directors of the Unilever Boards.
TRUST OFFICENV bearer shares and (bearer) share certificates
All NV shares are issued in registered form. A very limited number of shareholders have not yet handed in their (bearer) share certificates. As of 1 January 2021 (i) NV will acquire these certificates by operation of law for no consideration and (ii) NV will be registered as shareholder of the relevant shares. Holders of such certificates can exchange their certificates for NV shares until 1 January 2026.
Trust Office
On 26 June 2019 the meeting of depository receipt holders resolved to terminate the depositary receipt structure with effect from 28 June 2019. As a result, holders of depository receipts automatically received one NV ordinary share for every depository receipt they owned. In addition, the trading line of depositary receipts on Euronext Amsterdam (ISIN NL0000009355) was terminated and all trading continued in ordinary shares (ISIN NL0000388619). The ticker symbol of the ordinary shares was changed to UNA.
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) isshall not be dissolved until 27 June 2021 as a trust office with a board independentlimited number of Unilever. As part of its corporate objects, the Trust Office issues depositary receipts in exchange for the NV ordinary shares and NV 7% cumulative preference shares. These depositary receipts are listed on Euronext Amsterdam, as areoutstanding in respect of which the NV ordinary and 7% cumulative preference shares themselves.
Holders of depositary receipts can under all circumstances exchange their depositary receipts forbearer certificates issued by N.V. Nederlandsch Administratie- en Trustkantoor, the underlying shares (and vice versa) and are entitled to dividends and all economic benefits on the underlying shares held by the Trust Office. There are no limitations on the holders’ voting rights, they can attend all General Meetings of NV, either personally or by proxy, and have the right to speak. The Trust Office only votes shares that are not represented at a General Meeting. The Trust Office votes in such a way as it deems to be in the long-term interests of the holders of the depositary receipts. This voting policy is laid down in the Conditions of Administration that apply to the depositary receipts.
The Trust Office’s shareholding fluctuates daily. Its holdings on 31 December 2017 were 1,320,059,035 NV ordinary shares (76.98%) and 116 NV 7% cumulative preference shares (0.54%). At the 2017 NV AGM, the Trust Office represented 32.9% of all votes present at the meeting.
The current members of the board at the Trust Office are Mr J H Schraven (Chairman), Mr P M L Frentrop, Mr A Nühn and Ms C M S Smits-Nusteling. The Trust Office reports periodically on its activities. Further information on the Trust Office, including its Articles of Association, Conditions of Administration and Voting Policy, can be found on its website.
Unilever considers the arrangementspredecessor of the Trust Office, tohave not been handed in and have not been exchanged for ordinary shares.
Thereafter, it is expected that the Trust Office shall sell the shares that have not been exchanged and the proceeds will be appropriate andgiven in the interests of NV and its shareholders given the size of the voting rights attachedconsignment to the financing preference shares andDutch Ministry of Finance. Holders of bearer certificates have thereafter no claim whatsoever towards the relatively low attendance of holders of ordinary shares at the General Meetings of NV.Trust Office.
www.administratiekantoor-unilever.nl/eng/home |
PLC shares
PLC SHARES
SHARE CAPITALShare capital
PLC’s issued share capital on 31 December 20172019 was made up of:
• | £ |
LISTINGS* As at 31 December 2019 4,391,130 shares were held by NV group companies to satisfy obligations under employee compensation programmes. These shares and the deferred stock are not voted on.
Listings
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.exchange.
*One American Depository Receipt represents one |
VOTING RIGHTS
PLC shareholders can cast one vote for each 3 1⁄9p nominal capital they hold, and can vote in person or by proxy. This means that shareholders can cast one vote for each PLC ordinary share or PLC American Depositary Receiptwith a nominal value of Shares. Therefore, the total number31/9p.
Share issues and purchase of voting rights attached to PLC’s outstanding shares is as follows:
Total number of votes | % of issued capital | |||||||
1,310,156,361 ordinary shares | 1,310,156,361 | (a) | 99.76 | |||||
£100,000 deferred stock | 3,214,285 | 0.24 |
As at 31 December 2017:
The PLC Board may, subject to the UK Companies Act 2006 and the passing of the appropriate resolutions at a General Meeting, issue shares within the limits prescribed within the resolutions. At the 20172019 PLC AGM held on 27 April 20172 May 2019 the PLC Directors were authorised to to:
In addition, at PLC’s 2017 AGM the PLC Board was authorised to investment; and
These authorities expire on the earlier of the conclusion of PLC’s 20182020 AGM and 30 June 2018. These2020. Renewal of these authorities are renewed annually and authority will beis sought at PLC’s 2018 AGM.each year.
During 20172019 companies within the Unilever Group purchased 1,667,000995,000 PLC ordinary shares and 81,000 American Depository Shares, representing 0.13%0.09% of the issued share capital, for £68,225,066.€58 million. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found inFor further details see note 4C to the consolidated accounts on pages 103 and 104. In addition,page 103.
On 10 April 2019, Unilever PLC conductedcancelled 18,660,634 ordinary shares of 31/9p each held in treasury, representing 1.57% of the issued share capital, as a share buy-back programme during 2017 with an aggregate market valueresult of approximately £2.2 billion bought backwhich 1,168,530,650 ordinary shares remained in issue.
PLC deferred stock
To ensure unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the formrules for appointing PLC Directors. These rules cannot be changed without the permission of 51,692,284 PLC ordinary shares.
PLC DEFERRED STOCK
the holders of this deferred stock. The joint holders of the PLC deferred stock are N.V. Elma and United Holdings Limited, which are subsidiaries of NV and PLC respectively. The Boards of N.V. Elma and United Holdings Limited comprise three Directors of the Unilever Boards. The provisions within the PLC Articles of Association containing the rules for appointing PLC Directors cannot be changed without the permission of the holders of PLC’s deferred stock.
Annual Report on Form 20-F 2019 | 51 |
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF
Corporate Governancecontinued
Our shareholders
Significant shareholders of NV
As far as Unilever is aware and based on the notifications of substantial holdings disclosed in the AFM register, the only holders of more than 3% of, or 3% of voting rights attributable to, NV’s share capital on (‘Disclosable Interests’) on 31 December 2017 (apart from the Foundation Unilever N.V. Trust Office, see page 36) are2019 were BlackRock, Inc. (BlackRock)with a shareholding interest of 4.92% and UCHN, see page 36, as indicated in the table below.a voting right interest of 6.34% and Wellington Management Group LLP with a voting right interest of 4.03%.
Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares
| 66,947,018 | 3.90 | |||||||
UCHN | 6% cumulative preference shares
| 122,985 | 99.68 | |||||||
UCHN | 7% cumulative preference shares
| 21,320 | 99.44 |
As far as Unilever is aware, newno other Disclosable Interests have been notified to the AFM between 1 January 20182020 and 2120 February 20182020 (the latest practicable date for inclusion in this report)., other than Blackrock that notified a shareholding interest of 4.93% and a voting right interest of 6.42% as at 19 February 2020. Between 1 January 20152017 and 2120 February 2018,2020, BlackRock, Wellington, Norges Bank, The NV Trust Office, NN Group N.V. (NN) and, ASR Nederland N.V. (ASR)and Unilever Corporate Holdings Nederland B.V., have held more than 3% in the share capital of NV. During 2017 Unilever Corporate Holdings Nederland B.V. acquired from NN and ASR all
Significant shareholders of their 6% and 7% cumulative preference shares.
SIGNIFICANT SHAREHOLDERS OF PLC
As far as Unilever is aware, the only holders of more than 3% of, or 3% of voting rights attributable to, PLC’s ordinary share capital (‘Disclosable Interests’) on 31 December 2017 (apart from shares held in treasury by PLC, see page 37), are2019, were BlackRock and the Leverhulme Trust with a shareholding and voting interest of 6.73% and 4.02% respectively.
As far as indicated in the table below.
Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 84,013,193 | 6.8 | |||||||
The Leverhulme Trust | ordinary shares | 68,531,182 | 5.6 |
No disclosable changes in interests in the share capital of PLCUnilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 20182020 and 2120 February 20182020 (the latest practicable date for inclusion in this report). Between 1 January 20152017 and 2120 February 2018,2020, (i) BlackRock, and (ii) the aggregated holdings of the trustees of the Leverhulme Trust and the Leverhulme Trade Charities Trust, have held more than 3% of, or 3% of voting rights attributable to, PLC’s ordinary shares.
SHAREHOLDER ENGAGEMENTShareholder engagement
Unilever valuesWe value open constructive and effective communication with our shareholders. Our shareholders can raise issues directly with the Chairman and, if appropriate, the Vice-Chairman and Senior Independent Director.
The CFO has lead responsibility for investor relations,shareholder engagement, with the active involvement of the CEO. They areCEO and supported by ourthe Investor Relations department which organises presentations for analysts and investors. These and other materials (e.g. an Introduction to Unilever and AGM materials) are generally made available on our website.
CORPORATE GOVERNANCECONTINUEDdepartment.
Principal shareholders: the Executive Directors’ investor relations programme continuedIn 2019 meetings were held with institutional shareholders in 2017 with meetings in eleven major cities in Europe, North America and Asia. In all, they met more than 100 investors during these roadshows. In addition, our Chairman met investors in Europe and North America. As part of the strategic review of options to accelerate sustainable value creation, we sought feedback from our Top 50 shareholders and other investors.globally. The feedback was shared with, and discussed by, the Boards.
Quarterly announcements: briefings on quarterly results are given via teleconference and are accessible by telephone or via our website.
Annual investor seminar: this annual event was held at our Englewood Cliffs offices in the US in November. It focused on our Connected 4 Growth programme. The event was attended by the Chairman, CEO, CFO and other senior management. The slides shown and an audio recording of the presentations were made available and can be accessed on our website. This allows those investors not attending in person to access the information provided at the event.
Investor conferences: the Executive Directors and members of the Investor Relations team also meet a large number of investors at theattended industry conferences they attend. In 2017 the conferences that were attended by Unilever representatives included broker sponsored conferences in London, Paris, Stockholm, Boston and New York, TorontoYork.
We hosted an investor seminar in November at Englewood Cliffs, our North American headquarters. Webcast live, the event enabled investors to engage with the Chairman, CEO, CFO, COO and Singapore.other members of senior management, several of whom were new to their roles in the year.
The Chair of the Compensation Committee extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
Feedback from shareholders: weOn an ongoing basis, the Boards are briefed on investor reactions to the Unilever Group’s quarterly results announcements and on any issues raised by shareholders that are relevant to their responsibilities.
We maintain a frequent dialogue with our principal institutional shareholders and regularly collect feedback. We use this feedback to help shape our investor programme and future shareholder communications. Private shareholders are encouraged to give feedback via shareholder.services@unilever.com. Theshareholder. services@unilever.com. Our shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/ Vice-Chairman (the SID), and the Chairman, Executive Directors and Chairs of the Committees are also generally available to answer questions from the shareholders at the AGMs each year.
Board awareness: the Boards are briefed More information on investor reactions to the Unilever Group’s quarterly results announcements and are briefedshareholder engagement can be found on any issues raised by shareholders that are relevant to their responsibilities.page 13.
www.unilever.com/investor-relations/ |
GENERAL MEETINGSGeneral meetings
Both NV and PLC hold an AGM each year. At the AGMs the Chairman gives his thoughts on governance aspects of the preceding year and the CEO gives a detailed review of the performance of the Unilever Group over the last year. Shareholders are encouraged to attend the relevant meeting and to ask questions at or in advance of the meeting. Indeed, the question and answer session forms an important part of each meeting. The external auditors are welcomed to the AGMs and are entitled to address the meetings.
Provision 4.1.8 of the Corporate Governance Code in the Netherlands (Dutch Code) and Code Provision E.2.3 of the UK Corporate Governance Code (UK Code) require all Directors to attend both the NV and PLC AGMs. As questions asked at our AGMs tend to focus on business related matters, governance and the remit of our Board Committees, the Chairman, SID, CEO, CFO and the Chairs of our four Committees of the Board attend both our AGMs and the remaining members of the Board attend at least one AGM.
The 20172019 AGMs were held in Rotterdam and LondonLeatherhead in AprilMay and the topics raised by shareholders included: Acquisition policy, progress of the Unilever Sustainable Living Plan, the Baking, Cookinge-commerce, mergers & acquisitions, sustainability, Simplification, remuneration, total shareholder return, Brexit and Spreads business, tax transparency, the NV cumulative preference shares, remuneration policy, Brexit, innovation and risk assessment.data protection.
Shareholders of NV may propose resolutions if they individually or together hold at least 1% of NV’s issued capital in the form of shares or depositary receipts issued for NV shares.capital. Shareholders who together represent at least 10% of the issued capital of NV can, under certain circumstances, also requisition the District Court to allow them to convene an Extraordinary General Meeting to deal with specific resolutions.
Shareholders of PLC may propose resolutions if they individually or together hold shares representing at least 5% of the total voting rights of PLC, or 100 shareholders who hold on average £100 each in nominal value of PLC share capital can require PLC to propose a resolution at a General Meeting. PLC shareholders holding in aggregate 5% of the issued PLC ordinary shares are able to convene a General Meeting of PLC.
Information on the 20182020 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2018.2020.
REQUIRED MAJORITIESRequired majorities
Resolutions are usually adopted at NV and PLC General Meetings by an absolute majority of votes cast, unless there are other requirements under the applicable laws or NV’s or PLC’s Articles of Association. For example, there are special requirements for resolutions relating to the alteration of the Articles of Association, the liquidation of NV or PLC and the alteration of the Equalisation Agreement.
A proposal to alter the Articles of Association of NV can only be made by the NV Board. A proposal to alter the Articles of Association of PLC can be made either by the PLC Board or by requisition of shareholders in accordance with the UK Companies Act 2006. Unless expressly specified to the contrary in PLC’s Articles of Association, PLC’s Articles of Association may be amended by a special resolution. Proposals to alter the provisions in the Articles of Association of NV and PLC respectively relating to the unity of management require the prior approval of meetings of the holders of the NV special ordinary shares and the PLC deferred stock. The Articles of Association of both NV and PLC can be found on our website.
www.unilever.com/investor-relations/agm-and-corporate-governance/legal-structure-and-foundation-agreements/ |
RIGHT TO HOLD SHARESRight to hold and transfer shares
Unilever’s constitutional documents place no limitations on the right to hold or transfer NV and PLC ordinary shares. There are no limitations on the right to hold or exercise voting rights on the ordinary shares of NV and PLC imposed by Dutch or English law.
Annual Report on Form 20-F |
Governance Report |
CORPORATE GOVERNANCE COMPLIANCE
GENERALCorporate governance compliance
We conduct our operations in accordance with internationally accepted principles of good governance and best practice, whilstwhile ensuring compliance with the corporate governance requirements applicable in the countries in which we operate. Unilever is subject to corporate governance requirements (legislation, codes and/or standards) in the Netherlands, the UK and the US and in this section we report on our compliance against these.
MATERIAL CONTRACTSThe Netherlands
Under the European Takeover Directive as implemented in the Netherlands and the UK, the UK Companies Act 2006 and rules of the US Securities and Exchange Commission, Unilever is required to provide information on contracts and other arrangements essential or material to the business of the Unilever Group. Other than the Foundation Agreements referred to on page 34, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
During 2017, the new Dutch Code came into effect in the Netherlands. The Dutch Code is available on the Monitoring Committee Corporate Governance Code’s website.In 2019, NV compliescomplied with almost all the principles and best practice provisions of the Dutch Code, with the exception of Dutch Code Provision 4.1.8 as noted inand 3.2.3. The Dutch Code is available on the paragraphs onMonitoring Committee Corporate Governance Code’s website.
Best Practice Provision 4.1.8
This provision requires all Directors to attend the NV AGM. In the General Meetings withinsection on the Our Shareholders section above andprevious page, our approach towards director attendance at the best practice provisions set out below.AGM is noted.
Best Practice Provision 3.2.3
The Dutch Code provides that in case of dismissal, the remuneration of an Executive Director should not exceed one year’s salary.
It is our policy to set the level of severance payments for Executive Directors at no more than one year’s salary, unless the Boards, on the recommendation of the Compensation Committee, find this manifestly unreasonable given circumstances or unless otherwise dictated by applicable law.
Best Practice Provision 4.3.4
The Dutch Code provides that the voting rights attached to financing preference shares should be based on the fair value of the capital contribution.
The voting rights of the 6% and 7% cumulative preference shares issued by NV between 1927 and 1964 are based on their nominal value, as prescribed by Dutch law. NV agrees with the principle in the Dutch Code that the voting rights should be based on a fair value of the capital contribution. As mentioned in the Our Shares section above, Unilever has announced the Boards’ intention to terminate the 6% and 7% cumulative preference shares upon any unification.
Corporate Governance Statements:
In addition to an explanation ofnon-compliance, to the Dutch Code, as set out above, the Dutch Code also requires the Board to confirm, and the Board hereby confirms that:
The statements in this paragraphsection are not statements in accordance with the requirements of Section 404 of the US Sarbanes-Oxley Act of 2002.
Furthermore, NV is required to make a statement concerning corporate governance as referred to in article 2a of the decree on the content of the management report (Besluit inhoud bestuursverslag) (the Decree).
The information required to be included in this corporate governance statement as described in articles 3, 3a and 3b of the Decree can be found on our website.
www.commissiecorporategovernance.nl |
www.unilever.com/corporategovernance |
THE UNITED KINGDOMThe United Kingdom
In 2019, PLC being a company that is incorporated in the UK and listed on the London Stock Exchange, is required to state how it has applied the main principlesPrinciples and how far it has complied with the provisions set out inProvisions of the UK Corporate Governance Code. Further information on how Unilever has applied the five overarching categories of Principles can be found on the following pages - (i) Board Leadership and Company Purpose: pages 1, 9 and 47 to 48, (ii) Division of Responsibilities: pages 48 and 54 to 62, (iii) Composition, Succession and Evaluation: pages 4, 48 and 58 to 59, (iv) Audit, Risk and Internal Control: pages 33 to 45, 54 to 55 and 78; and (v) Remuneration: pages 60 to 77. The UK Code which is available on the Financial Reporting Council’s (FRC) website. In 2017 PLC complied with all UK Code provisions with the exception of UK Code Provision E.2.3 as noted in the General Meetings section above.
Risk Management and Control: Our approach to risk management and systems of internal control is in line with the recommendations in the FRC’s revised guidance ‘Risk management, internal control and related financial and business reporting’ (the Risk Guidance). It is Unilever’s practice to review acquired companies’ governance procedures and to align them to the Unilever Group’s governance procedures as soon as is practicable.
Greenhouse Gas (GHG) Emissions: In line with the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 as amended by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 our greenhouse gas performance is set out below. We report our CO2Information on GHG emissions with reference to the latest Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). From 2017, we are extending our reporting of emissions from manufacturing facilities to also include research laboratories, marketing/sales offices and distribution centres because the additional data is now collected for reporting of our ‘carbon positive’ emissions reduction programme.
Carbon emission factors are used to convert energy used in our operations to emissions of CO2. Carbon emission factors for fuels are provided by the Intergovernmental Panelcan be found on Climate Change (IPCC).
Carbon emission factors for grid electricity calculated according to the ‘market-based method’ are supplier-specific emissions factors reflecting contractual arrangements with electricity suppliers. Where supplier-specific emissions factors are not available, carbon emissions factors reflect the country where each operation is located and are provided by the International Energy Agency (IEA). For manufacturing we have selected an intensity ratio based on production; this aligns with our long-standing reporting of manufacturing performance.
The GHG data relates to emissions during the 12-month period from 1 October 2016 to 30 September 2017. This period is different from that for which the remainder of the Directors’ Report is prepared (which is the calendar year 2017).
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CORPORATE GOVERNANCECONTINUED
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Emissions from the combustion of biogenic fuels (biomass, fuel crops etc) within our operations are reported separately to other Scope 1 and 2 emissions, as recommended by the GHG Protocol, and excluded from our intensity ratio calculation. The data also excludes Scope 3 emissions (including consumer use of our products) which we report as part of our Unilever Sustainable Living Plan.page 43.
Employee Involvement and Communication: Unilever’s UK companies maintain formal processes to inform, consult and involve employees and their representatives. A National Consultative Forum comprising employees and management representatives from key locations meets regularly to provide a forum for discussingdiscuss issues relating to Unilever sites in the United Kingdom. We recognise collective bargaining on a number of sites and engage with employees via the Sourcing Unit Forum, which includes national officer representation from the three recognised trade unions. A European Works Council, embracing employee and management representatives from countries within Europe, has been in existence for several years and provides a forum for discussing issues that extend across national boundaries. Further details on how the Board has engaged with the workforce can be found on page 48.
Equal Opportunities and Diversity: Consistent with our Code of Business Principles, Unilever aims to ensure that applications for employment from everyone are given full and fair consideration and that everyone is given access to training, development and career opportunities. Every effort is made to retrain and support employees who become disabled while working within the Group.
www.frc.org.uk/ |
www.unilever.com/sustainable-living/values-and-values/ |
THE UNITED STATESThe United States
Both NV and PLC are listed on the New York Stock Exchange (NYSE). As such, both companies must comply with the requirements of US legislation, regulations enacted under US securities laws and the Listing Standards of the NYSE, that are applicable to foreign private issuers, copies of which are available on their websites.
We are substantially compliant with the Listing Standards of the NYSE applicable to foreign private issuers except as set out below.
We are required to disclose any significant ways in which our corporate governance practices differ from those typically followed by US companies listed on the NYSE. Our corporate governance practices are primarily based on the requirements of the UK Listing Rules, the UK Code and the Dutch Code but substantially conform to those required of US companies listed on the NYSE. The only significant way in which our corporate governance practices differ from those followed by domestic companies under Section 303A Corporate
Governance Standards of the NYSE is that the NYSE rules require that shareholders must be given the opportunity to vote on all equity-compensation plans and material revisions thereto, with certain limited exemptions. The UK Listing Rules require shareholder approval of equity-compensation plans only if new or treasury shares are issued for the purpose of satisfying obligations under the plan or if the plan is a long-term incentive plan in which a director may participate. Amendments to plans approved by shareholders generally only require approval if they are to the advantage of the plan participants. Furthermore, Dutch law and NV’s Articles of Association require shareholder approval of equity-compensation plans only if the Executive Directors are able to participate in such plans. Under Dutch law, shareholder approval is not required for material revisions to equity-compensation plans unless the Executive Directors participate in a plan and the plan does not contain its own procedure for revisions.
Attention is drawn to the Report of the Audit Committee on pages 41 and 42.54 to 55. In addition, further details about our corporate governance are provided in the document entitled ‘The Governance of Unilever’ which can be found on our website.
www.nyse.com/index |
www.sec.gov |
All senior executives and senior financial officers have declared their understanding of and compliance with Unilever’s Code of Business Principles and the related Code Policies. No waiver from any provision of the Code of Business Principles or Code Policies was granted in 20172019 to any of the persons falling within the scope of the SEC requirements. The Code of Business Principles and related Code Policies are published on our website.
Risk Management and Control: Following a review by the Disclosure Committee, Audit Committee and Boards, the CEO and the CFO concluded that the design and operation of the Unilever Group’s disclosure controls and procedures, including those defined in the United States Securities Exchange Act of 1934 – Rule 13a – 15(e), as at 31 December 20172019 were effective, and that subsequently until 23 February 2018 (the date of the approval of this Annual Report and Accounts (and the Additional Information for US Listing Purposes) by the Boards there have been no significant changes in the Unilever Group’s internal controls, or in other factors that could significantly affect those controls.effective.
Unilever is required by Section 404 of the US Sarbanes-Oxley Act of 2002 to report on the effectiveness of its internal control over financial reporting. This requirement is reported on within the section entitled ‘Management’s Report on Internal Control over Financial Reporting’ on page 168.
In February 2017, the Group received a public potential offer by The Kraft Heinz Company for $50 per share in respect of all of NV and PLC shares. Unilever rejected the proposal.171.
www.unilever.com/investor-relations/ and-corporate-governance/our-corporate-governance/ |
Annual Report on Form 20-F | 53 |
REPORT OF THE AUDIT COMMITTEEReport of the Audit Committee
Committee members and attendance
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John Rishton Chair | |||||
7/7 | |||||
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1 August 2019) | |||||
2/2 | |||||
until 13 November 2019) | |||||
6/6 | |||||
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This table shows the membership of the Committee together with their attendance at meetings during 2019. If Directors are unable to attend a meeting, they have the opportunity beforehand to discuss any agenda items with the Committee Chair. Attendance is expressed as the number of meetings attended out of the number eligible to be attended.
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MEMBERSHIP OF THE COMMITTEE
The Audit Committee is comprised only of independentNon-Executive Directors with a minimum requirement of three such members. It is chaired by John Rishton. The composition ofRishton and the Committee changed after the AGMs in April 2017 when Mary Ma retired from the Committee. The other current members are Nils AndersenJudith Hartmann and Judith Hartmann.Susan Kilsby. For the purposes of the US Sarbanes-Oxley Act of 2002, John Rishton is the Audit Committee’s financial expert. The Boards have satisfied themselves that the current members of the Audit Committee are competent in financial matters and have recent and relevant experience. Other attendees at Committee meetings (or part thereof) were the Chief Financial Officer, Chief Auditor, EVP Financial Control, Risk Management, Pensions & Sustainability, Chief Legal Officer and Group Secretary and the external auditors. Throughout the year the Committee members periodically met without others present and also held separate private sessions with the Chief Financial Officer, Chief Auditor and the external auditors, allowing the Committee to discuss any issues in more detail directly.detail.
ROLE OF THE COMMITTEERole of the Committee
The role and responsibilities of the Audit
Committee are set out in written terms of reference which are reviewed annually by the Committee, taking into account relevant legislation and recommended good practice. The terms of reference are contained within ‘The Governance of Unilever’ which is available on our website atwww.unilever.com/corporategovernance. The Committee’s responsibilities include, but are not limited to, the following matters, and relevant issues are brought to the attention of the Boards:matters:
All relevant matters arising are brought to the attention of the Board.
In order to help the Committee meet its oversight responsibilities, each year management organise knowledge sessions for the Committee on subject areas within its remit. In 2017, a joint session was2019, sessions were held with Unilever Management on cyber security, which included an overview of what is happening externally and the Corporate Responsibility Committee‘anatomy’ of a cyber security attack, and on the Unilever Sustainable Living Plan (USLP), which included a briefing on the methodology, impact and performance of Unilever’s Sustainable Living Brands.acquisition process. In addition, John Rishton visited both Brazil,the Brazilian MCO in São Paulo, where Indirect Taxation wasdevelopments in the local business environment andtax-related matters were reviewed and discussed in detail, anddetail. Also, Susan Kilsby, who joined the UK and Ireland MCO whereCommittee on 1 August 2019, completed her induction programme.
How the progress of C4G, including within the Finance Function, and controls around promotional activity were discussed.
HOW THE COMMITTEE HAS DISCHARGED ITS RESPONSIBILITIESCommittee has discharged its responsibilities
During the year, the Committee’s principal activities were as follows:
FINANCIAL STATEMENTSFinancial Statements
The Committee reviewed prior to publication the quarterly financial press releases together with the associated internal quarterly reports from the Chief Financial Officer and the Disclosure Committee and, with respect to the half-year and full-year results, the external auditors’ reports. It also reviewed this Annual Report and Accounts and the Annual Report on Form20-F 2017. 2019. These reviews incorporated the accounting policies and significant judgements and estimates underpinning the financial statements as disclosed within note 1 on pages 9091 to 93. Particular attention was paid to the following significant issues in relation to the financial statements:
These matters are also highlighted by our external auditors as being important in their audit. In addition the Committee reviewed the adoption of IFRS 16, refer to note 19 on page 130;
The external auditors have agreed the list of significant issues discussed by the Audit Committee.141.
For each of the above areas the Committee considered the key facts and judgements outlined by management. Members of management attended the section of the meeting of the Committee where their item was discussed to answer any questions or challenges posed by the Committee. The issues were also discussed with the external auditors.auditors and further information can be found on pages 79 to 86. The Committee specifically discussed with the external auditor as to how management’s judgement and assertions were challenged and how professional scepticism was demonstrated during their audit of these areas; this included the disclosures for each matter noted above and where relevant challenging the sensitivity
analysis performed by the external auditor. The Committee is satisfied that there are relevant accounting policies in place in relation to these significant issues and management have correctly applied these policies.
In addition to the matters noted above, our external auditors, as required by auditing standards, also consider the risk of management override of controls. Nothing has come to either our attention or their attention to suggest any material misstatement related to suspected or actual fraud relating to management override of controls.
At the request of the Boards the Committee undertook to:
REPORT OF THE AUDIT COMMITTEECONTINUED
At the request of the Boards the Committee also consideredconsider whether the Unilever Annual Report and Accounts 20172019 was fair, balanced and understandable and whether it provided the necessary information for shareholders to assess the Group’s position and performance, business model and strategy. The Committee was satisfied that, taken as a whole, the Unilever Annual Report and Accounts 20172019 is fair, balanced and understandable.
During the year the UK (FRC), Dutch (AFM) and US (SEC) regulators reviewed either part or all of the Unilever Annual Report and Accounts 2018 and asked the business to respond to a number of technical disclosure questions. Unilever has responded fully to each regulator. The Committee reviewed both the letters from the regulators and Unilever’s responses. As a result of the letters and subsequent discussions with the regulators we have clarified and enhanced some disclosures in this Annual Report and Accounts. All the enquiries have been closed apart from one which was received by the business in early January 2020 from the AFM. A response has been submitted and discussions have taken place, but we are awaiting a final response to formally close the enquiry.
RISK MANAGEMENT AND INTERNAL CONTROL ARRANGEMENTSRisk management and internal control arrangements
The Committee reviewed Unilever’s overall approach to risk management and control, and its processes, outcomes and disclosure. It reviewed:The assessment was undertaken through a review of:
54 | Annual Report on Form 20-F 2019 |
Governance Report |
• | �� | the annual financial plan and Unilever’s dividend policy and dividend proposals. |
The Committee reviewed the application of the requirements under Section 404 of the US Sarbanes-Oxley Act of 2002 with respect to internal controls over financial reporting.
In addition,fulfilling its oversight responsibilities in relation to risk management and internal control, the Committee reviewedmet regularly with senior members of management and is satisfied with the annual financial plankey judgements taken.
The Committee has completed its review for 2019 on both risk management and Unilever’s dividend policyinternal control and dividend proposals.was satisfied that the process had worked effectively and where specific areas for improvement were identified, there was adequate mitigating or alternative controls and that processes were underway to ensure sustainable improvements. The key area for improvement is ensuring that the documentation which describes how controls are being operated is at a sufficient level of detail.
During 20172019 the Committee also continued its oversight of the independent assurance work that is performed on a number of our USLP metrics (selected on the basis of their materiality to the USLP).
In fulfilling its oversight responsibilities in relation to risk management, internal control and the financial statements, the Committee met regularly with senior members of management and is satisfied with the key judgements taken.Internal audit function
INTERNAL AUDIT FUNCTION
The Committee reviewed Corporate Audit’s auditinternal audit’s plan for the year which is focused on Unilever’s corporate risks, and agreed its budget and resource requirements. It reviewed interim andyear-end summary reports and management’s response. Theresponse together with the completion status of agreed actions.
Every five years, the Committee engagedengages an independent third party to perform an effectiveness review of the function. The review concluded thatThis was last completed in 2018. In 2019 the function is compliant with the IIA (Chartered Institute of Internal Auditor’s) Standards in all material aspects. The Committee also carried out an evaluation ofevaluated the performance of the internal audit function through a questionnaire. The feedback was reviewed and the Committee was satisfied with the effectiveness of the internal audit function. TheDuring the year, the Committee also met independently with the Chief Auditor during the year and discussed the results of the audits performed duringand any additional insights obtained from Chief Auditor visits to various business units.
Audit of the year.
AUDIT OF THE ANNUAL ACCOUNTSannual accounts
KPMG, Unilever’s external auditors and independent registered public accounting firm, reported in depth to the Committee on the scope and outcome of the annual audit, including their audit of internal controls over financial reporting as required by Section 404 of the US Sarbanes-Oxley Act of 2002. Their reports included audit and accounting matters, governance and control, and accounting developments.
The Committee held independent meetings with the external auditors during the year and reviewed, agreed, discussed and challenged their audit plan, including theirthe materiality applied, scope and assessment of the financial reporting risk profile of the Group.
The Committee discussed the views and conclusions of KPMG regarding management’s treatment of significant transactions and areas of judgement during the year. The Committee considered these views and comments and is satisfied with the treatment in the financial statements.
EXTERNAL AUDITORSExternal auditors
KPMG have been the Group’s auditors since 2014 and shareholders approved theirre-appointment as the Group’s external auditors at the 20172019 AGMs. On the recommendation of the Committee, the Directors will be proposing there-appointment of KPMG at the AGMs in May 2018.April 2020.
Under current Dutch legislation, Unilever must change its external auditors after a maximum10-year appointment i.e. for the 2024 financial year end. At present, we are satisfied with the quality of our audit and hence have no plans to retender the external auditor appointment earlier.
Both Unilever and KPMG have safeguards in place to avoid the possibility that the external auditors’ objectivity and independence could be compromised, such as audit partner rotation and the restriction onnon-audit services that the external auditors can perform as described below. Both the KPMG partners with overall responsibility for the audit of NV and PLC were new in role in 2019. The NV audit partner went through an extensive induction programme at the end of last year and the PLC audit partner has been part of the audit team for a number of years. Unfortunately due to a last minute personal circumstance, the partner responsible for Unilever NV audit throughout the year was unable to complete the finalisation of the audit. Therefore another NV audit partner, who has already been part of the audit team for a number of years signed the audit opinion. KPMG has issued a formal letter to the Committee reviewedoutlining the report from KPMG ongeneral procedures to safeguard independence and objectivity, disclosing the actions they take to complyrelationship with the professionalCompany and regulatory requirements and best practice designed to ensureconfirming their independence from Unilever.audit independence.
Each year, the Committee assesses the effectiveness of the external audit process which includes discussing feedback from the members of the Committee and stakeholders at all levels across Unilever. Interviews are also held with key senior management within both Unilever and KPMG. In addition, the Committee meet with members of the KPMG external audit teams at both the Group and component level during country site visits. Furthermore the Board met with the Chairman of KPMG International to understand how they were driving improvements in the quality of their audits across the globe.
The Committee also reviewed the statutory audit, audit related andnon-audit related services provided by KPMG and compliance with Unilever’s documented approach, which prescribes in detail the types of engagements, listed below, for which the external auditors can be used:
Unilever has for many years maintained a policy which prescribes in detail the types of engagements for which the external auditors can be used and prohibits several types of engagements, including:
All audit related engagements over€250,000 andnon-audit related engagements over€100,000 required specific advance approval by the Audit Committee Chairman. The Committee further approved all engagements below these levels which have been authorised by the EVP Financial Control, Risk Management, Pension & Sustainability. These authorities are reviewed regularly and, where necessary, updated in the light of internal developments,and external developmentsdevelopments. Since the appointment of KPMG in 2014 to 2016 the level ofnon-audit fees has been below 7% of the annual audit fee. In 2017 and best practice.2018 the level ofnon-audit fees has been higher at 41% and 31% respectively due to assurance work relating to the disposal of our Spreads business and the Simplification project. In 2019 the level ofnon-audit fee is 4%.
The Committee confirms that the Group is in compliance with The Statutory Audit Services for Large Companies Market Investigation (Mandatory use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. The last tender for the audit of the annual accountsAnnual Report and Accounts was performed in 2013.
EVALUATION OF THE AUDIT COMMITTEEEvaluation of the Audit Committee
As part of the internal Board evaluation carried out in 2017,2019, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2017. Whilst2019. While overall the Committee members concluded that the Committee is performing effectively, the Committee agreed that to further enhance its effectiveness it needed to ensure the Committee members continued to develop their knowledge of the Group’s operations which would involve further knowledge sessions and site visits.
John Rishton
Chair of the Audit Committee
Nils Andersen
Judith Hartmann
Susan Kilsby
Annual Report on Form 20-F 2019 | 55 |
Report of the Corporate Responsibility Committee
Committee members and attendance
RESPONSIBILITY COMMITTEE
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Youngme Moon
Feike Sijbesma
The Corporate Responsibility Committee comprises threeNon-Executive Directors: Strive Masiyiwa (Chair), Youngme Moon and Feike Sijbesma.
The Chief Supply Chain Officer, the Chief Sustainability Officer and the Chief Business Integrity Officer attend the Committee’s meetings. The Chief Legal Officer and Group Secretary may also join the Committee’s discussions.
Role of the Committee together with their attendance at meetings during 2017. If Directors are unable to attend a meeting, they have the opportunity beforehand to discuss any agenda items with the Committee Chair. Attendance is expressed as the number of meetings attended out of the number eligible to be attended.
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ROLE OF THE COMMITTEE
The Corporate Responsibility Committee oversees Unilever’s conduct as a responsible global business. As the Unilever Sustainable Living Plan (USLP) is at the heart of Unilever’s vision to grow its business whilst decoupling its environmental footprint from its growth and increasing its positive social impact, the Committee tracks the progress and potential risks associated with the USLP. The
As the Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. Therefore aenhanced, consideration of the company’s influence and impact on stakeholders is central to the Committee’s duties. A core element of its role is the need to identify any external developments that are likely to have an influence upon Unilever’s standing in society, and to ensure that appropriate and effective communications policies are in place to support the company’s reputation.
Committee members report their findings to the Boards, thus ensuring that the Boards can fulfil their oversight responsibilities. The Committee’s discussions are informed by the experience of the Unilever Leadership Executive - as those accountable for driving sustainable growth through Unilever’s brands and operations - and other senior leaders who are invited to the Committee to share their views on a variety of topics and external trends. Many of these leaders are members of the Unilever Sustainable Living Plan Steering Team, the group of senior executives accountable for driving sustainable growth through Unilever’s brands and operations. These discussions ensure the Committee stays abreast of current and emerging trends and any potential risks arising from sustainability issues. In return, Committee members bring their own diverse perspectives to the table. This enables the Boards to draw on a well-rounded view of issues.
During 20172019 the Committee reviewed its terms of reference and the Boards approved minor changes to the terms.
The Committee’s responsibilities are complemented by those of the Audit Committee, which is responsible for reviewing significant breaches of the Code of Business Principles as part of itits remit to review risk management and for overseeing the independent assurance programme for the USLP.
The Committee’s terms of reference are set out atwww.unilever.com/corporategovernance and details of the USLP
Steering Team atwww.unilever.com/sustainable-living/our-strategy/our-sustainability-governance/
MEMBERS OF THE COMMITTEE
The Corporate Responsibility Committee comprises three Non-Executive Directors: Strive Masiyiwa, Feike Sijbesma and Youngme Moon. Strive Masiyiwa succeeded Louise Fresco as chair of the Committee at the AGM in April 2017. Laura Cha retired from the Committee at the AGM.The Chief Marketing & Communications Officer and the Executive Vice President for Sustainable Business & Communications attend the Committee’s meetings. The Chief Business Integrity Officer also attends part of each meeting.
MEETINGScorporategovernance.
Meetings are held quarterly and ad hoc as required – four meetings were held in 2017.2019. The Committee Chairman is responsible for reporting the findings from meetingmeetings to the Boards.Boards, thus ensuring that the Boards can fulfil their oversight responsibilities.
Following the Committee’s terms of reference and Unilever’s principal risks, and the priorities the Committee sets itself, the Committee’s agenda covers Unilever’sthe Code of Business Principles (the Code), alongside litigation, occupational and productthird-party compliance, safety, the USLP, and corporate reputation as well asand litigation. The Committee also discusses a range of other strategic and current issues.
To helpHow the Committee meethas discharged its oversight responsibilities each
During the year, management organise knowledge sessions for the Committee on subject areas within its remit. In 2017 a joint session was held with the Audit Committee to brief members on progress in developing Unilever’s Sustainable Living brands. These are brands which combine a strong purpose delivering a social or environmental benefit with products contributing to at least oneCommittee’s principal activities were as follows.
Code of the goals in the USLP.
CODE OF BUSINESS PRINCIPLESBusiness Principles
The Code and associated Code Policies set out the standards of conduct expected of all Unilever employees in their business endeavours. Compliance with these is an essential element in ensuring Unilever’s continued business success. Thesuccess and is identified as an ethical, legal and regulatory risk to Unilever.
While the Chief Executive Officer is responsible for implementing these principles, supported by the Global Code and Policy Committee, which is chaired by the Chief Legal Officer and Group Secretary.
TheCorporate Responsibility Committee is responsible for the oversight of the Code and Code Policies, ensuring that they remain fit for purpose and are appropriately applied. It maintains close scrutiny of the mechanisms for implementing the Code and Code Policies. This is vital as compliance is essential to promote and protect Unilever’s values and standards, and hence the good reputation of the Group.
At each meeting the Committee reviews an analysis of investigations intonon-compliance with the Code and Code Policies and is alerted todiscusses any trends arising from these investigations.
PRINCIPLES AND STANDARDS FOR THIRD PARTIES
In 2017 the Committee placed special emphasis on third-party compliance and was briefed on how Unilever’s programmes seek to ensure business integrity.
Extending Unilever’s values to third parties remains a priority, not only to generate continued responsible growth and a positive social impact on the industry, but to counter the significant risk that non-compliance by third parties can pose, particularly in the context of increasing regulation around the world, as exemplified by the UK’s Modern Slavery Act and initiatives seeking to fight corruption and other forms of economic crime. To this end, Unilever is working to harmonise its programmes across its value chain. Central to this is ensuring that these evaluate risks and provide the right measures to address the diversity of market conditions it operates in and the range of third parties it works with. Using external indices as well as internal expertise, Unilever is able to first target relationships presenting the highest risk for assessment.
The Committee monitors compliance with Unilever’s Responsible Sourcing Policy (RSP) for suppliers and the roll-out of its Responsible Business Partner Policy (RBPP) for customers. Both policies share 12 fundamental principles. They form the basis of ongoing dialogue with suppliers and customers on the standards Unilever expects them to meet – and will work with them to achieve.
REPORT OF THE CORPORATE
RESPONSIBILITY COMMITTEE CONTINUED
SAFETY
The Committee reviews quarterly scorecards of progress on occupational safetyChief Business Integrity Officer and product safety. These are complemented by regular in-depth discussions so that Committee members may reassure themselves that Unilever’s systems and processes remain robust.
Unilever’s focus on safety supports its growth ambition: sustainable growth is only achieved if Unilever also grows responsibly – by providing safe, high quality products, and protecting employees and the people and communities in which it operates.
A priority for Unilever in 2017 was to ensure occupational safety is recognised as the personal and everyday responsibility of all those working at Unilever. A mandatory safety leadership programme supported this by building awareness of safety from the top down: designed to help managers demonstrate and embed best practice in every team, its aim is to ensure that everyone who works at Unilever gets home safely every day.
Process safety in factories is an equally important priority. Improved standards, enhanced qualifications for employees and a Safety to Win programme for partners all contributed to safer manufacturing sites in 2017. Unilever’s approach, which is based on the identification of risk, resulted in a 46% reduction in process safety incidents versus 2016. And overall, these initiatives contributed to a lower Total Recordable Frequency Rate (TRFR) with accidents decreasing from 1.01 accidents per 1 million hours worked in 2016 to 0.89 in 2017 (measured 1 October 2016 to 30 September 2017).
On product safety, the Committee was briefed on the comprehensive processes Unilever has in place to ensure its products and services are safe for their intended use. Like occupational safety, the approach is based on risk identification and mitigation which covers all aspects of the value chain from development, sourcing, manufacture and transport to consumer use and disposal of the product. Unilever’s approach is centred on the application of rigorous standards based on sound science and the principle of Safe by Design and Safe in Execution. It has a comprehensive programme in place to drive performance improvements at its own manufacturing sites, manufacturing partners and raw and material pack suppliers. The learnings from this programme are being embedded across Unilever’s functions. The outcome represents a step change in performance with marketplace incidents reduced by 46% in 2017.
UNILEVER SUSTAINABLE LIVING PLAN (USLP)
Unilever is putting sustainable living at the heart of its brands to inspire consumers, grow sales and deliver on its purpose of making sustainable living commonplace. Consumers are becoming much more aware of the positive difference brands can make to social and environmental issues, and also the difference they themselves can make through their everyday shopping choices. The Committee was briefed on Unilever’s extensive research to understand whether consumers’ views on sustainability translate to actual purchasing choices. The research* showed that sustainability is no longer a niche issue and that 54% of consumers want to buy more sustainably. More people are taking action to live more sustainably, and sustainability issues are relevant to consumers in both developed and emerging markets. Against this backdrop, Unilever’s 18 Sustainable Living Brands grew 50% faster than the rest of the business and delivered more than 60% of the company’s growth in 2016.
In 2017 the Committee scrutinised the delivery of the USLP goal to halve the GHG emissions of its products across the lifecycle by 2030 and the climate change strategy that drives action towards this goal. Committee members were briefed on the plans in place to grow the business while meeting the UN’s goal of staying below a 2 degree Celsius rise in temperature. These plans encompass Unilever’s own manufacturing, its suppliers and its objectives for brands and innovation. Taking action on climate change brings benefits such as lower operational costs and greater resilience in energy supply, as well as improving the security of supply of raw
materials and avoiding disruption from extreme weather events. By proactively cutting its greenhouse gas (GHG) footprint, Unilever also reduces exposure to environmental regulation and taxes.
The Committee also reviewed Unilever’s plans for sustainable agricultural sourcing; its environmental compliance programme for factories; and progress on sustainable packaging – as in January 2017 Unilever announced it would commit to 100% recyclable plastic packaging by 2025 and called on the FMCG industry to accelerate progress towards a more circular economy.
At the end of the year, the Committee reviewed Unilever’s human rights ambitions, which are part of the Enhancing Livelihoods goal of the USLP. Unilever is working to embed human rights across its business and in tandem, is working with suppliers to ensure that the fundamental principles of its Responsible Sourcing Policy are met and that best practice is advanced. By addressing strategic human rights issues and helping the business tackle and prevent endemic abuses in global value chains, it is seeking to deliver a positive social impact alongside business growth. Unilever’s second Human Rights Report was published in December 2017, setting out its progress and challenges in this complex area (available atwww.unilever.com/sustainable-living/enhancing-livelihoods/fairness-in-the-workplace).
MONITORING REPUTATION
A global business working in many countries experiences many issues that may impact the business. So it is crucial that the Committee has a sound understanding of how Unilever’s reputation is viewed by others, and of the processes in place for managing any issues that may harm its good standing in society. To this end, the Committee studied the impact the USLP has had on Unilever’s reputation, as reflected in the annual GlobeScan Sustainability Leaders Survey and elsewhere. It was also briefed on Unilever’s well-established system for identifying and responding to short and longer-term issues. Enhancements made to this system include: a sharper focus on priority issues in market; issue-handling training for teams; and a more sophisticated approach to tracking issues across social media. It also studied the most significant issues managed through this system and the lessons learned from them.
LITIGATION REVIEW
The Chief Legal Officer and Group Secretary reportsreport to the Committee on litigation and regulatory matters which may have a reputational impact including environmental issues, bribery and corruption compliance and competition law compliance. For further information please see notes 19
In 2019, the Committee continued to analyse the adequacy and 20robustness of Unilever’s anti-bribery compliance programme to ensure it has the right controls to prevent, detect and respond to corruption threats. The Committee reviewed efforts to assess risk through country risk profiles, studied trends and insights from investigations data and was updated on risk-based training and capacity building.
Principles and standards for third parties
Extending Unilever’s values to third parties is essential if Unilever is to generate responsible growth and a positive social impact on the industry. In 2019 the Committee continued to examine third-party compliance as a lack of compliance can pose a significant risk to the consolidatedbusiness, particularly in the context of increasing regulation around the world (see principal risks, page 35).
At each meeting, the Committee tracks compliance with Unilever’s Responsible Sourcing Policy (RSP) for suppliers and its Responsible Business Partner Policy (RBPP) for customers and distributors. Together they set out Unilever’s requirements that third parties conduct business with integrity and respect for human rights and core labour principles.
Sourcing 100% of Unilever’s procurement spend in line with the RSP is also a target within the USLP: 70% of procurement spend was through suppliers meeting the mandatory requirements of the RSP in 2019.
These third-party policies support Unilever in evaluating risk and designing appropriate programmes to cover the diversity of market conditions and third parties it works with. For example, in 2019 Unilever began preparation for a new approach - ‘RSP before Purchase Order’ - which means that suppliers of products or services must be compliant with the RSP before a buyer can raise a purchase order. While as a principle Unilever seeks to work with its third parties to remediate and improve any poor practices identified through screening or auditing, those who are unwilling or unable to comply with the RSP or RBPP are subject to delisting.
Harmonisation of the RSP and RBBP to bring greater efficiencies continued during the year, driven by close collaboration across the Supply Chain, Customer Development and Business Integrity functions.
Safety
Sustainable growth is only achieved if Unilever grows responsibly. That means protecting the health and wellbeing of employees and the people and communities in which it operates and providing safe, high quality products. These issues are included within Unilever’s principal risks (see page 35).
Training programmes emphasise that safety is the personal and everyday responsibility of all those working at Unilever, from leadership to factory floor to third-party contractors. Safety is driven through clear standards and best practice via Unilever’s World Class Manufacturing Programme and company-wide communications.
Although Unilever believes every incident can and must be prevented, between 1 October 2018 and 30 September 2019, sadly there were four fatalities at work in Latin America: two employees and two contractors. Two happened in factories and two on the road. Unilever has scrutinised the causes of these deaths and is reinforcing the lessons learnedin-house and with the third parties it employs, including enhanced monitoring of contractor performance (see page 17).
56 | Annual Report on Form 20-F 2019 |
Governance Report |
Reducing Unilever’s Total Recordable Frequency Rate (TRFR) for accidents is a target within the USLP. TRFR was up from 0.69 in 2018 to 0.76 accidents per million hours worked in 2019 (measured 1 October 2018 to 30 September 2019). 2019 TRFR includes for the first time all acquisitions which operate as decentralised business units, as there are now processes in place to collect the data. After a spike in the first six months, when injury rates went up partly due to the inclusion of decentralised business units, the following six months showed substantial incident rate reduction, in line with theyear-on-year declining trend.
Product safety
High quality products that are safe to use are the foundation of Unilever’s business. Unilever’s approach to product safety is based on risk identification and mitigation. Its approach encompasses all aspects of the value chain – from development, sourcing, manufacture and transport to consumer use and disposal of the product. This approach turns on the application of rigorous standards based on sound science and the principle of Safe by Design and Safe in Execution.
Unilever has put in place a number of programmes to drive up quality. Examples include its C4G programme for suppliers which reduces qualitynon-conformance onin-bound supply to Unilever manufacturing sites and new rules that support rapid innovation and risk management. In 2019, total marketplace incidents originating in Unilever’s supply chain reduced by 34% compared to 2018 and the number of supplier incidents (detected via incoming raw material and packaging checks) reduced by 45%. Greater use of digital capabilities is also improving efficiency and responsiveness, for example by using its Digital Voice of the Consumer application, Unilever is able to quickly collate and analyse consumer feedback to improve product quality more rapidly.
Sustainability
Across the year, the Committee discussed the evolution of Unilever’s thinking on sustainability as part of its integrated business strategy. Unilever is building on the learning from the USLP to shape new ambitions that tackle today’s urgent environmental and social issues such as climate change and inequality. The Group’s industry-leading announcement on plastic packaging (see below) illustrates how it is approaching this task and challenging itself to setfar-reaching goals.
The Committee supported Unilever’s thinking, advising that a distinctive corporate agenda is key to delivering sustainable growth and ensuring Unilever remains a sustainability leader.
Plastic packaging
Concern about packaging waste continues to grow, particularlysingle-use plastic packaging. In 2019 it remained high on the public agenda across the world. Unilever continued to flag it a principal risk, recognising that its prominence had increased since 2018 (see page 36).
In the spring, the Committee studied Unilever’s existing plastic packaging initiatives, noting that while these were ambitious when first set, the business needs to go further and faster. The Committee urged Unilever to accelerate its actions and demonstrate industry leadership.
In October 2019, Unilever made two further, ambitious commitments to reduce its plastic waste and help create a circular economy for plastics by 2025. The first is to halve its use of virgin plastic by reducing its absolute use of plastic packaging by more than 100,000 tonnes and accelerating its use of recycled plastic. This commitment makes Unilever the first major global consumer goods company to commit to an absolute plastics reduction across its portfolio. The second is to help collect and process more plastic packaging than it sells.
Unilever is making progress towards its existing USLP targets to ensure all its plastic packaging is reusable, recyclable or compostable by 2025, and to use at least 25% recycled plastic in its packaging, also by 2025, (see page 44).
Reviewing the new commitments, the Committee commended Unilever on the level of ambition and the lead it had taken in tackling this important issue.
MCIP
Unilever’s Reward Framework includes the ManagementCo-investment Plan (MCIP), a long-term incentive plan that is linked to financial statements.and USLP performance (see page 62).
To come to a view on the USLP, the Corporate Responsibility Committee and the Compensation Committee evaluate performance against a Sustainability Progress Index (SPI).
EVALUATION OF THE CORPORATE RESPONSIBILITY COMMITTEEThe SPI is atwo-fold assessment that captures quantitative and qualitative elements. Firstly, it considers the 2018 performance on USLP targets reported in Unilever’s online Sustainable Living Report, alongside performance evidenced in a number of sustainability ratings and indices. These targets illustrate how Unilever aims to address a number of its principal risks, such as brand preference, climate change, supply chain and ethics (see Principal risks on pages 35 to 39). The second part of the assessment takes into account Unilever’s wider progress on sustainability
Following anin-depth discussion of the SPI, the Corporate Responsibility Committee agreed a performance rating which was endorsed by the Compensation Committee. This joint assessment forms part of the Compensation Committee’s overall recommendation on MCIP (see page 65).
Evaluation of the Corporate Responsibility Committee
As part of the internal Board evaluation carried out in 2017,2019, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2017. Whilst overall2019 and concluded that it was operating effectively.
In 2020, the Committee will invite members concluded thatof the USLP Advisory Council to join some of its discussions. The Advisory Council comprises seven external experts from fields as diverse as human rights, behavioural science and the environment. The joint meeting will allow the Committee is performing effectively,to hear at first hand how Unilever’s strategies and ambitions are perceived by key stakeholder groups. The full Board will also meet the Committee has agreedAdvisory Council to further enhance its effectiveness by reviewing how the USLP has been embedded into Unilevershare perspectives and how it should evolve.insights.
Strive Masiyiwa
Chair of the Corporate Responsibility Committee
Youngme Moon
Feike Sijbesma
Further details on the USLP will be set out in Unilever’s online Sustainable Living Report 2017,2019, to be published in April 2018.
www.unilever.com/sustainable-living2020.
CORPORATE GOVERNANCE COMMITTEE
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ROLE AND MEMBERSHIP OF THE COMMITTEE
The Nominating and Corporate Governance Committee is responsible for evaluating the balance of skills, experience, independence, diversity and knowledge on the Boards and for drawing up selection criteria, ongoing succession planning and appointment procedures for both internal and external appointments. It also has oversight of all matters relating to corporate governance and brings any issues in this respect to the attention of the Boards.
The Committee’s terms of reference are set out in ‘The Governance of Unilever’ which can be found on our website atwww.unilever.com/corporategovernance. During the year, the Committee reviewed its own terms of reference to determine whether its responsibilities are properly described. The amended terms became effective on 1 January 2018.
The Committee is comprised of two Non-Executive Directors and the Chairman. The Group Secretary acts as secretary to the Committee. Other attendees at Committee meetings in 2017 (or part thereof) were the Chief Executive Officer and the Chief HR Officer.
In 2017 the Committee met five times. At the start of the year the Committee considered the results of the Committee’s annual self-evaluation for 2016 and its priorities for the year and used these to help create an annual plan for meetings for 2017.
APPOINTMENT AND REAPPOINTMENT OF DIRECTORS
Reappointment: All Directors (unless they are retiring) are nominated by the Boards for re-election at the AGMs each year on the recommendation of the Committee who, in deciding whether to nominate a Director, takes into consideration the outcomes of the Chairman’s discussions with each Director on individual performance, the evaluation of the Boards and its Committees and the continued good performance of individual Directors. Non-Executive Directors normally serve for a period of up to nine years. The average tenure of the Non-Executive Directors who have retired from the Boards over the past ten years has been seven years. The schedule the Committee uses for orderly succession planning of Non-Executive Directors can be found on our website at unilever.com/committees. Louise Fresco did not put herself forward for re-election at the AGMs in April 2017. She had served eight years on the Boards. The Committee proposed the reappointment of all other Directors and the Directors were appointed by shareholders by a simple majority vote at the AGMs.
The Committee also recommends to the Boards candidates for election as Chairman and Vice-Chairman and Senior Independent Director. After being reappointed as Non-Executive Directors at the 2017 AGMs, Ann Fudge remained the Vice-Chairman and Senior Independent Director and John Rishton, Ann Fudge and Feike Sijbesma respectively remained Chairs of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. Strive Masiyiwa became Chair of the Corporate Responsibility Committee in April 2017.
Director Succession Planning and Appointment: In consultation with the Committee, the Boards review the adequacy of succession planning processes and the actual succession planning at Board level. In 2017 no new Non-Executive Directors were nominated by the Boards for appointment at the AGMs.
When recruiting, the Committee will take into account the profile of Unilever’s Boards of Directors set out in ‘The Governance of Unilever’ which is in line with the recommendations of applicable governance regulations and best practice. Pursuant to the profile the Boards should comprise a majority of Non-Executive Directors who are independent of Unilever, free from any conflicts of interest and able to allocate sufficient time to carry out their responsibilities effectively. With respect to composition and capabilities, the Boards should be in keeping with the size of Unilever, its strategy, portfolio, consumer base, culture, geographical spread and its status as a listed company and have sufficient understanding of the markets and business where Unilever is active in order to understand the key trends and developments relevant for Unilever. The objective pursued by the Boards is to have a variety of nationality, race, gender, ethnicity and relevant skills and expertise. It is important that the Boards have sufficient global experience and outlook, and financial literacy. As discussed later in this Report, Unilever currently has diverse Boards in terms of gender and nationality and, as can be seen from the subset of the mapping that this Committee has done of the current Non-Executive Directors’ skills and capabilities on page 3, composition and capabilities in line with our Board profile described above.
Unilever Leadership Executive (ULE) Succession Planning and Appointment: In consultation with the Committee, the Boards review the adequacy of succession planning processes and the actual succession planning at ULE level. In 2017 the Boards were consulted by the Chief Executive Officer upon the selection criteria and appointment procedures for senior management changes, including the changes to the ULE that took effect at the start of 2018.
Annual Report on Form 20-F |
REPORT OF THE NOMINATING AND
CORPORATE GOVERNANCE COMMITTEE
CONTINUEDReport of the Nominating and Corporate
Governance Committee
DIVERSITY POLICY
Unilever has long understood the importance of diversity within our workforce because of the wide range of consumers we connect with globally. This goes right through our organisation, starting with the Boards. Unilever’s Board Diversity Policy, which is reviewed by the Committee each year, is reflected on our website atwww.unilever.com/boardsofunilever. The Boards feel that, whilst gender and ethnicity are an important part of diversity, Unilever Directors will continue to be selected on the basis of their wide-ranging experience, backgrounds, skills, knowledge and insight.
In 2017 the Committee also reviewed and considered relevant recommendations on diversity and remains pleased that over a third of our Non-Executive Directors are women and that there are eight nationalities represented on the Boards.
CORPORATE GOVERNANCE DEVELOPMENTS
The Committee reviews relevant proposed legislation and changes to relevant corporate governance codes at least twice a year. It carefully considers whether and how the proposed laws/rules would impact upon Unilever and whether Unilever should participate in consultations on the proposed changes. For example, during 2017, developments and learnings from the first year of the Market Abuse Regulation were discussed by the Committee and the new Dutch Corporate Governance Code and Boardroom diversity were considered by the Committee.
EVALUATION
As part of the Board evaluation carried out in 2017, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own composition and performance in 2017. The Committee members concluded that the Committee is performing effectively.and attendance
Attendance | ||||
Nils Andersen (Chair since 13 November 2019) | 1/1 | |||
Laura Cha | 3/4 | |||
Marijn Dekkers (Chair until 13 November 2019) | 4/4 | |||
Feike Sijbesma
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This table shows the membership of the Committee together with their attendance at meetings during 2019. If Directors are unable to attend a meeting, they have the opportunity beforehand to discuss any agenda items with the Committee Chair. Attendance is expressed as the number of meetings attended out of the number eligible to be attended.
The Committee is comprised of threeNon-Executive Directors and the Chairman. The Group Secretary acts as secretary to the Committee. Other attendees at Committee meetings in 2019 were the Chief Executive Officer and the Chief HR Officer.
Role of the Committee
The Nominating and Corporate Governance Committee is responsible for evaluating the balance of skills, experience, independence, diversity and knowledge on the Boards and for drawing up selection criteria, ongoing succession planning and appointment procedures for both internal and external appointments. It also has oversight of all matters relating to corporate governance and brings any issues in this respect to the attention of the Boards.
The Committee’s terms of reference are set out in ‘The Governance of Unilever’ which can be found on our website at www.unilever.com/corporategovernance. During the year, the Committee reviewed its own terms of reference to determine whether its responsibilities are properly described. The amended terms became effective on 1 January 2020.
In 2019 the Committee met four times. At the start of the year the Committee considered the results of the Committee’s annual self-evaluation for 2018 and its priorities for the year and used these to help create an annual plan for meetings for 2019.
Appointment and Reappointment of Directors and ULE
Reappointment: All Directors (unless they are retiring) are nominated by the Boards forre-election at the AGMs each year on the recommendation of the Committee who, in deciding whether to recommend nomination of a Director, take into consideration the outcomes of the Chairman’s discussions with each Director on individual performance, the evaluation of the Boards and its Committees and the continued good performance of individual Directors.Non-Executive Directors normally serve for a period of up to nine years. The average tenure of theNon-Executive Directors who have retired from
the Boards over the past ten years has been seven years. The schedule the Committee uses for orderly succession planning ofNon-Executive Directors can be found on our website at www.unilever.com/committees. The Committee proposed the reappointment of all Directors and the Directors were appointed by shareholders by a simple majority vote at the AGMs.
The Committee also recommends to the Boards candidates for election as Chairman and Senior Independent Director/Vice-Chairman. After being reappointed asNon-Executive Director at the 2019 AGMs, Youngme Moon remained the Senior Independent Director/Vice-Chairman. Committee Chairs remained in place with John Rishton as Chair of the Audit Committee, Strive Masiyiwa as Chair of the Corporate Responsibility Committee, Vittorio Colao as Chair of the Compensation Committee and Marijn Dekkers as Chair of the Nominating and Corporate Governance Committee.
Marijn Dekkers decided to stand down as Chairman of the Boards on 12 November 2019. He continued to be aNon-Executive Director and a member of the Compensation Committee and the Nominating and Corporate Governance Committee. Nils Andersen has been appointed Chairman of the Boards, succeeding Marijn Dekkers effective 13 November 2019. Nils stepped down from the Audit Committee and became Chair of the Nominating and Corporate Governance Committee and member of the Compensation Committee. The Board engaged Egon Zehnder as external search consultant. Egon Zehnder does not have other connections with the company or individual directors.
Succession planning and Board changes: In consultation with the Committee, the Boards review the adequacy of succession planning processes and the actual succession planning at Board level.
When recruiting, the Committee will take into account the profile of Unilever’s Boards of Directors set out in ‘The Governance of Unilever’ which is in line with the recommendations of applicable governance regulations and best practice. Pursuant to the profile the Boards should comprise a majority ofNon-Executive Directors who are independent of Unilever, free from any conflicts of interest and able to allocate sufficient time to carry out their responsibilities effectively. With respect to composition and capabilities, the Boards should be in keeping with the size of Unilever, its strategy, portfolio, consumer base, culture, geographical spread and its status as a listed company and have sufficient understanding of the markets and business where Unilever is active in order to understand the key trends and developments relevant for Unilever. The objective pursued by the Boards is to have a variety of nationality, race, gender, ethnicity, social background and relevant skills and expertise. It is important that the Boards have sufficient global experience and outlook, and financial literacy. As discussed later in this Report, Unilever currently has diverse Boards in terms of gender and nationality and, as can be seen from the subset of the mapping that this Committee has done of the currentNon-Executive Directors’ skills and capabilities on page 49, composition and capabilities in line with our Board profile described above.
2019 appointments: In May 2019 the AGMs resolved to appoint Susan Kilsby as aNon-Executive Director with effect as from 1 August 2019 following the recommendation by the Committee to the Board. She has further strengthened the Boards in the areas of finance and M&A. The Boards engaged MWM Consulting as external search consultant. MWM does not have other connections with the company or individual directors.
At the same AGMs in May 2019, Alan Jope was appointed as Executive Director, after becoming the CEO as per 1 January 2019.
2019 other Board changes: Sadly, on 31 August 2019 Mary Ma unexpectedly passed away. Mary was a highly committed and capable Director and put her expertise and experience at the service of Unilever. Mary will be greatly missed. Her succession will be addressed as part of the Board’s succession planning process described above.
Unilever Leadership Executive (ULE) succession planning and appointment: In consultation with the Committee, the Boards review the adequacy of succession planning processes and the actual succession planning at ULE level. In 2019 the Boards were consulted by the Chief Executive Officer upon the selection criteria (variety of nationality, race, gender, ethnicity, social background and relevant skills and expertise) and appointment procedures for senior management changes.
Diversity Policy
Unilever has long understood the importance of diversity and inclusion within our workforce because of the wide range of consumers we connect with globally. This goes right through our organisation, starting with the Boards. Unilever’s Board Diversity Policy, which is reviewed by the Committee each year, is reflected on our website at www.unilever.com/boardsofunilever. The Boards feel that, while gender, social background and ethnicity are an important part of diversity, Unilever Directors will continue to be selected on the basis of their wide-ranging experience, backgrounds, skills, knowledge and insight.
In 2019 the Committee also reviewed and considered relevant recommendations on diversity and remains pleased that 45% of ourNon-Executive Directors are women and that there are nine nationalities represented on the Boards. Further details on our approach to diversity and inclusion as well as gender balance of our workforce can be found on pages 16 and 17.
58 | Annual Report on Form 20-F 2019 |
Governance
|
DIRECTORS’ REMUNERATION REPORT
Applicable standard | Key requirements or changes in accounting policy | Implementation progress and expected impact | ||
Amendments to IAS 19 ‘Employee Benefits’ | The change requires that following plan amendments, curtailments or settlements, current service and net interest costs for the remainder of the reporting period should be calculated in line with updated actuarial assumptions. | The amendment is applied prospectively. During the period the amendment had no impact on |
All other standards or amendments to standards that have been issued by the IASB and were effective by 1 January 2019 were not applicable or material to Unilever.
New standards, amendments and interpretations of existing standards that are not yet effective and have not been early adopted by the Group
1. ACCOUNTING INFORMATION AND POLICIESCONTINUED
The following new standards have been released but are not yet adopted by the Group. The expected impact and progress is shown below. In addition to the above, based on an initial review the Group does not currently believe adoption of the following standard/amendments will have a material impact on the consolidated results or financial position of the Group.
| ||
Applicable standard |
| |
Effective from the year | The amendments modify specific hedge accounting requirements so entities can continue to forecast future cash flows assuming that the interest rate benchmark will continue despite ongoing reviews of interest rate benchmark reform. As a result there is no requirement for an entity to discontinue hedge relationships or to reassess the economic relationships between hedged items and hedging instruments as a result of the uncertainties of the interest rate benchmark reform.
We do not have material derivatives that refer to | |
IFRS 17 ‘Insurance Contracts’
Effective from the year
| This standard introduces a new model for accounting for insurance contracts. | |
|
|
All other standards or amendments to standards that have been issued by the IASB and are effective from 1 January 20182020 onwards are not applicable or material to Unilever.
2. SEGMENT INFORMATIONSegment information
| ||||||
Segmental reporting | ||||||
| – primarily sales of | |||||
Foods & Refreshment | – primarily sales of ice cream, savoury (soups, bouillons, seasoning), dressings (mayonnaise, ketchup) and tea categories. | |||||
Home Care | – primarily sales of fabric category (washing powders and liquids, rinse conditioners) and | |||||
| Revenue Turnover comprises sales of | |||||
| Customer contracts generally contain a single performance obligation and turnover is recognised when control of the products being sold has transferred to our customer as there are no longer any unfulfilled obligations to the customer. This is generally on delivery to the customer but depending on individual customer terms, this can be at the time of dispatch, delivery or upon formal customer acceptance. This is considered the appropriate point where the performance obligations in our contracts are satisfied as Unilever no longer has control over the inventory. Our customers have the contractual right to return goods only when authorised by Unilever. At 31 December 2019, an estimate has been made of goods that will be returned and a liability has been recognised for this amount. An asset has also been recorded for the corresponding inventory that is estimated to return to Unilever using a best estimate based on accumulated experience. Some of our customers are distributors who may be able to return unsold goods in consignment arrangements.
Underlying operating profit means operating profit before the impact ofnon-underlying |
REVENUE
Turnover comprises sales of goods after the deduction of discounts, sales taxes and estimated returns. It does not include sales between group companies. Discounts given by Unilever include rebates, price reductions and incentives given to customers, promotional couponing and trade communication costs.
Turnover is recognised when the risks and rewards of the underlying products have been substantially transferred to the customer. Depending on individual customer terms, this can be at the time of dispatch, delivery or upon formal customer acceptance.
UNDERLYING OPERATING PROFIT
Underlying operating profit means operating profit before the impact ofnon-underlying items within operating profit (see note 3). Underlying operating profit represents our measure of segment profit or loss as it is the primary measure used for the purpose of making decisions about allocating resources and assessing performance of segments. Underlying operating margin is calculated as underlying operating profit divided by turnover.
Annual Report on Form 20-F | 93 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUP
Notes to the Consolidated Financial Statements
CONTINUEDUnilever Groupcontinued
2. SEGMENT INFORMATIONSegment informationCONTINUEDcontinued
€ million | € million | € million | € million | € million | € million | € million | ||||||||||||||||||||||||||||||||
Notes | Personal Care | Home Care | Home and Personal Care | Foods | Refresh- ment | Foods and ment(a) | Total | |||||||||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||||||||
Turnover | 20,697 | 10,574 | 31,271 | 12,512 | 9,932 | 22,444 | 53,715 | |||||||||||||||||||||||||||||||
Operating profit | 4,103 | 1,138 | 5,241 | 2,275 | 1,341 | 3,616 | 8,857 | |||||||||||||||||||||||||||||||
Non-underlying items | 3 | 272 | 150 | 422 | 196 | (75 | ) | 121 | 543 | |||||||||||||||||||||||||||||
Underlying operating profit | 4,375 | 1,288 | 5,663 | 2,471 | 1,266 | 3,737 | 9,400 | |||||||||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | 8 | 4 | 12 | 7 | 136 | 143 | 155 | |||||||||||||||||||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | 488 | 248 | 736 | 321 | 481 | 802 | 1,538 | |||||||||||||||||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 164 | 79 | 243 | 96 | �� | 78 | 174 | 417 | ||||||||||||||||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||||||||||||||||||||
Impairment and othernon-cash charges(c) | 80 | 48 | 128 | 76 | 115 | 191 | 319 | |||||||||||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||||||||
Turnover | 20,172 | 10,009 | 30,181 | 12,524 | 10,008 | 22,532 | 52,713 | |||||||||||||||||||||||||||||||
Operating profit | 3,704 | 949 | 4,653 | 2,180 | 968 | 3,148 | 7,801 | |||||||||||||||||||||||||||||||
Non-underlying items | 3 | 329 | 137 | 466 | 214 | 143 | 357 | 823 | ||||||||||||||||||||||||||||||
Underlying operating profit | 4,033 | 1,086 | 5,119 | 2,394 | 1,111 | 3,505 | 8,624 | |||||||||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | (5 | ) | 1 | (4 | ) | 4 | 127 | 131 | 127 | |||||||||||||||||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | 437 | 236 | 673 | 322 | 469 | 791 | 1,464 | |||||||||||||||||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 134 | 86 | 220 | 76 | 59 | 135 | 355 | |||||||||||||||||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||||||||||||||||||||
Impairment and othernon-cash charges(c) | 74 | 45 | 119 | 75 | 49 | 124 | 243 | |||||||||||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||||||||
Turnover | 20,074 | 10,159 | 30,233 | 12,919 | 10,120 | 23,039 | 53,272 | |||||||||||||||||||||||||||||||
Operating profit | 3,637 | 740 | 4,377 | 2,298 | 840 | 3,138 | 7,515 | |||||||||||||||||||||||||||||||
Non-underlying items | 3 | 314 | 115 | 429 | 170 | 197 | 367 | 796 | ||||||||||||||||||||||||||||||
Underlying operating profit | 3,951 | 855 | 4,806 | 2,468 | 1,037 | 3,505 | 8,311 | |||||||||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | (4 | ) | - | (4 | ) | 4 | 107 | 111 | 107 | |||||||||||||||||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||||||||||||||||||||
Depreciation and amortisation | 377 | 235 | 612 | 308 | 450 | 758 | 1,370 | |||||||||||||||||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 125 | 76 | 201 | 72 | 57 | 129 | 330 | |||||||||||||||||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||||||||||||||||||||
Impairment and othernon-cash charges(c) | 142 | 58 | 200 | 41 | 96 | 137 | 337 | |||||||||||||||||||||||||||||||
Our segments are comprised of similar product categories. 9 categories (2018: 9; 2017: 10) individually accounted for 5% or more of our revenue in one or more of the last three years. The following table shows the relevant contribution of these categories to group revenue for the periods shown:
Category | Segment | 2019 | 2018 | 2017 | ||||||||||
Fabric | Home Care | 15% | 15% | 15% | ||||||||||
Ice cream | Foods & Refreshment | 13% | 13% | 13% | ||||||||||
Hair care | Beauty & Personal Care | 12% | 12% | 11% | ||||||||||
Savoury | Foods & Refreshment | 11% | 11% | 11% | ||||||||||
Skin cleansing | Beauty & Personal Care | 10% | 10% | 10% | ||||||||||
Deodorants | Beauty & Personal Care | 8% | 8% | 8% | ||||||||||
Skin care | Beauty & Personal Care | 8% | 7% | 6% | ||||||||||
Tea | Foods & Refreshment | 6% | 6% | 5% | ||||||||||
Dressings | Foods & Refreshment | 5% | 5% | 6% | ||||||||||
Spreads | Foods & Refreshment | - | 3% | 6% | ||||||||||
Other | 12% | 10% | 9% |
The group operating segment information is provided based on three product areas: Beauty & Personal Care, Foods & Refreshment and Home Care
Notes | € million Beauty & | € million Foods & Refreshment | € million Care | € million
Total | ||||||||||||||||
2019 | ||||||||||||||||||||
Turnover | 21,868 | 19,287 | 10,825 | 51,980 | ||||||||||||||||
Operating profit | 4,520 | 2,811 | 1,377 | 8,708 | ||||||||||||||||
Non-underlying items | 3 | 440 | 571 | 228 | 1,239 | |||||||||||||||
Underlying operating profit | 4,960 | 3,382 | 1,605 | 9,947 | ||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | 1 | 171 | 4 | 176 | ||||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||
Depreciation and amortisation | 693 | 902 | 369 | 1,964 | ||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 62 | 56 | 50 | 168 | ||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||
Impairment and othernon-cash charges(c) | 105 | 159 | 46 | 310 | ||||||||||||||||
2018 (Restated)(a) | ||||||||||||||||||||
Turnover | 20,624 | 20,227 | 10,131 | 50,982 | ||||||||||||||||
Operating profit | 4,165 | 7,287 | 1,187 | 12,639 | ||||||||||||||||
Non-underlying items | 3 | 378 | (3,711 | ) | 157 | (3,176 | ) | |||||||||||||
Underlying operating profit | 4,543 | 3,576 | 1,344 | 9,463 | ||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | (1 | ) | 183 | 3 | 185 | |||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||
Depreciation and amortisation | 686 | 949 | 373 | 2,008 | ||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 102 | 102 | 46 | 250 | ||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||
Impairment and othernon-cash charges(c) | 122 | 164 | 263 | 549 | ||||||||||||||||
2017 (Restated)(a) | ||||||||||||||||||||
Turnover | 20,697 | 22,444 | 10,574 | 53,715 | ||||||||||||||||
Operating profit | 4,140 | 3,657 | 1,160 | 8,957 | ||||||||||||||||
Non-underlying items | 3 | 272 | 121 | 150 | 543 | |||||||||||||||
Underlying operating profit | 4,412 | 3,778 | 1,310 | 9,500 | ||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | 8 | 143 | 4 | 155 | ||||||||||||||||
Significantnon-cash charges: | ||||||||||||||||||||
Within underlying operating profit: | ||||||||||||||||||||
Depreciation and amortisation | 641 | 1,059 | 325 | 2,025 | ||||||||||||||||
Share-based compensation and othernon-cash charges(b) | 164 | 174 | 79 | 417 | ||||||||||||||||
Withinnon-underlying items: | ||||||||||||||||||||
Impairment and othernon-cash charges(c) | 80 | 191 | 48 | 319 |
(a) | Restated following adoption of IFRS 16. See note 1 and |
(b) | Othernon-cash charges within underlying operating profit |
(c) | Othernon-cash charges withinnon-underlying items includes movements in restructuring provisions |
Transactions between the Unilever Group’s reportable segments are immaterial and are carried out on an arm’s length basis.
The Unilever Group is not reliant on revenuesturnover from transactions with any single customer and does not receive 10% or more of its revenuesturnover from transactions with any single customer.
Segment assets and liabilities are not provided because they are not reported to or reviewed by our chief operating decision-maker, which is Unilever Leadership Executive (ULE) as explained in the Corporate Governance Section..
94 | Annual Report on Form 20-F |
Financial Statements |
2. SEGMENT INFORMATIONCONTINUED
2. Segment informationcontinued
The home countries of the Unilever Group are the Netherlands and the United Kingdom. Turnover andnon-current assets for these two countries combined, for the United States (being the largest country outside the home countries) and for all other countries are:
€ million | € million | € million | € million | |||||||||||||
2017 | Netherlands/ United Kingdom | United States | Others | Total | ||||||||||||
Turnover | 3,849 | 8,532 | 41,334 | 53,715 | ||||||||||||
Non-current assets(d) | 3,781 | 11,820 | 23,768 | 39,369 | ||||||||||||
2016 | ||||||||||||||||
Turnover | 3,819 | 8,263 | 40,631 | 52,713 | ||||||||||||
Non-current assets(d) | 4,770 | 11,696 | 23,358 | 39,824 | ||||||||||||
2015 | ||||||||||||||||
Turnover | 4,157 | 7,956 | 41,159 | 53,272 | ||||||||||||
Non-current assets(d) | 4,878 | 9,674 | 22,336 | 36,888 |
€ million Netherlands /United Kingdom | € million
United States | € million
Others | € million
Total | |||||||||||||
2019 | ||||||||||||||||
Turnover | 3,508 | 8,702 | 39,770 | 51,980 | ||||||||||||
Non-current assets(b) | 4,705 | 13,326 | 25,714 | 43,744 | ||||||||||||
2018 (Restated)(a) | ||||||||||||||||
Turnover | 3,679 | 8,305 | 38,998 | 50,982 | ||||||||||||
Non-current assets(b) | 4,336 | 12,471 | 25,304 | 42,111 | ||||||||||||
2017 (Restated)(a) | ||||||||||||||||
Turnover | 3,849 | 8,532 | 41,334 | 53,715 | ||||||||||||
Non-current assets(b) | 4,101 | 12,110 | 24,901 | 41,112 |
Restated following adoption of IFRS 16. See note 1 and |
For the |
No other country had turnover ornon-current assets (as shown above) greater than 10% of the Group total.
ADDITIONAL INFORMATION BY GEOGRAPHIESAdditional information by geographies
Although the Group’s operations are managed by product area, we provide additional information based on geographies. The analysis of turnover by geographical area is stated on the basis of origin.
€ million | € million | € million | € million | € million Asia/ AMET/RUB(b) | € million The Americas | € million
Europe | € million
Total | |||||||||||||||||||||||||
| Asia/ AMET/RUB | (e) | | The Americas |
| Europe | Total | |||||||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||||||
2019 | ||||||||||||||||||||||||||||||||
Turnover | 23,266 | 17,525 | 12,924 | 53,715 | 24,129 | 16,482 | 11,369 | 51,980 | ||||||||||||||||||||||||
Operating profit | 3,802 | 3,086 | 1,969 | 8,857 | 4,418 | 2,683 | 1,607 | 8,708 | ||||||||||||||||||||||||
Non-underlying items | 306 | (23 | ) | 260 | 543 | 439 | 395 | 405 | 1,239 | |||||||||||||||||||||||
Underlying operating profit | 4,108 | 3,063 | 2,229 | 9,400 | 4,857 | 3,078 | 2,012 | 9,947 | ||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | 12 | 112 | 31 | 155 | (5 | ) | 126 | 55 | 176 | |||||||||||||||||||||||
2016 | ||||||||||||||||||||||||||||||||
2018 (Restated)(a) | ||||||||||||||||||||||||||||||||
Turnover | 22,445 | 17,105 | 13,163 | 52,713 | 22,868 | 16,020 | 12,094 | 50,982 | ||||||||||||||||||||||||
Operating profit | 3,275 | 2,504 | 2,022 | 7,801 | 4,824 | 3,621 | 4,194 | 12,639 | ||||||||||||||||||||||||
Non-underlying items | 254 | 401 | 168 | 823 | (437 | ) | (892 | ) | (1,847 | ) | (3,176 | ) | ||||||||||||||||||||
Underlying operating profit | 3,529 | 2,905 | 2,190 | 8,624 | 4,387 | 2,729 | 2,347 | 9,463 | ||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | (2 | ) | 108 | 21 | 127 | – | 114 | 71 | 185 | |||||||||||||||||||||||
2015 | ||||||||||||||||||||||||||||||||
2017 (Restated)(a) | ||||||||||||||||||||||||||||||||
Turnover | 22,425 | 17,294 | 13,553 | 53,272 | 23,266 | 17,525 | 12,924 | 53,715 | ||||||||||||||||||||||||
Operating profit | 3,019 | 2,273 | 2,223 | 7,515 | 3,847 | 3,120 | 1,990 | 8,957 | ||||||||||||||||||||||||
Non-underlying items | 181 | 399 | 216 | 796 | 306 | (23 | ) | 260 | 543 | |||||||||||||||||||||||
Underlying operating profit | 3,200 | 2,672 | 2,439 | 8,311 | 4,153 | 3,097 | 2,250 | 9,500 | ||||||||||||||||||||||||
Share of net profit/(loss) of joint ventures and associates | (1 | ) | 96 | 12 | 107 | 12 | 112 | 31 | 155 |
Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
(b) | Refers to Asia, Africa, Middle East, Turkey, Russia, Ukraine and Belarus. |
Transactions between the Unilever Group’s geographical regions are immaterial and are carried out on an arm’s length basis.
3. Operating costs andnon-underlying items
Operating costs Operating costs include cost of sales, brand and marketing investment and overheads. (i) Cost of sales Cost of sales includes the cost of inventories sold during the period and distribution costs. The cost of inventories are raw and packaging materials and related production costs. Distribution costs are charged to the income statement as incurred. (ii) Brand and marketing investment Brand and marketing investment include costs related to creating and maintaining brand equity and brand awareness. This includes media, advertising production, promotional materials and engagement with consumers. These costs are charged to the income statement as incurred. (iii) Overheads Overheads include staff costs associated with sales activities and central functions such as finance, human resources and research and development costs. Research and development costs are staff costs, material costs, depreciation of property, plant and equipment and other costs that are directly attributable to research and product development activities. These costs are charged to the income statement as incurred. |
Annual Report on Form 20-F | 95 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUPCONTINUED
3. OPERATING COSTS ANDNotes to the Consolidated Financial Statements
NON-UNDERLYINGUnilever Group ITEMScontinued
BRAND AND MARKETING INVESTMENT
Brand3. Operating costs and marketing investment includes costs incurred for the purpose of building and maintaining brand equity and awareness. These include media, advertising production, promotional materials and engagement with consumers. non-underlying itemscontinued
Non-underlying items These items are relevant to an understanding of our financial performance due to their nature and/or frequency of occurrence. (i)Non-underlying items within operating profit These are gains and losses on business disposals, acquisition and disposal-related costs, restructuring costs, impairments andone-off items within operating profit. Restructuring costs are charges associated with activities planned by management that significantly change either the scope of the business or the manner in which it is conducted. (ii)Non-underlying items not in operating profit but within net profit These are net monetary gain or loss arising from hyperinflationary economies and significant and unusual items in net finance cost, share of profit/ (loss) of joint ventures and associates and taxation. |
| € million 2019 |
| | € million 2018 (Restated) |
(a) | | € million 2017 (Restated) |
(a) | ||||
Turnover | 51,980 | 50,982 | 53,715 | |||||||||
Cost of sales | (29,102 | ) | (28,703 | ) | (30,484 | ) | ||||||
of which: | ||||||||||||
Distribution costs | (3,089 | ) | (3,057 | ) | (3,202 | ) | ||||||
Production costs | (3,701 | ) | (3,732 | ) | (4,190 | ) | ||||||
Raw and packaging materials and goods purchased for resale | (20,769 | ) | (20,516 | ) | (21,587 | ) | ||||||
Other | (1,543 | ) | (1,398 | ) | (1,505 | ) | ||||||
Gross profit | 22,878 | 22,279 | 23,231 | |||||||||
Selling and administrative expenses | (12,931 | ) | (12,816 | ) | (13,731 | ) | ||||||
of which: | ||||||||||||
Brand and marketing investment | (7,272 | ) | (7,150 | ) | (7,575 | ) | ||||||
Overheads | (5,659 | ) | (5,666 | ) | (6,156 | ) | ||||||
of which: Research and development | (840 | ) | (900 | ) | (900 | ) | ||||||
Non-underlying items within operating profit before tax | (1,239 | ) | 3,176 | (543 | ) | |||||||
Operating profit | 8,708 | 12,639 | 8,957 |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
Exchange losses within operating costs are charged to the income statement as incurred.€41 million (2018:€49 million; 2017:€214 million).
RESEARCH AND DEVELOPMENT
Expenditure on research and development includes staff costs, material costs, depreciation of property, plant and equipment and other costs directly attributable to research and product development activities. These costs are charged to the income statement as incurred.
NON-UNDERLYING ITEMS
Non-underlying items are costs and revenues relating to gains and losses on business disposals, acquisition and disposal-related costs, restructuring costs, impairments and otherone-off items within operating profit, and other significant and unusual items within net profit but outside of operating profit, which we collectively termnon-underlying items due to their nature and/or frequency of occurrence. These items are significant in terms of nature and/or amount and are relevant to an understanding of our financial performance.
Restructuring costs are charges associated with activities planned by management that significantly change either the scope of the business or the manner in which it is conducted.
€ million | € million | € million | ||||||||||
2017 | 2016 | 2015 | ||||||||||
Turnover | 53,715 | 52,713 | 53,272 | |||||||||
Cost of sales | (30,547 | ) | (30,229 | ) | (30,808 | ) | ||||||
of which: Distribution costs | (3,241 | ) | (3,246 | ) | (3,358 | ) | ||||||
Gross profit | 23,168 | 22,484 | 22,464 | |||||||||
Selling and administrative expenses | (14,311 | ) | (14,683 | ) | (14,949 | ) | ||||||
of which: Brand and marketing investment | (7,566 | ) | (7,731 | ) | (8,003 | ) | ||||||
Research and development | (900 | ) | (978 | ) | (1,005 | ) | ||||||
Operating profit | 8,857 | 7,801 | 7,515 |
NON-UNDERLYING ITEMS(a)
Non-underlying items are disclosed on the face of the income statement to provide additional information to users to help them better understand underlying business performance.
€ million | € million | € million | ||||||||||||||||||
Notes | 2017 | 2016 | 2015 | |||||||||||||||||
Non-underlying items within operating profit before tax | (543 | ) | (823 | ) | (796 | ) | ||||||||||||||
Acquisition and disposal-related costs |
|
(159 |
) |
|
(132 |
) |
|
(105 |
) | |||||||||||
Gain/(loss) on disposal of group companies(b) | 334 | (95 | ) | (9 | ) | |||||||||||||||
Restructuring costs | (638 | ) | (578 | ) | (446 | ) | ||||||||||||||
Impairments and otherone-off items(c) | (80 | ) | (18 | ) | (236 | ) | ||||||||||||||
Tax onnon-underlying items within operating profit | 77 | 213 | 180 | |||||||||||||||||
Non-underlying items within operating profit after tax | (466 | ) | (610 | ) | (616 | ) | ||||||||||||||
Non-underlying items not in operating profit but within net profit before tax | ||||||||||||||||||||
Premium paid on buy back of preference shares | 25 | (382 | ) | - | - | |||||||||||||||
Tax impact ofnon-underlying items not in operating profit but within net profit | 578 | - | - | |||||||||||||||||
Tax on premium paid on buy back of preference shares (non deductible) | - | - | - | |||||||||||||||||
Impact of US tax reform | 6A | 578 | - | - | ||||||||||||||||
Non-underlying items not in operating profit but within net profit after tax | 196 | - | - | |||||||||||||||||
Non-underlying items after tax(d) | (270 | ) | (610 | ) | (616 | ) | ||||||||||||||
Attributable to: | ||||||||||||||||||||
Non-controlling interest | (8 | ) | (9 | ) | (11 | ) | ||||||||||||||
Shareholders’ equity | (262 | ) | (601 | ) | (605 | ) |
€ million 2019 | € million 2018 | € million 2017 | ||||||||||
Non-underlying items within operating profit before tax | (1,239 | ) | 3176 | (543 | ) | |||||||
Acquisition and disposal-related costs(a) | (132 | ) | 76 | (159 | ) | |||||||
Gain/(loss) on disposal of group companies(b) | 70 | 4,331 | 334 | |||||||||
Restructuring costs(c) | (1,159 | ) | (914 | ) | (638 | ) | ||||||
Impairments(d) | (18 | ) | (208 | ) | – | |||||||
One-off items(e) | – | (109 | ) | (80 | ) | |||||||
Tax onnon-underlying items within operating profit(f) | 309 | (259 | ) | 77 | ||||||||
Non-underlying items within operating profit after tax | (930 | ) | 2,917 | (466 | ) | |||||||
Non-underlying items not in operating profit but within net profit before tax | 35 | 154 | (382 | ) | ||||||||
Premium paid on buyback of preference shares | – | – | (382 | ) | ||||||||
Share of gain on disposal of Spreads business in Portugal JV | 3 | 32 | – | |||||||||
Net monetary gain arising from hyperinflationary economies | 32 | 122 | – | |||||||||
Tax impact ofnon-underlying items not in operating profit but within net profit(f) | (196 | ) | (29 | ) | 578 | |||||||
Impact of US tax reform(g) | – | (29 | ) | 578 | ||||||||
Taxes related to the reorganisation of our European business | (175 | ) | – | – | ||||||||
Hyperinflation adjustment for Argentina deferred tax | (21 | ) | – | – | ||||||||
Non-underlying items not in operating profit but within net profit after tax | (161 | ) | 125 | 196 | ||||||||
Non-underlying items after tax(h) | (1,091 | ) | 3,042 | (270 | ) | |||||||
Attributable to: | ||||||||||||
Non-controlling interest | (28 | ) | 18 | (8 | ) | |||||||
Shareholders’ equity | (1,063 | ) | 3,024 | (262 | ) |
(a) |
|
(b) | 2019 includes a gain of€57 million relating to the disposal of Alsa. 2018 includes a gain of€4,331 million on disposal of spreads business. 2017 includes a gain of€309 million from the sale of AdeS soy beverage business in Latin America. |
(c) | Restructuring costs are comprised of various supply chain optimisation projects and organisational change programmes across markets all of which have been further accelerated during 2019. |
(d) | 2019 includes a charge of€18 million relating to an impairment of goodwill for a local business classified to held for sale. 2018 includes a charge of€208 million relating to impairment of Blueair intangible asset. |
(e) | 2018 includes a charge of€98 million for litigation matters comprised of€48 million for UK pension obligations and€50 million for legal cases in relation to investigations by national competition authorities. 2017 includes an€80 million charge for legal cases in relation to investigations by national competition authorities including those within Italy and South Africa. |
Tax impact of non-underlying items shown in the income statement is the total of tax on non-underlying items within operating profit and the tax impact of non-underlying items not in operating profit but within net profit. |
(g) | On 22 December 2017, HR1, formerly known as the Tax Cuts and Jobs Act was signed into law in the United States. As a result, tax benefit of€578 million was recognised in 2017, primarily due tore-measurement of deferred tax assets and liabilities at the new lower 21% federal tax rate. |
(h) | Non-underlying items after tax is calculated asnon-underlying items within operating profit after tax plusnon-underlying items not in operating profit but within net profit after |
96 | Annual Report on Form 20-F |
Financial Statements |
3. OPERATING COSTS ANDNON-UNDERLYING ITEMSCONTINUED
OTHER
Other significant cost items within operating costs include:
€ million | € million | € million | ||||||||||||||||||
Notes | 2017 | 2016 | 2015 | |||||||||||||||||
Staff costs | 4A | (6,712 | ) | (6,523 | ) | (6,555 | ) | |||||||||||||
Raw and packaging materials and goods purchased for resale | (21,579 | ) | (21,122 | ) | (21,543 | ) | ||||||||||||||
Amortisation of finite-life intangible assets and software | 9 | (365 | ) | (310 | ) | (273 | ) | |||||||||||||
Depreciation of property, plant and equipment | 10 | (1,173 | ) | (1,154 | ) | (1,097 | ) | |||||||||||||
Exchange gains/(losses): | (214 | ) | (209 | ) | (87 | ) | ||||||||||||||
On underlying transactions | (51 | ) | (28 | ) | (118 | ) | ||||||||||||||
On covering forward contracts | (163 | ) | (181 | ) | 31 | |||||||||||||||
Lease rentals: | (557 | ) | (531 | ) | (534 | ) | ||||||||||||||
Minimum operating lease payments | (568 | ) | (536 | ) | (546 | ) | ||||||||||||||
Less:Sub-lease income relating to operating lease agreements | 11 | 5 | 12 | |||||||||||||||||
4. EMPLOYEESEmployees
4A. STAFF AND MANAGEMENT COSTSStaff and management costs
€ million | € million | € million | ||||||||||||||||||||||
Staff costs | 2017 | 2016 | 2015 | € million 2019 | € million 2018 | € million 2017 | ||||||||||||||||||
Wages and salaries | (5,416 | ) | (5,347 | ) | (5,474 | ) | (5,364 | ) | (5,346 | ) | (5,416 | ) | ||||||||||||
Social security costs | (613 | ) | (606 | ) | (606 | ) | (541 | ) | (571 | ) | (613 | ) | ||||||||||||
Other pension costs | (399 | ) | (372 | ) | (325 | ) | (334 | ) | (439 | ) | (399 | ) | ||||||||||||
Share-based compensation costs | (284 | ) | (198 | ) | (150 | ) | (151 | ) | (196 | ) | (284 | ) | ||||||||||||
(6,712 | ) | (6,523 | ) | (6,555 | ) | |||||||||||||||||||
(6,390 | ) | (6,552 | ) | (6,712 | ) | |||||||||||||||||||
‘000 | ‘000 | ‘000 | ||||||||||||||||||||||
Average number of employees during the year | 2017 | 2016 | 2015 | ‘000 2019 | ‘000 2018 | ‘000 2017 | ||||||||||||||||||
Asia/AMET/RUB | 93 | 95 | 97 | 84 | 88 | 93 | ||||||||||||||||||
The Americas | 41 | 42 | 42 | 40 | 40 | 41 | ||||||||||||||||||
Europe | 31 | 32 | 32 | 29 | 30 | 31 | ||||||||||||||||||
165 | 169 | 171 | ||||||||||||||||||||||
153 | 158 | 165 | ||||||||||||||||||||||
€ million | € million | € million | ||||||||||||||||||||||
Key management compensation | 2017 | 2016 | 2015 | € million 2019 | € million 2018 | € million 2017 | ||||||||||||||||||
Salaries and short-term employee benefits | (34 | ) | (31 | ) | (34 | ) | (42 | ) | (40 | ) | (34 | ) | ||||||||||||
Post-employment benefits | - | (1 | ) | (1 | ) | – | – | – | ||||||||||||||||
Share-based benefits(a) | (20 | ) | (17 | ) | (30 | ) | (16 | ) | (13 | ) | (26 | ) | ||||||||||||
| (54
| )
|
| (49
| )
|
| (65
| )
| ||||||||||||||||
Of which:Executive Directors | (14 | ) | (13 | ) | (18 | ) | ||||||||||||||||||
(58 | ) | (53 | ) | (60 | ) | |||||||||||||||||||
Of which: Executive Directors | (9 | ) | (13 | ) | (17 | ) | ||||||||||||||||||
Other(b) | (40 | ) | (36 | ) | (47 | ) | (49 | ) | (40 | ) | (43 | ) | ||||||||||||
Non-Executive Directors’ fees | (2 | ) | (2 | ) | (2 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||
(56 | ) | (51 | ) | (67 | ) | |||||||||||||||||||
(60 | ) | (55 | ) | (62 | ) |
(a) | Share-based benefits are shown based on the expense recognised in the income statement. Share-based benefits compensation for key management on a vesting |
(b) | Other includes all members of the Unilever Leadership Executive, other than Executive Directors. |
Key management are defined as the members of Unilever Leadership Executive (ULE) and theNon-Executive Directors. Compensation for the ULE includes the full yearfull-year compensation for ULE members who joined part way through the year.
Annual Report on Form 20-F | 97 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUP
Notes to the Consolidated Financial Statements
CONTINUEDUnilever Groupcontinued
4B. PENSIONS AND SIMILAR OBLIGATIONSPensions and similar obligations
For defined benefit plans, operating and finance costs are recognised separately in the income statement. The amount charged to operating cost in the income statement is the cost of accruing pension benefits promised to employees over the year, plus the costs of individual events such as past service benefit changes, settlements and curtailments (such events are recognised immediately in the income statement). The amount charged or credited to finance costs is a net interest expense calculated by applying the liability discount rate to the net defined benefit liability or asset. Any differences between the expected interest on assets and the return actually achieved, and any changes in the liabilities over the year due to changes in assumptions or experience within the plans, are recognised immediately in the statement of comprehensive income. The defined benefit plan surplus or deficit on the balance sheet comprises the total for each plan of the fair value of plan assets less the present value of the defined benefit liabilities (using a discount rate based on high-quality corporate bonds, or a suitable alternative where there is no active corporate bond market). All defined benefit plans are subject to regular actuarial review using the projected unit method by external consultants. The Group policy is that the most material plans, representing approximately 84% of the defined benefit liabilities, are formally valued every year. Other material plans, accounting for a further 12% of the liabilities, have their liabilities updated each year. Group policy for the remaining plans requires a full actuarial valuation at least every three years. Asset values for all plans are updated every year. For defined contribution plans, the charges to the income statement are the company contributions payable, as the company’s obligation is limited to the contributions paid into the plans. The assets and liabilities of such plans are not included in the balance sheet of the Group. |
Description of accruing pension benefits promised to employees over the year, plus the costs of individual events such as past service benefit changes, settlements and curtailments (such events are recognised immediately in the income statement). The amount charged or credited to finance costs is a net interest expense calculated by applying the liability discount rate to the net defined benefit liability or asset. Any differences between the expected interest on assets and the return actually achieved, and any changes in the liabilities over the year due to changes in assumptions or experience within the plans are recognised immediately in the statement of comprehensive income.
The defined benefit plan surplus or deficit on the balance sheet comprises the total for each plan of the fair value of plan assets less the present value of the defined benefit liabilities (using a discount rate based on high-quality corporate bonds, or a suitable alternative where there is no active corporate bond market).
All defined benefit plans are subject to regular actuarial review using the projected unit method, either by external consultants or by actuaries employed by Unilever. The Group policy is that the most material plans, representing approximately 85% of the defined benefit liabilities, are formally valued every year. Other material plans, accounting for a further 13% of the liabilities, have their liabilities updated each year. Group policy for the remaining plans requires a full actuarial valuation at least every three years. Asset values for all plans are updated every year.
For defined contribution plans, the charges to the income statement are the company contributions payable, as the company’s obligation is limited to the contributions paid into the plans. The assets and liabilities of such plans are not included in the balance sheet of the Group.
DESCRIPTION OF PLANS
The Group increasingly operates a number of defined contribution plans, the assets of which are held in external funds. In certain countries the Group operates defined benefit pension plans based on employee pensionable remuneration and length of service. The majority of defined benefit plans are either career average, final salary or hybrid plans and operate on a funded basis.basis with assets held in external funds. Benefits are determined by the plan rules and are linked to inflation in some countries. Our largest plans are in the UK and Netherlands. In the UK, we operate a combination of an open career average defined benefit plan with a salary limit for benefit accrual, and a defined contribution plan. In the Netherlands, we operate a collective defined contribution plan for all new benefit accrual and a closed career average defined benefit plan for benefits built up to April 2015.
The Group also provides other post-employment benefits, mainly post-employment healthcare plans in the United States. These plans are predominantly unfunded.
GOVERNANCEGovernance
The majority of the Group’s externally funded plans are established as trusts, foundations or similar entities. The operation of these entities is governed by local regulations and practice in each country, as is the nature of the relationship between the Group and the Trustees (or equivalent) and their composition. Where Trustees (or equivalent) are in place to operate plans, they are generally required to act on behalf of the plan’s stakeholders. They are tasked with periodic reviews of the solvency of the fund in accordance with local legislation and play a role in the long-term investment and funding strategy. The Group also has an internal body, the Pensions and Equity Committee, that is responsible for setting the company’s policies and decision-making on plan matters, including but not limited to design, funding, investments, risk management and governance.
INVESTMENT STRATEGYInvestment strategy
The Group’s investment strategy in respect of its funded 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 Group 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 continue to invest a good proportion of the assets in equities, which the Group believes offer the best returns over the long-term,long term, commensurate with an acceptable level of risk. The plans expose the Group to a number of actuarial risks such as investment risk, interest rate risk, longevity risk and, in certain markets, inflation risk. There are no unusual entity or plan-specific risks to the Group. For risk control, the pension funds also have significant investments in liability matching assets (bonds) as well as in property and other alternative assets; additionally, the Group uses derivatives to further mitigate the impact of the risks outlined above. The majority of assets are managed by a number of external fund managers with a small proportion managedin-house. Unilever has a pooled investment vehicle (Univest) which it believes offers its pension plans around the world a simplified externally managed investment vehicle to implement their strategic asset allocation models, currently for bonds, equities and alternative assets. The aim is to provide high-quality, well diversified, cost-effective, risk-controlled vehicles. The pension plans’ investments are overseen by Unilever’s internal investment company, the Univest Company.
ASSUMPTIONSAssumptions
With the objective of presenting the assets and liabilities of the pensions and other post-employment benefit plans at their fair value on the balance sheet, assumptions under IAS 19 are set by reference to market conditions at the valuation date. The actuarial assumptions used to calculate the benefit liabilities vary according to the country in which the plan is situated. The following table shows the assumptions, weighted by liabilities, used to value the principal defined benefit plans (representing approximately 96% of total pension liabilities)liabilities and other post-employment benefits.benefit liabilities).
31 December 2017 | 31 December 2016 | |||||||||||||||
Defined benefit pension plans | Other post-employment | Defined benefit pension plans | Other post-employment | |||||||||||||
Discount rate | 2.5% | 4.2% | 2.6% | 4.8% | ||||||||||||
Inflation | 2.5% | n/a | 2.5% | n/a | ||||||||||||
Rate of increase in salaries | 2.8% | 3.0% | 2.9% | 3.0% | ||||||||||||
Rate of increase for pensions in payment (where provided) | 2.4% | n/a | 2.4% | n/a | ||||||||||||
Rate of increase for pensions in deferment (where provided) | 2.6% | n/a | 2.7% | n/a | ||||||||||||
Long-term medical cost inflation | n/a | 5.3% | n/a | 5.3% |
4B. PENSIONS AND SIMILAR OBLIGATIONSCONTINUED
31 December 2019 | 31 December 2018 | |||||||||||||||
Defined benefit pension plans | Other post- employment benefit plans | Defined benefit pension plans | Other post- employment benefit plans | |||||||||||||
Discount rate | 1.9% | 3.9% | 2.7% | 4.8% | ||||||||||||
Inflation | 2.3% | n/a | 2.5% | n/a | ||||||||||||
Rate of increase in salaries | 2.9% | 3.0% | 2.8% | 3.0% | ||||||||||||
Rate of increase for pensions in payment (where provided) | 2.2% | n/a | 2.4% | n/a | ||||||||||||
Rate of increase for pensions in deferment (where provided) | 2.4% | n/a | 2.6% | n/a | ||||||||||||
Long-term medical cost inflation | n/a | 5.4% | n/a | 5.3% |
The valuations of other post-employment benefit plans generally assume a higher initial level of medical cost inflation, which falls from 7% to the long-term rate within the next five years. Assumed healthcare cost trend rates have a significant effect on the amounts reported for healthcare plans.
98 | Annual Report on Form 20-F 2019 |
Financial Statements |
4B. Pensions and similar obligationscontinued
For the most importantUK and Netherlands pension plans, representing approximately 68%69% of all defined benefit planspension liabilities, the assumptions used at 31 December 20172019 and 20162018 were:
United Kingdom | Netherlands | |||||||||||||||||||||||
United Kingdom | Netherlands | �� 2019 | 2018 | 2019 | 2018 | |||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||
Discount rate | 2.5% | 2.7% | 1.8% | 1.8% | 2.0% | 2.8% | 1.1% | 1.8% | ||||||||||||||||
Inflation | 3.1% | 3.2% | 1.7% | 1.7% | 2.9% | 3.2% | 1.5% | 1.6% | ||||||||||||||||
Rate of increase in salaries | 3.0% | 3.1% | 2.2% | 2.2% | 3.2% | 3.1% | 2.0% | 2.1% | ||||||||||||||||
Rate of increase for pensions in payment | 3.0% | 3.1% | 1.7% | 1.7% | ||||||||||||||||||||
Rate of increase for pensions in payment | ||||||||||||||||||||||||
(where provided) | 2.8% | 3.1% | 1.5% | 1.6% | ||||||||||||||||||||
Rate of increase for pensions in deferment | 3.0% | 3.1% | 1.7% | 1.7% | 2.8% | 3.1% | 1.5% | 1.6% | ||||||||||||||||
Number of years a current pensioner is | ||||||||||||||||||||||||
Men | 22.1 | 22.5 | 22.5 | 21.8 | 21.6 | 22.1 | 22.6 | 22.5 | ||||||||||||||||
Women | 24.0 | 24.6 | 24.3 | 24.0 | 23.4 | 24.0 | 24.1 | 24.0 | ||||||||||||||||
Number of years a future pensioner currently aged 45 is expected to live beyond age 65: | ||||||||||||||||||||||||
Men | 22.6 | 23.8 | 24.6 | 24.1 | 22.6 | 22.7 | 24.5 | 24.4 | ||||||||||||||||
Women | 25.6 | 26.5 | 26.6 | 26.3 | 24.6 | 25.6 | 26.2 | 26.1 |
Demographic assumptions, such as mortality rates, are set with having regard to the latest trends in life expectancy (including expectations of future improvements), plan experience and other relevant data. These assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the pension plans. The years of life expectancy for 20172019 above have been translated from the following tables:
UK: The year of use S2S3 series all pensioners (‘S2PA’(“S3PMA” and “S3PFA_M”) tables have been adopted, which are based on the experience of UK pension schemes over the period 2004-2011.2009-2016. Scaling factors are applied reflecting the experience of our pension funds appropriate to the member’s gender and status. Future improvements in longevity have been allowed for in line with the 20162018 CMI core projections (Sk = 7.5)7.0 and “A” parameter = 0.0%) and a 1% pa1.0% long-term improvement rate.
Netherlands: The Dutch Actuarial Society’s AG Prognosetafel 20162018 table is used with correction factors (2017) to allow for the typically longer life expectancy for fund members relative to the general population. This table has anin-built allowance for future improvements in longevity.
The remaining defined benefit plans are considered immaterial. Their assumptions vary due to a number of factors including the currency and long termlong-term economic conditions of the countries where they are situated.
INCOME STATEMENTIncome statement
The charge to the income statement comprises:
€ million | € million | € million | Notes | € million 2019 | € million 2018 | € million 2017 | ||||||||||||||||||||||||||||||
Notes | 2017 | 2016 | 2015 | |||||||||||||||||||||||||||||||||
Charged to operating profit: | ||||||||||||||||||||||||||||||||||||
Defined benefit pension and other benefit plans: | ||||||||||||||||||||||||||||||||||||
Current service cost | (245 | ) | (226 | ) | (271 | ) | (216 | ) | (220 | ) | (245 | ) | ||||||||||||||||||||||||
Employee contributions | 18 | 17 | 17 | 17 | 17 | 18 | ||||||||||||||||||||||||||||||
Special termination benefits | (4 | ) | (6 | ) | (9 | ) | (5 | ) | (16 | ) | (4 | ) | ||||||||||||||||||||||||
Past service cost including (losses)/gains on curtailments | 23 | 32 | 129 | 65 | (41 | ) | 23 | |||||||||||||||||||||||||||||
Settlements | 4 | (2 | ) | 6 | (2 | ) | – | 4 | ||||||||||||||||||||||||||||
Defined contribution plans | (195 | ) | (187 | ) | (197 | ) | (193 | ) | (179 | ) | (195 | ) | ||||||||||||||||||||||||
Total operating cost | 4A | (399 | ) | (372 | ) | (325 | ) | 4A | (334 | ) | (439 | ) | (399 | ) | ||||||||||||||||||||||
Finance income/(cost) | 5 | (96 | ) | (94 | ) | (121 | ) | 5 | (30 | ) | (25 | ) | (96 | ) | ||||||||||||||||||||||
Net impact on the income statement (before tax) | (495 | ) | (466 | ) | (446 | ) | (364 | ) | (464 | ) | (495 | ) |
STATEMENT OF COMPREHENSIVE INCOMEStatement of comprehensive income
Amounts recognised in the statement of comprehensive income on the remeasurement of the net defined benefit liability.
€ million | € million | € million | € million 2019 | € million 2018 | € million 2017 | |||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Return on plan assets excluding amounts included in net finance income/(cost) | 1,475 | 1,877 | (254 | ) | 2,385 | (1,108 | ) | 1,475 | ||||||||||||||||
Actuarial gains/(losses) arising from changes in demographic assumptions | 222 | (217 | ) | (22 | ) | 183 | 42 | 222 | ||||||||||||||||
Actuarial gains/(losses) arising from changes in financial assumptions | (210 | ) | (2,963 | ) | 1,167 | (2,138 | ) | 611 | (210 | ) | ||||||||||||||
Experience gains/(losses) arising on pension plan and other benefit plan liabilities | 133 | 82 | 233 | (12 | ) | 18 | 133 | |||||||||||||||||
Change in asset ceiling, excluding amounts included in finance cost | (37 | ) | – | – | ||||||||||||||||||||
Total of defined benefit costs recognised in other comprehensive income | 1,620 | (1,221 | ) | 1,124 | 381 | (437 | ) | 1,620 |
Annual Report on Form 20-F | 99 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUPCONTINUED
4B. PENSIONS AND SIMILAR OBLIGATIONS
Notes to the Consolidated Financial Statements
CONTINUEDUnilever Groupcontinued
BALANCE SHEET
4B. Pensions and similar obligationscontinued
Balance sheet
The assets, liabilities and surplus/(deficit) position of the pension and other post-employment benefit plans at the balance sheet date were:
€ million 2019 | € million 2018 | |||||||||||||||||||||||||||||||
€ million 2017 | € million 2016 | Pension plans | Other post- employment benefit plans | Pension plans | Other post- employment benefit plans | |||||||||||||||||||||||||||
Pension plans | Other post- employment benefit plans | Pension plans | Other post- employment benefit plans | |||||||||||||||||||||||||||||
Fair value of assets | 22,361 | 21 | 21,162 | 21 | 23,749 | 14 | 20,867 | 13 | ||||||||||||||||||||||||
Present value of liabilities | (22,420 | ) | (523 | ) | (23,751 | ) | (605 | ) | (23,438 | ) | (484 | ) | (21,288 | ) | (466 | ) | ||||||||||||||||
Net liabilities | (59 | ) | (502 | ) | (2,589 | ) | (584 | ) | ||||||||||||||||||||||||
Computed net assets/(liabilities) | 311 | (470 | ) | (421 | ) | (453 | ) | |||||||||||||||||||||||||
Irrecoverable surplus(a) | (37 | ) | – | – | – | |||||||||||||||||||||||||||
Net pension assets/(liabilities) | 274 | (470 | ) | (421 | ) | (453 | ) | |||||||||||||||||||||||||
Of which in respect of: | ||||||||||||||||||||||||||||||||
Funded plans in surplus: | ||||||||||||||||||||||||||||||||
Liabilities | (17,772 | ) | – | (16,182 | ) | – | ||||||||||||||||||||||||||
Assets | 20,229 | 2 | 17,909 | 1 | ||||||||||||||||||||||||||||
Aggregate Surplus: | 2,457 | 2 | 1,727 | 1 | ||||||||||||||||||||||||||||
Irrecoverable surplus | (37 | ) | – | – | – | |||||||||||||||||||||||||||
Pension asset net of liabilities | 2,420 | 2 | 1,727 | 1 | ||||||||||||||||||||||||||||
Funded plans in deficit: | ||||||||||||||||||||||||||||||||
Liabilities | (4,657 | ) | (32 | ) | (4,149 | ) | (30 | ) | ||||||||||||||||||||||||
Assets | 3,520 | 12 | 2,958 | 12 | ||||||||||||||||||||||||||||
Pension liability net of assets | (59 | ) | (502 | ) | (2,589 | ) | (584 | ) | (1,137 | ) | (20 | ) | (1,191 | ) | (18 | ) | ||||||||||||||||
Of which in respect of: | ||||||||||||||||||||||||||||||||
Funded plans in surplus: | ||||||||||||||||||||||||||||||||
Liabilities | (17,132 | ) | - | (5,833 | ) | - | ||||||||||||||||||||||||||
Assets | 19,302 | 3 | 6,524 | 3 | ||||||||||||||||||||||||||||
Aggregate surplus | 2,170 | 3 | 691 | 3 | ||||||||||||||||||||||||||||
Pension asset net of liabilities | 2,170 | 3 | 691 | 3 | ||||||||||||||||||||||||||||
Funded plans in deficit: | ||||||||||||||||||||||||||||||||
Liabilities | (4,267 | ) | (35 | ) | (16,783 | ) | (36 | ) | ||||||||||||||||||||||||
Assets | 3,059 | 18 | 14,638 | 18 | ||||||||||||||||||||||||||||
Pension liability net of assets | (1,208 | ) | (17 | ) | (2,145 | ) | (18 | ) | ||||||||||||||||||||||||
Unfunded plans: | ||||||||||||||||||||||||||||||||
Pension liability | (1,021 | ) | (488 | ) | (1,135 | ) | (569 | ) | (1,009 | ) | (452 | ) | (957 | ) | (436 | ) |
(a) | A surplus is deemed recoverable to the extent that the Group can benefit economically from the surplus. Unilever assesses the maximum economic benefit available through a combination of refunds and reductions in future contributions in accordance with local legislation and individual financing arrangements with each of our funded defined benefit plans. |
Reconciliation of refundschange in assets and reductions in future contributions in accordance with local legislation and individual financing arrangements with each of our funded defined benefit plans.
RECONCILIATION OF CHANGE IN ASSETS AND LIABILITIESliabilities
Movements in assets during the year:
The group of plans within ‘Rest of world’ category in the tables below are not materially different with respect to their risks that would require disaggregated disclosure.
UK | Netherlands | Rest of world | € million 2017 Total | UK | Netherlands | Rest of world | € million 2016 Total | |||||||||||||||||||||||||
1 January | 9,963 | 5,116 | 6,104 | 21,183 | 9,950 | 4,873 | 5,919 | 20,742 | ||||||||||||||||||||||||
Employee contributions | - | 1 | 17 | 18 | - | - | 17 | 17 | ||||||||||||||||||||||||
Settlements | - | - | (8 | ) | (8 | ) | - | - | - | - | ||||||||||||||||||||||
Actual return on plan assets (excluding amounts in net finance income/charge) | 863 | 275 | 337 | 1,475 | 1,412 | 281 | 184 | 1,877 | ||||||||||||||||||||||||
Interest income | 270 | 91 | 179 | 540 | 329 | 120 | 215 | 664 | ||||||||||||||||||||||||
Employer contributions | 778 | 43 | 284 | 1,105 | 202 | 11 | 299 | 512 | ||||||||||||||||||||||||
Benefit payments | (457 | ) | (169 | ) | (613 | ) | (1,239 | ) | (456 | ) | (169 | ) | (701 | ) | (1,326 | ) | ||||||||||||||||
Reclassification of benefits(a) | - | - | (1 | ) | (1 | ) | - | - | (2 | ) | (2 | ) | ||||||||||||||||||||
Currency retranslation | (379 | ) | - | (312 | ) | (691 | ) | (1,474 | ) | - | 173 | (1,301 | ) | |||||||||||||||||||
31 December | 11,038 | 5,357 | 5,987 | 22,382 | 9,963 | 5,116 | 6,104 | 21,183 |
UK | Netherlands | Rest of world | € million 2019 Total | UK | Netherlands | Rest of world | € million 2018 Total | |||||||||||||||||||||||||
1 January | 10,329 | 4,996 | 5,555 | 20,880 | 11,038 | 5,357 | 5,987 | 22,382 | ||||||||||||||||||||||||
Employee contributions | – | – | 17 | 17 | – | – | 17 | 17 | ||||||||||||||||||||||||
Settlements | – | – | – | – | – | – | (1 | ) | (1 | ) | ||||||||||||||||||||||
Actual return on plan assets (excluding amounts in net finance income/charge) | 1,233 | 588 | 564 | 2,385 | (459 | ) | (303 | ) | (346 | ) | (1,108 | ) | ||||||||||||||||||||
Change in asset ceiling, excluding amounts included in finance cost | – | – | (37 | ) | (37 | ) | – | – | – | – | ||||||||||||||||||||||
Interest income | 292 | 89 | 192 | 573 | 274 | 95 | 182 | 551 | ||||||||||||||||||||||||
Employer contributions | 94 | 14 | 293 | 401 | 95 | 14 | 274 | 383 | ||||||||||||||||||||||||
Benefit payments | (455 | ) | (165 | ) | (588 | ) | (1,208 | ) | (472 | ) | (166 | ) | (561 | ) | (1,199 | ) | ||||||||||||||||
Currency retranslation | 629 | – | 84 | 713 | (147 | ) | – | 12 | (135 | ) | ||||||||||||||||||||||
Others | – | – | 2 | 2 | – | (1 | ) | (9 | ) | (10 | ) | |||||||||||||||||||||
31 December | 12,122 | 5,522 | 6,082 | 23,726 | 10,329 | 4,996 | 5,555 | 20,880 |
100 | Annual Report on Form 20-F |
Financial Statements |
4B. PENSIONS AND SIMILAR OBLIGATIONSPensions and similar obligationsCONTINUEDcontinued
Movements in liabilities during the year:
UK | Netherlands | Rest of world | € million Total | UK | Netherlands | Rest of world | € million Total | |||||||||||||||||||||||||
1 January | (10,981 | ) | (4,877 | ) | (8,498 | ) | (24,356 | ) | (10,602 | ) | (4,443 | ) | (8,017 | ) | (23,062 | ) | ||||||||||||||||
Current service cost | (114 | ) | (6 | ) | (125 | ) | (245 | ) | (89 | ) | (3 | ) | (134 | ) | (226 | ) | ||||||||||||||||
Employee contributions | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Special termination benefits | - | - | (4 | ) | (4 | ) | - | - | (6 | ) | (6 | ) | ||||||||||||||||||||
Past service costs including losses/(gains) on curtailments | 5 | 12 | 6 | 23 | 5 | 4 | 23 | 32 | ||||||||||||||||||||||||
Settlements | - | - | 12 | 12 | - | - | (2 | ) | (2 | ) | ||||||||||||||||||||||
Interest cost | (286 | ) | (86 | ) | (264 | ) | (636 | ) | (347 | ) | (109 | ) | (302 | ) | (758 | ) | ||||||||||||||||
Actuarial gain/(loss) arising from changes in demographic assumptions | 312 | (96 | ) | 6 | 222 | 23 | (19 | ) | (221 | ) | (217 | ) | ||||||||||||||||||||
Actuarial gain/(loss) arising from changes in financial assumptions | (189 | ) | - | (21 | ) | (210 | ) | (1,919 | ) | (524 | ) | (520 | ) | (2,963 | ) | |||||||||||||||||
Actuarial gain/(loss) arising from experience adjustments | 144 | (37 | ) | 26 | 133 | 29 | 46 | 7 | 82 | |||||||||||||||||||||||
Benefit payments | 457 | 169 | 613 | 1,239 | 456 | 169 | 701 | 1,326 | ||||||||||||||||||||||||
Reclassification of benefits(a) | - | 8 | - | 8 | - | 2 | - | 2 | ||||||||||||||||||||||||
Currency retranslation | 397 | - | 474 | 871 | 1,463 | - | (27 | ) | 1,436 | |||||||||||||||||||||||
31 December | (10,255 | ) | (4,913 | ) | (7,775 | ) | (22,943 | ) | (10,981 | ) | (4,877 | ) | (8,498 | ) | (24,356 | ) |
UK | Netherlands | Rest of world | € million 2019 Total | UK | Netherlands | Rest of world | € million 2018 Total | |||||||||||||||||||||||||
1 January | (9,739 | ) | (4,664 | ) | (7,351 | ) | (21,754 | ) | (10,255 | ) | (4,913 | ) | (7,775 | ) | (22,943 | ) | ||||||||||||||||
Current service cost | (104 | ) | (4 | ) | (108 | ) | (216 | ) | (109 | ) | (4 | ) | (107 | ) | (220 | ) | ||||||||||||||||
Special termination benefits | – | – | (5 | ) | (5 | ) | – | – | (16 | ) | (16 | ) | ||||||||||||||||||||
Past service costs including (losses)/gains on curtailments | 56 | – | 9 | 65 | (46 | ) | 8 | (3 | ) | (41 | ) | |||||||||||||||||||||
Settlements | – | – | (2 | ) | (2 | ) | – | – | 1 | 1 | ||||||||||||||||||||||
Interest cost | (276 | ) | (82 | ) | (245 | ) | (603 | ) | (254 | ) | (87 | ) | (235 | ) | (576 | ) | ||||||||||||||||
Actuarial gain/(loss) arising from changes in demographic assumptions | 157 | 14 | 12 | 183 | – | 53 | (11 | ) | 42 | |||||||||||||||||||||||
Actuarial gain/(loss) arising from changes in financial assumptions | (955 | ) | (511 | ) | (672 | ) | (2,138 | ) | 351 | 84 | 176 | 611 | ||||||||||||||||||||
Actuarial gain/(loss) arising from experience adjustments | (44 | ) | (15 | ) | 47 | (12 | ) | (45 | ) | 37 | 26 | 18 | ||||||||||||||||||||
Benefit payments | 455 | 165 | 588 | 1,208 | 472 | 166 | 561 | 1,199 | ||||||||||||||||||||||||
Currency retranslation | (551 | ) | – | (77 | ) | (628 | ) | 147 | – | 14 | 161 | |||||||||||||||||||||
Others | – | – | (20 | ) | (20 | ) | – | (8 | ) | 18 | 10 | |||||||||||||||||||||
31 December | (11,001 | ) | (5,097 | ) | (7,824 | ) | (23,922 | ) | (9,739 | ) | (4,664 | ) | (7,351 | ) | (21,754 | ) |
Movements in (deficit)/surplus during the year:
UK | Netherlands | Rest of world | € million 2019 Total | UK | Netherlands | Rest of world | € million 2018 Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK | Netherlands | Rest of world | € million 2017 Total | UK | Netherlands | Rest of world | € million Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
1 January | (1,018 | ) | 239 | (2,394 | ) | (3,173 | ) | (652 | ) | 430 | (2,098 | ) | (2,320 | ) | 590 | 332 | (1,796 | ) | (874 | ) | 783 | 444 | (1,788 | ) | (561 | ) | ||||||||||||||||||||||||||||||||||||||
Current service cost | (114 | ) | (6 | ) | (125 | ) | (245 | ) | (89 | ) | (3 | ) | (134 | ) | (226 | ) | (104 | ) | (4 | ) | (108 | ) | (216 | ) | (109 | ) | (4 | ) | (107 | ) | (220 | ) | ||||||||||||||||||||||||||||||||
Employee contributions | - | 1 | 17 | 18 | - | - | 17 | 17 | – | – | 17 | 17 | – | – | 17 | 17 | ||||||||||||||||||||||||||||||||||||||||||||||||
Special termination benefits | - | - | (4 | ) | (4 | ) | - | - | (6 | ) | (6 | ) | – | – | (5 | ) | (5 | ) | – | – | (16 | ) | (16 | ) | ||||||||||||||||||||||||||||||||||||||||
Past service costs including losses/(gains) on curtailments | 5 | 12 | 6 | 23 | 5 | 4 | 23 | 32 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Past service costs including (losses)/gains on curtailments | 56 | – | 9 | 65 | (46 | ) | 8 | (3 | ) | (41 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Settlements | - | - | 4 | 4 | - | - | (2 | ) | (2 | ) | – | – | (2 | ) | (2 | ) | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||
Actual return on plan assets (excluding amounts in net finance income/charge) | 863 | 275 | 337 | 1,475 | 1,412 | 281 | 184 | 1,877 | 1,233 | 588 | 564 | 2,385 | (459 | ) | (303 | ) | (346 | ) | (1,108 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Interest cost | (286 | ) | (86 | ) | (264 | ) | (636 | ) | (347 | ) | (109 | ) | (302 | ) | (758 | ) | (276 | ) | (82 | ) | (245 | ) | (603 | ) | (254 | ) | (87 | ) | (235 | ) | (576 | ) | ||||||||||||||||||||||||||||||||
Interest income | 270 | 91 | 179 | 540 | 329 | 120 | 215 | 664 | 292 | 89 | 192 | 573 | 274 | 95 | 182 | 551 | ||||||||||||||||||||||||||||||||||||||||||||||||
Actuarial gain/(loss) arising from changes in demographic assumptions | 312 | (96 | ) | 6 | 222 | 23 | (19 | ) | (221 | ) | (217 | ) | 157 | 14 | 12 | 183 | – | 53 | (11 | ) | 42 | |||||||||||||||||||||||||||||||||||||||||||
Actuarial gain/(loss) arising from changes in financial assumptions | (189 | ) | - | (21 | ) | (210 | ) | (1,919 | ) | (524 | ) | (520 | ) | (2,963 | ) | (955 | ) | (511 | ) | (672 | ) | (2,138 | ) | 351 | 84 | 176 | 611 | |||||||||||||||||||||||||||||||||||||
Actuarial gain/(loss) arising from experience adjustments | 144 | (37 | ) | 26 | 133 | 29 | 46 | 7 | 82 | (44 | ) | (15 | ) | 47 | (12 | ) | (45 | ) | 37 | 26 | 18 | |||||||||||||||||||||||||||||||||||||||||||
Employer contributions | 778 | 43 | 284 | 1,105 | 202 | 11 | 299 | 512 | 94 | 14 | 293 | 401 | 95 | 14 | 274 | 383 | ||||||||||||||||||||||||||||||||||||||||||||||||
Benefit payments | - | - | - | - | - | - | - | - | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||
Reclassification of benefits(a) | - | 8 | (1 | ) | 7 | - | 2 | (2 | ) | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency retranslation | 18 | - | 162 | 180 | (11 | ) | - | 146 | 135 | 78 | – | 7 | 85 | – | – | 26 | 26 | |||||||||||||||||||||||||||||||||||||||||||||||
Change in asset ceiling, excluding amounts included in finance cost | – | – | (37 | ) | (37 | ) | – | – | – | – | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Others | – | – | (18 | ) | (18 | ) | – | (9 | ) | 9 | – | |||||||||||||||||||||||||||||||||||||||||||||||||||||
31 December | 783 | 444 | (1,788 | ) | (561 | ) | (1,018 | ) | 239 | (2,394 | ) | (3,173 | ) | 1,121 | 425 | (1,742 | ) | (196 | ) | 590 | 332 | (1,796 | ) | (874 | ) |
The actual return on plan assets during 20172019 was€2,0152,958 million, being€1,4752,385 million of asset returns and€540 573 million of interest income shown in the tables above (2016:(2018:€2,541(557) million).
Movements in irrecoverable surplus during the year:
UK | Netherlands | Rest of world | € million 2019 Total | UK | Netherlands | Rest of world | € million 2018 Total | |||||||||||||||||||||||||
1 January | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Change in asset ceiling, excluding amounts included in finance cost | – | – | (37 | ) | (37 | ) | – | – | – | – | ||||||||||||||||||||||
31 December | – | – | (37 | ) | (37 | ) | – | – | – | – |
No amounts were included in finance cost in respect of irrecoverable surplus in 2019 or 2018.
Annual Report on Form 20-F 2019 | 101 |
Notes to the Consolidated Financial Statements
Unilever Groupcontinued
4B. Pensions and similar obligationscontinued
The duration of the principal defined benefit plan liabilities (representing 96% of total pension liabilities and other post-employment benefit liabilities) and the split of liabilities between different categories of plan participants are:
UK | Netherlands | Rest of world(a) | 2019 Total | UK | Netherlands | Rest of world(a) | 2018 Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
UK | Netherlands | Rest of world(a) | 2017 Total | UK | Netherlands | Rest of world(a) | 2016 Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Duration (years) | 17 | 19 | 13 | 8 to 24 | 18 | 20 | 14 | 8 to 20 | 18 | 19 | 13 | 7 to 23 | 17 | 18 | 12 | 7 to 23 | ||||||||||||||||||||||||||||||||||||||||||||||||
Active members | 14% | 22% | 16% | 18% | 15% | 25% | 19% | 20% | 14% | 14% | 21% | 16% | 12% | 15% | 21% | 15% | ||||||||||||||||||||||||||||||||||||||||||||||||
Deferred members | 32% | 30% | 15% | 26% | 33% | 30% | 14% | 26% | 34% | 41% | 17% | 31% | 33% | 38% | 16% | 29% | ||||||||||||||||||||||||||||||||||||||||||||||||
Retired members | 54% | 48% | 69% | 56% | 52% | 45% | 67% | 54% | 52% | 45% | 62% | 53% | 55% | 47% | 63% | 56% |
(a) | Rest of world numbers shown are weighted averages by liabilities. |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUPCONTINUED
4B. PENSIONS AND SIMILAR OBLIGATIONSCONTINUED
PLAN ASSETSPlan assets
The fair value of plan assets, which are reported net of fund liabilities that are not employee benefits, at the end of the reporting period for each category are as follows:
The group of plans within “Rest of world” category in the tables below are not materially different with respect to their risks that would require disaggregated disclosure.
€ million 31 December 2017 | € million 31 December 2016 | |||||||||||||||||||||||||||||||
UK | Netherlands | Rest of world | Pension plans Total | UK | Netherlands | Rest of world | Pension plans Total | |||||||||||||||||||||||||
Total plan assets | 11,038 | 5,357 | 5,966 | 22,361 | 9,963 | 5,116 | 6,083 | 21,162 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Equities total | 4,538 | 1,876 | 1,909 | 8,323 | 4,418 | 1,831 | 1,884 | 8,133 | ||||||||||||||||||||||||
– Europe | 1,093 | 703 | 594 | 2,390 | 1,065 | 623 | 509 | 2,197 | ||||||||||||||||||||||||
– North America | 2,320 | 668 | 842 | 3,830 | 2,266 | 698 | 865 | 3,829 | ||||||||||||||||||||||||
– Other | 1,125 | 505 | 473 | 2,103 | 1,087 | 510 | 510 | 2,107 | ||||||||||||||||||||||||
Fixed income total | 4,210 | 2,500 | 2,954 | 9,664 | 4,727 | 2,665 | 2,890 | 10,282 | ||||||||||||||||||||||||
– Government bonds | 2,162 | 879 | 1,376 | 4,417 | 2,774 | 1,114 | 1,438 | 5,326 | ||||||||||||||||||||||||
– Investment grade corporate bonds | 1,368 | 485 | 1,207 | 3,060 | 1,361 | 438 | 1,128 | 2,927 | ||||||||||||||||||||||||
– Other fixed income | 680 | 1,136 | 371 | 2,187 | 592 | 1,113 | 324 | 2,029 | ||||||||||||||||||||||||
Private equity | 401 | 89 | 3 | 493 | 504 | 124 | 6 | 634 | ||||||||||||||||||||||||
Property and real estate | 810 | 411 | 246 | 1,467 | 830 | 410 | 221 | 1,461 | ||||||||||||||||||||||||
Hedge funds | 673 | 297 | 970 | 687 | 3 | 481 | 1,171 | |||||||||||||||||||||||||
Other | 463 | 427 | 274 | 1,164 | 246 | 63 | 282 | 591 | ||||||||||||||||||||||||
Other plans | 312 | 312 | - | - | 336 | 336 | ||||||||||||||||||||||||||
Fund liabilities that are not employee benefits | ||||||||||||||||||||||||||||||||
Derivatives | (57 | ) | 54 | (29 | ) | (32 | ) | (1,449 | ) | 20 | (17 | ) | (1,446 | ) |
€ million 31 December 2019 | € million 31 December 2018 | |||||||||||||||||||||||||||||||
UK | Netherlands | Rest of world | 2019 Total | UK | Netherlands | Rest of world | 2018 Total | |||||||||||||||||||||||||
Total plan assets | 12,122 | 5,522 | 6,105 | 23,749 | 10,329 | 4,996 | 5,542 | 20,867 | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||
Equities total | 4,173 | 1,831 | 1,752 | 7,756 | 3,182 | 1,594 | 1,505 | 6,281 | ||||||||||||||||||||||||
Europe | 930 | 517 | 583 | 2,030 | 731 | 480 | 451 | 1,662 | ||||||||||||||||||||||||
North America | 2,312 | 825 | 707 | 3,844 | 1,723 | 714 | 682 | 3,119 | ||||||||||||||||||||||||
Other | 931 | 489 | 462 | 1,882 | 728 | 400 | 372 | 1,500 | ||||||||||||||||||||||||
Fixed income total | 5,317 | 2,795 | 3,250 | 11,362 | 4,963 | 2,595 | 2,947 | 10,505 | ||||||||||||||||||||||||
Government bonds | 2,711 | 765 | 1,369 | 4,845 | 2,474 | 769 | 1,253 | 4,496 | ||||||||||||||||||||||||
Investment grade corporate bonds | 1,120 | 542 | 1,272 | 2,934 | 984 | 502 | 1,167 | 2,653 | ||||||||||||||||||||||||
Other fixed income | 1,486 | 1,488 | 609 | 3,583 | 1,505 | 1,324 | 527 | 3,356 | ||||||||||||||||||||||||
Private equity | 325 | 65 | 6 | 396 | 363 | 82 | 2 | 447 | ||||||||||||||||||||||||
Property and real estate | 916 | 491 | 321 | 1,728 | 852 | 451 | 276 | 1,579 | ||||||||||||||||||||||||
Hedge funds | 688 | – | 69 | 757 | 663 | – | 120 | 783 | ||||||||||||||||||||||||
Other | 454 | 289 | 415 | 1,158 | 435 | 293 | 389 | 1,117 | ||||||||||||||||||||||||
Other plans | – | – | 300 | 300 | – | – | 312 | 312 | ||||||||||||||||||||||||
Assets/fund (liabilities) that are not employee benefits | ||||||||||||||||||||||||||||||||
Derivatives | 249 | 51 | (8 | ) | 292 | (129 | ) | (19 | ) | (9 | ) | (157 | ) |
The fair values of the above equity and fixed income instruments are determined based on quoted market prices in active markets. The fair value of private equity, properties, derivatives and hedge funds are not based on quoted market prices in active markets. The Group uses swapsderivatives and other instruments to hedge some of its exposure to inflation and interest rate risk – the degree of this hedging of liabilities was 45%55% for interest rate and 55% for inflation for the UK plan (2016: 35%) and 30%32% for interest rate and 20% for inflation for the Netherlands plan (2016: 35%).plan. Foreign currency exposures in part are also hedged by the use of forward foreign exchange contracts. Assets included in the Other category are commodities, cash and insurance contracts which are also unquoted assets.
Equity securities include Unilever securities amounting to€1412 million (0.1%(0.05% of total plan assets) and€12 million (0.1% of total plan assets) at 31 December 20172019 and 20162018 respectively. Property includes property occupied by Unilever amounting to€3230 million at 31 December 2017 (2016:2019 (2018:€3428 million).
The pension assets above exclude the assets in a Special Benefits Trust amounting to€6354 million (2016:(2018:€7959 million) to fund pension and similar liabilities in the United States (see also note 17A on pages 127 to 128). In 2016, pensions assets also excluded€68 million in an escrow account that would otherwise have been payable to the UK pension fund. In 2017, as a result of the triennial valuation of the UK fund, the monies held in escrow have been returned to the Group (see also note 11 page 112 and 113)129).
SENSITIVITIESSensitivities
The sensitivity of the overall pension liabilities to changes in the weighted key assumptions are:
Change in liabilities | ||||||||||||||||||||||||||||||
Change in liabilities | Change in assumption | UK | Netherlands | Total | ||||||||||||||||||||||||||
Change in assumption | UK | Netherlands | Total | |||||||||||||||||||||||||||
Discount rate | Increase by 0.5% | -8% | -9% | -7% | Increase by 0.5% | -8% | -9% | -8% | ||||||||||||||||||||||
Inflation rate | Increase by 0.5% | +7% | +9% | +6% | Increase by 0.5% | 6% | 9% | 6% | ||||||||||||||||||||||
Life expectancy | Increase by 1 year | +4% | +4% | +4% | Increase by 1 year | 5% | 5% | 5% | ||||||||||||||||||||||
Long-term medical cost inflation(b) | Increase by 1.0% | 0% | 0% | +1% | Increase by 1.0% | 0% | 0% | 3% |
(b) | Long-term medical cost inflation only relates to post-retirement medical plans. |
An equivalent decrease in each assumption would have an equal and opposite impact on liabilities.
102 | Annual Report on Form 20-F 2019 |
Financial Statements |
4B. Pensions and similar obligationscontinued
The sensitivity analyses above have been determined based on reasonably possible changes of the respective assumptions occurring at the end of the reporting period and may not be representative of the actual change. It is based on a change in the key assumption while holding all other assumptions constant. When calculating the sensitivity to the assumption, the same method used to calculate the liability recognised in the balance sheet has been applied. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared with the previous period.
4B. PENSIONS AND SIMILAR OBLIGATIONSCONTINUED
CASH FLOWCash flow
Group cash flow in respect of pensions and similar post-employment benefits comprises company contributions paid to funded plans and benefits paid by the company in respect of unfunded plans. The table below sets out these amounts:
€ million 2018 | € million 2017 | € million 2016 | € million 2015 | € million 2020 Estimate | € million
| € million
| € million
| |||||||||||||||||||||||||
Estimate | ||||||||||||||||||||||||||||||||
Company contributions to funded plans: | ||||||||||||||||||||||||||||||||
Defined benefit(a) | 340 | 244 | 238 | 954 | ||||||||||||||||||||||||||||
Defined contributions | 210 | 193 | 179 | 195 | ||||||||||||||||||||||||||||
Benefits paid by the company in respect of unfunded plans: | ||||||||||||||||||||||||||||||||
Defined benefit | 245 | 954 | 355 | 356 | 150 | 157 | 144 | 151 | ||||||||||||||||||||||||
Defined contributions | 205 | 195 | 187 | 197 | ||||||||||||||||||||||||||||
Benefits paid by the company in respect of unfunded plans: | ||||||||||||||||||||||||||||||||
Defined benefit | 150 | 151 | 157 | 157 | ||||||||||||||||||||||||||||
Group cash flow in respect of pensions and similar benefits | 600 | 1,300 | 699 | 710 | 700 | 594 | 561 | 1,300 |
(a) | Following the conclusion of the 2019 Funding valuation of the US Unicare Pension plan, the Group will contribute $100 million into the plan in 2020. Deficit contributions to the US pension plan are expected to be nil for the following few years. Following the conclusion of the 2016 triennial valuation of |
The Group’s funding policy is to periodically review the contributions made to the plans while taking account of local legislations.
4C. SHARE-BASED COMPENSATION PLANSShare-based compensation plans
The fair value of awards at grant date is calculated using appropriate pricing models. This value is expensed over their vesting period, with a corresponding credit to equity. The expense is reviewed and adjusted to reflect changes to the level of awards expected to vest, except where this arises from a failure to meet a market condition. Any cancellations are recognised immediately in the income statement.
The fair value of awards at grant date is calculated using observable market price. This value is expensed over their vesting period, with a corresponding credit to equity. The expense is reviewed and adjusted to reflect changes to the level of awards expected to vest, except where this arises from a failure to meet a market condition. Any cancellations are recognised immediately in the income statement. |
As at 31 December 2017,2019 the Group had share-based compensation plans in the form of performance shares share options and other share awards.
The numbers in this note include those for Executive Directors and other key management shown in note 4A on page 97,97.Non-Executive Directors do not participate in any of the share-based compensation plans.
The charge in each of the last three years is shown below, and relates to equity-settled plans:
Income statement charge | € million 2019 | € million 2018 | € million 2017 | |||||||||||||||||||||
Performance share plans | (142 | ) | (183 | ) | (273 | ) | ||||||||||||||||||
Other plans | (9 | ) | (13 | ) | (11 | ) | ||||||||||||||||||
€ million | € million | € million | (151 | ) | (196 | ) | (284 | ) | ||||||||||||||||
Income statement charge | 2017 | 2016 | 2015 | |||||||||||||||||||||
Performance share plans | (273 | ) | (185 | ) | (143 | ) | ||||||||||||||||||
Other plans | (11 | ) | (13 | ) | (7 | ) | ||||||||||||||||||
(284 | ) | (198 | ) | (150 | ) |
PERFORMANCE SHARE PLANSPerformance share plans
Performance share awards are made in respect of the ManagementCo-Investment Plan (MCIP). Awards for the Global Share Incentive Plan (GSIP) were last made in February 2018 and the ManagementCo-Investment Plan (MCIP).will vest in February 2021. No further GSIP awards will be made. The awards of each plan will vest between 0 and 200% of grant level, subject to the level of satisfaction of performance measures (limits for Executive Directors may vary,vary.
The MCIP allows Unilever’s managers to invest up to 100% of their annual bonus (a minimum of 33% and maximum of 67% for Executive Directors) in shares in Unilever, and to receive a corresponding award of performance-related shares. The performance measures for MCIP are detailed inunderlying sales growth, underlying EPS growth, return on invested capital and sustainability progress index for the Directors’ Remuneration Report on pages 47 to 76).Group. MCIP awards will vest after four years.
Under the GSIP, Unilever’s managers receivereceived annual awards of NV and PLC shares. The performance measures for GSIP are underlying sales growth, underlying operating margin, and cumulative operating cash flow for the Group, although GSIP awards to certain managers below Unilever Leadership Executive level may be subject to similar performance measures specific to their business unit.Group. There is an additional target based on relative total shareholder return for senior executives. GSIP awards will vest after three years.
From 2017, the MCIP allows Unilever’s managers to invest a proportion of their annual bonus (a maximum of 60% for Executive Directors, 100% for other managers) in shares in Unilever, and to receive a corresponding award of performance-related shares. The performance measures for MCIP are underlying sales growth, underlying EPS growth, and sustainability progress index for the Group. There is an additional target of return on invested capital for senior executives. MCIP awards will vest after four years.
A summary of the status of the Performance Share Plans as at 31 December 2017, 20162019, 2018 and 20152017 and changes during the years ended on these dates is presented below:
2019 Number of shares | 2018 Number of shares | 2017 Number of shares | ||||||||||||||||||||||
2017 Number of shares | 2016 Number of | 2015 Number of | ||||||||||||||||||||||
Outstanding at 1 January | 14,818,060 | 15,979,140 | 17,468,291 | 13,634,518 | 13,684,747 | 14,818,060 | ||||||||||||||||||
Awarded | 4,962,345 | 7,016,274 | 8,890,394 | 4,538,771 | 6,870,882 | 4,962,345 | ||||||||||||||||||
Vested | (4,723,861 | ) | (6,983,053 | ) | (8,448,454 | ) | (6,041,011 | ) | (5,854,388 | ) | (4,723,861 | ) | ||||||||||||
Forfeited | (1,371,797 | ) | (1,194,301 | ) | (1,931,091 | ) | (994,477 | ) | (1,066,723 | ) | (1,371,797 | ) | ||||||||||||
Outstanding at 31 December | 13,684,747 | 14,818,060 | 15,979,140 | 11,137,801 | 13,634,518 | 13,684,747 |
Annual Report on Form 20-F | 103 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUP
Notes to the Consolidated Financial Statements
CONTINUEDUnilever Groupcontinued
4C. Share-based compensation planscontinued
4C. SHARE-BASED COMPENSATION PLANSCONTINUED
Share award value information | 2019 | 2018 | 2017 | |||||||||
Fair value per share award during the year | €48.22 | €42.44 | €42.59 |
Share award value information | 2017 | 2016 | 2015 | |||||||||
Fair value per share award during the year | €42.59 | €35.43 | €33.17 |
ADDITIONAL INFORMATIONAdditional information
At 31 December 2017,2019 shares and options in NV or PLC totalling 14,760,786 (2016: 16,085,024)11,944,106 (2018: 14,595,111) were heldoutstanding in respect of share-based compensation plans of NV, PLC and its subsidiaries, including North American plans.
To satisfy the options and awards granted, certain NV group companies hold 15,802,464 (2016: 16,936,797)12,419,009 (2018: 15,010,429) ordinary shares of NV or PLC. Shares acquired during 20172019 represent 0.15%0.14% of the Group’s called up share capital. The balance of shares held in connection with share plans at 31 December 20172019 represented 0.47% (2018: 0.5% (2016: 0.6%) of the Group’s called up share capital.
The book value of€695640 million (2016:(2018:€727704 million) of all shares held in respect of share-based compensation plans for both NV and PLC is eliminated on consolidation by deduction from other reserves. Their market value at 31 December 20172019 was€739635 million (2016:(2018:€658700 million).
At 31 December 2017,2019 the exercise price of nil PLC and NV options (2016:(2018: nil) were above the market price of the shares.
Shares held to satisfy options and awards are accounted for in accordance with IAS 32 ‘Financial Instruments: Presentation’. All differences between the purchase price of the shares held to satisfy options and awards granted and the proceeds received for the shares, whether on exercise or lapse, are charged to reserves. The basis of the charge to operating profit for the economic value of options granted is discussed on page 103.
Between 31 December 20172019 and 2120 February 20182020 (the latest practicable date for inclusion in this report), 1,268,802nil shares were granted, 5,293,7092,848,795 shares were vested and 29,551123,506 shares were forfeited related to the Performance Share Plans.
5. NET FINANCE COSTS
Net finance costs are comprised of finance costs and finance income, including net finance costs in relation to pensions and similar obligations.
Finance income includes income on cash and cash equivalents and income on other financial assets. Finance costs include interest costs in relation to financial liabilities.
Borrowing costs are recognised based on the effective interest method.
Net finance costs | Notes | 2017 | 2016 | 2015 | ||||||||||||||||
Finance costs | (556 | ) | (584 | ) | (516 | ) | ||||||||||||||
Bank loans and overdrafts | (46 | ) | (67 | ) | (56 | ) | ||||||||||||||
Interest on bonds and other loans(a) | (519 | ) | (501 | ) | (492 | ) | ||||||||||||||
Dividends paid on preference shares | (4 | ) | (4 | ) | (4 | ) | ||||||||||||||
Net gain/(loss) on transactions for which hedge accounting is not applied(b) | 13 | (12 | ) | 36 | ||||||||||||||||
On foreign exchange derivatives | 384 | (215 | ) | (218 | ) | |||||||||||||||
Exchange difference on underlying items | (371 | ) | 203 | 254 | ||||||||||||||||
Finance income | 157 | 115 | 144 | |||||||||||||||||
Pensions and similar obligations | 4B | (96 | ) | (94 | ) | (121 | ) | |||||||||||||
Net finance costs beforenon-underlying items(c) | (495 | ) | (563 | ) | (493 | ) | ||||||||||||||
Premium paid on buy back of preference shares | 25 | (382 | ) | - | - | |||||||||||||||
(877 | ) | (563 | ) | (493 | ) |
Net finance costs are comprised of finance costs and finance income, including net finance costs in relation to pensions and similar obligations. Finance income includes income on cash and cash equivalents and income on other financial assets. Finance costs include interest costs in relation to financial liabilities. This includes interest on lease liabilities which represents the unwind of the discount rate applied to lease liabilities. Borrowing costs are recognised based on the effective interest method. |
Net finance costs | Notes | € million 2019
| € million 2018 (Restated)(a) | € million 2017 (Restated)(a) | ||||||||||||
Finance costs | (821 | ) | (718 | ) | (683 | ) | ||||||||||
Bank loans and overdrafts | (46 | ) | (44 | ) | (46 | ) | ||||||||||
Interest on bonds and other loans(b) | (617 | ) | (560 | ) | (519 | ) | ||||||||||
Interest on lease liabilities | (100 | ) | (127 | ) | (127 | ) | ||||||||||
Dividends paid on preference shares(c) | – | – | (4 | ) | ||||||||||||
Net gain/(loss) on transactions for which hedge accounting is not applied | (58 | ) | 13 | 13 | ||||||||||||
On foreign exchange derivatives | (321 | ) | 144 | 384 | ||||||||||||
Exchange difference on underlying items(d) | 263 | (131 | ) | (371 | ) | |||||||||||
Finance income(e) | 224 | 135 | 157 | |||||||||||||
Pensions and similar obligations | 4B | (30 | ) | (25 | ) | (96 | ) | |||||||||
Net finance costs beforenon-underlying items(f) | (627 | ) | (608 | ) | (622 | ) | ||||||||||
Premium paid on buyback of preference shares | – | – | (382 | ) | ||||||||||||
(627 | ) | (608 | ) | (1004 | ) |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
(b) | Interest on bonds and other loans includes the impact of interest rate derivatives that are part of |
Preference shares were repurchased in 2017. |
(d) | 2019 includes€40 million (2018: Nil) finance cost due to change in functional currency in group’s operating entities in Zimbabwe from US dollar to RTGS dollar. For further details of derivatives for which hedge accounting is not applied, please refer to note 16C. |
Includes an amount of€70 million (2018: Nil) that relates to interest on tax settlement in Brazil. |
(f) | See note 3 for explanation ofnon-underlying items. |
104 | Annual Report on Form 20-F |
Financial Statements |
6. TAXATIONTaxation
6A. INCOME TAXIncome tax
Income tax on the profit for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Current tax in the consolidated income statement will differ from the income tax paid in the consolidated cash flow statement primarily because of deferred tax arising on temporary differences and payment dates for income tax occurring after the balance sheet date. Unilever is subject to taxation in the many countries in which it operates. The tax legislation of these countries differs, is often complex and is subject to interpretation by management and the government authorities. These matters of judgement give rise to the need to create provisions for tax payments that may arise in future years with respect to transactions already undertaken. Provisions are made against individual exposures and take into account the specific circumstances of each case, including the strength of technical arguments, recent case law decisions or rulings on similar issues and relevant external advice. The provision is estimated based on one of two methods, the expected value method (the sum of the probability weighted amounts in a range of possible outcomes) or the single most likely amount method, depending on which is expected to better predict the resolution of the uncertainty. |
Income tax on the profit for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years.
Current tax in the consolidated income statement will differ from the income tax paid in the consolidated cash flow statement primarily because of deferred tax arising on temporary differences and payment dates for income tax occurring after the balance sheet date.
Unilever is subject to taxation in the many countries in which it operates. The tax legislation of these countries differs, is often complex and is subject to interpretation by management and the government authorities. These matters of judgement give rise to the need to create provisions for tax payments that may arise in future years. Provisions are made against individual exposures and take into account the specific circumstances of each case, including the strength of technical arguments, recent case law decisions or rulings on similar issues and relevant external advice. The provision is estimated based on the individual most likely outcome approach.
Tax charge in income statement | € million 2019 | € million 2018 (Restated)(a) | € million 2017 (Restated)(a) | |||||||||
Current tax | ||||||||||||
Current year | (2,098 | ) | (2,647 | ) | (2,398 | ) | ||||||
Over/(under) provided in prior years | 119 | (10 | ) | (21 | ) | |||||||
(1,979 | ) | (2,657 | ) | (2,419 | ) | |||||||
Deferred tax | ||||||||||||
Origination and reversal of temporary differences | (255 | ) | 5 | 53 | ||||||||
Changes in tax rates | (59 | ) | (12 | ) | 604 | |||||||
Recognition of previously unrecognised losses brought forward | 30 | 92 | 92 | |||||||||
(284 | ) | 85 | 749 | |||||||||
(2,263 | ) | (2,572 | ) | (1,670 | ) |
€ million | € million | € million | ||||||||||
Tax charge in income statement | 2017 | 2016 | 2015 | |||||||||
Current tax | ||||||||||||
Current year | (2,398 | ) | (2,026 | ) | (1,992 | ) | ||||||
Over/(under) provided in prior years | (21 | ) | 158 | (57 | ) | |||||||
(2,419 | ) | (1,868 | ) | (2,049 | ) | |||||||
Deferred tax | ||||||||||||
Origination and reversal of temporary differences | 51 | (65 | ) | 82 | ||||||||
Changes in tax rates | 609 | (7 | ) | (13 | ) | |||||||
Recognition of previously unrecognised losses brought forward | 92 | 18 | 19 | |||||||||
752 | (54 | ) | 88 | |||||||||
(1,667 | ) | (1,922 | ) | (1,961 | ) |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
The reconciliation between the computed weighted average rate of income tax expense, which is generally applicable to Unilever companies, and the actual rate of taxation charged is as follows:
Reconciliation of effective tax rate | % 2017 | % 2016 | % 2015 | % 2019 | % 2018 (Restated)(a) | % 2017 (Restated)(a) | ||||||||||||||||||
Computed rate of tax(a) | 26 | 26 | 24 | |||||||||||||||||||||
Computed rate of tax(b) | 24 | 25 | 26 | |||||||||||||||||||||
Differences between computed rate of tax and effective tax rate due to: | ||||||||||||||||||||||||
Incentive tax credits | (4 | ) | (4 | ) | (5 | ) | (2 | ) | (3 | ) | (4 | ) | ||||||||||||
Withholding tax on dividends | 2 | 3 | 2 | 3 | 2 | 2 | ||||||||||||||||||
Expenses not deductible for tax purposes | 1 | 1 | 1 | 1 | 1 | 1 | ||||||||||||||||||
Irrecoverable withholding tax | 1 | 1 | 2 | 1 | 1 | 1 | ||||||||||||||||||
Income tax reserve adjustments – current and prior year | - | (1 | ) | 2 | – | 1 | – | |||||||||||||||||
Transfer to/(from) unrecognised deferred tax assets | 1 | - | 1 | (2 | ) | – | 1 | |||||||||||||||||
Others | (1 | ) | - | - | 1 | (1 | ) | (1 | ) | |||||||||||||||
Underlying effective tax rate | 26 | 26 | 27 | 26 | 26 | 26 | ||||||||||||||||||
Non-underlying items within operating profit(b) | 1 | - | 1 | |||||||||||||||||||||
Premium paid on buy back of preference shares(b) | 1 | - | - | |||||||||||||||||||||
Impact of US tax reform(b) | (7 | ) | - | - | ||||||||||||||||||||
Non-underlying items within operating profit(c) | – | (1 | ) | 1 | ||||||||||||||||||||
Premium paid on Buyback of preference shares(c) | – | – | 1 | |||||||||||||||||||||
Impact of US tax reform(c) | – | – | (7 | ) | ||||||||||||||||||||
Impact of Spreads disposal(c) | – | (4 | ) | – | ||||||||||||||||||||
Taxes related to the reorganisation of our European business(c) | 2 | – | – | |||||||||||||||||||||
Effective tax rate | 21 | 26 | 28 | 28 | 21 | 21 |
(a) | Restated following adoption of IFRS 16. See note 1 and note 24 for further details. |
(b) | The computed tax rate used is the average of the standard rate of tax applicable in the countries in which Unilever operates, weighted by the amount of underlying profit before taxation generated in each of those countries. For this reason, the rate may vary from year to year according to the mix of profit and related tax rates. |
See note 3 for explanation ofnon-underlying |
Our tax rate is reduced by incentive tax credits, the benefit from preferential tax regimes that have been legislated by the countries and provinces concerned in order to promote economic development and investment. The tax rate is increased by business expenses which are not deductible for tax, such as entertainment costs and some interest expense and by irrecoverable withholding taxes on dividends paid by subsidiary companies and on other cross-border payments such as royalties and service fees, which cannot be offset against other taxes due. Uncertain tax provisions including the related interest and penalties amounted to€787 million (2018:€716 million). Whilst the potential outcomes for the tax matters giving rise to this provision are highly variable our expectation is that there will be no material change to any of the amounts provided for in the 12 months from 31 December 2019. In 20172018 the effective tax rate has been increasedwas reduced by disposals in relatively high taxed locations and the significant impact ofnon-deductible costs relating to thebuy-back spreads disposals where a significant part of preference shares.
Impact of US Tax Reform – On 22 December 2017 HR1, formerly known as the Tax Cuts and Jobs Act, was signed into lawdisposals benefited from the participation exemption in the United States. As a result of this, we have recognized a tax benefit of€Netherlands.578 million, primarily due to are-measurement of US deferred tax assets and liabilities at the new lower 21% federal tax rate. This benefit is excluded from underlying earnings per share. The US tax rate reduction will have a positive impact on our future tax rate but the Act includes other provisions related to cross border payments which could offset this benefit. We are still assessing the overall impact on our future effective tax rate but at this stage we do not expect it to be significant.
The Group’s future tax charge and effective tax rate could be affected by several factors, including changes in tax laws and their interpretation and still to be determined tax reform proposals in the EU, Switzerland and Switzerland,the continuing OECD international tax reform work, as well as the impact of acquisitions, disposals and any restructuring of our businesses.
In September, India announced a change in tax legislation backdated to 1 April 2019. The favourable impact for Unilever of a reduction in the tax rate to 25.17% was partially offset by the reduction in various tax incentives.
Annual Report on Form 20-F | 105 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
UNILEVER GROUP
Notes to the Consolidated Financial Statements
CONTINUEDUnilever Groupcontinued
6B. DEFERRED TAXDeferred tax
Deferred tax is recognised using the liability method on taxable temporary differences between the tax base and the accounting base of items included in the balance sheet of the Group. Certain temporary differences are not provided for as follows:
At the balance sheet date, the Group had unused tax losses of€ Other deductible temporary differences of€ At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised was€ Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following amounts, determined after appropriate offsetting, are shown in the consolidated balance sheet:
6C.
Tax effects
7.
Earnings per share for total operations for the 12 months were as follows:
Unilever Groupcontinued
8. Dividends on ordinary capital
Four quarterly interim dividends were declared and paid during
9. Goodwill and intangible assets
9.
We have tested goodwill and indefinite-life intangible assets
Notes to the Consolidated Financial Statements
9. Goodwill and intangible assetscontinued
The goodwill and indefinite-life intangible assets held in the
Key assumptions The
Value in use has been calculated as the present value of projected cash flows.
The projections cover a period of five years, as we believe this to be the most appropriate timescale over which to review and consider annual performances before applying a fixed terminal value multiple to the final year cash flows. The growth rates and margins used to estimate future performance are based on the conservative end of the range of estimates from past performance, our annual forecast and three year strategic plan extended to year The long-term sustainable growth rates are determined as the lower of our three-year average market growth projection and World Bank’s three-year average GDP growth forecast for our markets. Apre-tax discount rate of 7.4% (2018: 7.4%) was used. The discount rate was based on the weighted average cost of capital of the Group, adjusted with a risk-premium. We have performed sensitivity analyses around the base assumptions. There are no reasonably possible changes in a key assumption that would cause the carrying amount to exceed the recoverable amount.
10. Property, plant and equipment
10A. Owned assets
The Group has commitments to purchase property, plant and equipment of€
Notes to the Consolidated Financial Statements Unilever Groupcontinued 10. Property, plant and equipmentcontinued 10A. Owned assetscontinued
10B. Leased assets
Our leases mainly comprise land and buildings and Plant and equipment. The Group leases land and buildings for manufacturing, warehouse facilities and office space and also sublease some of the properties under operating leases. The Group has leases for vehicles and equipment. The Group has recognised in the income statement an expense of€97 million (2018:€95 million) for short term leases and€79 million (2018:€70 million) on leases forlow-value assets. During the year the Group recognised an income of€25 million (2018:€22 million) in respect of sublet properties Cash flows: The total cash outflows for leases was€534 million (2018:€575 million). Lease liabilities: Lease liabilities are shown in note 15 on pages 116 and 119.
11. Othernon-current assets
The joint ventures and associates have no The Group has no outstanding capital commitments to joint ventures. Outstanding balances with joint ventures and associates are shown in note 23 on page 12. Inventories
Unilever Groupcontinued
12. Inventoriescontinued
Inventories with a value of€
13. Trade and other current receivables
We do not consider the fair values of trade and other current receivables to be significantly different from their carrying values. Concentrations of credit risk with respect to trade receivables are limited, due to the Group’s customer base being large and diverse. Our historical experience of collecting receivables, supported by the level of default, is that credit risk is low across territories and so trade receivables are considered to be a single class of financial assets. Impairment for trade receivables are calculated for specific receivables with known or anticipated issues affecting the likelihood of recovery and for balances past due with a probability of default based on historical data as well as relevant forward-looking information.
3,062 million). The increase from 2018 is primarily driven by differences in the timing of promotional activities and the settlement of customer invoices compared to last year. Other receivables comprise financial assets of€
The total impairment provision includes€
14. Trade payables
We do not consider the fair values of trade payables and other liabilities to be significantly different from their carrying values.
Included Deferred Consideration At 31 December Supplier financing arrangements for trade payables Some of our suppliers elect to factor some of their receivables from the Group with financial institutions. In some instances we provide suppliers and/or banks with visibility of invoices approved for payment, which helps them receive cash from the bank before the invoice due date, if they choose to do so. Payment dates and terms for Unilever do not vary based on whether the supplier chooses to factor their receivable. If a receivable is purchased by a third party bank, that third party bank does not benefit from additional security when compared to the security originally enjoyed by the supplier. The Group evaluates these arrangements to assess if the payable holds the characteristics of a trade payable or should be classified as a financial liability. At 31 December 2019 and 31 December 2018 all such liabilities were classified as trade payables.
Unilever Groupcontinued
The Group’s Treasury activities are designed to: maintain a competitive balance sheet in line with at least A/A2 rating (see below); secure funding at lowest costs for the Group’s operations, M&A activity and external dividend payments (see below); protect the Group’s financial results and position from financial risks (see note 16); maintain market risks within acceptable parameters, while optimising returns (see note 16); and protect the Group’s financial investments, while maximising returns (see note 17) The Treasury department provides central deposit taking, funding and foreign exchange management services for the Group’s operations. The department is governed by standards and processes which are approved by Unilever Leadership Executive (ULE). In addition to guidelines and exposure limits, a system of authorities and extensive independent reporting covers all major areas of activity. Performance is monitored closely by senior management. Reviews are undertaken periodically by corporate audit.
Key instruments used by the treasury department are: short-term and long-term borrowings; cash and cash equivalents; and plain vanilla derivatives, including cross currency interest rate swaps and foreign exchange contracts. The Treasury department maintains a list of approved financial instruments. The use of any new instrument must be approved by the Chief Financial Officer. The use of leveraged instruments is not permitted. Unilever considers the following components of its balance sheet to be managed capital: total equity – retained profit, other reserves, share capital, share premium,non-controlling interests (notes 15A and 15B); short-term debt – current financial liabilities (note 15C); and long-term debt –non-current The Group manages its capital so as to safeguard its ability to continue as a going concern and to optimise returns to our shareholders through an appropriate balance of debt and equity. The capital structure of the Group is based on management’s judgement of the appropriate balance of key elements in order to meet its strategic andday-to-day needs. We consider the amount of capital in proportion to risk and manage the capital structure in light of changes in economic conditions and the risk characteristics of the underlying assets. Our current long-term credit rating is A+/A1 and our short-term credit rating is A1/P1. We aim to maintain a competitive balance sheet which we consider to be the equivalent of a credit rating of at least A/A2 in the appropriate access to the debt and equity markets; sufficient flexibility for acquisitions; sufficient resilience against economic and financial uncertainty while ensuring ample liquidity; and optimal weighted average cost of capital, given the above constraints. Unilever monitors the qualitative and quantitative factors utilised by the rating agencies. This information is publicly available and is updated by the credit rating agencies on a regular basis.
15. Capital and fundingcontinued 15A. Share capital
For information on the rights of shareholders of NV and PLC and the operation of the Equalisation Agreement, see the Corporate Governance report on pages A nominal dividend of 6% per annum is paid on the deferred stock of PLC. 15B. Equity
Unilever is the majority shareholder of all material subsidiaries and has control in all cases. Information in relation to
Unilever has one subsidiary company which has a materialnon-controlling interest, Hindustan Unilever Limited (HUL). Summary financial information in relation to HUL is shown below.
Notes to the Consolidated Financial Statements Unilever Groupcontinued 15B. Equitycontinued
Analysis of other reserves
Unilever acquired The total number of treasury shares held at 31 December
15B. Equitycontinued
Statement of comprehensive income: other comprehensive income reconciliation
15C. Financial liabilities
Notes to the Consolidated Financial Statements
15C. Financial liabilitiescontinued
Analysis of bonds and other loans
Information in relation to the derivatives used to hedge bonds and other loans within a fair value hedge relationship is shown in note 16.
16.
The Group is exposed to the following risks that arise from its use of financial instruments, the management of which is described in the following sections: liquidity risk (see note 16A); market risk (see note 16B); and credit risk (see note 17B). The group’s risk management policies are established to set appropriate risk limits and controls, and to maintain adherence to these limits. These policies are in line with Unilever’s risk management framework. 16A. Liquidity risk is the risk that the Group will face in meeting its obligations associated with its financial liabilities. The Group’s approach to managing liquidity is to ensure that it will have sufficient funds to meet its liabilities when due without incurring unacceptable losses. In doing this, management considers both normal and stressed conditions. A material and sustained shortfall in our cash flow could undermine the Group’s credit rating, impair investor confidence and also restrict the Group’s ability to raise funds. The Group maintained a cautious funding strategy. This was the result of cash delivery from the business, coupled with the proceeds from bond issuances. This cash has been invested conservatively with low risk counter-parties at maturities of less than six months. Cash flow from operating activities provides the funds to service the financing of financial liabilities on aday-to-day basis. The Group seeks to manage its liquidity requirements by maintaining access to global debt markets through short-term and long-term debt programmes. In addition, Unilever has committed credit facilities for general corporate use. On 31 December
Notes to the Consolidated Financial Statements
16A.
The following table shows Unilever’s contractually agreed undiscounted cash flows, including expected interest payments, which are payable under financial liabilities at the balance sheet date:
The Group has sublet a small proportion of leased properties. Related future minimum sublease payments are€21 million (2018:€18 million).
16A.
The following table shows cash flows for which cash flow hedge accounting is applied. The derivatives in the cash flow hedge relationships are expected to have an impact on profit and loss in the same periods as the cash flows occur.
16B. Unilever’s size and operations result in it being exposed to the following market risks that arise from its use of financial instruments: commodity price risk; currency risk; and interest rate risk. The above risks may affect the Group’s income and expenses, or the value of its financial instruments. The objective of the Group’s management of market risk is to maintain this risk within acceptable parameters, while optimising returns. Generally, the Group applies hedge accounting to manage the volatility in profit and loss arising from market risk. Where the Group uses hedge accounting to mitigate the above risks, it is normally implemented centrally by either the Treasury or Commodity Risk Management teams, in line with their respective frameworks and strategies. Hedge effectiveness is determined at the inception of the hedge relationship, and through periodic prospective effectiveness assessments to ensure that an economic relationship continues to exist between the hedged item and hedging instrument. The Group generally enters into hedge relationships where the critical terms of the hedging instrument match exactly with the hedged item, meaning that the economic relationship between the hedged item and hedging instrument is evident, so only a qualitative assessment is performed. When a qualitative assessment is not considered sufficient, for example when the critical terms of the hedging instrument do not match exactly with the hedged item, a quantitative assessment of hedge effectiveness will also be performed. The hedge ratio is set on inception for all hedge relationships and is dependent on the alignment of the critical terms of the hedging instrument to the hedged item (in most instances these are matched, so the hedge ratio is 1:1). The Group’s exposure to, and management of, these risks is explained below. It often includes derivative financial instruments, the uses of which are described in note 16C.
Notes to the Consolidated Financial Statements Unilever Groupcontinued 16B. Management of market riskcontinued
Currency risk on the Group’s net investments The Group is also subject to currency risk in relation to the translation of the net investments of its foreign operations into euros for inclusion in its consolidated financial statements. These net investments include Group financial loans, which are monetary items that form part of our net investment in foreign operations, of€7.6 billion (2018:€7.5 billion), of which€3.5 billion (2018:€3.3 billion) is denominated in GBP. In accordance with IAS 21, the exchange differences on these financial loans are booked through reserves. Part of the currency exposure on the Group’s investments is also managed using US$ and Swiss franc net investment hedges with a nominal value of€4.0 billion (2018:€4.4 billion) for US$ and nil (2018:€(1.3) billion) for Swiss francs. At 31 December 2019, the net exposure of the net investments in foreign currencies amounts to €22.0 billion (2018:€14.5 billion). Unilever aims to minimise this currency risk on the Group’s net investment exposure by borrowing in local currency in the operating companies themselves. In some locations, however, the Group’s ability to do this is inhibited by local regulations, lack of local liquidity or by local market conditions. Where the residual risk from these countries exceeds prescribed limits, Treasury may decide on acase-by-case basis to actively hedge the exposure. This is done either through additional borrowings in the related currency, or through the use of forward foreign exchange contracts. Where local currency borrowings, or forward contracts, are used to hedge the currency risk in relation to the Group’s net investment in foreign subsidiaries, these relationships are designated as net investment hedges for accounting purposes. Exchange risks related to the principal amounts of the US$ and Swiss franc denominated debt either form part of hedging relationships themselves, or are hedged through forward contracts. As at year end, the Group had the below notional amount of currency derivatives outstanding to which cash flow hedge accounting is applied:
*Euro exposure relates to group companies having non - euro functional currencies. Impact on equity – trade-related cash flow hedges A 10% strengthening of foreign currencies against the respective functional currencies of group companies hedging future trade cash flows and applying cash flow hedge accounting, would have led to€89 million loss (2018:€193 million loss). A 10% weakening of the same would have led to an equal but opposite effect. Impact on equity – net investment hedges A 10% strengthening of the euro against other currencies would have led to a€396 million (2018:€312 million) loss on the net investment hedges used to manage the currency exposure on the Group’s investments. A 10% weakening of the euro against other currencies would have led to an equal but opposite effect. Impact on equity – net investments in group companies A 10% strengthening of the euro against all other currencies would have led to a€2,203 million negative retranslation effect (2018:€1,455 million negative retranslation effect). A 10% weakening of the euro against those currencies would have led to an equal but opposite effect. In line with accepted hedge accounting treatment and our accounting policy for financial loans, the retranslation differences would be recognised in equity.
The following table shows the split in fixed and floating-rate interest exposures, taking into account the impact of interest rate swaps and cross-currency swaps:
Notes to the Consolidated Financial Statements Unilever Groupcontinued 16C. The Group does not use derivative financial instruments for speculative purposes. The uses of derivatives and the related values of derivatives are summarised in the following table. Derivatives used to hedge:
Master netting or similar agreements A number of legal entities within our Group enter into derivative transactions under International Swap and Derivatives Association (ISDA) master netting agreements. In general, under such agreements the amounts owed by each counter-party on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one party to the other. In certain circumstances, such as when a credit event such as a default occurs, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions. The ISDA agreements do not meet the criteria for offsetting the positive and negative values in the consolidated balance sheet. This is because the Group does not have any currently legally enforceable right to offset recognised amounts, between various Group and bank affiliates, because the right to offset is enforceable only on the occurrence of future credit events such as a default. The column ‘Related amounts not set off in the balance sheet – Financial instruments’ shows the netting impact of our ISDA agreements, assuming the agreements are respected in the relevant jurisdiction.
The following financial assets are subject to offsetting, enforceable master netting arrangements and similar agreements.
(Ii) Financial liabilities The following financial liabilities are subject to offsetting, enforceable master netting arrangements and similar agreements.
Notes to the Consolidated Financial Statements Unilever Groupcontinued
17. Investment and
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