Unilever CLUB HISTORY COMPANY NEWS Unilever to sell dental brands in North America Times 11 September, 2003 Unilever, the giant Anglo-Dutch consumer goods group, yesterday announced the $104 million (£65 million) sale of its US and Canadian dental products as part of a drive to focus on a smaller range of core brands. The company, which owns Lipton tea and Hellman's mayonnaise, has agreed to terms to dispose of the oral care business to Church & Dwight, a consumer and speciality products group based in Princeton, New Jersey. Key brands in the oral care business include Mentadent toothpaste and toothbrushes, Pepsodent and Aim toothpastes, as well as the licensing rights to Close-up, the toothpaste. As well as the $104 million cash payment, Unilever will also receive additional performance-based cash payments of between $5 million and $12 million. The sale is the latest milestone in Unilever's "Path to Growth" strategy, which aims to pare down the number of brands in the company's global portfolio and concentrate on fewer leading name products. When the Path to Growth strategy was launched in 2000, the company had a total of 1,600 brands. By the end of the second quarter in July this year, the number of brands had fallen to 635, and this is expected to reduce further to 400 by the end of 2004. The reduction in brands follows the sale of 99 different businesses since 2000. The disposals raised an estimated €6.8 billion (£4.8 billion). Earlier this month Unilever sold the rights to Brut, its male grooming brand, in the US, Canada, and Central and Latin America, to Helen of Troy, the Texas-based maker of Vidal Sassoon hair and beauty products. Shares in Unilever finished 4½p ahead at 525½p. A slimmer Unilever needs fatter revenues Niall Fitzgerald might be excused for being a little fed up. At a recent round-table meeting with investors, the accusatory questions came thick and fast: "Are you not disappointed with your recent performance?" "In hindsight, was 5-6 per cent top-line growth too stretching a target?" "Was investing so much in food in 2000 the right decision?" And the coup de grace . . . "Have you considered the case for splitting the company?" Mr FitzGerald survived the encounter and scored some points in defence of Path to Growth, the mammoth restructuring and refocusing of the business launched three years ago. Unilever has sold 110 businesses, generating $7 billion (£4.9 billion) in proceeds. It has shed 1,000 brands, and generated cost savings of $3.5 billion out of a target $3.9 billion, closed 130 factories and eliminated 40,000 jobs. All achieved, notes FitzGerald, without a single strike. With one year still to go in Path to Growth, margins have grown from 11 per cent to 15.4 per cent, a fraction shy of the target of 16 per cent. Still, there is a fly in the soup and the rude City boys are waving their napkins, shouting at the waiter as he carries the offending plate back to the Unilever kitchen. Slimmed down to just 400 core brands, Unilever's aim is to raise underlying sales growth to between 5 and 6 per cent a year by the end of 2004, a mean target for a company that sells everyday necessities - shampoo and margarine, detergent and tea. At first, everything went swimmingly, with revenues from the core brands rising by more than 5 per cent in each of the past two years. This year, it started to go wrong. Some destocking by US retailers hit volumes in the first half and Prestige, the perfume business, was battered by war in the Middle East and the Sars virus in the Far East. There was worse to come. Fearing embarrassment, Mr FitzGerald was forced to renege on a decision not to make trading statements prior to results. In October, little more than a week before the third-quarter figures, the company issued a warning about sales. Underlying growth in the third quarter was just 2 per cent and the fourth quarter is not expected to be much better. Blame is piled on to Slim-Fast, the US diet drinks business. When Unilever acquired the business in 2000, it was growing at 20 per cent a year, but in the third quarter of this year it was shrinking at the same rate. Legions of American women have been spurning low-calorie diet products, such as Slim-Fast, in favour of low-carbohydrate, high-protein regimes, popularised by the Atkins diet book - steaks instead of shakes. Hardly the fault of Mr FitzGerald. The Unilever chief executive keeps trim running marathons and the Slim-Fast deal, which coincided with the acquisition of Ben & Jerry's, the quirky ice-cream brand, was hailed at the time as a clever purchase of two high-profile US brands with international potential. But Slim-Fast is probably a red herring. Diets are as much about fashion as food. Dig into the last quarter's sales figures and you find some more long-running problems. Spreads, for instance. Unilever has been in the margarine game since the 1930s. It is a low to nil-growth business, and price competition in Europe ate up revenues this year, causing underlying sales to crumble. Unilever's big idea is Pro-Activ, the cholesterol-reducing margarine which sent sales rocketing last year and the year before but failed to do the magic this time. Meanwhile, sauces were hit by summer heat, and laundry was battered by aggressive pricing in America. Frozen foods is another low-growth business, hit by price competition and some lacklustre product launches. Ice-cream did well, up 5 per cent, but not quite as well as the record temperatures might have heralded. The beneficiary was tea, up 11 per cent thanks to new Lipton's instant iced tea products. What should Unilever do? Is it possible to increase sales of salad dressing at twice or three times the rate of inflation? Unilever says you can, and the answer is innovation. Pro-Activ is a good example, as is Lipton iced tea, but new products don't always hit the spot; a new Bird's Eye frozen product was a flop in the UK. Businesses such as Unilever are always torn in two directions. Huge gains can be achieved by cutting costs, but squeeze too hard and sales growth disappears. The Anglo-Dutch firm promised to rebuild its huge advertising spend from 13 per cent to 15 per cent of sales. It is half-way with one year to go. It is easy to forget where this company has come from. Just two decades ago, Unilever had margins of just 5 per cent. It was a rambling post-colonial conglomerate. In the late 1970s, a third of the sales came from United Africa Company, a Nigerian plantations and trading business. Unilever owned textile factories and a chemicals business. It inherited a social conscience from the paternalistic founder of Lever Bros, a characteristic that is evident in the way it operates in emerging markets. Since then it has been through several restructurings, the most recent being the most dramatic and most effective. Cash is pouring into the company, and FitzGerald will probably appease investors next year with share buybacks. There are still those who demand ever more radical surgery - a demerger of the food business. On its own, household products, they say, would get a better rating, pointing to Procter & Gamble. FitzGerald is not impressed: "A compelling case might be advanced in the short term. The responsibility that I am charged with is to run this business for long-term value creation." Moreover, would demerger create value? When the Wal-Marts are getting ever larger, there are no prizes in being a smaller company. There are not just savings in distribution, but the sheer commercial clout in delivering dozens of the top-selling brands, whether you are selling to Tesco or buying airtime on ITV. In the short term Unilever can deliver more to shareholders by tweaking costs than by selling more bars of soap, but over the long term it must increase its revenues. Where the company failed in the past, it was in chasing distractions rather than building big brands, names such as Coca-Cola and Mars that have instant recognition worldwide. Mr FitzGerald has done much to make up for lost time, but he needs to do a lot more. He says that when he was given the top job he was not handed a box of sacred bones that must not be touched. One old bone is worth keeping - the social conscience - although he probably has no problem keeping that one. How we reached our decision The Times verdict Social responsibility 6/10 Fat-cat quotient 7/10 Financial record 8/10 Share performance 5/10 Attitude to employees 9/10 Strength of brand 7/10 Innovation 7/10 Annual report 8/10 City star rating 6/10 Future prospects 7/10 Total 70/100 Social responsibility is evaluated by Pirc. The fat-cat quotient, in which best boardroom pay practice scores highest, is provided by CEBR. Richard Greenwood, economist with the Centre for Economics and Business Research, said: "The objective of Unilever's remuneration policy is 'to attract, motivate and retain top class business executives who are able to direct and lead a large global company and to reward them accordingly based on performance.' "The remuneration report covers details of both Unilever NV and Unilever plc, as the executive directors listed feature on the boards of both companies. In addition to the executives, there is a combined total of 12 'advisory directors' over the two companies, though none are formally part of the respective boards. "Niall FitzGerald, chairman of Unilever plc, is the highest paid director overall. Our fat cat model estimates that Mr FitzGerald was paid 15 per cent more than one would expect for the senior executive of a similarly sized, similarly perfoming FTSE 100 company. Some 36 per cent of the value of his package is accounted for in performance-linked incentives." Tessa Younger, policy executive at Pirc, the corporate governance consultancy, said: "Unilever has formal policies in place addressing most corporate social responsibility (CSR) themes with board level responsibility residing with Clive Butler, the director for corporate development. Below board level, responsibility is delegated to senior management of the regions and operating companies. "The importance of engagement with stakeholders is recognised, but evidence that opinion is formally appraised group-wide and that views are fed back into the decision-making process is lacking. Disclosed indicators show global impact, but some areas lack sufficient detail to provide an overall view of performance. Environmental and social reporting is subject to external review and commentary." Unilever is another defensive company, its diverse product base allows it to weather almost all economic storms, something that it has achieved well over recent years. The company's recent strategy of focusing on reducing the number of brands by about two thirds, and concentrating on those with the highest margins must be considered a success. And while it had a 'wobble' in terms of sales in the second quarter, it now looks to be achieving its target 5% leading brand sales growth and the stock price is beginning to regain some of its lost ground. To add to this, the hot weather across Europe this summer is expected to add some £130 million to third quarter sales on the back of exceptional ice cream demand! Looking forward, Unilever is set to return practically all of its free cashflow to its investors during 2004 and yet still manage to achieve double-digit earnings growth. Visit the company website Top of page