UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORMFORM 20-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, 2018
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)
T.E. Lovell,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 | Name of each exchange on which registered | |
N.V. New York registry shares each representing one ordinary share of nominal amount of€0.16 each | New York Stock Exchange | |
4.8% Notes due 2.2% Notes due 2019 2.1% Notes due 2020 1.8% Notes due 2020 4.25% Notes due 2021 2.75% 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 3.375% Notes due 2025 3.1% Notes due 2025 2.0% Notes due 2026 2.9% Notes due 2027 3.5% Notes due 2028 5.9% Notes due 2032 | New York Stock Exchange | |
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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
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:1,714,727,700 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).
YesYes ☐☒ 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 large accelerated filer”“emerging growth company” inRule 12b-2 of the Exchange Act.
| Large | 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. ☐ Non-accelerated filer ☐
*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;growth including to plastic packaging; the effect of climate change on Unilever’s business; 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; the effect of climate change on Unilever’s business; 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 Unilever Annual Report and Accounts 2016.2018.
MAKING
SUSTAINABLE LIVING
COMMONPLACE
ANNUAL REPORT ON
FORM 20-F 20162018
ANNUAL REPORT ON
FORM20-F 2016 2018
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 28,35, 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 2016.2018. The Strategic Report has been approved by the Boards and signed on their behalf by Tonia LovellRitva Sotamaa – Group Secretary.
Our Governance Report, pages 2936 to 7765 contains detailed corporate governance information, how we mitigate risk, our Committee reports and how we remunerate our Directors.
Our Financial Statements and Notes are on pages 7866 to 154.127.
Pages 1 to 156147 constitute the Unilever Annual Report and Accounts 20162018 for UK and Dutch purposes, which we may also refer to as ‘this Annual Report and Accounts’ throughout this document.
The Directors’ Report of Unilever PLC (PLC) on pages 2936 to 47, 7849, 66 (Statement of Directors’ responsibilities), 10497 (Dividends on ordinary capital), 115110 to 120115 (Treasury Risk Management), 143 (branch disclosure)133 and 150 and 154137 (Post balance sheet event) and 145 (branch disclosure) has been approved by the PLC Board and signed on its behalf by Tonia LovellRitva 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 Unilever N.V. (NV)NV Board and signed on its behalf by Tonia LovellRitva Sotamaa – Group Secretary.
Pages 157148 to 178167 are included as Additional Information for US Listing Purposes.
ONLINE
You can find more information about Unilever online at www.unilever.com.
 | www.unilever.com |
For further information on the Unilever Sustainable Living Plan (USLP) visitwww.unilever.com/sustainable-living
| www.unilever.com/sustainable-living |
The Annual Report on Form20-F 2016 2018 along with other relevant documents can be downloaded atwww.unilever.com/ara2016/downloads
| www.unilever.com/ara2018/downloads |
| CONTENTS | ||||
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| Report of the Corporate Responsibility Committee | ||||
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| Directors’ Remuneration Report | 50 | |||
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| Statement of Directors’ responsibilities | 66 | |||
| Independent auditors’ reports | 67 | |||
| Consolidated financial statements | 75 | |||
| Consolidated income statement | 75 | |||
| Consolidated statement of comprehensive income | 75 | |||
| Consolidated statement of changes in equity | 76 | |||
| Consolidated balance sheet | 77 | |||
| Consolidated cash flow statement | 78 | |||
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| ABOUT US |
UNILEVER IS ONE
AT A GLANCE
OUR BRANDS ARE AVAILABLE IN OVER 190 COUNTRIES. THIS GIVES US A UNIQUE OPPORTUNITY TO POSITIVELY IMPACT THE LIVES OF PEOPLE ALL OVER THE WORLD’S BEST KNOWN CONSUMER GOODS COMPANIES. EVERY DAY,WORLD.
Every day, 2.5 BILLION PEOPLE USE OUR PRODUCTS TO FEEL GOOD, LOOK GOOD AND GET MORE OUT OF LIFE.
billion people use our products to feel good, look good and get more out of life. Our range of around 400 household brands includes Lipton, Knorr, Dove, Rexona, Hellmann’s and Omo. We are trulyone of the largest fast moving consumer goods (FMCG) companies globally. In 2018 we had 12 brands with turnover of over a billion euros or more. The strength of our global operatingbrands is reflected in Kantar’s Brand Footprint report published in May 2018. It found that 13 of the world’s top 50 FMCG brands – based on market penetration and consumer interactions – are owned by Unilever with these brands chosen 36 billion times each year. This is significantly more than 100 countries, sellingany other FMCG company in the study.
Our portfolio also includes iconic local brands designed to meet the specific needs of consumers in their home market such as Brooke Bond in India and Brilhante in Brazil. We are increasingly seeing our productslocal brands and innovations being rolled out to more markets such as Lakme and Breyers Delights. Our geographic reach gives us an unparalleled global presence, including a unique position in emerging markets which generate 58% of our turnover.
From the beginning of 2018, Unilever began operating across three new Divisions created as part of our efforts to accelerate shareholder value creation. The largest by turnover is Beauty & Personal Care followed by Foods & Refreshment then Home Care. Details of each can be found on pages 11 to 12. The sale of our spreads business was also completed inmid-2018. These changes create a strong platform to accelerate our strategy of long-term, sustainable shareholder value creation. Our strategy is explained in detail on page 10.
Our business activities span a complex global value chain which is described on page 9. At the heart of our business is a workforce of 155,000 people (as at 31 December 2018) who are driven by our purpose and empowered to excel in our fast-changing markets. The combination of global scale and local agility has become yet more effective through the continued implementation of our Connected 4 Growth (C4G) change programme to meet consumer trends which are detailed on page 8. Our employees are supported by leadership teams with representatives from over 70 countries. Of our business leaders, 80% are local to their markets reflecting the deep local expertise at the heart of our business. This rises to more than 190 countries90% when we include managers who support those teams.
In this volatile and employing around 169,000uncertain world, protecting Unilever through the fostering of business integrity is anon-negotiable for all employees. Our Code of Business Principles (the Code), and the 24 policies that support it (Code Policies), set out the behaviour standards required from all our people. The Code Policies cover a number of areas, including anti-bribery and corruption, respect, dignity and fair treatment of people and personal data and privacy. 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.
Unilever is organised in four categories, eachDuring the year the Boards withdrew proposals to simplify Unilever’s dual-headed legal structure after extensive engagement with a clearly defined strategyshareholders. We remain firmly committed to our 2020 financial programme and portfolioare confident of brands. The largest is Personal Care, then Foods followed by Home Caremeeting its key targets and Refreshment. Each one is discussed inobjectives as our faster, simpler organisation delivers more efficiency, lower costs and significant operational and financial benefits.
This Annual Report and Accounts provides further detail on pages 14our performance during the year and 15.
We have 13 brands with sales of€1 billion or more:
Ourhow our business model is detaileddelivering strong 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 86 and 9. It places sustainability at its heart through the Unilever Sustainable Living Plan (USLP) which spans our entire value chain and involves a wide range of stakeholders.
Our brands are household names but we constantly assess our portfolio to ensure the right balance and resilience. We dispose of brands that no longer fit our strategy while acquiring those that give access to new segments and channels. We have around 400 brands allowing us to operate both globally and locally and this scale offers efficiencies and lower costs while reducing risk and mitigating volatility.
In 2015 we had 12 Sustainable Living brands which grew 30% faster than the rest of the business (Knorr, Dove, Dirt is Good e.g. Omo, Lipton, Hellmann’s, Smile e.g. Signal/Pepsodent, Lifebuoy, Ben & Jerry’s, Radiant, Breyers, Heart Health and Domestos). In 2016 these brands grew 40% faster than the rest and delivered nearly half of Unilever’s growth. They are brands which combine a strong purpose delivering a social or environmental benefit, with products contributing to at least one of our USLP goals. Our Sustainable Living brands for 2016 will be announced in May 2017 once the analysis is complete.7.
UNILEVER HAS A CLEAR
OUR PURPOSE –
UNILEVER’S PURPOSE IS TO MAKE SUSTAINABLE LIVING COMMONPLACE. WE BELIEVE THIS IS THE BEST WAY TO CREATEDELIVER LONG-TERM VALUE FOR ALL OUR STAKEHOLDERS, ESPECIALLY IN A VOLATILE AND UNCERTAIN WORLD.SUSTAINABLE GROWTH.
We believe long-term sustainable growth is best delivered through brands that offer great performance and have a genuine purpose. Washing shirts whiter or making hair healthier and shinier is still vitally important, but product performance by itself is no longer enough. Consumers are looking for more.
At Unilever, we encourage our brand managers to take a stance and make a positive difference to society. Purpose defines a brand in people’s minds and is best delivered through action. It’s only through action that consumers will see purpose as more than marketing.
Our Purpose inspires our Vision – to accelerate growth in our business, while reducing our environmental footprint and increasing our positive social impact.company purpose ‘To make sustainable living commonplace’ is unequivocal. We want our business to grow but we recognise that growthhelp create a world where everyone can live well within the natural limits of the planet. We put sustainable living at the expenseheart of everything we do, including our brands and products, our standards of behaviour and our partnerships which drive transformational change across our value chain.
Purpose takes many forms amongst our brands. Some, like Lifebuoy, take on life-threatening diseases associated with poor hygiene with programmes to change handwashing behaviour. Domestos’ purpose is to improve sanitation for millions of people who do not have access to a toilet. Our brands can also be a catalyst to promote positive cultural norms. Brooke Bond’s purpose ‘Common ground is only a cup away’ is highly relevant in an increasingly divided world and can be applied well locally. In India, it addresses religious tensions. In the Gulf, divorce. In Canada,same-sex relationships.
Some of our brands take an activist stance, mobilising citizens to change policy or create social movements. For example, Ben & Jerry’s builds movements around issues such as climate change and the environmentrefugee crisis. Seventh Generation – with its plant-based products – campaigns for renewable energy. Deodorant brand Rexona’s purpose is both unacceptableto help reverse physical inactivity, a big issue for societies facing increasingly sedentary lifestyles. Rexona believes ‘the more you move, the more you live’ supported by Motion Sense technology which works through movement. Radiant believes everyone deserves an opportunity to shine. It goes beyond bright clothes and commercially unsustainable.helping consumers ‘dress to progress’, enhancing skills through its Career Academies. Each market focuses on the skills that matter locally. In Brazil that’s entrepreneurial and business skills. In India, English language skills.
All of Unilever’s brands are on a journey to becoming purposeful. Sustainable Living brands are those that are furthest ahead. In 2017, 26 of our brands qualified as Sustainable Living brands including ourB-Corp certified brands such as Ben & Jerry’s, Seventh Generation and Pukka Herbs, which means that they meet high standards of social and environmental performance, transparency and legal accountability. Our Sustainable Living brands grew 46% faster than the rest of the business and delivered more than 70% of Unilever’s growth, driven by consumer demand for brands with purpose at their core.
However volatile and uncertain the world is, Unilever’s purpose – supported by the Unilever Sustainable Living Plan (USLP) and brands with purpose – will remain steadfast because managing for the benefit of multiple stakeholders is the only acceptable modelbest way for us to grow.
We are now looking beyond the current USLP as many of our business.
Our Purpose and Vision combine a commercial imperative to succeed against competition globally and locally, with the changing attitudes and expectations of consumers.
This Annual Report and Accounts explains how,targets end in 2016, we have continued to pursue our Purpose and work towards making our Vision a reality. During 2016 we continued to deliver growth that is consistent, competitive, profitable and responsible. This track record of long-term success is underpinned by the USLP, which helps us manage risk, inspires brand purpose and innovation, drives down costs to improve returns and builds trust among consumers across our categories and operations.
Our success depends2020. We carried out an extensive listening exercise on the expertisefuture of sustainable business. We spoke to approximately 300 stakeholders, including more than 130 external experts, and talent of our people.heard from over 40,000 employees through a ‘Have Your Say’ survey. They are constantly challenged by an environmentgave us their views on the priorities that remains volatile, uncertain, complex and ambiguous. Digitalisation is impacting all aspects of life. At the same time it is getting easierthey would like Unilever to enter our industry. Our markets are fragmenting as a result of changes in consumer habits, sales channels, the media andfocus on. The results will be used to traditional business models.
This is why Unilever is also changing through our business transformation programme, Connected 4 Growth, which we started to implement during 2016. It is creating a business which is more consumer and customer-centric, faster, more efficient and empowered so that our people can meet these challenges with the necessary resources.
As part of this change, we are also adopting new ways of working to be more entrepreneurial to complement our existing category strategies. In turn, these clearly-defined strategies across our four categories involve the active management of our portfolio through acquisitions and disposals to ensure Unilever has a well-balanced and resilient portfolio relevant to meeting our Purpose and Vision.co-create Unilever’s future agenda.
| Annual Report on Form 20-F | Strategic Report | 1 |
| CHAIRMAN’S STATEMENT |
2018 PERFORMANCE
I am pleased to report that 2018 was another year of consistent top and bottom line performance for Unilever. Solid revenue growth was combined with good profitability and cash flow delivery. This despite a challenging year for the global economy, with subdued growth and high levels of volatility undermining consumer confidence in many parts of the world.
Unilever is also operating in a sector that is experiencing widespread change and disruption. Although challenging, these changes offer significant opportunities to companies able to move with speed and agility and who can tailor their offering to changing consumer preferences. To that end, the Boards are very confident that Unilever’s strategy and the measures it has taken to strengthen its organisation, sharpen its portfolio and digitise its operations make it well placed to capture new and emerging growth opportunities.
The Boards also believe that the Unilever Sustainable Living Plan continues to set Unilever apart as a business highly attuned to the growing desire among consumers for companies and brands that serve a wider societal and environmental need.
In 2018 we also completed successfully the complex disposal of the spreads business. Our ShareBuy-back programme delivered on its intention to buy back shares with an aggregate market value of€6 billion, in line with Unilever’s objective to return theafter-tax proceeds of the spreads disposal to shareholders.
SIMPLIFICATION
Following a thorough review and widespread consultation, the Boards put forward proposals in 2018 to simplify Unilever’s dual-headed structure under a new single holding company.
In developing the proposal – including a recommendation to incorporate in the Netherlands while maintaining listings in the Netherlands, the UK and the US – the Boards were motivated by the opportunity to unlock value by simplifying Unilever and giving it added flexibility to compete effectively over the longer-term.
We recognised however that the proposal did not receive support from a significant group of shareholders and therefore considered it appropriate to withdraw. The Boards still believe that simplifying Unilever’s dual-headed structure would, over time, provide opportunities to further accelerate value creation and would serve Unilever’s best long-term interests.
Since becoming Chairman in April 2016withdrawing the proposal, I have enjoyedmet with a busy period gettingsignificant number of PLC and NV shareholders to knowdiscuss further ideas and possible next steps. It is clear from all these meetings that there is widespread support for the principles and strategic rationale behind Simplification. In these meetings, I also took the opportunity to reaffirm our commitment to further strengthen our corporate governance. Accordingly, in February 2019, we followed through on our commitment to cancel the NV Preference Shares, in itself a major step towards simplifying the company’s share capital.
BOARD COMPOSITION AND SUCCESSION
The 2018 AGMs marked the retirement of Ann Fudge as aNon-Executive Director and Vice-Chairman of the Boards. On behalf of the Boards, I would like to thank Ann for her outstanding and valued contribution to Unilever.
I was also delighted that you elected Andrea Jung as aNon-Executive Director at the same AGMs. Andrea brings highly relevant experience and expertise to Unilever and discovering at first-hand whatis a superb organisation it is, made up of many talented and principled people who care deeply about the business and the contribution it can make to improving lives. I am excited to be part of a Group whose products are used by 2.5 billion people every day.
There was nowhere better perhaps to chair my first Board meeting, in July, than in a place often regarded as the physical and spiritual home of the Group, Port Sunlight in the UK. As well as giving me an insight into the history of Unilever and the values that still permeate the Group today, the visit also exposed the Boardvery welcome addition to the high quality manufacturing facilitiesBoards.
CEO SUCCESSION
A key focus for the Boards last year was to manage the CEO succession, with Paul Polman stepping down as CEO after 10 years with the Group.
After a rigorous and breakthrough technologieswide-ranging selection process, the Boards were unanimous in its decision to appoint Alan Jope to the role. Alan became CEO on 1 January 2019 and is being developed to keep Unileverproposed as an Executive Director at the forefront of its industry.2019 AGMs.
In September,Alan has led Unilever’s largest Division, Beauty & Personal Care, for the Board met in India for its annual reviewlast four years and he has been a member of the Group’s global strategy.Leadership Executive since 2011. His previous roles include running Unilever’s business in North Asia. Alan has deep understanding and wide experience of Unilever’s business and markets. He is a strong, dynamic and values-driven leader with an impressive track record of delivering consistent high-quality performance across both developed and emerging markets. The Board re-affirmed its support for a strategy whichBoards warmly welcome Alan to the role and look forward to working closely with him in the years ahead.
Unilever has helped to drivebeen transformed under the leadership of Paul Polman. He has overseen ten years of consistent top and bottom line growth and very competitive returns to shareholders. He leaves with the company’s geographic footprint and brand portfolio stronger and well positioned for future growth.
Paul’s pioneering commitment to sustainable and equitable growth have marked him – and the company – out as leaders in the field. Thanks to his visionary leadership and tireless efforts, Unilever over recent years, despite a very challenging environment. The pace of change in this industry is greater than at any time, and for that reason the Board was also pleased to endorse the Connected 4 Growth change programme, which we believe will enhance the organisational focus and agilitynot only one of the Group.
Whilemost admired and respected companies in India the Boardworld today, but also visited the Group’s global research facilities, as well as the impressive Enterprise and Technology Solutions Centre, which has been developed over the last five years to provide manyone of the modern global informationmost desired employers.
Paul retired as CEO and technology platformsas a Board member on which31 December 2018. He will support the transition process in the first half of 2019 and will leave the Group now depends. A review of Unilever’s business in India, Hindustan Unilever, highlightedearly July. We thank him for his remarkable contribution to the Directors why Unilever enjoys such a strong presencecompany and reputationwish him every success in India.the future.
We held our final Board meeting of the calendar year in Portugal, where Unilever has built up a strong business with its joint venture partners and which leads the way today for Unilever in its Out-of-Home capabilities, not just in Europe but across the world. Despite their differing sizes, it was fascinatingREMUNERATION
During 2018 we also continued to see how both the Indian and Portuguese businesses are exporters of talent and ideas to other parts of Unilever.
ENGAGEMENT
I have always enjoyed meetingconsult with shareholders on our Remuneration Policy, particularly for the Executive Directors. At the 2017 AGMs you provided your strong support to the implementation of a reward framework that encourages and have already met with a good number of them who I thank for their thoughts and insights on the business, strategy and governance. These meetings offered me the opportunity to discuss our ideas for changes to Unilever’s Remuneration Policy.
Over the last few years, Paul Polman has builtenhances a strong performance culture at Unilever. Indeed, I am pleasedby enabling Unilever managers to report that Unilever has again in 2016 delivered on its 4G growth model – consistent, competitive, profitable and responsible growth. We now want to take that performance culture to a new level based on managers havinghave an even stronger personal commitment to Unilever share ownership.
The proposedAt the 2018 AGMs, we asked shareholders to approve a new Remuneration Policy will be put to shareholders to be voted upon atthat would align the pay of our Executive Directors fully with the Reward Framework we introduced following the 2017 AGMs in April. Further information on our proposals can be found inAGMs. Whilst shareholders approved the Compensation Committee’s report on pages 48 to 77. Information on the AGMs can be found within thenew Remuneration Policy, we recognised that a significant minority of NV and PLC AGM Notices which will be publishedshareholders voted against the proposal. On pages 50 and 51 of the 2018 Directors’ Remuneration Report, we describe in March 2017.
EVALUATIONdetail the principal concerns and how we responded to them and other changes to the implementation of the Remuneration Policy.
Given 2016 was my first year IEVALUATION
Following the external Board evaluation in 2017, we used a simplified internal evaluation this year. While we concluded that the Boards continued to operate in an effective manner overall, the Boards decided that we would conductit will maintain a very focused board evaluation (covering strategic discussions,particular focus on portfolio and channel strategies and digitisation. Each Board composition and our plans for 2017 for further learning and site visits). We will explore these and otherCommittee also performed its own self-evaluation, agreeing areas further in our externally facilitated board evaluation in the first half of 2017, but in my view the Board is working effectively and this was evidenced when Kraft Heinz madewhere it could enhance its proposed bid for Unilever. Looking ahead, an important focus of our work will be on the management of risks given the increasingly volatile and uncertain nature of today’s external environment and, in the immediate future, weeffectiveness further. These are fully engaged in the recently announced comprehensive review of options available to accelerate delivery of value for the benefit of our shareholders. Further detail on the Board’s remit, operations and the topics the Board regularly discusses and debates can be found in the Governance section on pages 29 to 77.described within each Committee Report.
BOARD COMPOSITION AND SUCCESSION
I feel fortunate to have taken on the chairmanship of such a high calibre Board of Directors. I also believe you would struggle to find a more diverse Board – whether of nationality, experience or of course gender. Indeed, Unilever continues to lead the way among its peers at Board level, with the proportion of female Non-Executive Directors in 2016 at 50%.
I would like to take the opportunity to thank the two board members who stepped down in 2016, my predecessor Michael Treschow and Hixonia Nyasulu, for their many excellent contributions. In addition to my appointment, Unilever’s thorough succession planning identified two further new Non-Executive Directors, Youngme Moon and Strive Masiyiwa, who joined the Boards in April 2016 with me. They have further strengthened the international business and marketing experience on the Boards and also provide unique perspectives into the impact technology, particularly digital, is having on new business models for the future both in the developed and emerging worlds.
I have also been impressed by the quality of Unilever’s executive leadership and senior management team and the depth of management talent. The Board continues to work diligently with the CEO to ensure a further strengthening of the overall talent pipeline, the executive team and where relevant to ensure succession plans are in place.
LOOKING AHEAD
Even though trading conditions are likely to remain toughchallenging in 2019, the Boards remain confident both in the outlook and in the strategy for some time to come I believe the foundationsGroup, reflected by an 8% increase in the dividend for the 2018 financial year.
Over the year, Board members have visited Unilever operations in several parts of the business are very strongworld, including China and will only be strengthened further by the Connected 4 Growth programme. IUnited States. We have also been struck by howseenfirst-hand the depth of talent that exists within the company, as well as the commitment of Unilever Sustainable Living Plan, with its commitmentpeople to responsiblego on improving the lives of consumers and equitable growth, unites people across the whole Group and taps into a growing desire among citizenssocieties in which the world over for more purpose-driven brands and business models.
company operates. On behalf of the Board,Boards, I would likewant to thank Unilever’s executive leadership, senior management team and all of Unilever’sthe 155,000 employees around the worldof Unilever for their efforts, commitment and performance.remarkable efforts.
Equally we have been pleased to engage with many of the company’s other stakeholders, without whom Unilever could not be successful. That includes our shareholders, who I also want to thank for their continued support of the company.
MARIJN DEKKERS
CHAIRMAN
| 2 | Strategic Report | Annual Report on Form 20-F |
| BOARD OF DIRECTORS |
OVERVIEW OF EXECUTIVE &NON-EXECUTIVE DIRECTORS
MARIJN DEKKERS. Chairman. DEKKERSChairman
Previous relevant experience: Bayer AG (CEO); Thermo Fisher Scientific Inc. (CEO).
Current external appointments: General Electric (NED)
ANN FUDGE.Vice-Chairman/Senior Independent Director. Previous relevant experience: General Electric (NED); Marriott International (NED); Young & Rubicam (Chairman and CEO). Current external appointments: Novartis AG (NED); Northrop Grumman (NED); US Programs Advisory Panel of Gates Foundation (Chairman); Brookings (Honorary Trustee); Catalyst (Honorary Director)
PAUL POLMAN.CEO, Dutch, Male, 60. Appointed CEO: January 2009. Appointed Director: October 2008. Previous relevant experience: Procter & Gamble Co. (Group President, Europe); Nestlé S.A. (CFO); Alcon Inc (Director).Current external appointments: The Dow Chemical Company (NED); World Business Council for Sustainable Development (Chairman, Executive Committee); UN Global Compact (Board member); UK Business Ambassador
GRAEME PITKETHLY.CFO, British, Male, 50. Appointed CFO: October 2015. Appointed Director: April 2016. Previous Unilever posts include: Unilever UK and Ireland (EVP and General Manager); Finance Global Markets (EVP); Group Treasurer; Head of Mergers & Acquisitions; Unilever Indonesia (CFO); Group Chief Accountant
NILS SMEDEGAARD ANDERSEN. Previous relevant experience: A.P. Moller – Maersk A/S (Group CEO); Inditex (NED); Carlsberg A/S and Carlsberg Breweries A/S (CEO); Danske Sukkerfabrikker; Tuborg International; Union Cervecera; Hannen Brauerei; Hero Group; European Round Table of Industrialists (Vice-Chairman). Current external appointments: Dansk Supermarket Group (Chairman); BP PLC (NED)
LAURA CHA. Previous relevant experience: Securities and Futures Commission, Hong Kong; China Securities Regulatory Commission. Current external appointments: HSBC Holdings plc (Independent NED); China Telecom Corporation Limited (Independent NED); The Hongkong and Shanghai Banking Corporation (Non-executive deputy Chairman); Foundation Asset Management AB (Senior international advisor)
VITTORIO COLAO. Previous relevant experience: RCS MediaGroup (CEO); McKinsey & Co (Partner); Finmeccanica Group (NED); RAS Insurance (NED). Current external appointments: Vodafone Group Plc (CEO); Bocconi University (International Advisory Board); Harvard Business School (Dean’s Advisory Board); European Round Table of Industrialists (Vice-Chairman); Oxford Martin School (Advisor)
PROFESSOR LOUISE FRESCO. Previous relevant experience: Rabobank (Supervisory Director); Agriculture Department of the UN’s Food and Agriculture Organisation (Assistant director-general for agriculture). Current external appointments: Wageningen UR (President of the Executive Board)
JUDITH HARTMANN. Previous relevant experience: Bertelsmann SE & Co. KGaA (CFO); General Electric; The Walt Disney Company; RTL Group (NED); Penguin Random House (NED); Gruner + Jahr GmbH & Co KG (NED). Current external appointments: Suez (NED); ENGIE (CFO)
MARY MA. Previous relevant experience: TPG Capital (Partner); TPG China (Co-Chairman). Current external appointments: Boyu Capital (Managing Partner); MXZ Investment Limited (Director); Lenovo (NED); Securities and Futures Commission in Hong Kong (NED)
STRIVE MASIYIWA. Previous relevant experience: Africa Against Ebola Solidarity Trust (Co-FounderNovalis LifeSciences LLC (Founder and Chairman); Grow Africa (Co-Chairman)Quanterix Corporation (Director); Micronutrient Initiative (Chairman). Current external appointments: Econet Group (Founder and Executive Chairman)Georgetown University (member Board of Directors); AGRA (Chairman); Rockefeller Foundation (Board member); US Council on Foreign Relations (Member Global Advisory Board); Africa Progress Panel (Board member); Asia Society (Trustee)
YOUNGME MOON. Previous relevant experience: Harvard Business School (Chairman and Senior Associated Dean for the MBA Program); Massachusetts InstituteNational Institutes of Technology (Professor); American Red Cross (Board of Governors Member)Health (Director). Current external appointments: Avid Technology (NED); Rakuten (NED); Harvard Business School (Professor)
JOHN RISHTON. Previous relevant experience: Rolls-Royce Holdings plc (CEO); Royal Ahold N.V. (CEO, President and CFO); ICA AB (NED); Allied Domecq plc (NED); AeroSpace and Defence Trade Organisation (ASD) (Board member); British Airways plc (CFO). Current external appointments: Informa PLC (NED); Serco Group PLC (NED); Associated British Ports (NED)
FEIKE SIJBESMA. Previous relevant experience: Supervisory Board of DSM Netherlands (Chairman); Dutch Genomics Initiative (NGI) (Member); Utrecht University (Board member); Dutch Cancer Institute (NKI/AVL) (Board member). Current external appointments: Royal DSM N.V. (CEO and Chairman of the Managing Board); De Nederlandsche Bank (Member of the Supervisory Board); Carbon Pricing Leadership Coalition (Co-Chairman) and Climate Leader, convened by the World Bank Group
Unilever’s Group Secretary is Tonia Lovell and she was appointed in 2010.
OVERVIEW OF NON-EXECUTIVE DIRECTORS – INCLUDING DIVERSITY AND EXPERIENCE
| Marijn | Nils | Laura | Vittorio | Louise | Ann | Judith | Mary | Strive | Youngme | John | Feike | |||||||||||||
| Dekkers | Andersen | Cha | Colao | Fresco | Fudge | Hartmann | Ma | Masiyiwa | Moon | Rishton | Sijbesma | |||||||||||||
Age | 59 | 58 | 67 | 55 | 65 | 65 | 47 | 64 | 56 | 52 | 59 | 57 | ||||||||||||
Gender | Male | Male | Female | Male | Female | Female | Female | Female | Male | Female | Male | Male | ||||||||||||
Nationality | Dutch / American | Danish | Chinese | Italian | Dutch | American | Austrian | Chinese | Zimbab- wean | American | British | Dutch | ||||||||||||
Appointment date | April 2016 | April 2015 | May 2013 | July 2015 | May 2009 | May 2009 | April 2015 | May 2013 | April 2016 | April 2016 | May 2013 | November 2014 | ||||||||||||
Committee membership* | CC, NCGC | AC | CRC, NCGC | CC | CRC (Chairman) | CC (Chairman) | AC | AC | CC | CRC | AC (Chairman) | NCGC (Chairman), CRC | ||||||||||||
Attendance at planned Board Meetings** | 3/3 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | 3/3 | 3/3 | 6/6 | 6/6 | ||||||||||||
Attendance at ad hoc Board Meetings | 2/2 | 1/2 | 1/2 | 1/2 | 1/2 | 2/2 | 2/2 | 2/2 | 2/2 | 2/2 | 0/2 | 2/2 | ||||||||||||
Consumer | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||||
Sales & Marketing | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||||||
Geopolitical networks and insights | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||
Science & Technology | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ||||||||||||||||||
Finance | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | ✓ | |||||||||||||||
YOUNGME MOON | ALAN JOPE | GRAEME PITKETHLY | NILS SMEDEGAARD | |||
| Vice-Chairman/Senior | CEO | CFO | ANDERSEN | |||
| Independent Director | ||||||
Previous experience:Harvard Business School (Chairman and Senior Associate Dean for the MBA Program); Massachusetts Institute of Technology (Professor); Avid Technology (NED). Current external appointments:Sweetgreen Inc (Board Member); Jand Inc (Board Member); Harvard Business School (Professor). | NationalityBritishAge54, Male. Appointed CEO: January 2019. Appointed Director: Alan Jope will be proposed for election as an Executive Director at the 2019 AGMs. 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). | NationalityBritishAge52, Male. Appointed CFO: October 2015. Appointed Director: April 2016. Attended 6/6 planned Board Meetings and 4/4 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:Financial Stability Board Task Force on Climate Related Financial Disclosure (Vice Chair). | 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); BP Plc (NED); Dansk Supermarked A/S (Chairman); Faerch Plast (Chairman). | |||
LAURA CHA | VITTORIO COLAO | JUDITH HARTMANN | ANDREA JUNG | |||
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). | 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:Bocconi University (NED and Executive Committee member); Oxford Martin School (Advisor). | 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 (CFO and EVP North America and UK/Ireland); Suez (NED). | Previous experience:Avon Products Inc (CEO); General Electric (Board Member); Daimler AG (Board Member). Currentexternal appointments:Grameen America Inc (President and CEO); Apple Inc (NED); Wayfair Inc (NED). | |||
MARY MA | STRIVE MASIYIWA | JOHN RISHTON | FEIKE SIJBESMA | |||
Previous experience:TPG Capital, LP (Partner); TPG China Partners(Co-Chairman). Current external appointments:Lenovo Group Ltd. (NED); Boyu Capital Consultancy Co. Ltd (Managing Partner); MXZ Investment Limited (Director); Securities and Futures Commission, Hong Kong (NED). | Previous experience:Africa Against Ebola Solidarity Trust(Co-Founder and Chairman); Grow Africa(Co-Chairman); Nutrition International (formerly known as Micronutrient Initiative) (Chairman). Current external appointments:Econet Group (Founder and Group Executive Chairman); Econet Wireless Zimbabwe Ltd (Director); The Alliance for a Green Revolution in Africa (AGRA)Not-for-Profit Corporation (Chairman); Rockefeller Foundation (Trustee). | 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). | 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); Carbon Pricing Leadership Coalition (High Level AssemblyCo-Chairman), Climate Leader for the World Bank Group. | |||
NON-EXECUTIVE DIRECTORS
| MARIJN | NILS | LAURA | VITTORIO | JUDITH | ANDREA | MARY | STRIVE | YOUNGME | JOHN | FEIKE | ||||||||||||
| DEKKERS | ANDERSEN | CHA | COLAO | HARTMANN | JUNG | MA | MASIYIWA | MOON | RISHTON | SIJBESMA | ||||||||||||
Age | 61 | 60 | 69 | 57 | 49 | 59 | 66 | 58 | 54 | 61 | 59 | |||||||||||
Gender | Male | Male | Female | Male | Female | Female | Female | Male | Female | Male | Male | |||||||||||
Nationality | Dutch / American | Danish | Chinese | Italian | Austrian | American / Canadian | Chinese | Zimbabwean | American | British | Dutch | |||||||||||
Appointment date | April 2016 | April 2015 | May 2013 | July 2015 | April 2015 | May 2018 | May 2013 | April 2016 | April 2016 | May 2013 | November 2014 | |||||||||||
Committee membership* | CC, NCGC (Chairman) | AC | NCGC | CC (Chairman) | AC | CC | CC | 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 | 6/6 | 6/6 | 6/6 | 6/6 | 3/3 | 6/6 | 6/6 | 6/6 | 6/6 | 6/6 | |||||||||||
Attendance at ad hoc Board Meetings | 4/4 | 2/4 | 2/4 | 4/4 | 3/4 | 3/3 | 4/4 | 3/4 | 4/4 | 3/4 | 4/4 | |||||||||||
Tenure as at 2018 AGMs | 2 | 3 | 5 | 3 | 3 | 0 | 5 | 2 | 2 | 5 | 4 | |||||||||||
| * | 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 | Strategic Report | 3 |
| CHIEF EXECUTIVE OFFICER’S REVIEW | ||
It has been
Widespread economic and geopolitical uncertainty meant that the global business environment remained challenging in 2018. Currency depreciation in a busy startnumber of key markets fuelled inflationary pressures and dampened consumer demand, while input costs rose steadily on the back of escalating commodity prices.
A SOLID PERFORMANCE
Against this backdrop, Unilever delivered a solid performance. Underlying sales grew by 3.1%, excluding the recently-divested spreads business (2.9% including spreads). Growth was profitable, bringing our underlying operating margin to 2017. While the proposed bid18.4%, up 90 basis points, which also drove a healthy free cash flow of€5 billion for the Group fromyear.
Importantly, the Kraft Heinz Company was without financialoverall shape and strategic merit – and quickly seen as such – we are using it as an opportunity to review the options open to us to accelerate the delivery of value to shareholders. Our aim is to build on the strong track record we have built up of long-term value creation, which has seen a total shareholder return of 190% since 2009.
We will be saying more about this after the review is completed. For the moment, let me focus on the purpose of this report – a review of 2016. There is no doubt it was another difficult year for the global economy, characterised by low growth and slowing consumer demand. We also saw a significant backlash against the forces of globalisation, with all the related challenges around political polarisation and economic uncertainty.
While a more globalised and digitally-connected world has undoubtedly brought vast social and economic benefits, helping to lift millions out of poverty, it is equally clear that many people now feel left behind, detached from a system that they perceive no longer works in their interests. Brexit in the UK and the US Presidential election were clear manifestations of this desire on the part of many to see our political and economic systems evolve in a way that benefits more people.
These political developments and the rise of populism associated with them added to a growing sense of unease and uncertainty on the world’s markets, calling into question the shape of future trading relationships and in particular the unwelcome prospect of a return to protectionism. This comes at a time when trade is already slowing as a proportion of global GDP – itself onequality of the clear symptoms of a stuttering world economy.
While economic growth may be slowing there is no let-up in the pace of scientific and technological change. The advent of what has been termed a ‘fourth industrial revolution’ is already disrupting whole industry sectors, including our own, not least by increasing the opportunities for new – and mostly local – entrants. Competition is now coming from many, varied directions, making it more important than ever to stay ahead of fast-moving trends and to ensure our business remains relevant for the future.
Despite this turbulent and challenging backdrop, 2016performance was another year of solid progress and achievement for Unilever. Guided by our model of consistent, competitive, profitable and responsible growth, we once again out-performed our markets, with 60% of the business gaining share.
encouraging. We believe that this model of consistency, particularly at times of uncertainty, is in the best long-term interests of Unilever andachieved a good indicationbalance of a robust strategy. Good quality topprice and bottom line growth has now been delivered over the last eight years, a rare achievement in today’s volatile and unpredictable markets and a clear sign of the progress we have made.
Underlying sales growth of 3.7% in 2016 was a good performance in both absolute and relative terms and would have been higher but for the impact of demonetisation in India and the economic crisis in Brazil, two major markets for Unilever. On the bottom line, profitability stepped-up as a result of our organisational change programmes and the returns we are now getting on the significant investments we have made in modernising our industrial base and in upgrading our in-house capabilities. Furthermore, we continue to exert tight discipline in capital spending and in working capital, with both improving again last year.
Importantly, growthvolume growth. Growth was broad-based, across our four major categories. This reflects the sharper and more differentiated strategies we have put in place, as well as our ability to roll-out bigger and stronger innovations to even more markets. Examples from 2016 included twoeach of our thirteen€1 billion plus brands: Rexona Antibacterial deodorant, which helps eliminate over 90% of odour-causing bacteria, was introduced to more than 40 countries; and Omo, with its enhanced formulation and cleaning technology, has now successfully been rolled-out across 27 markets.
In addition to driving our core business, it is also important that we continue to experiment with new models, channels and innovative
approaches. That is why we took the opportunity in 2016 to strengthen the business further by acquiring a number of attractive businesses in fast-growing segments of the market and with a strong appeal among Millennials. Seventh Generation, Blueair and the Dollar Shave Club all joined the Unilever family and are proving to be great additions. Since the beginning of 2017 we have also been delighted to welcome Living Proof.
This consistent evolution of the portfolio means that over the last eight years we have disposed of€2.8 billion of turnover in non-strategic businesses and acquired€4 billion in faster growing areas of the market, notablythree global Divisions – Beauty & Personal Care, which today accounts for 38% of our total business, upHome Care and Foods & Refreshment. Our continuing margin progression was underpinned by well-embedded savings and efficiency programmes, and an improving mix from 28% only eight years ago. We have also invested a total of€3.4 billionunderlying sales growth in increasing our participation in countries where we do not own 100% of our subsidiaries, most recently in Egypt and China.Beauty & Personal Care.
The relevance and importance ofInspired by the Unilever Sustainable Living Plan, (USLP)we also saw our brands with the most distinct and well-articulated social and environmental purpose grow significantly faster than our other brands.
The performance last year demonstrates I believe that our strategy is working. By empowering our three global Divisions, we are allowing for more strategic allocation of resource and for greater differentiation in driving a responsible business model,meeting changing consumer needs. Beauty & Personal Care, for example, made good progress in moving to more premium positions and in helping to accelerate the growth and profitability of Unilever, was demonstrated again in 2016. Our leadership was also recognized externally. We were industry group leaderexpanding in the prestigious Dow Jones Sustainability Index,high growth segments. Home Care built on its already strong emerging market footprint with a strategy of market development andbenefit-led innovation for example,emerging needs. Whilst Foods & Refreshment was combined into a single division bringing more scale and for the sixth consecutive year we topped the Globescan/SustainAbility surveyfocus to allow faster transformation of experts on leadership in sustainability.our portfolio.
The alignmentresults in 2018re-affirm the enduring strength of Unilever’s brands and the growing resilience of our USLP objectives to the 17 Global Goals for Sustainable Development, set out by the United Nations to eradicate poverty in a sustainable and equitable way by 2030, further highlights the relevance of our approach in helping to address some of today’s most urgent global challenges. As the recent report from the Business & Sustainable Development Commission also makes clear, addressing these challenges can generate significant economic opportunities for enlightened businesses, possibly adding as much as€12 trillion to the global economy.
As we look ahead it is clear that the world around us is changing at an accelerating pace. Digital technology in particular is transforming every aspect of the way we live, work and shop.
Companies that thrive in this increasingly dynamic environment will be those best able to respond quickly and innovatively to rapidly changing consumer preferences and market conditions, able to display agility on the one hand and resilience on the other. This calls for faster, simpler and more agile organisational models,model, as well as cost structuresunderlining Unilever’s ability to deliver consistent top and bottom line performance even in very challenging conditions. Nevertheless, we are determined to step up the proportion of our business that reflect onlyis winning market share as part of moving our sales growth more consistently into the costsmiddle of our multi-year3-5% targeted range.
A YEAR OF PROGRESS
As well as delivering a solid set of results, we also made good progress in 2018 in strengthening the overall business to be ready for future opportunities:
announce the acquisition of GlaxoSmithKline’s Health Food Drinks portfolio, including its iconic Horlicks brand in India and the rest of Asia, further increasing our presence in the highly attractive health-food category. We have been answering this callalso completed successfully the complex disposal of the spreads business, returning theafter-tax proceeds to shareholders.
new and faster-growing channels. Oure-commerce sales were up by 47%, ahead of globale-commerce market growth and putting us well on the road to building a scalee-commerce business. We also accelerated the growth of our business with Discounters, in the Health and Beauty channel and in theout-of-home eating market. |
Strengthened by these measures, we are good in shape for the future. We ended 2018 with 58% of our turnover in the emerging markets and enjoying number 1 or 2 positions in 85% of the key markets and categories in which we compete. Our Beauty & Personal Care business – where some of the biggest in Unilever’s history. Connected 4 Growth (C4G) will simplifygrowth opportunities exist – now represents 40% of our turnover. All of this makes us well placed to capture the way we are organised, freeing up time, resource and – most importantly – the entrepreneurial instinct needed to seize themany opportunities that exist across our markets.
LOOKING AHEAD
Building on these strong foundations, I have already made clear that my first priority as CEO will be to accelerate quality growth. For us, that means aninvestment-led approach based on delivering our 4G growth model – consistent growth, competitive growth, profitable growth and responsible growth, with an equal focus on each.
In particular, I want to leave no doubt that I intend to build further on Unilever’scentury-old commitment to responsible business. ‘Making Sustainable Living Commonplace’ will remain our purpose as a company and we will use this to keep Unilever at the forefront of ensuring business is a force for good. More and more digitally connectedof our brands will become explicit about the positive social and environmental impact they have. This is entirely aligned to the instincts of our people and to the expectations of our consumers. It is not about putting purpose ahead of profits, it is purpose that drives profits.
Despite the progress we have made in recent years, I am also clear that – in a world provides. The changes, which have been developed thoroughly overwhere the last two years, will touch all elementsspeed of change is relentless – we need to quicken the pace of everything we do still further. I want to make speed and skills for a digital age a hallmark of Unilever under my leadership.
If we can do all this then I am confident we can achieve our strategic aims and will help to sharpen evendeliver many years of solid cash flow, further the strong performance culture we have built up at Unilever.
We will complete the implementation of the C4G programme in 2017. Together with related savings programmes – like Zero-Based Budgeting – it will release funds to support our growth ambitions and accelerateunderlying operating margin improvement despite what we expectand good quality growth.
AND FINALLY…
I want to be a continuationthank my colleagues throughout the whole company for their hard work in delivering these results. Unilever is fortunate to have such talented and dedicated people and I am deeply aware of my responsibilities to them – and to our many other stakeholders – in being asked to lead this wonderful company.
I especially want to thank my predecessor, Paul Polman. Unilever has been transformed under his inspiring leadership. He has worked tirelessly to make the very tough trading environment.
Unilever’s strong performance in 2016company stronger and the further steps we tookworld a better place. It has been a privilege to strengthenserve with him and an honour now to succeed him.
I also want to thank the fundamental pillarsUnilever Board of the business could not have been achieved without the 169,000 wonderful men and women of Unilever, as well as the many thousands more who work with us throughout the value chain. I thank all of themDirectors for their leadership, integrityconfidence and dedication.invaluable guidance as I take on the role. And, finally, to our shareholders, thank you for your ongoing support and belief in the company, which we will always work hard to retain.
PAUL POLMANALAN JOPE
CHIEF EXECUTIVE OFFICER
| 4 | Strategic Report | Annual Report on Form 20-F |
UNILEVER LEADERSHIP EXECUTIVE (ULE) OVERVIEW
FOR PAUL POLMANALAN JOPE AND GRAEME PITKETHLY SEE PAGE 3
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DAVID BLANCHARD Chief R&D Officer
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NationalityBritishAge Appointed to ULEJanuary 2013 (will retire in April 2019) Joined Unilever1986 Previous Unilever posts include: Unilever Research & Development (SVP); Unilever Canada Inc. (Chairman); Foods America (SVP Marketing Operations); Global Dressings (VP R&D); Margarine and Spreads (Director of Product Development). Current external appointments: Ingleby Farms and Forests (NED). | NationalityDutchAge Appointed to ULEJanuary 2016 Joined Unilever1990 Previous Unilever posts include: 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: PostNL
| Nationality Joined Unilever2018 Previous posts include: Royal Ahold Delhaize (CEIO & EC); Royal Ahold (CCO); P&G (VP & GM). Current external appointments: Bayer AG (Supervisory Board member), Leading Executives Advancing Diversity (LEAD) (advisory board member). | NationalityDutchAge50, Male Appointed to ULENovember 2011 Joined Unilever Previous Unilever posts include: President, North America and Global Current external |
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| NationalityIndianAge Appointed to ULEMarch 2016 Joined Unilever1992 Previous Unilever posts include:HR Leadership and Organisational Development and Global Head of Diversity (SVP); Hindustan Unilever Limited (Executive Director HR); Hindustan Lever (various roles). | NationalityIndianAge Appointed to ULEOctober 2013 Joined Unilever1987 Previous Unilever posts include: President Home Care; EVP South Asia and Hindustan Unilever Limited (CEO); Home and Personal Care, India (Executive Director); Home Care (VP); Fabric Wash (Category Head); Laundry and Household Cleaning, Asia (Regional Brand Director). | NationalityFinnishAge Appointed to ULEFebruary 2013 Joined Unilever2013 Previous posts include:Siemens AG – Siemens Healthcare (GC); General Electric Company – GE Healthcare (various positions including GE Healthcare Systems (GC)); Instrumentarium Corporation (GC). Currentexternal appointments: Fiskars Corporation (NED). | NationalityBritishAge55, Female Appointed to ULEOctober 2015 Joined Unilever1985 Previous Unilever posts include: President Foods; Global Hair (EVP); Unilever UK and Ireland (EVP and Chairman); Global Spreads and Dressings (EVP); Unilever US Foods (SVP). Current external appointments:PVH Corporation. (NED).
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| Annual Report on Form 20-F | Strategic Report | 5 |
UNILEVER OPERATES IN THE FAST-MOVING CONSUMER GOODS (FMCG) INDUSTRY, ONE OF THE LARGEST AND MOST COMPETITIVE INDUSTRIAL SECTORS IN THE WORLD.
As an indication of the size of the FMCG industry that Unilever competes in, the top 25 global players generate sales of about€590 billion. While enjoying significant scale, global FMCG players are also facing material risks and challenges to their traditional business models.
Our markets are characterised by intense levels of competition, globally but also locally, and equally intense levels of change and fragmentation among consumers, routes to market, media used to reach consumers and business models. This is disrupting the competitor landscape. 2016 has seen significant milestones achieved in Unilever’s response, through innovation-led growth, acquisitions and disposals or our Connected 4 Growth change programme.
Increased competition and disruption within the FMCG industry continue to drive the trend for consolidation and focus, notably among larger players.
Cost reduction is a constant theme, as is a requirement to ensure focus on execution and the management of brands which fit specific strategic objectives. This continues to lead to disposals, with proceeds – at least in part – reinvested in rebalancing portfolios for long-term growth.
Our markets continue to see rapid and conflicting changes to how consumers live, representing significant social challenges for our business. The middle class, middle income, nuclear family – once the bedrock of FMCG businesses – is no longer as culturally dominant. In the US, the middle class has ceased to be the nation’s economic majority, although in emerging markets the middle class continues to expand. However, worldwide the demographic divide continues to widen with older generations commanding significant spending power compared with younger generations often exposed to high levels of unemployment.
That said, research shows that by 2025 Millennials (18-34 year olds) will number around 2.3 billion people, representing the largest population cohort globally. Their spending power will have risen to€1.7 trillion,€570 billion of which will be for non-essential expenditure. Such spending power encourages the trend for growth categories such as foods with organic and traceable ingredients, free-from alternatives and personal care products with natural formulations and greater authenticity – all areas in which Unilever has innovated this year.
Consumer concerns once considered niche, such as sustainability, have gone mainstream. Our own research shows that interest in sustainability cuts across demographic and socio-economic groups, with 78% of consumers in the US, 53% in the UK, 85% in Brazil and 88% in India agreeing that they felt better about themselves when they bought products that they knew were sustainable or better for the environment. These trends are shared across emerging markets and developed markets with consumers in emerging markets often more acutely aware of sustainability issues. In South Africa, for instance, our laundry brand Sunlight responded with a revolutionary water-saving formulation in 2016 which reduced by half the amount of water and time required for laundry.
Whether in emerging or developed markets, the trend for consumers to be motivated to buy sustainably is clear. In Unilever’s study, 54% of consumers either already buy sustainably or are open to buying sustainably.
ECONOMIC FORCES
2016 has added further evidence to the prevailing wisdom among economists of a ‘slow growth’ global economy becoming embedded as a medium- to long-term issue, caused by falling population growth and productivity levels. The OECD has predicted that its members, plus Nigeria (Africa’s largest economy), will see average growth over the next 50 years of 2.4%, down from 3.6% over the previous 50 years.
In the short-term, a mix of weakening consumer confidence during 2016 combined with a recovery in commodity prices, such as Brent Crude and palm oil, and sharp fluctuations in the currency markets, have continued to drive volatility in our markets. Against this backdrop, growth in Europe was slightly down, with increased political and economic uncertainty caused by events such as the UK’s decision to leave the EU. We respect the outcome of the UK’s EU referendum. Brexit will not change our commitment to creating a strong and thriving UK and European business. Since we sell our products in more than 190 countries, we are used to dealing in many currencies and inside many different trading structures. We will adapt to the new arrangements, whatever the outcomes. In the meantime, we remain focused on delivering consistent, competitive, profitable and responsible growth.
North America is witnessing slightly better economic conditions and an improvement in growth. In emerging markets, Latin America has experienced slowing consumer demand with countries such as Brazil in recession while Asia has seen weaker demand with some inflationary pressures coming through.
Emerging markets still provide the FMCG industry with significant growth potential and cause for optimism. Unilever is unique in having around 70% of its volume in emerging markets, equal to 57% of turnover in emerging markets. Unlike in developed markets such as the US, the number of people at middle income levels is expected to continue to grow, with a further 800 million by 2020 generating higher levels of per capita consumption that will benefit FMCG companies. The continuing trend of urbanisation in emerging markets means there will be another 400 million people living in cities while an additional 300 million women are predicted to move into paid employment by 2020, supporting demand for FMCG products.
There are certainly bright spots in emerging markets but overall growth is weaker at present than many FMCG groups have been used to.
MARKET DISRUPTORS
These more restrained growth rates make traditional business models all the more sensitive to greater competition, which is becoming ever more disruptive and unpredictable in nature.
A key disruptor is the increased success of local competitors. These players have always been present but are increasingly sophisticated. Their advantages include a scale and organisational approach that allows for a more agile, nimble and culturally attuned response to changing consumer needs, thanks to relevant local insights.
At the same time, the FMCG industry is seeing a new generation of entrepreneur enter the industry with brands that speak directly to growth segments, such as Millennials, with values, purpose and attributes directly relevant to these groups.
Such entrepreneurial challengers utilise digital distribution and marketing to forge alternative business models that represent another source of disruption. Chief among these is a direct-to-consumer model with cost advantages and faster response times to changing consumer needs. Crucial also is the direct relationship forged with consumers, providing data that can be utilised to improve brand offers and more accurately generate and predict sales opportunities. Such direct-to-consumer models are accelerating the further fragmentation of the traditional sales channels used by FMCG groups, such as the ‘big box’ retailers and long-established distributors within markets. Brands that can apply a subscription model – generally premium brands with strong consumer engagement – or are a replenishment purchase are particularly well suited to the direct-to-consumer model.
Unilever is responding to these challenges by making the business fitter and more agile through our Connected 4 Growth programme. Our focus on active portfolio management means we can also respond through acquisitions and disposals to ensure our brand portfolio remains resilient. Our acquisition of Dollar Shave Club in 2016 is a good example of this.
DIGITAL REVOLUTION
The adoption of digital technology continues to impact every walk of life. Research shows that global online shopping retail sales are predicted to grow to US$370 billion in 2017, while 18-34 year olds in the US spend US$2,000 per head on e-commerce annually which is more than any other group.
Digital shopping is being powered by mobile devices with about 50% of the world’s population now mobile subscribers and PC sales in decline. Mobile access to the internet is being accelerated by the take-up of smartphones, which Cisco predicts will account for half of all global devices and connections by 2020.
Digital technology is also empowering companies’ understanding of consumers. Unilever’s own Consumer and Market Insights (CMI) group has created People Data Centres which analyse data from social media, consumer carelines and digital marketing to turn millions of conversations into business decisions to maximise sales and revenue.
Consumers’ use of technology, however, is constantly changing. Generation Z (post-Millennial generation) are increasingly adopting applications such as WhatsApp and Snapchat, reflecting an evolving approach to social media usage, including a more comprehensive use of privacy settings.
Artificial Intelligence, augmented and virtual reality are increasingly being incorporated in many companies’ marketing plans with these technologies rapidly going mainstream and falling within consumer affordability, increasing take-up and further accelerating its development.
ENVIRONMENTAL AND SOCIAL CHALLENGES
The business case for sustainability is increasingly accepted, witnessed by private sector support of the Global Goals for Sustainable Development (see page 19) and evidence that consumers want to buy more sustainably. Unilever is not alone in recognising that a sustainable business requires sustainable production, sustainable consumption and climate stability but there is more work to be done.
According to the World Meteorological Organization, 2016 was the hottest year on record. The top three ten-year risks in the World Economic Forum’s Global Risks Survey relate to this fact. They are: water crises; failure of climate change mitigation and adaptation; and extreme weather events. The FMCG industry relies on agriculture to provide its raw materials but agriculture is also part of the environmental problem, causing deforestation which accounts for 15% of global greenhouse gas emissions. Consumption places a strain on natural resources such as water and uses energy in both manufacturing and end-use which contributes to harmful emissions and further climate change problems.
We are taking direct action to address climate change within our value chain. For instance, we have committed to being carbon positive in our operations by 2030, with all electricity purchased from the grid coming from renewable sources and coal eliminated from our energy mix by 2020. We will also support the generation of more renewable energy than we consume and make the surplus available to the markets and communities where we operate.
There are serious human and social consequences to these environmental challenges too, not least displacement caused by severe weather events and threats to the livelihoods of smallholder farmers. Shortages of clean water have hygiene implications while the dwindling of natural resources reinforces social inequality. Find out how we are addressing societal issues on pages 16 to 18.
WE BELIEVE THAT SUSTAINABLE AND EQUITABLE GROWTH IS THE ONLY LONG-TERM BUSINESS MODEL. THAT IS WHY WE HAVE PLACED THE UNILEVER SUSTAINABLE LIVING PLAN AT THE HEART OF OURS.
Our sustainable business model drives growth that is consistent by reducing risks, is more competitive by inspiring innovations that help us grow, is more profitable by reducing costs and is more responsible – leading to enhanced trust in our business.
The three big goals of the USLP – to help more than 1 billion people improve their health and well-being by 2020; to halve the environmental impact of our products across the value chain by 2030; and to enhance the livelihoods of millions as we grow our business by 2020 – are integrated into our business model. From sustainable sourcing of our agricultural raw materials to eco-production in manufacturing to marketing brands with purpose – the USLP is our blueprint for achieving our vision.
We invest in innovation and brands, which creates profitable volume growth. Our scale spreads fixed overheads, improving profitability further, and this profitable growth allows us to reinvest, generating more free cash flow which can be further invested in brands and innovation which in turn drive more profitable volume growth. Our geographical reach also helps spread the risks of local environmental disruptions in our markets caused by climate change.
CONSUMER INSIGHT
Our business model begins with consumer insight which informs brand innovation. Accurate insight is critical to understanding how markets are changing and segmenting. We forge relationships with consumers through insights from focus groups and quantitative studies. Digital research adds one-on-one sophistication while new lines of communication are opening through direct-to-consumer channels, allowing closer relationships.
Our Consumer and Market Insight (CMI) group helps us prioritise growth opportunities. Through CMI we monitor data about consumption patterns and social media dialogue to inform action, including sustainability insights, which drive product innovations and behaviour change programmes.
COLLABORATION
Collaboration is critical to our success. We are open to external ideas and adept at capturing and integrating their benefits. The USLP involves working with many governments and NGOs. Our supply chain operates our Partner to Win programme to encourage innovations from suppliers. For example, we work with biotechnology partners to create laundry products that give superior stain removal and whiteness while using less water and energy. This furthers innovation-led growth and our USLP commitment to halve the environmental impact of our products across their lifecycle.
INNOVATION
Unilever spends€1 billion annually on research and development, employing approximately 6,000 experts to drive innovation, often in partnership with suppliers and academia. Our innovations use insights and technologies to deliver brand-led benefits which meet the latest trends. Examples include natural variants in Foods and Personal Care by our Knorr and TRESemmé brands, and vegan product variants by Ben & Jerry’s and Hellmann’s. Our innovation is increasingly responsive to local needs, landing results faster into markets.
An important development in 2016 has been the announcement of our intention to build a new global Foods Innovation Centre in Wageningen, The Netherlands, complementing similar innovation centres in Port Sunlight and Colworth in the UK, Shanghai in China, Bangalore in India and Trumbull in the US.
SOURCING
Our procurement teams are responsible for purchasing€34 billion of goods and services. They are central to driving efficiencies to enhance profitability, delivering over€1 billion of savings, but also implementing our USLP. 51% of our agricultural raw materials were sustainably sourced in 2016, including 95% of our top 13 vegetables and herbs and 75% of tea, supporting brands such as Knorr and Lipton. 67% of our suppliers met the mandatory self-assessed criteria in our Responsible Sourcing Policy.
MANUFACTURING
We operate 306 factories in 69 countries and employ approximately 100,000 people in 100 countries. Our focus is on implementing World Class Manufacturing with 119 factories enrolled and€139.5 million of savings identified. We also carry out annual climate change risk assessments at the manufacturing site level alongside environmental initiatives.
Our Aguai factory in Brazil is setting new benchmarks in sustainability. With Brazil’s water system under huge strain due to climate change, 60% of the site’s water needs will be met by collecting rainwater and recycling waste water, while returning clean water to the environment. Skylights reduce artificial light needs and solar panels power the entire administration block.
LOGISTICS
We operate a network of around 400 warehouses globally coordinated by a central system of control towers that improve customer service, cut costs and reduce emissions. We transport goods the equivalent of approximately 1.5 billion km a year. In 2016, despite significantly higher volumes, we have achieved a 7.5% CO2 absolute emissions reduction across 14 countries compared to 2015. We have also delivered a 27% improvement in CO2 efficiency measured as kg CO2/tonne sold compared to 2010 figures across these 14 countries. This has been achieved by reducing truck mileage; using lower emission vehicles and fuels; employing alternative transport such as rail or ship; and improving the energy efficiency of our warehouses.
MARKETING
In 2016 we mapped consumers’ purchase journeys in the digital world, using data to delve deeper and segment consumers more accurately. This enables us to deliver more relevant, authentic and effective marketing content in real time using the full range of digital communications. We have launched U-Studio, our in-house studios, to create content and advertising across our digital platforms, direct-to-consumer, e-commerce channels and our social and digital communications to make marketing faster, more efficient and effective. In parallel U-Entertainment collaborates with media companies to create brand-inspired entertainment content.
Sustainability is an integral part of our brand strategies. We want all of our top brands to be Sustainable Living brands, which combine a strong purpose delivering a social or environmental benefit, with products contributing to at least one of our USLP goals.
SALES
Generating turnover of€52.7 billion in 2016 in a highly competitive market place involves a sophisticated Customer Development function. We work closely with retailers, online through e-commerce and in physical stores. Our teams ensure our brands are always available, properly displayed and in the right recommended price bracket. We strive to be supplier of choice for customers and trade partners, through strong joint business planning and in-store execution applying our Perfect Store programme. In 2016 this reached 10 million plus executions, to deliver sales growth as we launch product innovations and brand extensions, and enter new geographies.
In 2016 we developed a strategic framework to ensure Unilever wins with every shopper on every occasion. As the traditional channels continue to fragment, we have brought renewed focus to e-commerce and out-of-home. We have now added an additional focus on small and convenience stores. There are 33 million of these globally, growing at about 5% annually as consumers shop more regularly for smaller baskets of goods. We are using our global advantages of technology and analytics to help us execute through these local channels via flexible service models and digitised distribution systems, further strengthening our strong heritage in this channel.
DELIVERING VALUE FOR OUR STAKEHOLDERS
Key to our sustainable business model are our stakeholders. To succeed we need to engage and work in partnership with them. They include customers and consumers; investors; suppliers; governments, regulators and legislators; NGOs and charities; scientific institutions and academia; and other organisations in the business world, including peer companies and trade associations.
Some of our stakeholders are direct participants in our value chain and are integral to our ability to deliver consistent, competitive, profitable and responsible growth. Others influence how we do business by setting the laws and norms within our countries of operation. In turn, we deliver value to our stakeholders in various forms. Read about the value we deliver for consumers, society, employees and shareholders on pages 14 to 22.
Stakeholder engagement is essential in delivering our Compass strategy outlined on page 10 and in tackling the issues addressed by the USLP. We also combine action in our business with external advocacy and joint working with governments, NGOs and others through ‘transformational change’ partnerships. By working together, we believe that fundamental change is possible in the near-term. Read more about our work in our four transformational areas in the Society section on page 16.
OUR CATEGORIES HAVE CLEARLY DEFINED STRATEGIES WITH THE COMMON GOAL OF GROWTH THAT IS CONSISTENT, COMPETITIVE, PROFITABLE AND RESPONSIBLE.
Further binding the category strategies together are our Compass pillars which define how Unilever wins in the FMCG industry. They are:
Underpinning the Compass is the USLP which is the foundation of our business. By delivering social and environmental benefits throughout our business we drive our growth, which in turn drives our ability to improve the lives and opportunities of people everywhere.
The USLP contributes directly to consistent growth by helping manage risk through the supply of sustainably-grown agricultural raw materials, such as vegetables in our Foods brands, especially important as climate change affects rainfall. It drives growth that is competitive by stimulating innovation to create brands that meet the growing consumer demand for sustainable products. Profitable growth is achieved by reducing costs through our eco-production methods in our factories, which reduce waste, use fewer raw materials and consume less energy. And responsible growth is an outcome from the trust that we earn by acting ethically and responsibly. Our impact on society through the USLP and our wider partnerships and collaboration, is detailed further on page 16.
Each of Unilever’s four category strategies includes specific priorities aimed at growing sales and delivering improved financial metrics, such as margin and cash flow, against a backdrop of continued low growth in markets globally. The individual category strategies are:
Our categories face numerous and increasingly complex challenges in their markets as the industry experiences rapid fragmentation and disruption. However, our Compass pillars provide strategic responses to help drive growth ahead of our markets.
Our success as an organisation depends on our ability to identify and mitigate the risks 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 leadership team agenda, which is where we believe it should be. A summary of the most material risks to our business performance – our Principal Risk Factors – are described on pages 37 to 41.
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THE BENEFITS THAT OUR VISION AND STRATEGY DELIVER TRANSLATE INTO PERFORMANCE FOR SHAREHOLDERS AND SOCIETY AT LARGE.
FINANCIAL PERFORMANCE
GROWING THE BUSINESS: GROUP
| ||||||
| TURNOVER GROWTH | OPERATING MARGIN | |||||
| 2016 | 2016 | |||||
| (1.0)% | 14.8% | |||||
2015: 10.0%
| 2015: 14.1%
| |||||
| UNDERLYING SALES GROWTH* | UNDERLYING VOLUME GROWTH* | CORE OPERATING MARGIN* | FREE CASH FLOW* | |||
| 2016 | 2016 | 2016 | 2016 | |||
| 3.7% | 0.9% | 15.3% | €4.8 billion | |||
| 2015: 4.1% | 2015: 2.1% | 2015: 14.8% | 2015:€4.8 billion | |||
Underlying sales growth averaged 4.4% over five years. | Underlying volume growth averaged 2.0% over five years. | Core operating margin has steadily increased over five years from 13.7% to 15.3%.
| Unilever has generated free cash flow of€20.9 billion over five years.
| |||
GROWING THE BUSINESS: CATEGORIES
| ||||||
| PERSONAL CARE | FOODS | HOME CARE | REFRESHMENT | |||
| Turnover | Turnover | Turnover | Turnover | |||
| €20.2 billion | €12.5 billion | €10.0 billion | €10.0 billion | |||
| 2015:€20.1 billion | 2015:€12.9 billion | 2015:€10.2 billion | 2015:€10.1 billion | |||
| Turnover growth | Turnover growth | Turnover growth | Turnover growth | |||
| 0.5% | (3.1)% | (1.5)% | (1.1)% | |||
| 2015: 13.2% | 2015: 4.5% | 2015: 10.9% | 2015: 10.3% | |||
| Underlying sales growth | Underlying sales growth | Underlying sales growth | Underlying sales growth | |||
| 4.2% | 2.1% | 4.9% | 3.5% | |||
| 2015: 4.1% | 2015: 1.5% | 2015: 5.9% | 2015: 5.4% | |||
| Operating margin | Operating margin | Operating margin | Operating margin | |||
| 18.4% | 17.4% | 9.5% | 9.7% | |||
| 2015: 18.1% | 2015: 17.8% | 2015: 7.3% | 2015: 8.3% | |||
| Core operating margin | Core operating margin | Core operating margin | Core operating margin | |||
| 19.1% | 17.9% | 9.7% | 9.9% | |||
| 2015: 18.9% | 2015: 18.2%
| 2015: 7.6% | 2015: 9.4% | |||
| GROWING THE BUSINESS | 2018 | 2017 | 2016 | |||||||||
| GROUP | ||||||||||||
TURNOVER GROWTH | ||||||||||||
Turnover growth averaged 0.6% over five years | (5.1% | ) | 1.9% | (1.0% | ) | |||||||
UNDERLYING SALES GROWTH* | ||||||||||||
Underlying sales growth averaged 3.3% over five years | 2.9% | ^ | 3.1% | ^ | 3.7% | |||||||
UNDERLYING VOLUME GROWTH* | ||||||||||||
Underlying volume growth averaged 1.3% over five years | 1.9% | 0.8% | 0.9% | |||||||||
OPERATING MARGIN | ||||||||||||
Operating margin averaged 17.3% over five years | 24.6% | 16.5% | 14.8% | |||||||||
UNDERLYING OPERATING MARGIN* | ||||||||||||
Underlying operating margin has steadily increased over five years from 15.5% to 18.4% | 18.4% | 17.5% | 16.4% | |||||||||
FREE CASH FLOW* | ||||||||||||
Unilever has generated free cash flow of€23.0 billion over five years | €5.0 billion | €5.4 billion | €4.8 billion | |||||||||
| DIVISIONS | ||||||||||||
BEAUTY & PERSONAL CARE | ||||||||||||
Turnover | €20.6 billion | €20.7 billion | €20.2 billion | |||||||||
Turnover growth | (0.3% | ) | 2.6% | 0.5% | ||||||||
Underlying sales growth | 3.1% | ^ | 2.9% | ^ | 4.2% | |||||||
Operating margin | 20.0% | 19.8% | 18.4% | |||||||||
Underlying operating margin | 21.9% | 21.1% | 20.0% | |||||||||
FOODS & REFRESHMENT | ||||||||||||
Turnover | €20.2 billion | €22.4 billion | €22.5 billion | |||||||||
Turnover growth | (9.9% | ) | (0.4% | ) | (2.2% | ) | ||||||
Underlying sales growth | 2.0% | ^ | 2.7% | ^ | 2.7% | |||||||
Operating margin | 35.8% | 16.1% | 14.0% | |||||||||
Underlying operating margin | 17.5% | 16.7% | 15.6% | |||||||||
HOME CARE | ||||||||||||
Turnover | €10.1 billion | €10.6 billion | €10.0 billion | |||||||||
Turnover growth | (4.2% | ) | 5.6% | (1.5% | ) | |||||||
Underlying sales growth | 4.2% | ^ | 4.4% | ^ | 4.9% | |||||||
Operating margin | 11.5% | 10.8% | 9.5% | |||||||||
Underlying operating margin | 13.0% | 12.2% | 10.9% | |||||||||
| * | Key Financial Indicators. |
| ^ | Wherever referenced in this document, 2018 underlying sales growth does not include price growth in Venezuela for the whole of 2018 and in Argentina from July 2018. 2017 underlying sales growth does not include Q4 price growth in Venezuela. See pages 23 and 24 onnon-GAAP measures for more details. |
| ◇ | The Group has revised its operating segments to align with the new structure under which the business is managed. Beginning 2018, operating segment information is provided based on three product areas: Beauty & Personal Care, Foods & Refreshment and Home Care. |
Underlying sales growth, underlying volume growth, coreunderlying operating margin and free cash flow 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 23.
| 6 | Strategic Report | Annual Report on Form 20-F 2018 |
UNILEVER SUSTAINABLE LIVING PLAN
| TARGET | 2018 | 2017 | 2016 | |||||||||||||
| 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. | 1 billion | 653 million | 601 million | 538 million | f | |||||||||||
NUTRITION | ||||||||||||||||
| Target: By 2020 we will double (ie 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% | 48% | 39% | ¥ | 35% | |||||||||||
| 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 to 14. |
| |||||||||||||||
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% | ) | 6% | q | 9% | ¥ | 8% | |||||||||
| 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 | 70.46 | † | 76.77 | ¥ | 83.52 | f | |||||||||
WATER | ||||||||||||||||
| Target: Halve the water associated with the consumer use of our products by 2020 (water impact per consumer use). | (50% | ) | (2% | )q | (2% | )¥ | (7% | ) | ||||||||
| 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 | 1.67 | † | 1.80 | ¥ | 1.85 | f | |||||||||
WASTE | ||||||||||||||||
| Target: Halve the waste associated with the disposal of our products by 2020 (waste impact per consumer use). | (50% | ) | (31% | )†q | (29% | ) | (28% | )f | ||||||||
| 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 | 0.20 | † | 0.18 | ¥ | 0.35 | f | |||||||||
SUSTAINABLE SOURCING | ||||||||||||||||
| Target: By 2020 we will source 100% of our agricultural raw materials sustainably (% of tonnes purchased). | 100% | 56% | 56% | 51% | ||||||||||||
| 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). | 100% | 61% | ‡† | 55% | ‡¥ | – | ||||||||||
• Reducing workplace injuries and accidents (Total Recordable Frequency Rate of workplace accidents per million hours worked)**. | 0.69 | † | 0.89 | ¥ | 1.01 | f | ||||||||||
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). | 5 million | 1.85 million | † | 1.26 million | ¥ | 0.92 million | ||||||||||
• Expanding opportunities in our value chain (number of women). | ||||||||||||||||
• Building a gender-balanced organisation with a focus on management (% of managers that are women)**. | 50% | 49% | † | 47% | ¥ | 46% | ||||||||||
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 | 1.73 million | 1.60 million | 1.53 million | ||||||||||||
• Enabling smallholder farmers to access initiatives aiming to improve their agricultural practices. | 0.5 million | 0.75 million | 0.72 million | ¥ | 0.65 million | |||||||||||
Baseline 2010 unless otherwise stated
| ** | KeyNon-Financial Indicators. |
| † | PricewaterhouseCoopers assured in 2018. For details and 2018 basis of preparation seewww.unilever.com/investor-relations/annual-report-and-accounts/ |
| ¥ | PricewaterhouseCoopers assured in 2017. For details and 2017 basis of preparation seewww.unilever.com/sustainable-living/our-approach-to-reporting/reports-and-publications-archive |
| f | PricewaterhouseCoopers assured in 2016. For details and 2016 basis of preparation seewww.unilever.com/sustainable-living/our-approach-to-reporting/reports-and-publications-archive |
| ‡ | During 2017 and 2018 we amended how we assessed compliance with the Responsible Sourcing Policy, henceyear-on-year data is not comparable. |
| Around 490,000 women have accessed initiatives under both the Inclusive Business and the Opportunities for Women pillars in 2018. |
| ( ) | In the table above, brackets around numbers indicate a negative trend which, for environmental metrics, represents a reduction in impact. |
| + | Target approved by the Science Based Targets Initiative. |
| q | The spreads business was sold inmid-2018 and is excluded from the performance measure (including the baseline) to ensure alignment with the existing business structure. |
| Annual Report on Form 20-F 2018 | Strategic Report | 7 |
| A CHANGING WORLD |
UNILEVER OPERATES IN THE FAST-MOVING CONSUMER GOODS (FMCG) INDUSTRY, ONE OF THE WORLD’S LARGEST, MOST COMPETITIVE AND DYNAMIC.
MARKET OVERVIEW
The top 25 global FMCG players generate sales of over€700 billion in markets characterised by their dynamic nature. A global, digital economy is fuelling rapid change characterised by fragmentation throughout the value chain. This requires fast, innovative, profitable global and local responses in areas such as supply chain, customer development, marketing and brand innovation.
In response, Unilever has reorganised into three Divisions: Beauty
& Personal Care, Foods & Refreshment and Home Care. Each has implemented our C4G change programme which was introduced in 2016 to create a simpler organisation capable of innovating more quickly to evolve our brand portfolios and meet changing trends more effectively – harnessing our global scale and local expertise. Acquisitions of new brands have further supplemented our core portfolios.
The use and threat of tariffs for political leverage continues to drive uncertainty in our markets. Currency volatility in Argentina, Turkey and Pakistan as well as major political disruption in markets such as Brazil, continues to demand rapid local responses from our brands.
Our business is shaped by systemic macro forces. We periodically review these to ensure our strategy remains relevant. We believe there are four distinct but overlapping macro trends that will shape the world over the next ten years.
DIGITAL AND TECHNOLOGY REVOLUTION
Business is evolving at a faster pace than ever. Traditional understanding and engagement with consumers is being redefined. Digital technology is transforming relationships with consumers – from connectivity and the Internet of Things, to robotics, artificial intelligence and augmented reality. All are linked by more targeted and data-driven marketing.
Fragmentation remains a principal driver of change, impacting consumer journeys,route-to-market channels and media, and brand spend. Consumers are taking different paths to purchase, often combining offline and online channels where influencers are a growing force. Younger consumers continue to prioritise meaning over materialism and are demanding more authenticity, transparency and natural ingredients. The talkability of brands is vital in a fragmented digital media landscape, favouring those with a strong point of view, or purpose, relevant to consumers. The growth of the global workforce and middle class consumers, especially in emerging markets, has resulted in long-term shifts favouring greater convenience and time-saving attributes.
Channels to reach consumers are equally fragmented. There is less reliance on ‘big box’ retailers withe-commerce growing 13% globally, driven bydirect-to-consumer models and platforms such as Amazon and Alibaba. The market is also polarising between specialist channels and discounters and convenience stores, creating both risks and opportunities for FMCG companies.
The proliferation of digital and social media channels has resulted in media fragmentation, with digital advertising now about 40% of the market. However, improving standards and tackling fraud to protect the integrity of digital marketing are major challenges.
POLARISED WORLD
Slow and uneven economic growth, rising inequality, political polarisation and the rise of nationalism within countries is impacting consumer confidence. At the same time, consumers continue to have low confidence in government, business, media and NGOs, according to the Edelman Trust Barometer. However, according to the same study, three out of four people agree a company can take action to both increase profits while improving economic and social conditions in the community it operates in.
ENVIRONMENT UNDER PRESSURE
According to a 2018 Intergovernmental Panel on Climate Change report, the world is on course for warming of 1.5 degrees Celsius by as early as 2030. Drought, floods, extreme heat and poverty for hundreds of millions are threatened if no action is taken to curb emissions. The cost of inaction will be profound, estimated to be about $44 trillion in lost GDP. But the rewards for positive action are substantial and thanks to the Paris Agreement, nearly 200 countries are pursuing carbon reforms. This is helping to open about $23 trillion in opportunities for climate-smart investments in 21 emerging markets alone by 2030.
Climate change also threatens our food system which must produce 50% more food to feed over 9 billion people by 2050. However, changing weather patterns and growing seasons threaten suitable cultivation areas around the world. Business can spur positive change and achieving food security could create 80 million jobs and business opportunities worth $2.3 trillion annually by 2030. Linked to climate change is water scarcity, a threat to 3.2 billion people. If current usage continues the world will have only 60% of its required water by 2030. See pages 30 and 33 to 35 for more on climate change risks.
Other environmental concerns are growing in significance, such as plastic packaging. The Ellen MacArthur Foundation found that 95% of the value of plastic packaging is lost to the economy after one short use, equivalent of$80-120 billion lost to the global economy each year. See pages 14 to 15 and 30 for more on plastic packaging risks and opportunities.
PEOPLE LIVING DIFFERENTLY
Concerns about the planet and society are matched by concerns about our own health and what we eat. Growing urbanisation is shaping new health priorities while the cost of care is also rising, placing health services under increased pressure. Obesity kills more people than hunger, while many populations struggle to find sufficient nourishment in their diets. Sugar is seen as a major threat which has resulted in a number of countries choosing to implement a tax on it. For food companies, this presents a mix of challenges and opportunities. Meanwhile, public awareness around mental health issues continues to grow, particularly with digital connectivity.
Consumers are now living in communities that are becoming more diverse with fragmented identities. Younger generations, especially Millennials and Generation Z, continue to have a powerful influence on cultural norms – on issues such as diversity and discrimination. Meanwhile, older generations are exerting a strong economic influence. The number of people aged 80 or over is expected to triple by 2050.
Migration is having a profound effect on national identity. 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 with more than ten million inhabitants. The number of 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. Climate change looks set to increase migration even further as populations are displaced due to rising sea levels and changing climates.
The #MeToo movement has encapsulated a major shift in women’s rights. The global gender gap in primary school completion and enrolment in secondary school has closed, however barriers and opportunities remain, particularly on equal pay. According to the World Bank, gender equality would enrich the global economy by an estimated $160 trillion if women were earning as much as men in the workplace. Men themselves face changing roles. Time spent with children has almost quadrupled for men since 1965 and in some countries the burden of care is changing in response to improved paternity leave entitlements and shared parental leave. Changing demographics and societal expectations present significant risks and opportunities for FMCG companies.
Find out more about how we are responding to the trends outlined in this section in delivering value for our stakeholders (pages 11 to 18).
| 8 | Strategic Report | Annual Report on Form 20-F 2018 |
| OUR VALUE CREATION MODEL |
UNILEVER HAS A PROVEN BUSINESS MODEL THAT SUPPORTS LONG-TERM, SUSTAINABLE VALUE CREATION.
Our business activities span a complex, global and cyclical value chain. The start of our value chain is consumer insight. We track changing consumer sentiment through our 27 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. Our research aims to bring together the best thinking and ideas from wherever they exist – within Unilever and beyond, including universities and specialist companies.
We work with tens of thousands of suppliers and spend around€34 billion on goods and services. Our supply chain sources the materials and ingredients that make up our products. Our global manufacturing operations across more than 300 factories in 69 countries turn these raw materials into products with a total volume of nearly 19 million tonnes.
Our products are then distributed via a network of around 400 globally coordinated distribution centres to 26 million retail stores, from large supermarkets, hypermarkets, wholesalers and cash and carry, to 28.small convenience stores, as well as other fast-growing channels such ase-commerce,out-of-home anddirect-to-consumer.
We are the second largest advertiser in the world, based on media spend. We create an increasing amount of tailored content ourselves to market our brands, using digital channels.
Underpinning our value chain is a set of defining strengths which set us apart from our competitors: our portfolio of global,purpose-led brands and local jewels; a geographic 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 leaders – over 80% of our business leaders are local to their markets.
Our strategy (see page 10) and our Divisional strategies (see pages 11 to 12) harness these strengths to deliver competitive top and
bottom-line growth, and capital efficiency which in turn drives underlying operating margin, free cash flow and return on invested capital – and ultimately attractive returns for shareholders.
To respond further to the increasing pace of change and accelerate value creation, we have embedded our C4G programme across all Divisions so we are a faster, simpler organisation. We are also rapidly embracing new digital technologies such as the Internet of Things, AI and robotics to get even closer to our value chain partners and consumers.
Our strategy and business model continue to deliver solid growth. From 2014 to 2018 we have delivered average underlying sales growth of 3.3% a year while underlying operating margin increased by an average 70 basis points per year to 18.4%. Longer term, Unilever has grown dividends by an average of 8% per year over the last 38 years, with no reductions.
We are on track to meet a number of targets to accelerate shareholder value since 2017. These include underlying sales growth ahead of our markets, which we expect to translate into underlying sales growth of3-5% each year up to 2020, projected cumulative savings of€6 billion by 2019 and an expansion of underlying operating margin from 18.4% in 2018 to 20% by 2020. Return on Invested Capital is expected to be sustained in the high teens and dividends will continue to rise, reflecting confidence in the outlook for profit growth and cash generation.
Sustainable value creation also means creating value for the many stakeholders Unilever relies on. The Unilever Sustainable Living Plan (USLP) is at the heart of our multi-stakeholder business model and vision to grow our business, whilst decoupling our environmental footprint from our growth and increasing our positive social impact – in turn contributing to the United Nations Sustainable Development Goals (see page 15). The USLP helps us to deliver more growth through our brands with purpose, less risk by future proofing our supply chain, lower costs througheco-efficiency practices and more trust from the stakeholders who we rely on.
| Annual Report on Form 20-F 2018 | Strategic Report | 9 |
GROWING THE CORE, EVOLVING THE PORTFOLIO AND DEVELOPING CHANNELS ARE AT THE HEART OF OUR STRATEGY.
Our strategy helps us deliver top and bottom line growth in a fast-changing world. It is underpinned by C4G which aims to create a faster, simpler organisation.
WINNING WITH BRANDS AND INNOVATION |
Rapid innovation is critical to respond effectively to the fragmentation we are experiencing in consumer segments, routes to market and media channels. Innovation varies by Division based on market requirements and brand strategies but we split projects into three separate groups. Firstly, we have global roll-outs, such as the Sunsilk Natural Recharge launched in 5 markets in 2018. Secondly, we have local innovations marketed through global brands, such as our partnership with Kinder (owned by Ferrero) which was launched in several European countries following success in France. Finally, we have local brands with local innovation, such as Vim bars with mint extract launched in India. Our faster response to consumer trends is due to different ways of working to meet the needs of local consumers and customers, and quick decision-making. Global marketing networks called Brand Communities work hand in hand with more than 230 Country Category Business Teams (CCBTs) that operate as multifunctional entrepreneurial units. This allows for more experimentation, responsiveness and scaling up of innovation across markets. We are already seeing an improvement in time to market across our portfolio as a result of a range of initiatives to speed up the innovation process. For example, time to market with new innovations to meet local trends is now40-50% faster compared to 2016. Our portfolios are evolving to meet consumer demand for brands that take a stand on issues they care about. Unilever’s purpose and our Sustainable Living brands are key to driving purchase preference. Consumer trust in brands is also driven by their experiences of marketing. In 2018 we took a key role in the industry ensuring digital responsibility covering content, platforms and measurement while also campaigning to improve influencer marketing and combat fraud in the digital ecosystem. Related principal risks (pages 29 to 32):Brand preference, Economic and political instability, Portfolio management, Safe and high-quality products, Sustainability, Climate change, Plastic packaging |
WINNING THROUGH CONTINUOUS IMPROVEMENT |
C4G plays a significant role in driving growth, but is also responsible for margin expansion for profitable growth. Through sharper financial discipline governing overhead spending, and ourzero-based budgeting (ZBB) approach, we are reducing costs and uncovering innovative ways of working. We are applying the 5S ‘smart’ programme across the Group which cuts costs and examines the business case for improvements more broadly driving savings through smart buying, smart sourcing and a smart product portfolio, as well as leveraging our supplier Partner to Win programme. 5S also drives revenue and margin through smart mix and smart pricing delivered through our Net Revenue Management programme. 5S is delivering over€1 billion of savings per year, with the aim to reinvesttwo-thirds of these savings. Brand and Marketing Investment is focused on maximising return on spend. We are increasing spend in the areas driving growth, such as digital media andin-store, whilst reducing production and promotional spend. In 2018 we generated savings in BMI of over€500 million. We are creating more contentin-house while making existing assets go further. Our 16U-Studios in 13 countries create brand content faster and more efficiently than external agencies. Improvements to measurement and verification of digital audiences ensure we maximise value in digital advertising alongside improvements in the measurement of influencer follower data. Related principal risks (pages 29 and 31):Brand preference, Supply chain |
WINNING IN THE MARKETPLACE |
Every day, 2.5 billion people use our products. We evolve our portfolio to reach consumers in all income brackets from our prestige range in Beauty & Personal Care, built from carefully selected acquisitions, to theroll-out of affordable products, such as Domex Toilet Cleaning Powder in India, for low income consumers. We reach wide into new geographies, with brands expanding into new pockets of growth such as launching Ben & Jerry’sMoo-phoria low calorie ice cream in the US and Premium Cif sprays in 15 European markets in 2018. Data is key and our ambition is to build one billionone-to-one consumer relationships through our People Data Centres which connect us with consumers in a responsible way through real-time analytics. Our 27 People Data Centres identify trends from social listening alongside engaging with consumers on ideas for new launches. Our contact with consumers is governed by our Code Policy on Personal Data & Privacy which sets out the steps we take to protect personal data. Alongside innovation, customer development is key to growth, ensuring products are available when and where consumers want them, in the format they prefer, at the right price.E-commerce remains a crucial channel. Online is now around 5% of Unilever turnover. In Chinae-commerce accounts for over 20% of turnover. We are building our business through online channels such as Amazon, Taobao in China, online grocery websites, anddirect-to-consumer models deployed by Dollar Shave Club, T2 and our prestige brands. Related principal risks (pages 29, 30 and 32):Customer relationships, Economic and political instability, Portfolio management, Sustainability, Climate change |
WINNING WITH PEOPLE |
With unprecedented change happening externally, we are taking action in a number of areas to ensure we are more agile, digitally focused and networked. Our C4G programme is empowering our people with an owner’s mindset and gives them the licence to take greater responsibility. Through C4G we are already seeing higher levels of empowerment, collaboration, experimentation and increased speed in decision-making. To develop the capabilities, skills and leadership which support new ways of working, we are investing in continuous,‘always-on’ learning programmes. We are particularly focused on digital capabilities. To developpurpose-led and future-fit leaders, in 2018 we launched new Standards of Leadership. Developed in collaboration with thought leaders and groups of young and senior leaders, the new Standards recognise the need for leaders to embrace both the inner and outer aspects of leadership. The ‘outer game’ is what leaders need to do to succeed; the ‘inner game’ is about their inner purpose which guides their behaviours and actions. Attracting and retaining talent is vital to support our growth ambitions. Purpose and our Unilever Sustainable Living Plan (USLP) remain key talent attractors with 75% of employees in our 2018 UniVoice survey believing their role contributes to the USLP and 70% believing they can fulfil their purpose at work. To reinforce this link and give more people a stake in the business we are developing our approach to reward by including more long-term share-based incentives for business performance and progress on our USLP targets. Related principal risks (pages 29, 31 and 32):Talent, Business transformation, Sustainability |
| 10 | Strategic Report | Annual Report on Form 20-F 2018 |
| DELIVERING LONG-TERM VALUE FOR OUR STAKEHOLDERS | ||
Our three Divisions meet the constantly changing needs of consumers by harnessing our global scale and local expertise. Innovation is the fuel, creating great products that consumers love, from nutritionally balanced foods and refreshments, to affordable soaps that combat disease, luxurious shampoos and everyday household care products. Whatever the brand, wherever it is bought, we’re working to ensure that it plays a part in helping fulfil our purpose as a business – making sustainable living commonplace.
BEAUTY & PERSONAL CARE
BEAUTY & PERSONAL CARE (BPC) GENERATED TURNOVER OF€20.6 BILLION, ACCOUNTING FOR 40% OF UNILEVER’S TURNOVER AND 33% OF OPERATING PROFIT IN 2018.
The Division is our largest and includes five global brands with turnover of€1 billion or above, namely Axe, Dove, Lux, Rexona and Sunsilk, as well as other household names such as TRESemmé, Signal, Lifebuoy and Vaseline. BPC has leading global positions in hair care, skin cleansing and deodorants, and strong local positions in skin care and oral care. The prestige business leads in premiumising our portfolio with turnover of€490 million from brands including Dermalogica and Hourglass.
BPC’s strategic ambition is to become the most valuable and admired BPC company, led by its purpose ‘Beauty that cares for people, society and our planet’. Its priorities are to continue to grow its core brands, build afuture-fit portfolio, lead in high-growth spaces and adopt a new model of marketing. The priorities reflect and respond to key trends shaping the Division. 2018 saw increasing fragmentation across route to market, retail channels and media, alongside growing data, analytic and automation capabilities. Together these trends are creating a more dynamic, complex and sophisticated landscape with greater segmentation, differentiation and personalisation.
BPC’s core brands are introducing new innovations and formats quickly and at scale, such as the new shower mousses from Axe, Dove and Radox as well as a growing range of products which respond to the trend for natural and wellbeing products. During 2018 we launched Vaseline Clinical Care and Dove Derma Series in the fast-growing therapeutics segment and Dove Facial Cleansing Series infused with 100% plant-derived botanical oils in Japan. Hair care has created and launched multiple naturals products, creating a business with over€300 million in turnover in 2018.
Succeeding in the hyper-fragmented world demands greater consumer responsiveness and we are proud to have launched nine new brands over the past two years: ApotheCARE Essentials, Hijab Fresh,K-Bright,K-JU, Korea Glow, Love Beauty and Planet, Pure Derm, Purifi and Skinsei. Love Beauty and Planet has expanded from North America into four markets in Europe and is now active across several categories including skin cleansing, deodorants, skin care and hair care.
Our acquisitions play a key role in building the future-fit portfolio. In the last four years, BPC has acquired 13 companies including wellbeing focused Equilibra in 2018. AHC (Carver Korea), acquired in 2017, showed stronge-commerce performance and in 2018, we rolled it out to Taiwan, Hong Kong, Singapore, Malaysia and Russia. Schmidt’s Naturals, also acquired in 2017, has extended beyond deodorants into more categories. The acquisition of Quala S.A completed in February 2018. Within two months of acquisition, its Savile and Ego extensions had brought to market multiple new products in five categories. Strong progress has been made building a highly attractive prestige portfolio which is on track to becoming a€1 billion business. Our most recent acquisition in prestige, Hourglass, is growing fast, expanding into new geographies and with a commitment to become entirely vegan by 2020.
Future growth will depend on accelerating the adoption of a new model of marketing focused on brands with purpose, generating great content, delivered via digital channels using advanced data and analytics. The model is creating many new consumer touchpoints. For instance, Axe collaborated with DJ Martin Garrix to launch his Burn Out video with over 40 million YouTube views to date, celebrating the brand’s message of individuality. In Latin America, Sunsilk partnered with an online influencer toco-create products for curly hair.
Ourpurpose-led brands are well positioned to meet growing concerns about the fragility of the planet and consumer preference for more
sustainable products. In October we joined calls from consumers, NGOs and politicians for a worldwide ban on animal testing of cosmetics and Dove, the Division’s biggest brand, achieved PETA accreditation as ‘cruelty free’. The PETA cruelty-free logo will start appearing on many packs in 2019 and more brands are set to follow. We are also developing new packaging solutions with less plastic, better plastic and no plastic. REN launched a sea kelp and magnesium body wash in a bottle made from 100% recycled plastic, with 20% from recovered ocean plastic. Simple launched biodegradable face wipes made from renewable plant fibres and sustainable wood pulp. More packaging innovations will be launched in 2019.
Overall, underlying sales growth was 3.1%, driven by skin care and skin cleansing, but partly offset by slower growth in deodorants and oral care due to market and competitive pressures. Profitability progressed with underlying operating margin improving 80 basis points to 21.9%. Geographically, a number of countries grew above the market including US, Canada and the UK while emerging markets such as Pakistan and Bangladesh also had high growth. Brazil underperformed as did Japan and parts of Western Europe, where markets were flat to declining. In our channels,e-commerce remains a key driver of growth alongside the Health & Beauty channel where we would like to see faster growth following a slow year, especially in North America.
Looking ahead, we will continue to build our future-fit portfolio while adopting the new model of marketing, to deliver strong growth, making an accretive contribution to Unilever’s top and bottom line.
FOODS & REFRESHMENT
FOODS & REFRESHMENT (F&R) GENERATED TURNOVER OF€20.2 BILLION, ACCOUNTING FOR 40% OF UNILEVER’S TURNOVER AND 58% OF OPERATING PROFIT IN 2018.
The Division launched in January 2018 after the previous Foods and Refreshment Categories merged. The integration and relocation of the global teams to Rotterdam is complete. The disposal of the spreads business was also completed in July. F&R now includes the foods, ice cream and beverages categories, as well as Unilever Food Solutions, our dedicated foodservice business. F&R is home to five global brands with turnover of€1 billion or above, namely Knorr, Hellmann’s, Magnum, Lipton and Heart brand (eg Wall’s) as well as other famous global brands including Brooke Bond and Ben & Jerry’s. It also includes local jewels such as Bango and Robertson’s plus recent B Corp acquisitions such as Pukka Herbs, Sir Kensington’s and Mãe Terra. F&R’s ambition is to accelerate growth while improving underlying operating margin. F&R’s purpose ‘Taste good, Feel good, Force for good’ underpins our strategic priorities which are to: transform the portfolio; organise for agility and lower costs; and transform capabilities.
Our efforts to transform the F&R portfolio are driven by consumer insights. For example, we are seeing stronger preference for healthier products with more natural and organic ingredients. F&R has launched a number of products addressing this trend, including Magnum and Hellmann’s vegan variants in Europe, meat-free Knorr launches in the Nordics and Ben & Jerry’snon-dairy alternatives. Knorr also expanded its organic and 100% natural ranges in Europe. In our beverages category, we continue to grow our ‘good for me tea’ ranges. Lipton’s range, which includes variants such as detox and stress-less, continued its globalroll-out with strong performance. Recently acquired brands such as Pukka Herbs are being rolled out at pace. However, given continuous acceleration of the external landscape, we have to step up portfolio transformation further and increase the speed of our response to trends.
Our market-focused organisation and agility supports our portfolio transformation and delivered several new brands in 2018 such as RED RED (UK), Culture Republick (US), and Jawara (Indonesia). We announced an agreement to acquire Horlicks and other consumer healthcare nutrition products in India and other Asian markets from GlaxoSmithKline (GSK), and also acquired the Vegetarian Butcher (Netherlands) and three ice cream brands – Adityaa (India), Betty (Romania) and Denny (Bulgaria). After success in the US, Breyers Delights was launched in Europe. In addition, we introduced innovative licensed ice cream brands including Kinder in Europe and Cornetto Oreo in India.
| Annual Report on Form 20-F 2018 | Strategic Report | 11 |
| DELIVERING LONG-TERM VALUE FOR OUR STAKEHOLDERSCONTINUED | ||
Consumers’ shopping habits continue to change. We launched the IceCreamNow platform in partnership with restaurant delivery services, building a new home-delivery channel. We have also launched a globalfront-of-house programme to showcase our teas and condiments in restaurants, hotels and bars, and to capitalise on the growth of eating out andout-of-home consumption. These represent significant business opportunities.
The second F&R strategic priority is to organise for agility and lower costs. In 2018, our 5S and ZBB programmes stepped up fuelling our gross margin and marketing support. We will continue our savings programme to reduce structural costs, while providing funding for portfolio transformation and margin expansion. Our speed to market has improved by almost a third, reflecting how C4G is helping to unlock speed and agility. We are also piloting new ways of working across our teams.
Our final strategic priority is to transform our capabilities with a focus on R&D, lean innovation and precision marketing. The creation of ourstate-of-the art global Foods Innovation Centre in Wageningen (Netherlands) will further strengthen our innovation capability. It is scheduled to open in 2019. We are also enhancing our capabilities in digital-driven marketing through extra resourcing across key markets, upskilling our current teams and hiring digital savvy marketeers.
These strategic priorities are underpinned by the development of morepurpose-led brands. Knorr, Hellmann’s, Lipton, Brooke Bond and Ben & Jerry’s continued to grow, each fuelled by a unique purpose which is resonating with consumers. Brooke Bond for example continued its work tackling cultural taboos through its campaigns, addressingsame-sex relationships in Canada and divorce in the Gulf markets. Meanwhile, Hellmann’s launched a major focus on food waste with an activation in Brazil to inspire people to use Hellmann’s to transform leftovers into tasty meals. Action on plastic packaging is another priority for F&R. We have partnered with Ioniqa and Indorama Ventures to pioneer a technology which converts PET waste into virgin grade material for use in food packaging. In the UK, PG tips started to introduce 100% biodegradable plant-based pyramid bags. More innovations and new technologies are in the pipeline.
During 2018 F&R turnover declined 9.9% to€20.2 billion, due to the sale of spreads and currency devaluation. Underlying sales growth was 2.0% while our underlying operating margin improved by 80 basis points to reach 17.5%. Europe returned good results in ice cream, underpinned by good weather and innovations such as Magnum pints and Kinder ice cream. However, developed markets overall remain difficult and are seeing slower volume growth due to increasing segmentation of consumer preferences, especially in foods, where our efforts on portfolio transformation were not enough to offset the headwinds. Traditional channels in Europe such as supermarkets and hypermarkets continue to discount, creating deflationary pressure. Latin America had a challenging year due to tough economic conditions, a truckers’ strike in Brazil and currency headwinds in Argentina which affected growth in these two markets. Excluding Latin America, emerging markets generally delivered a strong performance. Several key markets including India, China and Turkey saw double-digit growth reflecting the strong potential in emerging markets.
F&R will continue to drive growth and margin by focusing on its strategic priorities. Our portfolio transformation,step-up in capabilities and shift in culture are of paramount importance to meet these objectives.
HOME CARE
HOME CARE GENERATED TURNOVER OF€10.1 BILLION, ACCOUNTING FOR 20% OF UNILEVER’S TURNOVER AND
9% OF OPERATING PROFIT IN 2018.
Home Care is home to two global brands with turnover of€1 billion or above, namely Dirt is Good (eg Omo and Persil) and Surf. Other leading brands include Comfort, Domestos, Sunlight, Cif, Seventh Generation as well as our air and water purification brands Blueair, Pureit and Truliva/Qinyuan. 79.5% of our turnover is in developing and emerging countries. Home Care’s ambition is to deliver sustained underlying sales growth and step up underlying operating margin.
The rapid change of consumer habits, media, competitors and channels, as well as heightened environmental stress, has redefined Home Care’s
growth opportunities. The Division responded to these changes by creating four consumer-centric categories: Fabric solutions which focuses on ready to wear clothes (eg Omo, Surf, Radiant); Fabric sensations which focuses on fabrics, fashion and lifestyle (eg Comfort, Snuggle); Home & hygiene (eg Sunlight, Sun) which focuses on delivering care for a cleaner world; and life essentials which unites our air and water purification brands (eg Pureit, Truliva, Blueair). Home Care’s purpose ‘Making your home a better world. Making our world a better home’ underpins the Division’s strategic priorities: strengthening further the foundation of the business; making Home Care fit for the future; and investing in capabilities.
Home Care strengthened the foundations of the business by delivering superior products and benefits. We launched Cif Specialist sprays across 15 countries in Europe whilst continuing toroll-out our toilet blocks to 11 more markets. We expanded our product portfolio into high potential geographies, building on our most established brands such asOmo-branded floor cleaners in Brazil. Our Comfort Intense ultra-concentrated fabric conditioners are now in 20 markets and continue to enjoy strong growth.
Our brands made progress in embracing purpose to connect more meaningfully with consumers – in particular millennials. In India, Domex enrolled renowned movie stars in its ‘Pick up the brush’ campaign to help overcome the social stigma associated with cleaning toilets, a key barrier to improve sanitation. Seventh Generation, acquired in 2016, stepped up its advocacy for Climate Justice together with the Sierra Club to move cities to commit to 100% renewable energy. Home Care’s biggest brand, Omo/Persil, joined forces with National Geographic, IKEA and Lego to promote the developmental benefits of play in children.
The second pillar of our strategy is to future-proof our business to lead new trends. We intensified our efforts and increased our footprint in the fast-growing natural segment through the launch of Omo naturals in New Zealand, France and Brazil among others, theroll-out of Seventh Generation in more markets and the launch of Sunlight Naturals across South-East Asia and South Africa. Our brands such as Cif, Omo/Persil and Seventh Generation responded to growing concerns about plastic by including recycled plastic in their packaging. Home Care launched Day2, a dry wash spray that revives clothes between washes – saving time and water. Our ultra-concentrated laundry gems, a new format launched in the UK in 2017, performed below expectations. In South Africa we reacted quickly to the drought in Cape Town with Domestos Flush Less, a toilet spray that disinfects and eliminates odours without the need to flush. We increased our presence ine-commerce, crossing€500 million of sales and continued to experiment with new business models such aspeer-to-peer laundry services.
The third strategic pillar is investing in our capabilities. This includes partnering to tap into the opportunities that data brings to make Home Care more efficient and better able to seize growth opportunities. In China, our water purification brand, Truliva, partnered with Alibaba to develop an online leasing market for water purifiers. We also joined forces with Ms Paris, the Chinese dress rental platform, that allows consumers to hire designer dresses and return without laundering. To support our R&D efforts, we have inaugurated the Materials Innovation Factory at the University of Liverpool, a world-class centre of excellence in advanced material chemistry and an ecosystem that brings together innovation partners and leading academics to develop more sustainable and superior formula and packaging for our brands.
Home Care delivered underlying sales growth of 4.2% while our underlying operating margin improved by 80 basis points to reach 13.0%. Key drivers of growth were North and South Asia with South East Asia, Middle-East, Turkey and the US also performing strongly. By contrast, our performance in Latin America was challenged by a trucker’s strike and extreme inflationary pressures. Our home & hygiene and fabric sensations categories delivered strong, broad-based profitable growth whereas life essentials performed below expectations largely driven by a significant decline in category growth in air purification in China and intense competitive pressures. Margin expansion in fabric solutions was hampered by inflationary headwinds and competitive pressures on pricing.
Home Care will continue to drive growth and margin by shifting our portfolio and footprint towards the higher growth, more profitable market segments, formats, channels and geographies while continuing to address with agility changing consumer preferences.
| 12 | Strategic Report | Annual Report on Form 20-F |
UNILEVER SUSTAINABLE LIVING PLAN
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OUR CONSUMERSSOCIETY AND ENVIRONMENT
PERSONAL CARE
PERSONAL CARE IS UNILEVER’S LARGEST CATEGORY WITH A TURNOVER OF€20.2 BILLION IN 2016, ACCOUNTING FOR 38% OF UNILEVER’S TURNOVER AND 48% OF OPERATING PROFIT.
Unilever is one of the big three global players in Personal Care, with a growth rate that continues to outpace the market. It includes five€1 billion brands: Axe, Dove, Lux, Rexona and Sunsilk.
Personal Care’s strategic role is to deliver competitive growth of the core brands while premiumising the overall portfolio. In 2016 the category continued to execute its strategy and delivered underlying sales growth of 4.2%.
Dove continued its global Self Esteem Project, helping the next generation of women to realise their full potential, and helping make beauty a source of confidence, not anxiety. In 2016, Dove unveiled a new campaign in India, ‘Let’s Break the Rules of Beauty’, aimed at inspiring India to embrace its own diversity and widening beauty ideals beyond current stereotypes. The centrepiece of the campaign was an online film that captured 85 ‘real women’ from across India celebrating their own ideal of beauty.
In 2016 Axe announced a bold new direction with a campaign that took a progressive point of view on masculinity and attractiveness. Contributing to Unilever’s #unstereotype initiative, Axe called on men all over the world to ‘Find Your Magic’, offering a broader range of male grooming products to help men work on their individual style, and in doing so challenge stereotypical notions of masculinity. The new range includes daily fragrances, hair styling, body washes, and antiperspirants. Brand performance has improved in a number of geographies and brand equity was stronger, but continued focus and investment are required in 2017 to improve financial contribution consistently across all countries.
The growth of our core brands was fuelled by innovation and equity building communication.
Growth in hair care was supported by innovations such as TRESemmé Beauty-Full Volume. This is a unique reverse system, first using conditioner to soften hair, then shampoo to wash away weight, improving volume-seekers’ product experience and beauty results.
In our deodorants business, Rexona Antibacterial Defence built on its 2015 launch and is now present in more than 40 countries, helping fight the bacteria which cause body odour with 48 hours of protection.
Personal Care is also home to several brands which are driving Unilever’s purpose of making sustainable living commonplace. In addition to Dove, these include Lifebuoy and Signal, which we categorise as Sustainable Living brands.
We are under-represented in the premium segment of the global Personal Care market and so we continued to build our market share in this fast-growing market segment. We strengthened and expanded our premium brands such as TRESemmé and Zendium, and launched and supported premium ranges and formats including Dove Advanced Hair Series and Signal White Now.OUR MULTI-STAKEHOLDER MODEL AIMS TO REWARD OUR SHAREHOLDERS WHILE POSITIVELY IMPACTING SOCIETY.
Our acquisition of brands such as Dollar Shave Club in the male grooming segment and Living Proof in early 2017, the premium hair care business, demonstrated active management of our portfolio. We also continued to build the prestige skin care brands acquired in 2015: Dermalogica; Murad; Kate Somerville; and REN.
The digital revolution is quickly changing how we do business and how we build brands. Responding quickly to these opportunities is an important priority for the Personal Care category. Communication for our brands increasingly makes the most of digital channels, from video or display to social media and search. The Axe ‘Find Your Magic’ campaign took a digitally-led multi-channel approach, while All Things Hair, our content-rich online channel, offers hair ideas, insightsimpact on
latest trends, and how-to videos on a digital platform. The acquisition of Dollar Shave Club brought us a direct-to-consumer business model that thrives on insights generated from rich relationships with its members.
The Unilever-wide Connected 4 Growth transformation programme is helping evolve the Personal Care organisation so that we continue to grow ahead of our markets. Global strengths are increasingly combined with local insights to make initiatives more consumer and customer-centric, with ways of working becoming faster and simpler.
FOODS
FOODS GENERATED TURNOVER OF€12.5 BILLION IN 2016, ACCOUNTING FOR 24% OF UNILEVER’S TURNOVER AND 28% OF OPERATING PROFIT.
It includes€1 billion brands Knorr and Hellmann’s, both of which are Sustainable Living brands. Alongside global brands, we have iconic local brands such as Bango in Indonesia, Robertson’s in South Africa and Kissan in India.
The category’s strategic role is to accelerate top-line growth while maintaining profitability and its strong cash contribution.
To achieve this, the category has three priorities: accelerating growth in emerging markets, which now account for more than 40% of sales; modernising our portfolio to address changing consumer habits; and preserving value in the Baking, Cooking and Spreads (BCS) business (Europe and North America).
We made solid progress in 2016 against these goals, although markets remained challenging and volatile, characterised by acceleration of local competition, ongoing price deflation in Europe and currency devaluation in emerging markets. This highlights the importance of Unilever’s Connected 4 Growth programme to transform the organisation, making us leaner, fitter and more empowered to tackle the challenges we face.
In 2016, underlying sales growth improved to 2.1% thanks to an acceleration in Knorr and Hellmann’s and strong positive momentum in savoury, dressings and Food Solutions.
Sales in emerging markets expanded by over 7%, broadly ahead of market. Growth has been particularly strong in Latin America, Africa and South East Asia, with all markets showing double-digit growth. Except for South East Asia, where Bango continued to be a key growth driver, underlying sales growth has been predominantly price-led, with volume lagging.
In both Europe and the US, consumers continue to seek greater trust and transparency from products along with new taste experiences and healthier options. In response, we modernised our portfolio by reformulating existing products and launching new organic and ‘100% natural’ variants under Hellmann’s and Knorr respectively. We saw good growth in our US dressings business, and both Hellmann’s and Knorr grew market share in a highly competitive environment.
In BCS, we repositioned key brands to feature their plant-based origins which showed early signs of success. We also implemented a leaner, more market-facing organisation. However, these have not stemmed the overall decline of the category driven by changing consumer preferences. There were no fundamental changes to the negative trend in Europe and the US.
Our sustainability mission – ‘Food that tastes good, does good and doesn’t cost the earth’ – remains at the heart of our category strategy. For instance, we have improved food fortification with Blue Band in Africa and continue to promote healthy, nutritious cooking with Knorr and made reducing food waste a priority in Food Solutions.
2016 also saw a step-change in our digital marketing to respond to changing consumer and media trends. This includes the successful Hellmann’s #strangewich activation in the US and the ground-breaking Knorr #LoveAtFirstTaste film, which generated around 2.1 billion impressions and well over 100 million YouTube views.
HOME CARE
HOME CARE GENERATED TURNOVER OF€10.0 BILLION IN 2016, ACCOUNTING FOR 19% OF UNILEVER’S TURNOVER AND 12% OF OPERATING PROFIT.
It includes€1 billion brands Dirt is Good and Surf as well as other household names including Comfort, Sunlight, Domestos and our water purification brand, Pureit. Dirt is Good, Domestos and Radiant are Sustainable Living brands.
The category generates 80% of its sales in emerging markets where strong future growth is most likely and holds the number one position in 7 out of its top 10 markets.
Home Care’s strategic role is to step up profitability and scale household care. It made good progress delivering on this strategy during 2016, generating underlying sales growth of 4.9% while expanding operating margin by 2.2 percentage points. It achieved this by simplifying its operations, increasing efficiencies and providing consumers the opportunity to trade up through premium offerings.
This performance was delivered in a rapidly evolving consumer environment that witnessed intensifying competition both globally and locally, presenting opportunities as well as challenges for Home Care’s brands.
Rapid urbanisation and more women in the workforce mean households have more income, and better homes and clothes, but less time for household tasks. Cif responded by expanding its Ultrafast and Power & Shine range of trigger sprays, delivering efficacy and convenience while growing market share for household care. Dirt is Good addressed the need for greater convenience by launching ancillaries in Argentina, Chile and Colombia. Skip sharpened its brand proposition with an innovative campaign which started its rollout to 11 markets, meeting fashion lovers’ demands for superior garment care. Higher disposable incomes and an appetite for improved fragrance and longer lasting garment freshness fuelled growth in the fabric conditioner market in which Comfort Intense, the ultra-concentrated fabric conditioner, continued to grow.
Urbanisation combined with water stress and pollution results in consumers becoming more concerned about health, hygiene and the environment. Although existing brands such as Domestos and Pureit were already responding to this concern, in 2016 Home Care stepped up its response to these issues through strategic acquisitions. These comprised Blueair, a pioneer of premium air purifiers which also introduced a new and fast-growing product category into Home Care, and Seventh Generation, a leading manufacturer of plant-based products with a strong Millennial following.
As consumers grow increasingly aware of the impact their choices have on the world around them, the need for a brand to also be meaningful and have a strong purpose becomes imperative. To this end the category’s brands are key to realising Unilever’s Purpose of making sustainable living commonplace.
In 2016, Surf established a three-year partnership with Oxfam to alleviate the burden of unpaid care work on women and Sunlight introduced a revolutionary water-saving formulation in South Africa, halving the amount of water and time required for laundry. Meanwhile, Domestos and its partners, including UNICEF, continued their work to help around 6 million people gain improved access to a toilet through behaviour change interventions and capacity-building initiatives.
The connected, digital world is not only changing how consumers buy Home Care products but also giving rise to stronger local competition. Home Care is building digital capabilities to enhance its brands and innovations while utilising digital retail channels such as direct to consumer. It used this channel successfully in 2016 to launch the Neutral brand into the UK, offering household, face, skin and baby care products, all free from perfumes or colourants.
Underpinning these achievements was a strong focus on end to end value creation to improve margins and cash generation, driving profitability through lower costs and simpler, more efficient operations.
REFRESHMENT
REFRESHMENT GENERATED TURNOVER OF€10.0 BILLION IN 2016, ACCOUNTING FOR 19% OF UNILEVER’S TURNOVER AND 12% OF OPERATING PROFIT.
It includes€1 billion brands such as Heartbrand (e.g. Wall’s), Magnum and Lipton. Lipton, Ben & Jerry’s and Breyers are Sustainable Living brands.
Refreshment’s strategic role is to grow ice cream returns on capital and accelerate growth in tea. Underlying sales grew 3.5% in 2016 as a result of a focus on our core brands, premiumising the portfolio and delivering best in class retail execution, both in customers’ stores and Unilever’s own retail channels.
In 2016 ice cream delivered strong growth and profitability, increasing its presence in a growing and dynamic sector, with continued progress in our strongholds of Europe and North America, and Asian regions and Turkey showing good results. Brazil fared less well due to growing economic uncertainty which impacted summer sales. Ice cream sales were helped by strong brands and new formats which address new occasions to consume, responding to consumers’ on-the-go lives.
Profitability also increased thanks to successful innovations behind premium brands. We launched the Magnum Double range and in the US Ben & Jerry’s extended into a range of non-dairy ice creams, meeting the consumer demand for plant-based alternative formats. Ben & Jerry’s also launched its ‘Wich format in Europe, extending beyond the successful pint format into a new cookie and ice cream product that can be eaten on the go.
With purpose and sustainability at its heart, Ben & Jerry’s continued to create movements for social change. For instance, advocacy campaigns in the US and UK encouraged people to exercise their right to vote in elections.
The Wall’s Talking Ice Cream campaign was extended to 30 countries in 2016, successfully driving brand growth and strengthening equity across the range. Our local brands have enjoyed particular success under the Talking Ice Cream campaign. In 2016, the UK campaign was awarded a Silver IPA Effectiveness Award in recognition of the strong ROI generated by the campaign over the past years. The ice cream sector generally continued to witness the impact of consolidation among international competitors.
Responding to the nutritional needs of our consumers remains a priority. We continue to work on ensuring that 100% of our children’s ice cream brands have fewer than 110 calories and 91% of our packaged ice cream products do not exceed 250 calories per portion (calculated based on 97% of global ice cream sales volume). We have a clear policy on marketing to children and continue to work with the wider industry. Our sugar reduction in our sweetened tea-based beverages continues, consistent society starts with our USLP commitment to help people achieve a healthier diet.
In tea we continued to build our presence in more premium segments whilst strengthening the core products. Our Brooke Bond Family in India continued to grow, helped by a series of engaging films highlighting people coming together over a cup of tea to overcome prejudice and inequality. Together, these films generated around 10 million views during 2016 helping Brooke Bond regain its market leading position. Meanwhile, Lipton’s ‘Be A Maker’ digital campaign highlighted the lives behind the leaves of Lipton’s tea farmers in Kenya. The social media campaign ran in November 2016 with very positive engagement results amongst its target Millennial audience in key markets. PG tips in the UK had a more challenging year with negative growth.
Lipton launched Matcha into the green tea segment in the US while we also launched Pure Leaf in the US as a premium proposition in hot tea. Building on the success of Pure Leaf ready to drink brand in the US, the range has been extended into premium leaf teas.
DELIVERING VALUE FOR OUR STAKEHOLDERSCONTINUED
The luxury tea segment, where our T2 business is positioned, experienced good growth throughout the year. T2 also added 13 new stores mainly in Australia and the UK, expanding the chain to 89 stores in total. A new e-commerce platform for T2 has also seen strong sales growth.
We announced an agreement to dispose of our AdeS soy beverage business in Latin America, continuing the active management of our brand portfolio to sharpen our focus on growth.
WE ARE TAKING COLLECTIVE ACTION ACROSS OUR VALUE CHAIN TO TACKLE THE MOST PRESSING ISSUES OF OUR TIME. IT IS THE RIGHT THING TO DO, AND THE ONLY WAY TO GROW OUR BUSINESS SUSTAINABLY.
Unilever creates value for society in many ways, be they shareholders, consumers, society at large or around 169,000155,000 employees who make a vital contribution toreceived€5.3 billion in pay in 2018, and extends across our Purposevalue chain including the millions of making sustainable living commonplace. Ourretailers and distributors who sell our products are sold in more than 190 countries, generating income and employment for retailers and distributors who bring our brands to consumers. Wemany more. Our suppliers also create value for suppliers – in 2016 we purchasedbenefit from the€34 billion of goods and services.
Taxes pay for the publicwe spent on goods and services that benefit each and every one of us, and effective taxation is the foundation of healthy societies.in 2018. The taxes paid by businesses – and as a direct result of business activity – make anwe pay are another important contribution.contribution to society. Total taxestax borne by Unilever in 2016 amounted to2018 was€43.7 billion, of which€2.3 billion was corporation tax. To build confidence in the tax system, it is especially important that business taxation is simple to understand, transparent, and applied consistently, and that society trusts tax authorities to administer taxes fairly for all taxpayers. Unilever fully complies with the tax laws in the countries where we operate, but where theoperate. Where tax law is not clearunclear, or has not kept pace with the way modern business operates Unilever interprets its taxpractice, we interpret our obligations in a responsible way. At Unileverway, guided by our Tax Principles provide this reference point – further information is available on our website.Principles.
We are proud of our contributions to society, because they reflect the hard work and dedication of generations of Unilever people and stakeholders. But we know that the success we enjoy, and the contribution we make, depend in turn on the success and resilience of the economies and societies we operate in.
In these volatile and uncertain times, those societies face many urgent challenges – social, political and environmental. We know that we, and business as a whole, can and must do more to address them. If we succeed, it will create the conditions for business to thrive.
That is why we introduced our Unilever Sustainable Living Plan (USLP) to leverage our scale, influence, expertise in innovation and resources to directly address issues that matter to people – an approach that strengthens our business so that it can grow sustainably.
UNILEVER SUSTAINABLE LIVING PLAN
Our impact on society is significant but we want our impact to go beyond business as usual, delivering value for multiple stakeholders at the same time as growing our business. This idea is encapsulated in the Unilever Sustainable Living Plan (USLP) which represents a simple idea – that business growth and sustainability are not mutually exclusive. By focusing on sustainable growth, we believe we will generate consistent and profitable long-term shareholder returns. The USLP launchedhas 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 are supported by over 50 time-bound stretching targets and a transformational change agenda which aims to create change on a systemic scale. We are making good progress overall against our targets although some remain a challenge to achieve by the end of 2020. Our Sustainable Living Report includes extensive disclosure on progress against our USLP targets including challenges we have faced, some of which are summarised in 2010, is our blueprint for achieving our vision. By spurring innovation, strengthening our supply chain, lowering costs, reducing risks and building trust,this section of the Annual Report & Accounts.
Our actions on sustainability isare creating value for Unilever as well as society.
For example, we have achieved a cumulative cost avoidance of over€700 million through eco-efficiency measures in our factories since 2008, of which our waste programme has contributed to cost avoidance of around€250 million. In 2015 we had 12numerous ways, generating more growth, lower costs, less risk and more trust in the business. Our Sustainable Living brands, which grew 30% faster than the rest of the business. In 2016 these brands grew 40% faster than the rest and delivered nearly half of Unilever’s growth. They are brands which combine a strongpowerful purpose delivering a social or environmental benefit, with products contributing
to at least onethe USLP, are a key driver of growth. In 2017, 26 of our USLP goals.top 40 brands were Sustainable Living brands including Ben & Jerry’s, Dove and Lifebuoy. Our Sustainable Living brands grew 46% faster than our other brands and accounted for 2016 will be announced70% of total growth. Product innovations which respond to water scarcity and climate change at the same time as helping consumers, continue to create growth opportunities for us. Recent sustainability innovations which deliver consumer benefits include our new Love Beauty and Planet range in May 2017 once the analysis is complete.US which uses fast-rinse technology in its conditioners thereby requiring less water. Domestos Flush Less, available in water-scarce South Africa, keeps toilets clean while saving nine litres of water per flush.
The USLP strengthens our business by helping us to save costs. Since our baseline year of 2008 we have saved over€600 million on energy costs in our factories; and by using fewer materials and producing less waste we have avoided costs of approximately€234 million.
Through the USLP, we are also responding 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, climate, the environment, and rising inequality. We have identified the broad issue of sustainability, related to the achievement of our goals in the USLP, as a principal risk (page 29) as well as a number of specific risks including climate change (page 30) and plastic packaging (page 30). Mitigating the physical impacts of climate change is critical because we depend on raw materials sourced from countries that are particularly vulnerable to rising sea temperatures and changing weather patterns. See pages 33 to 35 for our response to the risks and opportunities from alow-carbon economy.
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 the number one FMCG graduate employer of choice in around 50 countries where we recruit. We have been ranked first in the annual GlobeScan survey of sustainability leaders for eight years and also came top of the Dow Jones Sustainability Index Personal Products sector in 2018.
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 three clear goals: to helpbeen made against our first USLP goal of helping more than 1one billion people improve their health and well-being by 2020; to halve the environmental impact of our products across the value chain by 2030; and to enhance the livelihoods of millions as we grow our business by 2020.
To date we have made significant progress on our first big USLP goal of helping more than 1 billion people improve their health and well-being. By the end of 2016,2018, we had reached 538653 million people, led bymaking a significant contribution to the successSustainable Development Goal on Clean Water and Sanitation (SDG6).
In order to increase the reach and social impact of Sustainable Living brands such as Lifebuoy, Dove and Signal. In addition, 35%some of our Foodsbiggest health & hygiene programmes we continue to explore the potential of using mass media and digital to drive behaviour change at greater scale, as well as scaling up partnerships to increase the reach of more conventionalon-ground programmes. Dove, one of Unilever’s biggest brands which grew at 7.8% in 2018, has reached around 35 million young people since 2004 through its Self-Esteem Project. To expand its reach, Dove has partnered with the Cartoon Network to create Steven Universe mini episodes which bring to life the proven themes from ouron-ground programmes to boost self-esteem for young people. Our aim is that this will reach 20 million young people over the next two years. This series is supported by a music video which has so far received over 1.8 million views on YouTube. As well as reaching more young people with body confidence messaging, this activity is helping to raise overall awareness of Dove’s work to improve self-esteem which correlates with higher purchase intent.
Since 2010, Lifebuoy’s programmes have reached 458 million people through schools, health clinics and community outreach. Lifebuoy has recently expanded its behaviour change programme on the importance of handwashing with soap using mobile technology. The new service aims to reach out to women in media dark areas, providing free advice to mothers on their child’s health. Another recent Lifebuoy partnership with Gavi (the Vaccine Alliance) ties together the importance of handwashing with soap and immunisation, using a variety of channels including home visits and mobile communications. While our programmes have focused on reaching children and motherson-ground, we have long believed that TV advertising can drive behaviour change. To test this, we ran a study in India to assess the effectiveness of specific Lifebuoy TV adverts. The study showed a significant increase in the frequency of handwashing with soap after people watched the adverts. We are progressing with peer review publication of our study.
For more than a decade, we have been working to make our products even healthier by increasing goodness and reducing nutrients of concern like sugar, salt and saturated fat. We aim to double the proportion of our portfolio metthat meets the highest nutritional standards, based on globally recognised dietary guidelines. So far 48% of our products have reached this standard and we are on track to meet our 2020 commitment. We are also using the power of our brands to empower people to make responsible choices. In support of our Code Policy on Responsible Marketing, in 2018 95% of our Foods and Refreshment portfolio had full nutrition labelling on pack that aligned with Unilever’s product labelling criteria (based on 96% of global sales from 1 April 2018 to 30 June 2018). We continued our efforts to improve the goodness in our products and set out the ambition to provide 200 billion servings by 2022 containing at least one of the 5 key micronutrients: iron, iodine, zinc, vitamin A or D. We are developing plans to deliver against the ambition.
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. These impacts are reflected in the USLP environmental pillar and are supported by our Environmental Policy which is available on our website. Our environmental big goal is by 2030 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 turn contributing to the Sustainable Development Goals.
As a consumer goods company, we are acutely aware of the causes and consequences of the linear ‘take-make-dispose’ model of consumption. We are taking action across our value chain to reduce, reuse, recycle and recover post-consumer waste and move towards a more circular model. Our manufacturing operations have seen a reduction in total waste disposed to landfill, or incineration without energy recovery, of around 97% per tonne of production since 2008.
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| DELIVERING LONG-TERM VALUE FOR OUR STAKEHOLDERSCONTINUED |
Furthermore, we achieved zeronon-hazardous waste to landfill across our global factory network in 2015 and have maintained this every year since. We are importantmore than half way towards meeting our 2020 commitment to realisingreduce waste associated with the disposal of our second goalproducts. This has reduced by about 31% 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. We are moving in the right direction to make all of reducing our environmental impact. Since 2008packaging recyclable but there is more work to do. Find out more on page 15. Seventh Generation is eliminating virgin petroleum plastic (new plastic made from oil) and virgin fibre (virgin wood pulp) from its packs and has committed that all its packaging will be fully recyclable or compostable by 2020. In Brazil, Omo is launching its first plant-based detergent in a 100% recyclable pack containing recycled plastic.
We have reduced the water used in manufacturing by 44% per tonne of production since 2008. Our biggest water impact occurs when consumers shower, bathe and clean clothes with our products. In 2018, our water impact per consumer use reduced by around 2% compared to 2010. We recognise that we are a long way short of halving our water impact and we will not achieve this very challenging target by the end of 2020. This is due in part to our portfolio being made up of more products that have a higher than average water footprint than in 2010 and the significant consumer behaviour change needed to reduce water consumption when our products are used, where the vast majority of our water footprint resides. Going forward we want to broaden our water strategy by recognising the role of water in our consumers’ lives and its importance as a growth driver for our business. We are developing and launching innovative products which deliver the benefits people need with less water, or even no water at all, as well as products that improve the quality of water.
As with water, our biggest greenhouse gas impact comes through consumer use. The greenhouse gas impact of our products across their lifecycle has increased by about 6% since 2010. We are having more success in areas that are within our direct control such as manufacturing where we have cut CO2 from energy by 43%, water abstraction by 37% and total waste disposed by 96% per tonne of production. The latter is a slight fall in performance as total waste52% per tonne of production disposed fellcompared to 96% from 97% in 2015. This was due to changes in local regulation in two countries restricting recycling routes and issues at a recently acquired site that have now been resolved.
When it comes to reducing the environmental impact of how consumers use our products,2008. Similarly, we continue to find this difficult. Since 2010,make savings through the water impactongoingroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. Our ability to meet our target partly depends on changes in the energy markets worldwide, such as the rate of installation of renewable electricity in many countries. We have a role to play as an industry leader to help shape those markets. We are committed to implementing the recommendations of the Taskforce on Climate-related Financial Disclosures (see pages 33 to 35). Two of our products has reducedcarbon reduction targets have been officially approved by around 7%, while the waste associated with consumer disposalScience-Based Targets Initiative.
Our sustainable sourcing strategy focuses on a set of key agricultural crops, which are not only crucial to our brands, but also where we can drive measurable impact for sustainable transformation of the industry. By the end of 2018, the total volume of our products has reducedagricultural raw materials that were sustainably sourced was 56%. In line with our strategy, sustainably sourced volumes for our 12 key crops increased by rather more, around 28%, as recycling rates increase. But the greenhouse gas impactover 4% including significant increases for palm oil and tea, whilst our sustainably sourced volumes for non-key crops reduced. As a result, our performance versus 2017 was flat. The sale of our products across their lifecycle, including consumer use, continues to edge up and has now increased by around 8% since 2010. The acquisitionspreads business during 2018 had a slight downward impact on overall sustainable sourcing performance given the substantial volume of skin cleansing and hair care brands has increased the share of products associated with a higher greenhouse gas impact per consumer use. These products are beingsustainable palm oil used by consumers while taking heated showersour spreads business.
A number of key activities moved our sustainable sourcing agenda forward in 2018. We deepened our commitment to transparency with the publication of our palm oil mill list and baths.the creation of a grievance tracker for our palm oil supply; and we, along with key NGOs including WWF, initiated a new jurisdictional approach to palm oil in Malaysia. The additional programmes were also supported by digital solutions like leveraging satellite data for deforestation detection and risk assessments, mapping of smallholder parcels in Indonesia, sending critical weather alerts to farmers’ mobiles in India, and using the Internet of Things to optimise tea production in Kenya. We are also piloting innovative approaches to achieving upstream traceability in several supply chains.
ENHANCING LIVELIHOODS
Our third USLP goalactivities have the potential to positively 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 2018, 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 development and economic growth. We are building a gender-balanced organisation (page 16) while improving women’s safety in the communities in which we operate, and developing employment opportunities through the Shakti programme which has provided work for around 113,000 women, equipping them to sell Unilever products in low income rural communities. Shakti continues to scale up in India, Sri Lanka, Pakistan and Nigeria and is now being rolled out to new countries, including Colombia. By 2018, we had also enabled about 1,724,000 women to access initiatives aiming to develop their skills.
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. By 2018, we had enabled 746,000 smallholder farmers and over 1.7 million small-scale retailers to access initiatives to improve agricultural practices or increase incomes. The Philippines Kabisig programme, for example, has seen good progress. 67%reached over 165,000 small retailers, training them 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.
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 2018, we focused on completing the onboarding of high risk suppliers into our compliance database and programme. Over 20,000 suppliers have now completed their registration and are undergoing review processes allowing us to verify their compliance to the RSP and identify areas for remediation. In 2018, 61% of procurement spend was through suppliers who were assessed as meeting our Responsible Sourcing Policy’sthe mandatory criteria. Meanwhile we are conducting a reviewrequirements of the accountabilityRSP.
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). We also began a process to improve it basedreview these through a series of global and regional consultations. This year, one of our primary areas of focus has been on the last two years’ experience. A projecteradication of risk-mapping across the sourcing of our key commodities, such as tea, was also started during 2016 to identify our social footprint human rights risks and the procedures we haveforced labour in place to respond to any such risks identified. We continue to work to strengthen certification, particularly relating to working conditions. Our progress on embedding human rights into our organisation continued in 2016 and we have now integrated our human rights function into our supply chain organisation (more detailsthrough training, capacity building and driving a robust vetting process for temporary labour agencies. We launched and are rolling out our Land Rights Principles and Implementation Guidance. Human rights risks are included as part of our sustainability and ethical principal risks (see pages 29 and 33). See our website and our latest Human Rights report for more on our activities and due diligence processes.
Safety is a critically important part of our USLP. Our Vision Zero strategy continues to aim for: Zero Fatalities; Zero Injuries; Zero Motor Vehicle Accidents; Zero Process Incidents; and Zero Tolerance of Unsafe Behaviour and Practices. This is supported by our Code Policy on Occupational Health & Safety. Our Total Recordable Frequency Rate from 1 October 2017 to 30 September 2018 went from 0.89 accidents per 1 million hours worked in 2017 to 0.69, thanks to a continuous focus in high risk areas. See page 21).47 for more on safety.
In 2016,DRIVING TRANSFORMATIONAL CHANGE
Our USLP is a bold ambition to achieve change within our company. However, we are just one company among many and the problems our society faces are urgent, large and complex. Our ‘transformational change’ agenda combines direct action on the SDGs with partnerships and external advocacy to create change on a systemic scale – while unlocking business opportunities at the same time.
We are working on a number of areas where we believe we can make the biggest difference: climate change and forests; sustainable agriculture, land use and food security; health and well-being including water, sanitation and hygiene; and improving livelihoods and creating more opportunities for women. Many of these issues relate directly to the SDGs. We are stepping up our engagement with governments, NGOs and others in our industry on these issues. We are also continueddeveloping a range of partnerships that will accelerate and scale new solutions.
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UNLOCKING GROWTH OPPORTUNITIES FROM THE SUSTAINABLE DEVELOPMENT 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. By using our resources as a business to address issues such as sanitation, hygiene, nutrition, gender equality and climate change – among other interconnected growth opportunities covered by the SDGs – we are delivering benefits for our business, shareholders and society. Partnerships (SDG17) play a key role in unlocking these opportunities. Business, governments and civil society must work together, through innovative partnerships, with new types of funding and new business models. We are working with a range of programmes to improve livelihoods. Underpartners across many of the Opportunities for Women pillar,SDGs, often through our brands. Below we provide three examples where we have enabled around 920,000 womentaken action in 2018. There are many more on our website.
SDG1 – NO POVERTY: EMPOWERING SMALL-SCALE RETAILERS FOR GROWTH | ||
 | Our products are sold in more than 190 countries, generating income and employment for millions of retailers and distributors who bring our brands to consumers. Inclusive distribution models such as Shakti and our retailer training programmes such as Kabisig in the Philippines help small-scale retailers to grow while strengthening our own sales and supply networks. | |
| For any small retailer, selling out of a product line is a missed opportunity. But for retailers who are stuck in cash economies without access to credit, especially in the developing world, running out of stock can be a routine event. | ||
| In 2017, we began a strategic partnership with Mastercard in Kenya. Together, we’ve launched the Jaza Duka (‘fill up your store’) initiative, which uses a combination of innovative technology, targeted training and the strength of our relationships with our distribution network to free retailers from the constraints of cash, helping them fulfil their potential. | ||
| By digitising the processes of buying supplies and selling goods, small-scale retailers can build the credentials they need to access short-term working capital loans from Kenya Commercial Bank. This gives them better control of their inventory, so they can keep their shelves full and meet consumer demand. They are also able to access training and essential financial tools to help them grow their sales and incomes. Our research found that stores that fully moved to the new platform grew their sales of Unilever products by up to 20%. These are still early days. But if the partnership keeps succeeding, we believe it could help drive growth and improve incomes. | ||
Our partnership with Mastercard is just one of a number of exciting new innovative last-mile distribution projects which harness the power of digital ande-commerce to create positive social impact at the same time as helping retailers grow. | ||
SDG6 – CLEAN WATER AND SANITATION: ADDRESSING BASIC NEEDS THROUGH OUR PRODUCTS | ||
 | Nearly a billion people defecate in the open and around 2.3 billion people live without adequate sanitation. Addressing water, sanitation and hygiene needs is a significant opportunity for Unilever. A number of our health and hygiene brands directly address these needs through products and innovative partnerships which drive growth and deliver positive impact at scale, including Lifebuoy, Domestos, Vaseline, Signal and Pureit. | |
| Domestos, which is one of our fastest growing brands, has committed to help 25 million people gain improved access to a toilet by 2020 in countries such as India. By partnering with UNICEF, over 16 million people between 2012 and 2017 gained access to a toilet through behaviour-change interventions and capacity-building initiatives. In 2018, Domestos went one step further and refocused its brand and marketing investment around its purpose. The new ‘Unstoppable’ campaign, now live in the UK and Poland, is showcasing how Domestos is helping to fight germs while improving sanitation conditions for millions around the world. | ||
| Pureit, our water purification business, is another brand that is well positioned to address clean water needs in South Asia. It has provided 106 billion litres of safe drinking water since 2005 through the sale of water purifiers. Pureit is looking at different models to serve communities with accessible and affordable clean drinking water where it is most needed. One model is community water plants, which provide 20 litres of clean drinking water from a central point for just 8 to 10 rupees. In 2017, we began partnering with Water Health International (WHI) who are global experts in community water systems. So far, we have set up four pilot plants in the city of Tumkur in India, managed by WHI. | ||
These examples show that everyday products can help prevent disease and improve people’s wellbeing, while helping us grow our business. | ||
SDG12 – RESPONSIBLE CONSUMPTION AND PRODUCTION: RETHINKING PLASTIC PACKAGING | ||
 | Plastic has become an integral part of our lives. It protects products and makes them easy to dispense or reseal after use. But with that has emerged the enormous – and growing – problem of plastic waste. It is littering our environment, polluting our seas and killing aquatic life. The challenge is that so little plastic packaging is currently recycled, recyclable or reusable. The result is a significant economic loss for society and business. It is for these reasons that we have singled out plastic packaging as a principal risk for our business in 2018 (see page 30 for more). | |
| In 2017, we were one of the first multinational companies to make a public commitment to address plastic packaging waste. By 2025, all our plastic packaging will be reusable, recyclable or compostable and at least 25% of it will come from recycled plastic content. To help deliver these commitments we have an internal framework: Less plastic. Better plastic. No plastic. ‘Less plastic’ is about cutting down how much we use in the first place. Since 2010 we’ve reduced the weight of our packaging by 18% through lightweighting and design improvements. For example, several years ago we launched MuCell technology which usesgas-injection to create gas bubbles in the middle layer of a bottle wall. This cuts the amount of plastic by at least 15%. | ||
| ‘Better plastics’ is about making our products recyclable and eliminating problematic materials. Specifically, how we get recycled content in our packaging – a number of our brands are working to incorporate post-consumer recycled (PCR) plastic in their products including Love Beauty and Planet, TRESemmé, Sunlight and Omo. Better plastics is also about how we work with governments and partners to build infrastructure so we can help keep plastic in the economy and out of the natural environment. Our Community Waste Banks and CreaSolv®Sachet recycling technology pilot plant in Indonesia are at the heart of these efforts. The plant is currently processing around three tonnes of discarded sachets per day with an aim to scale up this process. | ||
| ‘No plastics’ is about thinking differently – using alternative materials such as aluminium, glass, paper and board where possible and removing plastic where it is not necessary, such as plastic stiffeners from soap bars. We’re also looking at reuse, encouraging shoppers to refill or reuse through vending machines. It’s early days but we are committed to findingnon-plastic packaging solutions. | ||
We’re putting significant resource into tackling the issues associated with plastic packaging. It makes business sense to keep plastic in the economy and is imperative for the planet. | ||
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UNILEVER EMPLOYEES ARE EMPOWERED TO ACT LIKE BUSINESS OWNERS IN A PURPOSEFUL CULTURE.
The world of work is rapidly changing. Automation, flexible resourcing and new business models continue to access initiatives that aimed to promote their safety, develop their skillsimpact our business and expand their opportunities. As partworkforce. The workforce expects more flexibility and is increasingly freelance. A job for life is no longer the norm. Once employed, people must regularly reinvent themselves with new skills. The digital transformation of work and growth of automation is bringing both great benefits, but also great disruption. The composition of the Inclusiveworkforce is changing too. By 2020, Millennials will make up around 35% of the global workforce. Just over half of Unilever’s own workforce in 2018 were Millennials.
CREATING AFUTURE-FIT WORKFORCE
In response to the trends outlined above, we are taking action across our business, including simplifying processes and ways of working to free people fromnon-value adding tasks so they can focus on key priorities. 2018 saw the continued implementation of Connected 4 Growth (C4G), our organisational change programme, and the creation of three new Divisions to bring further focus and simplicity. Our regular surveys show that 74% of our people now feel more empowered to make decisions. Our time to bring innovations to market is now40-50% faster than in 2016.
With the advance of AI and robotics, it is more important than ever that we strike the right balance between the use of technology and more human-centred approaches. We have invested in Una Hub, anAI-based platform, which automates responses to all general employee enquiries so People Experience Leads and HR Business pillar,Partners can focus on more complex queries, and provideface-to-face support where relevant.
Our research shows that a focus on purpose helps attract talent and binds us together for growth. Through our People with Purpose programme, more than 30,000 employees have joined workshops to help them define their purpose, with 50,000 targeted by 2019. Our global Univoice survey results reinforce the importance of these workshops – 92% of employees who believe they can live their purpose at Unilever, also say that their job inspires them to go the extra mile.
As the workplace changes it is important that we continue to prioritise mental wellbeing. In 2018, we officially recognised World Mental Health Day in 2016October and continue to invest in the mental wellbeing of our people, alongside their physical wellbeing. This builds on theroll-out of a mental wellbeing framework globally several years ago which guides us in tackling the health risks across our business.
Another area of focus is on personalising training and capability building to develop the right leaders and teams who are fit for the future. We are responding to demands for new skills through continuous learning. Since the launch of Degreed, our online learning platform in 2017, 76,000 people have access to 2.3 million pieces of learning content, with 55,000 pieces being consumed on a monthly basis, including PowerUp, our digital upskilling programme. We are also accelerating impact through new agile ways of working. In the UK and US we are piloting more agile team structures to ensure we have enabledthe right people, doing the right job at the right time, while breaking down silos.
RECRUITMENT AND RETENTION
Our attractiveness as an employer is improving amongst Millennial and Generation Z recruits. We are the number one FMCG graduate employer of choice in around 650,000 smallholder farmers50 countries and 1.5the most followed FMCG employer on LinkedIn with over 4 million small-scale retailers to access initiatives aiming to improve their agricultural practices or increase their incomes. The numberfollowers as at the end of small-scale retailers has decreased from 1.8 million in 2015 following a rescoping of stores that can benefit from the Perfect Store programme in India.2018.
In 20162018 we introduced more ways to give our employees a voice, through monthly pulse surveys and global and local surveys on a range of topics, reaching around 70,000 people. Our largest listening exercise is the annual engagement survey called UniVoice which covered a representative sample of almost 25,000 office-based employees in 2018. We maintained high levels of employee engagement – 90% of employees said they were proud to work for Unilever and our Engagement Index remained at 74%. The survey also reinforced the
importance of focusing on speed and responsiveness to the market. We use survey results to help us take action in areas where there is room for improvement. For example, last year we implemented the new Standards of Leadership in response to feedback we received. Alongside our UniVoice survey, we use Glassdoor to benchmark our employee experience. As at 31 December 2018, our rating of 3.9 out of 5 was named leaderabove the site average of the Household & Personal Products Industry Group in the Dow Jones Sustainability Index (DJSI), a global sustainability performance benchmark. 3.2.
DIVERSITY AND INCLUSION
We are one of only 24 companieswant our culture to be awarded Industry Group Leader status. In 2016 we were also listedinclusive, promoting gender balance and respecting the contribution of all employees regardless of gender, age, race, disability or sexual orientation – as set out in our Code Policy on the CDP Climate, WaterRespect, Dignity and Forest A Lists.Fair Treatment.
The USLP continuessets out clear targets for expanding opportunities and enhancing access to evolveskills and training for women in responseour 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. By the changing landscape.end of 2018, 49% of total management were women (47% in 2017). Among the top 92 executives, 23% were women (22% in 2017). If you include employees who are statutory directors of the corporate entities whose financial information is included in the Group’s 2018 consolidated accounts in this Annual Report and Accounts, the number increases to 474 (71%) males and 190 (29%) females. 38% (5 out of 13) of the Board were female (38% in 2017). Of our total workforce of 154,848, 101,383 (65%) were male and 53,465 (35%) were female at the end of 2018.
We run programmes across Unilever aimed at attracting, retaining and developing female talent. This includes developing candidates for potential future roles, aiming for ‘balanced slates’ so that we interview equal numbers of men and women for roles, 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. In January 20172018, we announcedalso committed to introduce by the end of 2019, three weeks of fully paid paternity leave as a benefit to all new fathers, adopting partners and parents insame-sex couples.
Unilever has a commitment to ensuregender equality and fairness in the workplace based on equal pay for equal work and achieving greater gender balance. Pay and overall reward is intended to be gender neutral, with any differences between employees in similar jobs reflecting performance and skill. Gender pay gaps develop where there is a representational imbalance between genders. When we look at our worldwide business as a whole, in countries with more than 250 employees, the average female pay was 26% higher than male pay in 2018 (2017: 25%). This is largely due to the fact that all80% of our plastic packaginglower paying blue-collar roles are held by male employees. ‘Equal pay for equal work’ is fully reusable, recyclableour primary ambition and is a crucial part of fair compensation. Our Framework for Fair Compensation reviews the average pay differences between genders at each work level and in each country. The most recent analysis highlights that there is more work to do to continue improving our gender balance, and related gender pay gaps, at various levels and in various countries throughout the business.
BUSINESS INTEGRITY
Our principles and values apply to all our employees through our Code and Code Policies. Our employees undertake mandatory annual training on these Policies via online training modules and an annual business integrity pledge. Our Business Integrity guidelines include clear processes for managing Code breaches. For more information on Business Integrity see our website.
In 2018 1,206 whistleblowing incidents were opened (defined as Code Policy cases raised). We closed 1,252 incidents across all areas of our Code and Code Policies, with 662 confirmed breaches. In 2018, we terminated the employment of 330 people. Business integrity risks are included as part of our ethical and legal and regulatory principal risks (see page 30). The Code and Code Policies reflect our desire to fight corruption in all its forms. We are committed to eradicating any practices or compostable by 2025. We will report on progress against this commitment in future reports.behaviours though ourzero-tolerance policy.
Our Responsible Sourcing Policy and Responsible Business Partner Policy help to give us visibility of our third parties to ensure their business principles are consistent with our own.
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Despite
WE WORK WITH MANY PARTNERS TO SUPPORT THE SUSTAINABLE GROWTH OF OUR BUSINESS.
ENGAGING STAKEHOLDERS
We have many interactions with our progressstakeholders on a daily basis. Our Code of Business Principles and Code Policies guide how we interact with suppliers, customers, governments,Non-Governmental Organisations (NGOs) and trade associations in particular. Only authorised and appropriately trained employees or representatives can engage with these groups and we require that a record should be kept of all interactions and that all engagement must be conducted: in a transparent manner with honesty, integrity and openness; in compliance with laws and in accordance with Unilever’s values. Our website contains further disclosure on how we engage with our stakeholders.
SUPPLIERS
Our supply chain is very diverse and highly dynamic as we respond to date, therechanging consumer preferences, in line with our C4G programme. Our suppliers help us meet consumer needs by innovating, creating capacity and delivering quality materials and services for our products. We work with a large range of suppliers in over 160 countries – from multinational companies through to SMEs and smallholder farmers.
We screen suppliers in relation to their supply chain capabilities and the level of associated environmental and social risk. Managing supplier risk is still mucha key role of our Supply Chain function. All suppliers must complete our registration process to be done. While we are on trackassess compliance with the mandatory requirements of our Responsible Sourcing Policy which includes anti-bribery and corruption. We conduct audits and follow up issues identified where necessary.
Partner to Win is our approach to building long-term relationships with selected key strategic supplier partners in order to achieve mutual growth. It focuses on five key areas: quality and service, innovation, value, sustainability and capacity and capability. Partner to Win helps us strengthen supplier and customer collaboration and improves operational efficiency. In 2018, we had 175 Partner to Win suppliers, representing 35% of total procurement spend.
We came first in the annual Gartner Supply Chain Top 25 for the third year running, emphasising our leading practices in the area of supply chain management, in particular on sustainability and digitalisation.
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 26 million retail stores globally of which we cover eight million directly and another 18 million indirectly through wholesale and cash & carry.
In 2018 we focused on developing oure-commerce channels, digitising our value chain to respond to the rapid fragmentation of traditional routes to market. We are actively driving B2C and B2Be-commerce in our top 30 markets. Our focus is to build a balancede-commerce business model, growing acrosse-retailers, bricks and mortar online sales anddirect-to-consumer businesses. In 2018 we signed a logistics partnership with JD.com, China’s largest retailer. JD will help to bring our most popular products to the mosthard-to-reach communities in China, securely and quickly.
Health & Beauty channels have been an area of focus for Beauty
& Personal Care. In Europe we have been increasing our presence and share with the discounter channel, which continues to see growth, contributing to top line growth for Unilever while delivering incremental gross profit.
We are collaborating with hyper and supermarkets to win with omni-channel shoppers and evolve new experiential concepts with these large-scale retailers to ensure Unilever brands enjoy the best positioning in store and online.
We continue to engage with small-scale retailers by professionalising their store operations through capability training. Our Rise Sales Academy is currently being piloted in Nigeria and Sri Lanka to deliver store operations retail training for micro retailers across the world. In turn, this will help contribute to our USLP target to improve the incomes of 5 million small-scale retailers in our distribution network.
GOVERNMENTS
Weco-operate 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 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.
Our participation in policy discussions is varied, covering macro topics such as climate change, nutrition and plastic packaging. We engage with government stakeholders directly 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 USLP commitments, we aretrade association memberships and membership fees, which is regularly updated. We also aware thatengage 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 global memberships in the biggest challenges facing the world cannot be addressed by one company acting alone.Engaging with stakeholders section on our website. We are changing ourselves as a business but we want to play a partregistered in changing the way business is done more broadly.
ADVOCATING A ‘NEW SOCIAL CONTRACT’ FOR BUSINESS
The need for collective action and partnership between businesses and other stakeholders, and between businesses themselves, has never been greater. By doing the right thing and being partTransparency Register of the solution toEuropean Union. Our US trade association memberships can be found on 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.
The Paris Agreement and the publicationFAQ section of the UN’s 17 Global Goals for Sustainable Development (referred to as the ‘Global Goals’)Unilever USA website.
NON-GOVERNMENTAL ORGANISATIONS
We are building transformational partnerships in 2015 showed the world there was a movement towards combating climate change, eradicating poverty, and promoting greater inclusion and economic prosperity – one that would require widespread co-operation to succeed.
Throughout 2016, we sought to build on the momentum of these historic global accords. We did so within our business, for example by mapping our USLPcollaboration with the Global Goals (see page 19). In January 2016, we co-founded the Business & Sustainable Development Commission (BSDC). It brings together businesses and other stakeholdersNGOs who share our belief that implementationvision for a more sustainable future. These partnerships are instrumental in improving the quality of the Global Goals will help create a world where responsible business can continue to thrive. While business is key to generating the economicpeople’s lives, driving growth, job creation,achieving our USLP targets and investment in innovation that will unlock the US$3.3-4.5 trillion needed to deliver the Global Goals, BSDC research shows that successful delivery of the Global Goals will create market opportunities of up to US$12 trillion a year. The BSDC’s report, Better Business, Better World, published in January 2017, aims to launch a global movement of CEOs and business leaders who place sustainability at the core of business strategy.
Increasingly, we are finding new ways to contributecontributing to the systemic changes neededSustainable Development Goals.
In collaboration with NGOs, we build programmes on the ground to address global challenges. This is a responsibility but also an opportunity, because resilient societies and economies are onesimplement our brands’ purpose in which businessesaddition to advancing our efforts in areas such as Unilever can flourish.sustainable sourcing and distribution – often in partnership with governments and other businesses. We aim to use ourdrive scale through new business models, digital technologies and influence to help bring about transformational change in four key areas where we believe we can makeexternal financing.
Our leadership engages with stakeholders through platforms such as the biggest difference:
TAKING ACTION ON CLIMATE CHANGE AND HALTING DEFORESTATION
World leaders assembled in Marrakech for COP22 in November 2016, by which time enough states had ratified the Paris Agreement for it to achieve ‘entry-into-force’, making it a binding agreement.
Unilever welcomed the Paris agreement and its legal status, having worked with many others at COP21 and beforehand to help create the conditions in which it could be achieved. At COP22, we called for faster transformation of our energy, food, transport and urban systems into ones consistent with the ambition of transforming our economy by the middle of the century. We believe businesses must contribute to climate action and that they will benefit by doing so.
Addressing our own greenhouse gas emissions is a key element of our USLP, and we have been working to reduce our impact for many years. In 2016 we made progress towards our Carbon Positive 2030 ambition, announced in 2015. We know consumers rightly expect businesses to act responsibly on climate, and that reducing our energy usage and switching to renewables can create cost savings and make our business more resilient.
We also worked with others on the systemic changes needed for climate action. For example, commercial agriculture is the main driver of deforestation, which accounts for up to 15% of global greenhouse gas emissions. Together with others in our industry, we have committed to achieving zero net deforestation associated with four commodities – palm oil, soy, paper and board, and beef – no later than 2020. We have extended this commitment to our tea businesses and supply chains.
We work closely on climate action with a number of strategic partners: the We Mean Business coalition includingEconomic Forum, UN Global Compact, the World Business Council for Sustainable Development (WBCSD); HRH The Prince of Wales’ Corporate Leaders Group on Climate Change, The B-Team, and CERES; the World Economic Forum; the Consumer Goods Forum, (CGF)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 Global Compact Caring for Climate initiative.
We also worked with the World Bank Group on the formal launch of the Carbon Pricing Leadership Coalition at the World Bank Spring Meetings in Washington DC in April 2016, which will advance the pricing of carbon emissions and removal of market-distorting fossil fuel subsidies.
Unilever holds the Vice-Chair of the industry-led Task Force on Climate–related Financial Disclosures, which aims to develop voluntary and consistent climate risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders. We have developed metrics to assess climate related risks and opportunities in line with our strategy and risk management process. These are outlined on page 13.
CREATING MORE OPPORTUNITIES FOR WOMEN AND ENHANCING LIVELIHOODS
Women control a significant portion of consumer spending. Building greater trust in our brands among our consumer base is critical – and women make up a large number of our consumers.
Creating opportunities for women is also a core element of our USLP, our partnership work, and our overall ambition to enhance the livelihoods of millions of people. Empowering women has the potential to contribute substantially to many of the Global Goals because including more women in the economic cycle has a positive impact on growth and the progress of families and communities.
Our goal is to empower 5 million women by 2020. We aim to do this by respecting women’s rights, promoting their safety, developing skills and advancing economic opportunities.
Unilever has built partnerships to help achieve this with many stakeholders, including the Clinton Guistra Enterprise Partnership (CGEP), BoP Innovation Center (BoPInc), Global Alliance for Improved Nutrition (GAIN) and Population Services International (PSI).
We are working with UN Women to create a global violence-prevention framework to advance the implementation of human rights in our tea value chain in Kenya and other places. The programme aims to apply the global framework to Unilever’s supply chain and extend into the wider tea industry and other commodities over time. Unilever, through its Pond’s brand, joined No Ceilings: The Full Participation Project, an initiative of the Clinton Foundation, Vital Voices Global Partnership, WEConnect International to announce a collective commitment “Girls, Women and the Global Goals”. This is a coalition of over 30 partners securing new commitments that aim to address significant gender gaps and advance the gender equality targets of the Sustainable Development Goals.
We know it is important to reflect this commitment in our brands’ actions. In 2016 we listened to consumers and looked at the way we portray gender in our advertising and realised we needed to change. We launched #unstereotype, a major global campaign to lead advertising away from stereotypical portrayals of gender. Brands including Axe, Dirt is Good and Sunsilk have led the way with this initiative.Goals (see page 15).
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PROMOTING HEALTH & WELL-BEING
WE DELIVERED SOLID PERFORMANCE IN 2018 AND REMAIN ON TRACK FOR OUR 2020 TARGETS.
We aim to help improvebuild long-term relationships with our shareholders through positive engagement for the healthbenefit of all our stakeholders. We engage directly with our shareholders on a broad range of financial and well-beingenvironmental, social and governance (ESG) matters. During 2018 we engaged with shareholders on a number of topics including our Remuneration Policy and on the simplification of Unilever. See page 39 and our website for more than 1details. In addition to direct engagement we regularly engage indirectly via ESG ratings organisations such as MSCI, Sustainalytics and ISS, as well as investor-focused sustainability rankings such CDP and the Dow Jones Sustainability Index.
PERFORMANCE IN 2018
Underlying sales growth for 2018 was 2.9% and underlying operating margin was 18.4%, a rise of 90 basis points. Turnover declined by 5.1% due to the sale of spreads and currency devaluation; operating margin was 24.6% due to profit on the spreads disposals.
Emerging markets saw a good performance in underlying sales growth of 4.6% including improved price growth in response to commodity inflation. Notable improvements were in India, which was strong across all categories, and China where strong volume growth was seen particularly ine-commerce. Argentina was classified ashyper-inflationary and price growth was excluded from underlying figures from July; any volume growth or decline is included within underlying figures. North America saw an improvement in underlying sales growth and there was acceleration in the US, helped by our acquisition programme in recent years, particularly in BPC. Europe remains challenged by a deflationary environment generally. We delivered solid volume-driven growth across our business with good margin progression.
We generated€5.0 billion peopleof free cash flow and 18.8% return on capital. Underlying earnings per share was€2.36, a rise of 5.2%, and dividends were increased 8%, reflecting Unilever’s confidence in future profit growth and cash generation. Diluted earnings per share was€3.48. Our share price has fallen 0.42% for PLC shareholders and risen 0.98% for NV shareholders. For information on ournon-GAAP measure, see pages 23 to 26.
PROGRESS AGAINST OUR 2020 FINANCIAL TARGETS
In April 2017, we set out financial targets for 2020 to further accelerate shareholder value. In 2018 we maintained a strong delivery of savings with over€2 billion of savings from the supply chain, ZBB and change programmes. As a result, we are on track to meet our cumulative savings target of€6 billion by 2020. As part2019 and a 2020 underlying operating margin target of this ambition,20%, compared to 16.4% in 2016.
We continue to maintain our leverage by targeting a Net Debt to underlying EBITDA ratio of 2x, consistent with a credit rating of at least A/A2. During 2018, we returned€6 billion to shareholders through our share buyback programme following the sale of spreads.
During the year the Boards decided to withdraw proposals to revise Unilever’s dual-headed legal structure after extensive engagement with shareholders. We remain firmly committed to our 2020 improvement programme and are confident of meeting its key goals. To simplify our capital structure, we cancelled the NV preference shares in February 2019 (see page 38).
BUSINESS TRANSFORMATION
Our brand portfolio continues to evolve to match our Divisions’ 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 nine years we have a strongsold€6.8 billion of turnover, mainly in the lower growth foods businesses. During that same period, we have acquired approximately€5.3 billion of turnover. The spreads disposals in July allow Foods & Refreshment to focus on Water, Sanitation,growth.
Actively managing our brand portfolio through acquisitions and Hygiene (‘WASH’). Togetherdisposals remains an important strategic growth driver. In December we announced an agreement to acquire the Health Food Drinks portfolio of GlaxoSmithKline (GSK) in India, Bangladesh and 20 other predominantly Asian markets. Further details of the transaction can be found on our website. The acquisition includes iconic brands such as Horlicks and Boost, and a product portfolio supported by strong nutritional claims. The transaction is aligned with our partners, we aimstrategy to change people’s hygiene behaviours by raising awareness ofincrease our presence in health-food categories and in high-growth emerging markets. The transaction is subject to customary regulatory and shareholder approvals, with expected completion around 12 months from the benefits of handwashing with soap, helping people gain improved access to a toilet through promoting the benefits of using clean toilets and making them accessible, and providing people with safe drinking water. Our leading brands, including Lifebuoy and Domestos, provide us with a unique opportunity to make a difference in these areas.
Cost-effective WASH solutions can lift people out of poverty and give them greater opportunities for a successful future. With partners such as UNICEF we have helped around 6 million people gain improved access to a toilet through behaviour-change interventions and capacity-building initiatives (results are reported by our partners in accordance with their respective methodologies and include reach from direct and indirect initiatives between 2012 and 2015).announcement.
In 2016,October we continued our efforts to raise awarenesscompleted the acquisition of the importance of handwashing with soap and access to improved sanitation, through campaigns on Global Handwashing Day and World Toilet Day. On World Toilet Day in 2016, we opened Suvidha, a sustainable hygiene and sanitation community centre in one of Mumbai’s largest slums, which will address the hygiene needs of 1,500 people from low-income urban households who face severe challenges due to lack of infrastructure and facilities. The centre provides toilets that flush, handwashing facilities with soap, clean showers, safe drinking water and laundry facilities at an affordable cost. The Suvidha Centre uses circular economy principles to reduce water use. Fresh water is first used for brushing teeth, bathing, handwashing and laundry. The waste water from these activities is then used for flushing toilets.
Lifebuoy’s new partnership with the World Association of Girl Guides and Girl Scouts will help over 4 million children gain a better understanding of the importance of handwashing with soap, while WASH4Work, a multi-stakeholder coalition, will mobilise greater private sector engagement75% stake in the provisionItalian personal care business Equilibra which has a growing presence in the natural skin and hair care segments. We also completed the acquisition of adequateQuala’s Beauty & Personal Care and accessible WASH solutionsHome Care brands. We acquired a number of exciting new businesses including the Vegetarian Butcher (Netherlands) which expands our portfolio into plant-based foods, and three ice cream brands – Adityaa (India), Betty (Romania) and Denny (Bulgaria). With the exception of brands launched in business operations, supply chainscountries where they were not previously sold, acquisitions and surrounding communities.disposals only contribute to underlying sales growth from 12 months after completion.
A key enablerpart of our 2020 programme is faster portfolio evolution in order to achievefocus Unilever on more rapidly growing segments. This process continued at pace during 2018 with the focus on new brand launches and evolving our Health & Wellbeing targets iscore brands. Our C4G organisation means we can respond to consumer trends more inclusive partnership models,quickly. We have launched nearly 30 brands in the last two years. Local brands are also being launched more quickly followed by rapid globalroll-out, for instance Breyers Delights, Love Beauty and Planet and Lakme all responding to the trend for more natural and healthy products.
Evolving our core brands has also accelerated. Brands such as ‘Transform’ –Dove, Lifebuoy and Sunsilk in Beauty & Personal Care all launched new variants responding to consumer trends. In Home Care there were new launches of Domestos, Cif and Comfort while Foods & Refreshment extended the Knorr, Hellmann’s and Lipton brands with newon-trend variants (for more information on brand launches see pages 11 to 12).
Realising the opportunities from digital technology to help deliver further growth and margin improvement is another key part of our business transformation. We have launched a partnership withdigital transformation programme across all aspects of our value chain. We have 30 platforms across Unilever which power our business using digital technologies. Our Enterprise & Technology Solutions team is set up to deliver a technologically enabled Unilever for the UK’s Department for International Developmentfuture while ensuring that processes and Clinton Guistra Enterprise Partnership (CGEP) designedactivities are shared and scaled across the business. This will allow us to improveuse technology as a competitive advantage rather than a cost.
Digital technology changed our approach to marketing some time ago but the healthtransformation of Unilever more broadly has begun at pace. AI, machine learning and well-being of 100 million people in Africavoice related technologies are being used to deliver personalised and South Asia by increasing household access to water, sanitation and hygiene as well as energy through effective market-based solutions.
CHAMPIONING SUSTAINABLE AGRICULTURE AND IMPROVING FOOD SECURITY
Agriculture and the people who practise it are vital to the world, andimmersive experiences to our business. The world needs to double food production by 2050 to help feed a population that will likely exceed 9 billion people.
What is more, of the 3.4 billion people living in rural areas in the world today, up to 600 million may be undernourished. We therefore see agricultureconsumer platforms such as sitting at the heart of the climateRecipedia and development challenge, and view changes to the current systems as a vital way to help meet the aims of the Global Goals in eradicating hunger and poverty, while making our supply of ingredients more resilient. We advocate a move away from purely production-led approaches, which run at the expense of people and planet, to a more integrated, holistic approach that can both improve livelihoods and enable sustainable agriculture.
Cleanipedia websites. We are committed to sourcing allalso driving digital through our agricultural raw materials sustainably. By working with others, we aim to ensure all the major commodities on which we depend – notably palm oil, soy, paper and board, and tea – are produced sustainably for mainstream consumer markets.
In 2016 we refreshed our Palm Oil Policy and brought forward our target for purchasing 100% physically certified palm oil from 2020 to 2019. We also stopped buying GreenPalm certificates, which accounted for 18% of our sustainably sourced agricultural raw materials in 2015. However, our goal to source 100% of our palm oil sustainably from physical, certified sources by 2019 is still on track with 36% of our palm volumes already physically certified in 2016 (representing 9% of all agricultural raw materials). We aim to repurpose US$50 million over five years that would have been spent on GreenPalm certificates and invest it in place-based partnerships. This isR&D organisation, introducing new tools to increase the availabilityspeed, efficiency and quality of physically certified sustainable palm oil and scale up direct sourcing from smallholder farmers.
This has created a temporary dip in our sustainably sourced agricultural raw materials performance from 60% in 2015 to 51% in 2016. Had we continued to buy GreenPalm certificates at the same level our overall sustainable sourcing performance in 2016 would have been 66%. Instead, we have increased our purchasing of sustainable physical agricultural raw materials from 39% in 2015 to 48% in 2016 whilst maintaining the same proportion of certificates purchased for soy and sugar (3% in 2015 and 2016).
We are also focusing on reducing food loss and waste, as a third of the food the world currently produces is lost or wasted. According to WRAP, a waste and resource think tank, reducing consumer food waste could save US$120-300 billion, and reduce greenhouse gas emissions by 1 billion tonnes of CO2 emissions per year by 2030. We are members of ‘Champions 12.3’, a coalition of business, government and civil society leaders, and signatories to the Consumer Goods Forum Resolution on Food Waste to halve food waste in direct operations by 2025.
We want the debate on food and agriculture to be high on the political and business agenda, and in 2016 we contributed to the Business and Sustainable Development Commission report ‘Valuing the SDG Prize in Food and Agriculture’, which found that achieving food security could create 80 million jobs and unlock 14 major business opportunities worth US$2.3 trillion annually by 2030. To help unlock this potential, we supported the World Business Council for Sustainable Development (WBCSD) and EAT Foundation partnership, launched at the EAT Forum in June 2016, which seeks to better link production through consumption.innovation processes.
| 18 | Strategic Report | Annual Report on Form 20-F |
NON-FINANCIAL INFORMATION STATEMENT
THE GLOBAL GOALS FOR SUSTAINABLE DEVELOPMENT
ThroughIn accordance with sections 414CA and 414CB of the Companies Act 2006 which outline new requirements fornon-financial reporting, the table below is intended to provide our Unileverstakeholders 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 Plan, Sustainable Living brands andReport, Human Rights Report as well as policy documents contained on our transformational change agenda we contribute to the Global Goals.website.
Non-financial matter and relevant sections
| Annual Report page reference | |
| Environmental matters | ||
| Relevant sections of Annual Report & Accounts: | ||
• Reducing environmental impact |
| |
|
• Position and performance: Pages 7 and 13 to 14 | |
|
• Risk: Pages 30 and 33 to 34 | |
• Impact: Pages 13 to 15 and 33 to 35 | ||
| Social and community matters | ||
| Relevant sections of Annual Report & Accounts: | ||
|
• Policy: Pages 13 and 15 | |
|
• Position and performance: Pages 7, 13 to 15 | |
|
• Risk: Page 31 | |
| • Impact: Pages 13 to 15 | |
| Employee matters | ||
| ||
|
• Policy: Pages 14 and 16 | |
|
• Position and performance: Pages 10 and 16 | |
|
• Risk: Page 29 | |
|
• Impact: Page 14 and 16 | |
| Human rights matters | ||
| Relevant sections of Annual Report & Accounts: | ||
|
• Policy: Pages 14 and 17 | |
|
• Position and performance: Pages 7 and 14 | |
• Risk: Page 29 | ||
| ||
| Anti-corruption and bribery matters | ||
| Relevant section of Annual Report & Accounts: | ||
• Business integrity |
• Policy: Page 16 | |
|
• Position and performance: Page 16 | |
|
• Risk: Pages 29 and 31 | |
|
| |
|
| |
| Annual Report on Form 20-F | Strategic Report | 19 |
DELIVERING VALUE FOR OUR STAKEHOLDERSCONTINUED
| FINANCIAL REVIEW |
FINANCIAL OVERVIEW 2018
CONSOLIDATED INCOME STATEMENT
Turnover declined by 5.1% to€51.0 billion including an unfavourable currency impact of 6.7% (2017: 2.1% unfavourable currency impact) mainly due to weakening of currencies in key emerging markets such as Brazil, Argentina and India. Underlying sales growth^ was 2.9% (2017: 3.1%), with a positive contribution from all divisions. Underlying volume growth was 1.9% (2017: 0.8%) and underlying price growth was 0.9% (2017: 2.3%). The net impact of acquisitions and disposals was a reduction in turnover of 1.0% (2017: 0.9% increase) with the impact of recent acquisitions such as Carver Korea and Quala outweighed by the disposal of the spreads businesses. Emerging markets contributed 58% of total turnover (2017: 58%) with underlying sales growth of 4.6% (2017: 5.9%) coming from price growth of 1.7% and volume growth of 2.8%. Developed markets underlying sales growth was 0.5% coming from volume growth of 0.7% slightly offset by price decline of 0.2%.
Underlying operating margin improved by 0.9 percentage points to 18.4%. Gross margin improved by 0.5 percentage points driven by margin-accretive innovations and continued strong delivery from our‘5-S’ savings programmes. As a percentage of turnover, overheads and brand and marketing investment were down by 0.3 percentage points and 0.1 percentage points respectively as a result of productivity gains fromzero-based budgeting.
Operating profit was up 41.5% to€12.5 billion (2017:€8.9 billion) as a result of€3,176 million fromnon-underlying items.Non-underlying items within operating profit comprised a gain on spreads disposal of€4,331 million, a credit from the early settlement of contingent consideration related to the Blueair acquisition of€277 million, partially offset by restructuring costs of€914 million, acquisition and disposal related costs of€201 million and impairment andone-off items of€317 million.
Highlights for the year ended 31 December
| 2018 | 2017 | % change | ||||||||||
Turnover (€ million)
|
| 50,982
|
|
| 53,715
|
|
| (5.1
| )
| |||
Operating profit (€ million)
|
| 12,535
|
|
| 8,857
|
|
| 41.5
|
| |||
Underlying operating profit (€ million)*
|
| 9,359
|
|
| 9,400
|
|
| (0.4
| )
| |||
Profit before tax (€ million)
|
| 12,383
|
|
| 8,153
|
|
| 51.9
|
| |||
Net profit (€ million)
|
| 9,808
|
|
| 6,486
|
|
| 51.2
|
| |||
Diluted earnings per share (€)
|
| 3.48
|
|
| 2.15
|
|
| 62.0
|
| |||
Underlying earnings per share (€)*
|
| 2.36
|
|
| 2.24
|
|
| 5.2
|
| |||
Net finance costs were€481 million in 2018 compared with€877 million in 2017, which included aone-off cost of€382 million for the buyback of the Unilever NV preference shares. The cost of financing net borrowings was€57 million higher than 2017. The increase was primarily driven by an increase in net debt which was partially offset by lower interest rates and a prior yearone-off in Brazil relating to the interest element of an indirect tax amnesty programme. The average interest rate on net debt reduced to 2.2% from 2.7% in 2017. The pensions financing charge was€25 million, down from€96 million in 2017 reflecting a lower pension deficit at the beginning of 2018.
A monetary gain of€122 million was recorded following adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1) from 1 July 2018.
The effective tax rate was 21.1% compared with 20.8% in the prior year. In both years the rate was low relative to longer term norms, due to the significant impact on tax of the disposals of our spreads businesses in 2018 and US tax reform in 2017.
Net profit from joint ventures and associates was up 19% at€185 million, with the increase coming mainly from a gain on disposal of the spreads business of the Portuguese joint venture. Other income fromnon-current investments was€22 million versus€18 million in the prior year.
Diluted earnings per share were up 62.0% at€3.48. The increase was mainly driven by the€4,331 million gain on disposal for the spreads businesses, improvement in operating margin and the impact of the share buyback programmes.
PEOPLE ARE OUR MOST POWERFUL RESOURCE TO TRANSFORM OUR BUSINESS, DRIVEN BY OUR CLEAR PURPOSE TO MAKE SUSTAINABLE LIVING COMMONPLACE.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 67 to 74.
Our continued success is constantly challengedThe consolidated financial statements have been prepared in a world where change is happening at an ever faster pace fuelledaccordance with IFRS as adopted by the rapid take-up of digital technology. ConsumersEU and IFRS as issued by the International Accounting Standards Board. The critical accounting policies and those that are far more responsive and sensitive to changing trends and attitudes, opening up new opportunities for entrepreneurial competitors who are agile and flexible in approach.
During 2016 our people have been at the centre of a major organisational change programme, Connected 4 Growth (C4G), one of the largest and most significant change initiatives undertaken by Unilever. The key objectives are to create an organisation that is faster, more agile and more competitive. Through C4G we want our people to think and behave differently, making them more empowered, giving them the opportunity to experiment and encouraging them to think and act like entrepreneurs and business owners. These changes will be key in attracting the right people to achieve our goals.
By 2020, 60% of our employees are expected to be Millennials and we need new employment strategies that reflect both their changing attitudes to work and the fast changing world in which we expect our people to compete and perform. The skills our people need are also changing rapidly. According to the World Economic Forum, on average, by 2020 more than a third of the desired core skill sets will have changed and nearly 35% of the core skills required for key roles in future are currently missing from the equivalent roles today.
The vision of our Human Resources function is to be simpler, with more impact in order to accelerate business growth. This is being realised through three priorities. First, we are focusing our activities on Well-being, Talent, Learning and Reward. Second, we are developing an agile and empowered organisation to build connected teams through technology-driven approaches and, thirdly, we are building an organisation powered by purpose where all our people are able to reach their potential and thrive in the increasingly connected world. A priority during 2016 was to define the profile of future talent required by the business and plan for the skills and capabilities required.
To support our vision we have also made a step-change in the use of data and analytics to generate more accurate insights. We are using more sophisticated digital and mobile processes while applying new performance and reward systems to offer more career development opportunities and create a more empowered workforce. Finally, through C4G, we are encouraging our people to experiment and collaborate more to improve our top-line growth.
ATTRACTING TALENT
Unilever’s reputation as an employer of choice continues despite a highly competitive market place. Our purpose-led goals consistently support our position as employer of choice across the world. During 2016, we were the number one FMCG Graduate Employer of Choice in 34 of the 60 countries that we recruit from.
Unilever’s Future Leaders’ League, our global competition for students, continues to grow. For the 2016 finals, almost 40,000 applications were received across 59 countries and 1,120 universities.
The recent launch of our social media campaign #PutItRight generated 108 million impressions and reached 9.8 million unique users globally. Our objective is to change the conversation around how Millennials are defined, helping them reach their full potential. Our commitment to sustainability, brought to life through the Unilever Sustainable Living Plan, is critical to engaging with this generation.
This year we have seen our LinkedIn presence grow significantly, reaching the key milestone of 2 million followers, highlighting how LinkedIn followers are engagingconnection with our content. Half of our followersfinancial reporting are entry level professionals.set out in note 1 on pages 79 to 82 and are consistent with those applied in 2017.
We were ranked the number one FMCG company and the number 8 company overall to work for on the LinkedIn Top Attractors global list based on our ability to attract and retain talent. More than 100,000 of our employees are active LinkedIn users. We have also raised visibility of the LinkedIn Elevate platform where Unilever curated content can be shared by Unilever people with their social networks, allowing them to act as ambassadors for the business, enhancing our visibility, creating brand awareness and communicating our values. The initiative has reached more than 190 million members of LinkedIn, Twitter and Facebook.
In July 2016 we launched our new digital selection process for graduate hires that uses the latest technology to help select candidates that best meet Unilever’s requirements. The new process removes the potential for unconscious bias in recruitment. The flexible process is quick and interactive, with candidates receiving feedback at every stage.
First, candidates complete an online application form. Successful candidates are then invited to complete a series of games over a 20-minute period which allows Unilever to gain insight into the candidate’s potential and how well they connect with the Unilever’s goals and purpose. The best candidates will then take part in a video interview.
For the final stage of the process, candidates are invited to a Discovery Centre to collaborate and experience a ‘day in the life’ of Unilever. At every stage feedback is provided to help them in their career whether or not they are successful in joining Unilever.
RETAINING TALENT
In line with C4G we have also introduced significant changes to performance management to encourage feedback and development. The objective is to encourage new ways of thinking, and build a more agile and empowered organisation, with managers better able to support people who are being encouraged to experiment, fail, learn and collaborate. We are inverting the traditional structures, pushing responsibility and opportunity outwards into the organisation so people can be more entrepreneurial with performance management that reflects this culture shift.
As part of C4G, managers are now equipped to understand individual requirements, set targets and help navigate the necessary changes with the right training and support, linked to our Learning Hub. ‘Always On’ conversations are encouraged more than ever so that managers and their teams have more open discussions on performance and feedback throughout the year and not just at mid or year-end.
We are working to create a culture of development for all by removing labels and categorisations in our talent processes and promoting individuals’ development needs. Our reward principles are becoming simpler with fewer reward elements which are in turn focused on short-term performance and long-term value creation to encourage a more entrepreneurial approach and an owner’s attitude.
We recognise that to get the best out of our people and help them thrive in the world of work, we need to look after more than just their professional development. Their physical, mental, and emotional well-being also needs attention to help engender a strong sense of purpose, matching Unilever’s own clear Purpose of making sustainable living commonplace. Since 2015, more than 41,430 people have been through our Thrive Programme to help improve well-being including issues such as eating healthily in a busy work environment, sleep, fitness, well-being and practical ways of managing energy levels.
| * | 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 23 to 26. |
| ^ | Wherever referenced in this report, underlying sales growth (USG) and underlying price growth (UPG) do not include price growth in Venezuela for the whole of 2018 and in Argentina from July 2018. USG and UPG for 2017 do not include Q4 2017 price growth in Venezuela. See pages 23 and 24 onnon-GAAP measures for further details. |
| 20 | Strategic Report | Annual Report on Form 20-F |
The Group has revised its operating segments to align with the new structure under which the business is managed. Operating segment information is now provided based on three product areas: Beauty & Personal Care, Foods & Refreshment and Home Care.
BEAUTY & PERSONAL CARE
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,624 | 20,697 | (0.3 | ) | ||||||||
| Operating profit (€ million) | 4,130 | 4,103 | 0.7 | |||||||||
| Underlying operating profit (€ million) | 4,508 | 4,375 | 3.0 | |||||||||
| Operating margin (%) | 20.0 | 19.8 | 0.2 | |||||||||
| Underlying operating margin (%) | 21.9 | 21.1 | 0.8 | |||||||||
| Underlying sales growth (%) | 3.1 | 2.9 | ||||||||||
| Underlying volume growth (%) | 2.5 | 1.4 | ||||||||||
| Underlying price growth (%) | 0.6 | 1.5 | ||||||||||
KEY DEVELOPMENTS
FOODS & REFRESHMENT
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,227 | 22,444 | (9.9 | ) | ||||||||
| Operating profit (€ million) | 7,245 | 3,616 | 100.4 | |||||||||
| Underlying operating profit (€ million) | 3,534 | 3,737 | (5.4 | ) | ||||||||
| Operating margin (%) | 35.8 | 16.1 | 19.7 | |||||||||
| Underlying operating margin (%) | 17.5 | 16.7 | 0.8 | |||||||||
| Underlying sales growth (%) | 2.0 | 2.7 | ||||||||||
| Underlying volume growth (%) | 1.3 | (0.2 | ) | |||||||||
| Underlying price growth (%) | 0.7 | 3.0 | ||||||||||
KEY DEVELOPMENTS
| • | Turnover declined by 9.9% including a negative currency impact of 5.6%. Acquisitions and disposals had an unfavourable impact of 6.4% reflecting the disposal of the spreads business. Underlying sales growth was 2.0% coming from volume growth of 1.3% and price growth of 0.7%. Ice cream had another strong year helped by innovations on our premium brands which included a new Magnum praline variant and anon-dairy range of Ben & Jerrys. The launch of Kinder® ice cream and good weather helped to drive strong ice cream growth in Europe. Sales in tea grew modestly: emerging markets growth was driven by good performance on core brands like Brooke Bond in India whilst in developed markets challenges in black tea offset good growth from Pukka and the new organic Lipton |
range. In savoury, Knorr was helped by good performance of cooking products in emerging markets and more organic and natural innovations such as a new ‘soup in glass’ range. In dressings, campaigns centred around Hellmann’s purpose to fight food waste helped to increase brand equity, but sales were held back by promotional intensity particularly in the US. Our actions to transform the portfolio are working: strong innovations including Knorr rice and pasta pots as well as our new brands Red Red, PrepCo and Mãe Terra helped us build scale in the fast growing snacking segment. |
HOME CARE
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 10,131 | 10,574 | (4.2 | ) | ||||||||
| Operating profit (€ million) | 1,160 | 1,138 | 1.9 | |||||||||
| Underlying operating profit (€ million) | 1,317 | 1,288 | 2.3 | |||||||||
| Operating margin (%) | 11.5 | 10.8 | 0.7 | |||||||||
| Underlying operating margin (%) | 13.0 | 12.2 | 0.8 | |||||||||
| Underlying sales growth (%) | 4.2 | 4.4 | ||||||||||
| Underlying volume growth (%) | 2.3 | 2.1 | ||||||||||
| Underlying price growth (%) | 1.9 | 2.3 | ||||||||||
KEY DEVELOPMENTS
| Annual Report on Form 20-F 2018 | Strategic Report | 21 |
FINANCIAL REVIEWCONTINUED
CASH FLOW
Cash flow from operating activities was€9.0 billion, a decline of€0.5 billion compared to the prior year. Free cash flow was€5.0 billion, a reduction of€0.4 billion on the prior year. The reductions reflected the impact of currency devaluation and higher working capital, including a€0.4 billion increase arising from the disposal of spreads.
| € million 2018 | € million 2017 | |||||||
| Operating profit | 12,535 | 8,857 | ||||||
Depreciation, amortisation and impairment |
| 1,747 |
|
| 1,538 |
| ||
Changes in working capital |
| (793 | ) |
| (68 | ) | ||
Pensions and similar obligations less payments |
| (128 | ) |
| (904 | ) | ||
Provisions less payments |
| 55 |
|
| 200 |
| ||
Elimination of (profits)/losses on disposals |
| (4,299 | ) |
| (298 | ) | ||
Non-cash charge for share-based compensation |
| 196 |
|
| 284 |
| ||
Other adjustments |
| (266 | ) |
| (153 | ) | ||
Cash flow from operating activities |
| 9,047 |
|
| 9,456 |
| ||
Income tax paid |
| (2,294 | ) |
| (2,164 | ) | ||
Net capital expenditure |
| (1,424 | ) |
| (1,621 | ) | ||
Net interest and preference dividends paid |
| (367 | ) |
| (316 | ) | ||
Free cash flow* |
| 4,962 |
|
| 5,355 |
| ||
Net cash flow (used in)/from investing activities |
| 4,644 |
|
| (5,879 | ) | ||
Net cash flow (used in)/from financing activities |
| (11,548 | ) |
| (1,433 | ) | ||
| * | 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 23 to 26. |
Net inflow from investing activities was€4.6 billion, an increase of€10.5 billion compared to the prior year. The increase reflects proceeds of€7.2 billion from the disposal of spreads and higher spend on acquisitions during the prior year.
The net outflow from financing activities was€11.5 billion, compared with€1.4 billion in the prior year. In 2018 there were repayments of financial liabilities of€6.6 billion compared with€2.6 billion in 2017; and an outflow from changes in short-term borrowings of€4.0 billion, compared with an inflow of€2.7 billion in 2017. The cash outflow in respect of the repurchase of shares in 2018 was€6.0 billion, compared with€5.0 billion in the prior year.
BALANCE SHEET
At 31 December 2018, Unilever’s combined market capitalisation was€121.8 billion compared with€127.9 billion at the end of 2017.
Goodwill and intangible assets increased by€1.1 billion mainly coming from the acquisition of Quala and restatement of goodwill in relation to adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1 and note 9). The increase was partially offset by impairment of Blueair. All material goodwill and indefinite-life intangible assets have been tested for impairment with no charge recognised during the year other than for Blueair. Othernon-current assets decreased by€0.4 billion mainly due to a reduction in the value of pension assets.
| € million 2018 | € million 2017 | |||||||
| Goodwill and intangible assets | 29,493 | 28,401 | ||||||
Othernon-current assets |
| 14,482 |
|
| 14,901 |
| ||
Current assets |
| 15,481 |
|
| 16,983 |
| ||
Total assets |
| 59,456 |
|
| 60,285 |
| ||
Current liabilities |
| 19,772 |
|
| 23,177 |
| ||
Non-current liabilities |
| 27,392 |
|
| 22,721 |
| ||
Total liabilities |
| 47,164 |
|
| 45,898 |
| ||
Shareholders’ equity |
| 11,572 |
|
| 13,629 |
| ||
Non-controlling interest |
| 720 |
|
| 758 |
| ||
Total equity |
| 12,292 |
|
| 14,387 |
| ||
Total liabilities and equity |
| 59,456 |
|
| 60,285 |
| ||
Current assets decreased from€17.0 billion to€15.5 billion mainly reflecting the reduction in assets held for disposals as a result of the completion of the spreads transactions on 2 July 2018. Current liabilities were€19.8 billion, a decrease of€3.4 billion compared to the prior year. The decrease was due to repayment of short-term liabilities which were replaced by long term borrowings.Non-current liabilities were€27.4 billion, an increase of€4.7 billion on the prior year. During the year the Group issued bonds worth over€6.0 billion and repaid notes of about€1.0 billion. See note 15C for analysis of bonds and other loans.
The table below shows the movement in net pension liability during the year. The increase from€0.6 billion at the beginning of the year to€0.9 billion at the end of 2018 was primarily due to reduced pension assets, driven by adverse equity markets towards the end of 2018.
| € million 2018 | ||||
| 1 January | (561 | ) | ||
Current service cost | (220 | ) | ||
Employee contributions | 17 | |||
Actual return on plan assets (excluding interest) | (1,108 | ) | ||
Net interest cost | (25 | ) | ||
Actuarial gain | 671 | |||
Employer contributions | 383 | |||
Currency retranslation | 26 | |||
Other movements(a) | (57 | ) | ||
31 December | (874 | ) | ||
| (a) | Other movements relate to special termination benefits, past service costs including losses/(gains) on curtailment, settlements and other immaterial movements. For more details see note 4B on pages 87 to 92. |
FINANCE AND LIQUIDITY
Approximately€0.8 billion (or 26%) of the Group’s cash and cash equivalents are held in the parent and central finance companies, for 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 110 to 115.
The remaining€2.4 billion (74%) 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€154 million (2017:€206 million, 2016:€240 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 2018 were $7,865 million.
| 22 | Strategic Report | Annual Report on Form 20-F 2018 |
CONTRACTUAL OBLIGATIONS AT 31 DECEMBER 2018
€ million
Total | € million 1 year | € million | € million | € million | ||||||||||||||||
Long-term debt
|
| 24,428
|
|
| 2,950
|
|
| 4,533
|
|
| 4,683
|
|
| 12,262
|
| |||||
Interest on financial liabilities
|
| 3,723
|
|
| 467
|
|
| 800
|
|
| 628
|
|
| 1,828
|
| |||||
Operating lease obligations
|
| 2,464
|
|
| 481
|
|
| 758
|
|
| 501
|
|
| 724
|
| |||||
Purchase obligations(a)
|
| 520
|
|
| 421
|
|
| 94
|
|
| 1
|
|
| 4
|
| |||||
Finance leases
|
| 187
|
|
| 20
|
|
| 37
|
|
| 34
|
|
| 96
|
| |||||
Other long-term commitments
|
| 1,390
|
|
| 678
|
|
| 590
|
|
| 95
|
|
| 27
|
| |||||
Other financial liabilities
|
| 150
|
|
| 149
|
|
| 1
|
|
| –
|
|
| –
|
| |||||
Total
|
| 32,862
|
|
| 5,166
|
|
| 6,813
|
|
| 5,942
|
|
| 14,941
|
| |||||
| (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 100 and 101, note 15C on page 108 and 109, and note 20 on pages 120 to 122. 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
Included within operating profit is€21 million (2017:€20 million) paid to the external auditor, of which€16 million (2017:€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.
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 using the prior period average exchange rates into euro, except for countries where the impact of consumer price inflation rates has escalated to extreme levels. In these countries, the local currency amounts before the application of IAS 29 are translated into euros using the period closing exchange rate.
The table below shows exchange rate movements in our key markets.
Annual 2018 | Annual 2017 | |||||||
Brazilian real (€1 = BRL) | 4.282 | 3.573 | ||||||
Chinese yuan (€1 = CNY) |
| 7.807 |
|
| 7.608 |
| ||
Indian rupee (€1 = INR) |
| 80.730 |
|
| 73.258 |
| ||
Indonesia rupiah (€1 = IDR) |
| 16831 |
|
| 15011 |
| ||
Philippine peso (€ 1 = PHP) |
| 62.379 |
|
| 56.596 |
| ||
UK pound sterling (€1 = GBP) |
| 0.884 |
|
| 0.876 |
| ||
US dollar (€1 = US$) |
| 1.185 |
|
| 1.123 |
| ||
In the following sections we set out our definitions of the followingnon-GAAP measures and provide reconciliations to relevant GAAP measures:
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. 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. Also excluded is the impact of price growth from countries where the impact of consumer price inflation (CPI) rates has escalated to extreme levels.
There are two countries where we have determined extreme levels of CPI exist. The first is Venezuela where in Q4 2017 inflation rates exceeded 1,000% and management considered that the situation would persist for some time. Consequently, price growth in Venezuela has been excluded from USG since Q4 2017. The second is Argentina, which from Q3 2018 has been accounted for in accordance with IAS 29, and thus from Q3 2018 Argentina price growth is excluded from USG. The adjustment made at Group level as a result of these two exclusions was a reduction in price growth of 32.4% for the year. This treatment for both countries will be kept under regular review.
Prior to Q3 2018 USG only excluded the impact of price changes in countries where consumer price inflation has escalated to extreme levels of 1,000% or more. However, given the need to account for our Argentinian business in accordance with IAS 29, we have now also excluded price changes in countries that need to be accounted for in accordance with IAS 29. Prior to Q3 2018 there were no countries that were accounted for under IAS 29, so no restatements are necessary.
| Annual Report on Form 20-F 2018 | Strategic Report | 23 |
FINANCIAL REVIEWCONTINUED
The reconciliation of USG to changes in the GAAP measure turnover is as follows:
| TOTAL GROUP | 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (5.1 | ) |
| 1.9 |
| ||
Effect of acquisitions (%) |
| 2.0 |
|
| 1.3 |
| ||
Effect of disposals (%) |
| (3.0 | ) |
| (0.4 | ) | ||
Effect of exchange rates (%)(b) |
| (6.7 | ) |
| (2.1 | ) | ||
Underlying sales growth (%)(b) |
| 2.9 |
|
| 3.1 |
| ||
BEAUTY & PERSONAL CARE
| 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (0.3 | ) |
| 2.6 |
| ||
Effect of acquisitions (%) |
| 3.9 |
|
| 1.8 |
| ||
Effect of disposals (%) |
| – |
|
| (0.1 | ) | ||
Effect of exchange rates (%)(b) |
| (7.0 | ) |
| (1.9 | ) | ||
Underlying sales growth (%)(b) | 3.1 | 2.9 | ||||||
FOODS & REFRESHMENT
| 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (9.9 | ) |
| (0.4 | ) | ||
Effect of acquisitions (%) |
| 0.8 |
|
| 0.2 |
| ||
Effect of disposals (%) |
| (7.2 | ) |
| (0.8 | ) | ||
Effect of exchange rates (%)(b) |
| (5.6 | ) |
| (2.4 | ) | ||
Underlying sales growth (%)(b) |
| 2.0 |
|
| 2.7 |
| ||
| HOME CARE | 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (4.2 | ) |
| 5.6 |
| ||
Effect of acquisitions (%) |
| 0.5 |
|
| 3.1 |
| ||
Effect of disposals (%) |
| (0.2 | ) |
| (0.2 | ) | ||
Effect of exchange rates (%)(b) |
| (8.3 | ) |
| (1.7 | ) | ||
Underlying sales growth (%)(b) |
| 4.2 |
|
| 4.4 |
| ||
| (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) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying sales growth and an equal and opposite adjustment made in effect of exchange rate. For 2017 only Q4 price growth in Venezuela has been excluded. |
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 growth in Argentina and Venezuela as explained in USG above.
The relationship between USG, UVG and UPG is set out below:
| 2018 vs 2017 | 2017 vs 2016 | |||||||
Underlying volume growth (%) |
| 1.9 |
|
| 0.8 |
| ||
Underlying price growth (%)(a) |
| 0.9 |
|
| 2.3 |
| ||
Underlying sales growth (%) |
| 2.9 |
|
| 3.1 |
| ||
| (a) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying price in the table above and an equal and opposite adjustment made in the effect of exchange rates. For 2017 only Q4 price growth in Venezuela has been excluded. |
Refer to page 21 for the relationship between USG, UVG and UPG for each of the categories.
NON-UNDERLYING ITEMS
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 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 96 for reconciliation of net profit attributable to shareholders’ equity to underlying profit attributable to shareholders’ equity.
| 24 | Strategic Report | Annual Report on Form 20-F 2018 |
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 2018 | € million 2017 | |||||||
Operating profit
|
|
12,535
|
|
|
8,857
|
| ||
Non-underlying items within operating profit (see note 3)
|
| (3,176
| )
|
| 543
|
| ||
Underlying operating profit
|
| 9,359
|
|
| 9,400
|
| ||
Turnover
|
| 50,982
|
|
| 53,715
|
| ||
Operating margin
|
| 24.6
| %
|
| 16.5
| %
| ||
Underlying operating margin | 18.4 | % | 17.5 | % | ||||
Further details ofnon-underlying items can be found in note 3 on page 85 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. This is shown in the following table:
| € million 2018 | € million 2017 | |||||||
Taxation
|
|
2,575 |
|
|
1,667 |
| ||
Tax impact of:
| ||||||||
Non-underlying items within operating profit(a)
|
| (259
| )
|
| 77
|
| ||
Non-underlying items not in operating profit but within net profit(a)
|
| (29
| )
|
| 578
|
| ||
Taxation before tax impact ofnon-underlying | 2,287 | 2,322 | ||||||
Profit before taxation
|
| 12,383
|
|
| 8,153
|
| ||
Non-underlying items within operating profit before tax(a)
|
| (3,176
| )
|
| 543
|
| ||
Non-underlying items not in operating profit but within net profit before tax(b)
|
| (122
| )
|
| 382
|
| ||
Share of net (profit)/loss of joint ventures and associates
|
| (185
| )
|
| (155
| )
| ||
Profit before tax excludingnon-underlying items before tax and share of net profit/ (loss) of joint ventures and associates | 8,900 | 8,923 | ||||||
Underlying effective tax rate
| 25.7 | % | 26.0 | % | ||||
| (a) | Refer to note 3 for further details on these items. |
| (b) | 2018 amount excludes€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€32 million, totalnon-underlying items not in operating profit but within net profit before tax is€154 million. See note 3. |
CONSTANT 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 price inflation in Venezuela (for the whole of 2018) and Argentina (from July 2018) divided by the diluted average number of ordinary shares. This measure reflects the underlying earnings for each ordinary share of the Group in constant exchange rates.
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 2018 | € million 2017 | |||||||
Underlying profit attributable to shareholders’ equity(a)
|
|
6,365
|
|
|
6,315
|
| ||
Impact of translation from current to constant exchange rates and translational hedges
|
| 7,112
|
|
| 95
|
| ||
Impact of Venezuela and Argentina price inflation(b)
|
| (6,551
| )
|
| –
|
| ||
Constant underlying earnings attributable to shareholders’ equity
|
|
6,926
|
|
|
6,410
|
| ||
Diluted combined average number of share units (millions of units)
|
| 2,694.8
|
|
| 2,814.0
|
| ||
Constant underlying EPS (€)
|
| 2.57
|
|
| 2.28
|
| ||
| (a) | See note 7. |
| (b) | See pages 23 and 24 for further details. |
From 2018, in our reporting of growth in constant underlying EPS, we translate the prior period using an annual average exchange rate rather than monthly averages. This change has been made to align with the prior period constant exchange rate used for calculating USG. The impact of this is an increase of€0.01 per share in 2017 constant underlying EPS.
FREE CASH FLOW
Free cash flow (FCF) is defined as cash flow from operating activities, less income taxes paid, net capital expenditures and net interest payments and preference dividends paid. 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 2018 | € million 2017 | |||||||
Net profit
|
|
9,808
|
|
|
6,486
|
| ||
Taxation
|
| 2,575
|
|
| 1,667
|
| ||
Share of net profit of joint ventures/associates and other income fromnon-current investments
|
| (207
| )
|
| (173
| )
| ||
Net monetary gain arising from hyperinflationary economies
|
| (122
| )
|
| –
|
| ||
Net finance costs
|
| 481
|
|
| 877
|
| ||
Depreciation, amortisation and impairment
|
| 1,747
|
|
| 1,538
|
| ||
Changes in working capital
|
| (793
| )
|
| (68
| )
| ||
Pensions and similar obligations less payments
|
| (128
| )
|
| (904
| )
| ||
Provisions less payments
|
| 55
|
|
| 200
|
| ||
Elimination of (profits)/losses on disposals
|
| (4,299
| )
|
| (298
| )
| ||
Non-cash charge for share-based compensation
|
| 196
|
|
| 284
|
| ||
Other adjustments
|
| (266
| )
|
| (153
| )
| ||
Cash flow from operating activities
|
| 9,047
|
|
| 9,456
|
| ||
Income tax paid
|
| (2,294
| )
|
| (2,164
| )
| ||
Net capital expenditure
|
| (1,424
| )
|
| (1,621
| )
| ||
Net interest and preference dividends paid
|
| (367
| )
|
| (316
| )
| ||
Free cash flow
|
|
4,962
|
|
|
5,355
|
| ||
Net cash flow (used in)/from investing activities
|
| 4,644
|
|
| (5,879
| )
| ||
Net cash flow (used in)/from financing activities
|
| (11,548
| )
|
| (1,433
| )
| ||
| Annual Report on Form 20-F 2018 | Strategic Report | 25 |
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.
| € million | € million | € million | ||||||||||||||
| Beauty & | Foods & | Home | € million | |||||||||||||
| 2018 | Personal Care | Refreshment | Care | Total | ||||||||||||
Underlying operating profit before tax |
| 4,508 |
|
| 3,534 |
|
| 1,317 |
|
| 9,359 |
| ||||
Tax on underlying operating profit |
| (1,159 | ) |
| (908 | ) |
| (338 | ) |
| (2,405 | ) | ||||
Underlying operating profit after tax |
| 3,349 |
|
| 2,626 |
|
| 979 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,631 |
|
| 4,783 |
|
| 1,933 |
|
| 10,347 |
| ||||
Net assets held for sale |
| 1 |
|
| 25 |
|
| – |
|
| 26 |
| ||||
Inventories |
| 1,737 |
|
| 1,761 |
|
| 803 |
|
| 4,301 |
| ||||
Trade and other receivables |
| 2,319 |
|
| 3,027 |
|
| 1,139 |
|
| 6,485 |
| ||||
Trade payables and other current liabilities |
| (5,478 | ) |
| (5,984 | ) |
| (2,995 | ) |
| (14,457 | ) | ||||
Period end assets (net) |
| 2,210 |
|
| 3,612 |
|
| 880 |
|
| 6,702 |
| ||||
Average assets for the period (net) |
| 2,178 |
|
| 3,830 |
|
| 799 |
|
| 6,807 |
| ||||
Division return on assets |
| 154 | % |
| 69 | % |
| 123 | % |
| 102 | % | ||||
2017 | ||||||||||||||||
Underlying Operating Profit before tax |
| 4,375 |
|
| 3,737 |
|
| 1,288 |
|
| 9,400 |
| ||||
Tax on underlying operating profit |
| (1,139 | ) |
| (972 | ) |
| (335 | ) |
| 2,446 |
| ||||
Underlying Operating Profit after tax |
| 3,236 |
|
| 2,765 |
|
| 953 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,520 |
|
| 5,104 |
|
| 1,787 |
|
| 10,411 |
| ||||
Net assets held for sale |
| 1 |
|
| 742 |
|
| – |
|
| 743 |
| ||||
Inventories |
| 1,590 |
|
| 1,637 |
|
| 735 |
|
| 3,962 |
| ||||
Trade and other receivables |
| 2,018 |
|
| 2,172 |
|
| 1,032 |
|
| 5,222 |
| ||||
Trade payables and other current liabilities |
| (4,984 | ) |
| (5,606 | ) |
| (2,836 | ) |
| (13,426 | ) | ||||
Period end assets (net) |
| 2,145 |
|
| 4,049 |
|
| 718 |
|
| 6,912 |
| ||||
Average assets for the period (net) |
| 2,122 |
|
| 4,201 |
|
| 778 |
|
| 7,101 |
| ||||
Division return on assets |
| 152 | % |
| 66 | % |
| 122 | % |
| 98 | % | ||||
NET DEBT
Net debt is 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 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.
The reconciliation of total financial liabilities to net debt is as follows:
| € million 2018 | € million 2017 | |||||||
Total financial liabilities |
| (24,885
| )
|
| (24,430
| )
| ||
Current financial liabilities |
| (3,235 | ) |
| (7,968 | ) | ||
Non-current financial liabilities |
| (21,650 | ) |
| (16,462 | ) | ||
Cash and cash equivalents as per balance sheet |
| 3,230
|
|
| 3,317
|
| ||
Cash and cash equivalents as per cash flow statement |
| 3,090 |
|
| 3,169 |
| ||
Add bank overdrafts deducted therein |
| 140 |
|
| 167 |
| ||
Less cash and cash equivalents held for sale |
| – |
|
| (19 | ) | ||
Other current financial assets |
| 874 |
|
| 770 |
| ||
Net debt |
| (20,781 | ) |
| (20,343 | ) | ||
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 liabilities.
| € million 2018 | € million 2017 | |||||||
Underlying operating profit before tax(a) |
| 9,359 |
|
| 9,400 |
| ||
Tax on underlying operating profit(b) |
| (2,405 | ) |
| (2,446 | ) | ||
Underlying operating profit after tax |
| 6,954 |
|
| 6,954 |
| ||
Goodwill |
| 17,341 |
|
| 16,881 |
| ||
Intangible assets |
| 12,152 |
|
| 11,520 |
| ||
Property, plant and equipment |
| 10,347 |
|
| 10,411 |
| ||
Net assets held for sale |
| 108 |
|
| 3,054 |
| ||
Inventories |
| 4,301 |
|
| 3,962 |
| ||
Trade and other current receivables |
| 6,485 |
|
| 5,222 |
| ||
Trade payables and other current liabilities |
| (14,457 | ) |
| (13,426 | ) | ||
Period-end invested capital |
| 36,277 |
|
| 37,624 |
| ||
Average invested capital for the period |
| 36,951 |
|
| 36,222 |
| ||
Return on average invested capital |
| 18.8 | % |
| 19.2 | % | ||
| (a) | See reconciliation of operating profit to underlying operating profit on page 25. |
| (b) | Tax on underlying operating profit is calculated as underlying operating profit before tax multiplied by underlying effective tax rate of 25.7% (2017: 26.0%) which is shown on page 25. |
| 26 | Strategic Report | Annual Report on Form 20-F 2018 |
OUR 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 Board agenda, which is where we believe it should be.
Unilever adopts a risk profile that is aligned to our vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact. Our 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.
ORGANISATION
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. This organisational structure and distribution of accountabilities and responsibilities ensure that every country in which we operate has specific resources and processes for risk reviews 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 PRINCIPLES
Unilever’s approach to doing business is framed by our Purpose and values (see page 1). 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 underpins the Code of Business Principles and set 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.
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.
PROCESSES
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 ANDRE-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 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 43 to 45.
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 41 and 42.
| Annual Report on Form 20-F 2018 | Strategic Report | 27 |
RISKSCONTINUED
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 the Group together with the factors likely to affect the Group’s future development, performance, financial position, cash flows, liquidity position and borrowing facilities as described on pages 1 to 26. In addition, we describe in notes 15 to 18 on pages 104 to 120 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.
ASSESSMENT
In order to report on the long-term viability of 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 the Group, including those that would threaten its business model, future performance, solvency or liquidity. The assessment assumes that any debt maturing in the next three years can bere-financed at commercially acceptable terms or via our current standby facility. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks. The risk factors are summarised on pages 29 to 33.
The viability assessment has two parts:
First, the Directors considered the period over which they have a reasonable expectation that the Group will continue to operate and meet its liabilities, taking into account current debt facilities and debt headroom; and
Second, 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 and the lost cost and growth opportunities from not keeping up with technological changes; and
assessing scenarios that involve more than one principal risk 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 lower sales of products of this brand and the temporary closure of our largest sourcing unit. | A fine equal to 1% of Group turnover was considered along with damage to our largest brand and disruption to supply chain. | • 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 sourcing unit and significant water shortages in our key developing markets. | The complete loss of all of our turnover in our largest geographic market was considered along with destruction of a key sourcing unit and reduced demand for our products that require water. | • Economic and political instability • Supply chain • Climate change | ||
| Global economic downturn leading to an increase in funding costs and the loss of our three largest customers. | Significant business disruption in our largest emerging market was considered with the impact of losing our three key customers. | • Economic and political instability • Treasury and pensions • Customer relationships | ||
FINDINGS
| ��� | Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by the strategic 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 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 year horizon; and
the Group’s diverse product and geographical activities which are impacted by continuously evolving technology and innovation.
Secondly, 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.
CONCLUSION
On the basis described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
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 principal risks could impact our business within the next two years (ie short-term risks), or could impact our business over the next three to five years (ie medium-term risks). Some principal risks, such as climate change, could also impact over the longer term (ie beyond five years).
Our principal risks have not fundamentally changed this year apart from the addition of a plastic packaging risk. Given the nature of our business, a reduction in the amount of plastic packaging and increase in the use of recyclable content in our packaging is critical to our future success.
| 28 | Strategic Report | Annual Report on Form 20-F 2018 |
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. In addition to our plastic packaging risk there are three areas where we believe there is an increased level of risk:
LEARNINGCustomer Relationships: technology is changing our channel landscape and hence changing the nature of the relationships with our traditional customers as well as requiring us to develop relationships with new customers who are drivinge-commerce development;
Systems and Information: the number of cybersecurity attacks is still increasing significantly, and incidents are becoming more sophisticated as technology further evolves; and
Business Transformation: this risk has increased as a result of the speed of technological change which means the pressure to digitalise our business to take advantage of the opportunities it presents, both in terms of growth and cost efficiency, is increasing.
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.
Learning and building capability
DESCRIPTION OF RISK |
BRAND PREFERENCE As a branded goods business, Unilever’s 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, and Unilever’s ability to identify and respond to these changes is vital to our business success. 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. If we are unable to innovate effectively, Unilever’s sales or margins could be materially adversely affected. |
| 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 categories, 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. |
| SUSTAINABILITY |
The success of our business depends on finding sustainable solutions to support long-term growth. Unilever’s vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact, will require more sustainable ways of doing business. In a world where resources are scarce and demand for them continues to increase, it is critical that we succeed in reducing our resource consumption and converting to sustainably sourced supplies. In doing this we are dependent on the efforts of partners and various certification bodies. We are also committed to improving health and well-being and enhancing livelihoods around the world so Unilever and our communities grow successfully together. There can be no assurance that sustainable business solutions will be developed and failure to do so could limit Unilever’s growth and profit potential and damage our corporate reputation. |
| Annual Report on Form 20-F 2018 | Strategic Report | 29 |
RISKSCONTINUED
DESCRIPTION OF RISK |
CLIMATE CHANGE |
Climate changes and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products. Climate changes are occurring around the globe which may impact our business in various ways. They could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. They 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. |
| PLASTIC PACKAGING |
A reduction in the amount of plastic and an increase in the use of recyclable content in our packaging is 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 globe. 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. |
| CUSTOMER RELATIONSHIPS |
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. |
| 30 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
TALENT |
A skilled workforce and agile ways of working are essential for the continued success of our business. Our ability to attract, develop and retain the right number of appropriately qualified 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. |
| 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. |
| 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. |
| 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. |
| Annual Report on Form 20-F 2018 | Strategic Report | 31 |
RISKSCONTINUED
DESCRIPTION OF RISK |
| 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. A number of key projects were announced in 2017 to accelerate sustainable shareholder value creation. 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. Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation. Failure to keep pace with such technological change would significantly impact our growth and profitability. |
| 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. |
| TREASURY AND PENSIONS |
Unilever is exposed to a variety of external financial risks in relation to Treasury and Pensions. 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. Unilever may face liquidity risk, ie difficulty in meeting its obligations, associated with its financial liabilities. A material and sustained shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and also restrict Unilever’s ability to raise funds. We are exposed to market interest rate fluctuations on our floating rate debt. Increases in benchmark interest rates could increase the interest cost of our floating rate debt and increase the cost of future borrowings. In times of financial market volatility, we are also potentially exposed to counter-party risks with banks, suppliers and customers. Certain businesses have defined benefit pension plans, most now closed to new employees, which are exposed to movements in interest rates, fluctuating values of underlying investments and increased life expectancy. Changes in any or all of these inputs could potentially increase the cost to Unilever of funding the schemes and therefore have an adverse impact on profitability and cash flow. |
| 32 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
| ETHICAL |
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. 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. Despite the commitment of Unilever to ethical business and the steps we take to adhere to this commitment, there remains a risk that activities or events cause us to fall short of our desired standard, resulting in damage to Unilever’s corporate reputation and business results. |
| 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. Tax, in particular, is a complex 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 & Profit Shifting project and further potential tax reform in the EU and Switzerland. |
IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIES
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES.
Unilever recognises the importance of disclosing climate-related risks and opportunities. Adopting the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to alow-carbon economy.
In this Annual Report and Accounts, we continue to integrate climate-related disclosures throughout the Strategic Report narrative. However, in recognition of the growing significance of the impacts of climate change on our business, we have also summarised the risks and opportunities arising from climate change, and our response below.
The Boards take overall accountability for the management of climate change risks and opportunities with support from the ULE and the USLP Steering Team (see page 46). Chaired by Keith Weed in 2018, the USLP Steering Team includes nine members of the ULE and meets five times a year. During 2018, there were numerous agenda items on topics related to climate change including our overall climate strategy and our renewable electricity target.
For management employees (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. The USLP component accounts for 25% of total MCIP award. The sustainability component of MCIP includes consideration of our progress against climate change, water and palm oil targets, which among others, underpin our climate strategy. See pages 52 to 54 for more on MCIP.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever which has the potential to impact our business in the connectedshort, medium and long-term. Further details on the nature of climate risks and opportunities for Unilever can be found in our 2018 CDP Climate submission (see further climate change disclosures on pages 7 and 14).
To further understand the impact that climate change could have on Unilever’s business 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 and we have looked at the impact on our business in 2030 assuming we have the same business activities as we do today. We also made the following simplifying assumptions:
| Annual Report on Form 20-F 2018 | Strategic Report | 33 |
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 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 work 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.
During 2018 we developed and piloted an approach to assess the impact of climate change on our key commodities. We selected soy for this pilot based on its importance to Unilever (large purchased volume), it being ahigh-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. Climate change was the only price factor accounted for in the model used to calculate the impact. Other factors which impact price, such as technology and acreage, were excluded. The model considered the direct risks from climate change to the price of soybean oil, such as change in yield and change in supply. 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 would need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as catastrophic 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. We have therefore decided to get broader understanding on the climate change risks to our agricultural sourcing and extend our analysis to two other important crops to Unilever: Palm Oil and Tea, for which suitable climate change models for yield predictions will be available in 2019.
RESPONDING TO RISKS AND OPPORTUNITIES
Unilever’s vision is to grow our business whilst decoupling our growth from our environmental footprint and increasing positive social impact. This vision explicitly recognises that sustainable growth – including management of climate-related risks and opportunities – is the only way to create long-term value for all our stakeholders.
The Unilever Sustainable Living Plan (USLP) was developed to deliver our vision. It is fully integrated with our business strategy. Climate-related issues are integral to the USLP. Two of our GHG reduction targets included in the USLP are recognised as science-based:
We are taking action across our value chain to reduce our emissions, creating growth opportunities and minimising risk. Our commitment to source 100% of our palm oil from sustainable sources is helping to avoid emissions from deforestation (see pages 14 and 47). Our efforts to reduce energy and GHG emissions in manufacturing are helping us to save costs. For example, by using less energy, we have already avoided energy costs in our factories of over€600 million since our baseline year of 2008.
Our divisions are taking action to reduce emissions. In Home Care we are focusing on concentrated liquid laundry detergents such as Persil, Omo and Surf Small & Mighty which help consumers to wash clothes at lower temperatures, reducing GHG by up to 50% per load. We have removed phosphates from all laundry powders worldwide, resulting in lower greenhouse gas emissions of up to 50% per consumer use. Our Foods & Refreshment division has prioritised reducing greenhouse gas emissions from ice cream freezers since 2008. As the world’s largest producer of ice cream, we have committed to accelerating theroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2018 our total purchase of these cabinets had increased to around 2.9 million.
Detailed Lifecycle Analysis has shown that our GHG contribution from animal-based agriculture, including fats and proteins, is relatively low: 7.5% for Foods & Refreshment and 2.5% for total Unilever. While emissions are comparatively low, the business opportunity is significant for natural and plant-based foods and beverages. We have a range of vegan and vegetarian variants such as Hellmann’s vegan mayonnaise, Ben & Jerry’snon-dairy ice creams, Magnum vegan and other options (see pages 11 to 12). We continue to actively promote vegetarian and vegan recipes, notably via our Knorr brand websites.
A number of our targets directly address risks and opportunities related to water scarcity caused by climate change. We estimate that the sale of products which address water scarcity issues could increase in our Home Care and Beauty & Personal Care divisions where a number of products are available which address water scarcity and/ or have a lower GHG in use. For example, our Beauty & Personal Care division is investing in water smart product innovations such as dry shampoo and cleansing conditioner which help consumers use less water while also offering relevant benefits such as reduced colour loss and damage which can arise from frequent washing. Home Care is 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 help our consumers save water. Day2, the world’s first dry wash spray is made with only 0.02% of the water in a normal laundry load. Sunlight2-in-1 Handwashing Laundry Powder and Rin (Radiant) detergent bar are also helping to reduce water consumption at point of use in water-stressed countries.
| 34 | Strategic Report | Annual Report on Form 20-F 2018 |
Home Care is home to three brands, Pureit, Truliva/Qinyuan and Blueair, which are responding directly to issues related to climate change. Pureit and Truliva, our water purification businesses, offer products which provide safe drinking water to millions of people with a lower carbon footprint than alternatives. Our detailed lifecycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair, our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Several other targets in our USLP indirectly address climate risk and opportunities by aiming to support groups who are vulnerable to the effects of climate change and who are critical to our future growth, notably smallholder farmers and women in low income countries.
Unilever continues to support a number of policy measures to accelerate the transition to alow-carbon economy, including the pricing of carbon and removal of fossil fuel subsidies which act as negative carbon prices. We believe that carbon pricing is a fundamental part of the global response to climate change 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. In 2016, we implemented an internal price on carbon as part of the business case appraisal for large capital expenditure projects. The carbon price is also applied to emissions from our manufacturing sites to raise a clean-tech fund. So far,€73 million has been allocated to this fund for energy and water saving projects. In January 2018 the price of carbon was€40 per tonne.
MEASURING AND REPORTING
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 7 with skills evolvingcommentary on page 13 and 14. Our website contains detailed commentary on our USLP targets as well as actions we are taking to achieve them.
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. We have a role to play as an industry leader to help shape those markets. We are working collaboratively with partners, suppliers and others to achieve our ambition.
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. The basis of this plan is the set of around 2,800 products representative of our global portfolio across all divisions for which we have full value-chain lifecycle analysis results.
We recalculated the footprint of these products using the latest 2030 projections on external transitions to alow-carbon economy (eg International Energy Agency 2030 projection on grid changes to renewable energy),low-carbon transition plans in our operations (eg achieving zero net deforestation by 2020, using 100% renewable energy by 2020) and Innovation Roadmaps (eg redesign for lower embedded carbon emissions, transforming the temperature-controlled supply chain).
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 (GHG) emissions are set out below. 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.
We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels and the operation of facilities (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). Each year PwC assure selected manufacturing environmental metrics including carbon emissions from energy use and energy use per tonne of production.
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.
UNILEVER GREENHOUSE GAS EMISSIONS BY ACTIVITY^
| 2018 | 2017 | |||||||
| Manufacturing (scope 1 and 2) | ||||||||
Scope 1 (tonnes CO2) | 711,875 | 773,856 | ||||||
Scope 2* (tonnes CO2) | 726,167 | 793,472 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 1,438,042 | 1,567,328 | ||||||
Intensity ratio (kg CO2 per tonne of production) | 70.46 | 76.77 | ||||||
| Distribution centres, research laboratories, marketing and sales offices (scope 1 and 2) |
| |||||||
Scope 1 (tonnes CO2) | 20,052 | 20,039 | ||||||
Scope 2* (tonnes CO2) | 100,924 | 102,292 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 120,976 | 122,331 | ||||||
| Upstream and downstream of Unilever operations – top 3 emissions sources (scope 3) |
| |||||||
Consumer use | ||||||||
(downstream) (tonnes CO2e)q | 39,895,946 | 38,697,432 | ||||||
Ingredients and packaging | ||||||||
(upstream) (tonnes CO2e)‡ | 14,985,897 | 15,000,941 | ||||||
Distribution and retail | ||||||||
(downstream) (tonnes CO2e) | 4,368,626 | 3,895,589 | ||||||
| ^ | 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). |
| + | 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. |
| * | 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). |
| q | 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. |
| ‡ | 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. |
| Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
FURTHER CLIMATE CHANGE DISCLOSURES
This Annual Report and Accounts contains additional disclosures on our climate change risks and opportunities:
Our website contains disclosures on our greenhouse gas and water USLP 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 (password required).
 | www.cdp.net |
| Annual Report on Form 20-F 2018 | Strategic Report | 35 |
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* 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.
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 information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be found on our website.
| * | Throughout this report, when referring to NV shares or shareholders, the term ‘shares’ or ‘shareholder’ also encompasses a depositary receipt or a holder of depositary receipts. |
| www.unilever.com/investor-relations/agm-and-corporate- governance/legal-structure-and-foundation-agreements/ |
BOARDS
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, 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. In the normal course Unilever has two Executive Directors, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). On 31 December 2018 the current CEO resigned and his successor, Alan Jope, was appointed on 1 January 2019. Alan will be proposed to be appointed as an Executive Director at pace.the 2019 AGMs. Consequently, between 1 January 2019 and the 2019 AGMs in May we have 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 out on page 3.
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, the Division Presidents, the Presidents for Europe and North America, and the Chief 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 COMMITTEES
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 2018, can be found on pages 43 to 65.
| www.unilever.com/investor-relations/agm-and-corporate- governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVER
Further details of the roles and responsibilities of the Chairman, Senior Independent Director/Vice-Chairman, CEO, CFO 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).
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 36 | Governance Report | Annual Report on Form 20-F 2018 |
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 of the Unilever Group; the development of and approval of the overall strategy of the Unilever Group; oversight of the performance of the business; review of risks and internal risk management and control systems; authorisation of major transactions; declaration of dividends; convening of shareholders’ meetings; succession planning; review of the functioning of the Boards and their Committees; culture; and review of corporate responsibility and sustainability, in particular the Unilever Sustainable Living Plan. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In response,2018 the Boards met physically in January, March, May, 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 sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, and promotes effective relationships and open communication between the Executive andNon-Executive Directors.
ATTENDANCE
The table showing the attendance of current Directors at Board meetings in 2018 can be found on page 3. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Ann Fudge attended four of the Board meetings she was eligible to attend before retiring from the Boards on 3 May 2018.
NON-EXECUTIVE DIRECTOR MEETINGS
TheNon-Executive Directors usually meet as a group, without the Executive Directors present, when there is aface-to-face Board meeting. In 2018 they met five times. The Chairman, or in his absence the Senior Independent Director/Vice-Chairman, chairs such meetings.
BOARD EVALUATION
Each year the Boards formally assess their own performance 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. The last external evaluation was performed in 2017. The evaluation consists of individual interviews with the Directors by the Chairman and, when relevant, by the external evaluator. These interviews are complemented by the completion by all Directors of three confidential online evaluation questionnaires on the efficiency and effectiveness of our Learning team hasBoards, CEO and Chairman. The Boards evaluation questionnaire this year focused on igniting a passionnumber of key areas including Strategy, Risk/Financial Controls, Board Effectiveness and Information/Knowledge. The Chairman’s statement on page 2 describes the key actions agreed by the Boards following the evaluation.
The evaluation of the performance of the Chairman and CEO is led by the Senior Independent Director/Vice-Chairman and Chairman respectively, and the bespoke questionnaires will be used to support these evaluations. 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 2018 evaluations can be found in each Committee Report.
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 learningelection as Directors. Anyone being elected as a Director of NV must also be elected as a Director of PLC and fosteringvice versa. Therefore, if an ‘Always On’ learning culture. individual fails to be elected to both companies he or she will be unable to take his or her place on either Board.
The Learning Hub,report of the Nominating and Corporate Governance Committee (NCGC) on pages 48 and 49 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 collaborative digital learning platform,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 TRAINING
All new Directors participate in a comprehensive induction programme when they join the Boards. The Chairman ensures that ongoing training is supporting this shift. Our peopleprovided 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 2018 the Directors received presentations on Information Security, Digital, the Supply Chain and Simplification.
INDEPENDENCE AND CONFLICTS
As theNon-Executive Directors make up the Committees of the Boards, it is important that they can access bite-sized, just-in-time learningbe 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. A Director must without delay report any conflict of interest or potential conflict of interest to the Chairman and to the other Directors, or, in case any conflict of interest or potential conflict of interest of the Chairman, to the Senior Independent Director/Vice-Chairman and to the other Directors. The Director in question must provide all relevant information to the Boards, so that the Boards can decide whether a reported (potential) conflict of interest of a Director qualifies as a conflict of interest within the meaning of the relevant laws. A Director may not vote on, or be counted in a quorum in relation to, any resolution 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 both engaginggenerally limited to one per Executive Director and mobile-enabled, featuring industry experts.approval is required from the Chairman.
BuildingINDEMNIFICATION
The terms of NV Directors’ indemnification are provided for in NV’s Articles 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 2018 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.
| Annual Report on Form 20-F 2018 | Governance Report | 37 |
CORPORATE GOVERNANCECONTINUED
OUR SHARES
NV SHARES
SHARE CAPITAL
NV’s issued share capital on 31 December 2018* was made up of:
| * | When referred to the issued share capital on 31 December 2018 also€62,065,550 split into two classes (6% and 7%) of cumulative preference shares was outstanding. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon in the General Meeting of NV. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018 with the Dutch Trade Register and an announcement thereof in a daily and nationally distributed newspaper in the Netherlands was made on 5 December 2018. These shares were cancelled on 6 February 2019. |
LISTINGS
NV has ordinary shares (UNIA) and depositary receipts for such ordinary shares (UNA) listed on Euronext Amsterdam and, as US New York Registry Shares* (UN) on the work doneNew 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 hold and can vote in person or by proxy. The voting rights attached to NV’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 99.63 | |||||
2,400 special shares |
| 6,428,550 |
|
| 0.37 |
| ||
As at 31 December 2018:
| (a) | 254,012,896 shares were held in treasury and 9,336,215 shares were held to satisfy obligations under share-based incentive schemes. These shares and the special shares are not voted on. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon, as described within the Share Capital section above. |
SHARE ISSUES AND PURCHASE OF SHARES
At the NV AGM held on 3 May 2018 the Board of NV was designated as the corporate body authorised to resolve on the issue of, or on the granting of rights to subscribe for, shares not yet issued and to restrict or exclude the statutorypre-emption rights that accrue to shareholders upon issue of shares, on the understanding that this authority is limited to 33% of NV’s issued ordinary share capital and to disapplypre-emption rights to 5% of NV’s issued share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at NV’s 2018 AGM the NV Board was designated as the corporate body authorised to purchase (i) ordinary shares with a maximum of 10% of the issued share capital as well as (ii) any and all 6% and 7% cumulative preference shares.
These authorities expire on the earlier of the conclusion of the 2019 NV AGM or the close of business on 30 June 2019 (the last date by which NV must hold an AGM in 2019). Such authorities (other than with respect to the 6% and 7% cumulative preference shares) are renewed annually.
During 2018 companies within the Unilever Group purchased 4,000,000 NV ordinary shares, representing 0.23% of the issued ordinary share capital, for€183,380,649. These purchases were made to facilitate grants made in connection with Unilever’s employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, NV conducted a share buyback programme during 2018 with an aggregate market value of approximately€3 billion bought back in the form of 62,202,168 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
Following a public offer and a subsequent squeeze out procedure, Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired all 6% cumulative preference shares and 7% cumulative preference shares. Unilever N.V. purchased these 6% cumulative preference shares and 7% cumulative preference shares on 2 October 2018. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018, as described within the Share Capital section above.
Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisions within the NV Articles of Association containing the rules for appointing NV Directors cannot be changed without the permission of the holders of the 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 OFFICE
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) is a trust office with a board independent of Unilever. As part of its corporate objects, the Trust Office issues depositary receipts in exchange for the NV ordinary shares. These depositary receipts are listed on Euronext Amsterdam, as are the NV ordinary shares themselves
Holders of depositary receipts can under all circumstances exchange their depositary receipts for 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 2018 were 1,268,051,254 NV ordinary shares (73.95%).
At the 2018 NV AGM, the Trust Office represented 36.95% 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.
 | www.administratiekantoor-unilever.nl/eng/home |
| 38 | Governance Report | Annual Report on Form 20-F 2018 |
PLC SHARES
SHARE CAPITAL
PLC’s issued share capital on 31 December 2018 was made up of:
| • | £36,934,840 split into 1,187,191,284 ordinary shares of 31⁄9p each; and |
LISTINGS
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.
| * | One American Depository Receipt represents one PLC ordinary share with a nominal value of 31⁄9p. |
VOTING RIGHTS
PLC shareholders can cast one vote for each 31⁄9p nominal capital they hold and can vote in person or by proxy. The voting rights attached to PLC’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,187,191,284 ordinary shares | 1,187,191,284 | 99.73 | ||||||
£100,000 deferred stock |
| 3,214,285 |
|
| 0.27 |
| ||
As at 31 December 2018:
| (a) | 18,660,634 shares were held by PLC in treasury and 5,645,392 shares were held by NV group companies. These shares and the deferred stock are not voted on. |
SHARE ISSUES AND PURCHASE OF SHARES
At the 2018 PLC AGM held on 2 May 2018 the PLC Directors were authorised to issue new shares, up to a maximum of £12,755,555 nominal value (which at the time represented approximately 33% of PLC’s issued ordinary share capital) and to disapplypre-emption rights up to approximately 5% of PLC’s issued ordinary share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at PLC’s 2018 AGM the PLC Board was authorised to make market purchases of its ordinary shares, up to a maximum of just under 10% of PLC’s issued ordinary share capital and within the limits prescribed in the resolution until the earlier of the conclusion of PLC’s 2019 AGM and 30 June 2019. These authorities are renewed annually and authority will be sought at PLC’s 2019 AGM.
During 2018 companies within the Unilever Group purchased 2,222,000 PLC ordinary shares, representing 0.19% of the issued share capital, for £87,978,671. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, PLC conducted a share buyback programme during 2018 with an aggregate market value of approximately £3 billion bought back in the form of 63,236,433 PLC ordinary shares.
On 31 July 2018, PLC cancelled 110,493,623 PLC ordinary shares of 31⁄9p each held in treasury, representing 8.43% of the issued share capital. On 19 September 2018, PLC cancelled a further 12,471,454 PLC ordinary shares of 31⁄9p each held in treasury, representing 1.04% of the issued share capital.
PLC DEFERRED STOCK
To support unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the rules for appointing PLC Directors. 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.
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF NV
As far as Unilever is aware, the only holder of more than 3% of, or 3% of voting rights attributable to, NV’s share capital (‘Disclosable Interests’) on 31 December 2018 (apart from the Foundation Unilever N.V. Trust Office, see page 38) is BlackRock, Inc. (BlackRock) as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 66,947,018 | 3.90 | |||||||
BlackRock notified the AFM that its holding changed to 4.02% on
19 February 2019. Between 1 January 2016 and 21 February 2019, BlackRock, NN Group N.V. (NN), ASR Nederland N.V. (ASR) and UCHN, see page 38, have held more than 3% in the share capital of NV.
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 on 31 December 2018 (apart from shares held in treasury by PLC, see page 39), are BlackRock and the Leverhulme Trust as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 77,176,319 | 6.60 | |||||||
The Leverhulme Trust | ordinary shares | 46,931,182 | 4.02 | |||||||
As far as Unilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 2019 and 21 February 2019 (the latest practicable date for inclusion in this report). Between 1 January 2016 and 21 February 2019, (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.
STAKEHOLDER ENGAGEMENT
We value open and effective communication with our stakeholders. The primary responsibility for stakeholder engagement, which is generally related to the operations of the business, rests with our Executive Directors.Non-Executive Directors also actively engage with stakeholders as part of their oversight duties and responsibilities that have not been delegated to the Executive Directors.
SHAREHOLDERS
The CFO has lead responsibility for shareholder engagement, with the active involvement of the CEO and supported by the Investor Relations department.
The Executive Directors’ investor relations programme continued in 2018 with meetings held with institutional shareholders in major cities globally. The Executive Directors and members of the Investor Relations team also meet a large number of investors at the industry conferences they attend. In 2018 industry conferences attended by Unilever representatives included events in London, Paris, Stockholm, Boston and New York.
Our annual investor seminar in December also allowed investors to meet the Chairman, CEO,CEO-designate, CFO and other members of senior leadersmanagement. The event was held at the offices of Hindustan Unilever in recent years,Mumbai and focused on Unilever’s emerging markets expertise as well as the digital transformation of the business.
In 2018, as part of the strategic review of options to accelerate sustainable value creation and our proposal to simplify the Unilever corporate structure, the Chairman met and spoke with global investors during the year. The Chair of the Compensation Committee also extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
| Annual Report on Form 20-F 2018 | Governance Report | 39 |
CORPORATE GOVERNANCECONTINUED
On 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. Private shareholders are encouraged to give feedback via shareholder.services@unilever.com. Our shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/Vice-Chairman, 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.
OTHERS
Our Executive Directors andNon-Executive Directors also engage with a wide-ranging group of stakeholders during specific Unilever events. For example, we are giving allannually organise one or more Board Relationship meetings offering our people anDirectors the opportunity to discover their unique purpose,directly meet our key customers, suppliers, agencies, NGOs, trade associations and advisers. In 2018, such meetings were held in the Netherlands and the UK.
EMPLOYEES
In order to allow ourNon-Executive Directors to gainfirst-hand experience of our operations and to engage in a broader context, we organise one or more site visits annually. During these site visits,Non-Executive Directors are informed about local market conditions and operations as well as relevant local matters. Typically, the programme allowsNon-Executive to meet management and young talent at these sites. In 2018, such site visits were held in China, Germany, the Netherlands and the US. In terms of engaging with pilotsemployees, ourNon-Executive Directors actively participate in fiveour management development programme sharing knowledge and insight on a mutual basis.
 | www.unilever.com/investor-relations/ |
GENERAL 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, 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 2018 AGMs were held in Rotterdam and London in May and the topics raised by shareholders included:e-commerce, mergers & acquisitions, sustainability, Simplification, remuneration, total shareholder return, Brexit and 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. 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 2019 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2019.
REQUIRED 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 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.
| 40 | Governance Report | Annual Report on Form 20-F 2018 |
CORPORATE GOVERNANCE COMPLIANCE
GENERAL
We conduct our operations in accordance with internationally accepted principles of good governance and best practice, while ensuring compliance with the corporate governance requirements applicable in the countries in which we operate. Unilever is subject to encourage better performancecorporate governance requirements (legislation, codes and/or standards) in the Netherlands, the UK and well-being.the US and in this section we report on our compliance against these.
“Four Acres”,MATERIAL CONTRACTS
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 36, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
In 2018, NV complied 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 in the General Meetings section above and the best practice provision set out below. The Dutch Code is available on the Monitoring Committee Corporate Governance Code’s website.
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 leadership development centrespolicy 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.
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 paragraph 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 critical contributionstatement 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 KINGDOM
In 2018, 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. The UK Code is available on the Financial Reporting Council’s (FRC) website.
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 performance. Theyreporting’ (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: Information on GHG emissions can be found on page 35.
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 discussing 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.
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/ | |
| Annual Report on Form 20-F 2018 | Governance Report | 41 |
CORPORATE GOVERNANCECONTINUED
THE 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 43 to 45. 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 2018 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 2018 were 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 156.
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.
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 42 | Governance Report | Annual Report on Form 20-F 2018 |
COMMITTEE MEMBERS AND ATTENDANCE | ||
| ATTENDANCE | ||
John RishtonChair | 8/8 | |
Nils Andersen | 8/8 | |
Judith Hartmann | 8/8 | |
This table shows the membership of the Committee together with their attendance at meetings during 2018. 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. | ||
HIGHLIGHTS OF 2018 |
• Annual Report and Accounts • Tax regulations, provisions and disclosure • Information security, including Cyber, and IT resilience • Supply Chain flexibility and continuity of supply • Accounting for significant Mergers and Acquisitions • Acquisition Review • Spreads Disposal • IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’ |
PRIORITIES FOR 2019 |
• Tax regulations, provisions and disclosure • Information Security, including Cyber, and IT resilience • IFRS 16 ‘Leases’ • Accounting for significant Mergers and Acquisitions |
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 and the other members are Nils Andersen and Judith Hartmann. 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.
ROLE 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:
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 2018, a session was held with Unilever Management on the acquisition of the Dollar Shave Club, which included a briefing on the acquisition case, recent performance, and key learnings that might be relevant for future acquisitions. In addition, John Rishton visited the Indian MCO in Mumbai, where the developments of routes to market, controls automation and centralisation were reviewed and discussed in detail. Mr Rishton also visited the Indian finance and IT hub in Bangalore where progress being made on monitoring systems of potential cyber threat and access controls were reviewed.
HOW THE COMMITTEE HAS DISCHARGED ITS RESPONSIBILITIES
During the year, the Committee’s principal activities were as follows:
FINANCIAL 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 2018. These reviews incorporated the accounting policies and significant judgements and estimates underpinning the financial statements as disclosed within note 1 on pages 79 to 82. Particular attention was paid to the following significant issues in relation to the financial statements:
| Annual Report on Form 20-F 2018 | Governance Report | 43 |
REPORT OF THE AUDIT COMMITTEECONTINUED
The external auditors have agreed the list of significant issues discussed by the Audit Committee. In addition to these risks KPMG, as required by auditing standards, also consider the risk of management override of controls. Nothing has come to either our attention or the attention of KPMG to suggest any material suspected or actual fraud relating to management override of controls.
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 and further information can be found on pages 67 to 74. The Committee was satisfied that there are relevant accounting policies in place in relation to these significant issues and management have correctly applied these policies.
At the request of the Boards the Committee undertook to:
At the request of the Boards the Committee also considered whether the Unilever Annual Report and Accounts 2018 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 2018 is fair, balanced and understandable.
RISK 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 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, the Committee reviewed the annual financial plan and Unilever’s dividend policy and dividend proposals.
During 2018 the Committee 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
The Committee reviewed Corporate Audit’s audit plan for the year and agreed its budget and resource requirements. It reviewed interim andyear-end summary reports and management’s response. The Committee engaged an independent third party to perform an effectiveness review of the function. The review concluded that the function is compliant with the IIA (Chartered Institute of Internal Auditors) Standards in all material aspects. The Committee also carried out an evaluation of the performance of the internal audit function and was satisfied with the effectiveness of the function. The Committee met independently with the Chief Auditor during the year and discussed the results of the audits performed during the year.
AUDIT OF THE ANNUAL 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 their 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 AUDITORS
KPMG have been the Group’s auditors since 2014 and shareholders approved theirre-appointment as the Group’s external auditors at the 2018 AGMs. On the recommendation of the Committee, the Directors will be proposing there-appointment of KPMG at the AGMs in May 2019.
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 will rotate off the assignment after completion of the 2018year-end financial statements. One of the new partners already has experience of the Unilever global audit, and the other partner underwent an induction programme through much of thisyear-end to ensure a smooth transition. KPMG has issued a formal letter to the Committee outlining the general procedures to safeguard independence and objectivity, disclosing the relationship with the Company and confirming their 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.
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:
| 44 | Governance Report | Annual Report on Form 20-F 2018 |
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, external developments and best practice. 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 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.
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 accounts was performed in 2013.
EVALUATION OF THE AUDIT COMMITTEE
As part of the internal Board evaluation carried out in 2018, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2018. 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
| Annual Report on Form 20-F 2018 | Governance Report | 45 |
RESPONSIBILITY COMMITTEE
COMMITTEE MEMBERS AND ATTENDANCE | ||
| ATTENDANCE | ||
Strive Masiyiwa(Member since April 2017)Chair | 4/4 | |
Youngme Moon | 4/4 | |
Feike Sijbesma | 3/4 | |
This table shows the membership of the Committee together with their attendance at meetings during 2018. 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. | ||
HIGHLIGHTS OF 2018 |
• Competition and anti-bribery compliance • Third-party compliance • Product quality and safety • Unilever Sustainable Living Plan (USLP) |
PRIORITIES FOR 2019 |
• Compliance with Unilever policies on fair competition and anti-bribery and requirements for third parties • Product quality and safety • Unilever Sustainable Living Plan (USLP) including plastic packaging |
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 Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. Therefore a central 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.
The Committee’s discussions are informed by the experience of the senior leaders 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. This enables the Boards to draw on a well-rounded view of issues.
During 2018 the Committee reviewed its terms of reference and 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 its remit to review risk management and for overseeing the independent assurance programme for the USLP.
The Committee’s terms of reference are set outwww.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 threeNon-Executive Directors: Strive Masiyiwa (Chair), Feike Sijbesma and Youngme Moon. The Chief Marketing & Communications Officer and the Chief Sustainability Officer attend the Committee’s meetings. The Chief Business Integrity Officer also attends to present Unilever’s company report that covers cases under Unilever’s Code of Business Principles (the Code) as well as updates on third-party compliance, product quality and safety.
MEETINGS
Meetings are held quarterly and ad hoc as required – four were held in 2018. The Committee Chairman is responsible for reporting the findings from meeting to the Boards, thus ensuring that the Boards can fulfil their oversight responsibilities.
Following the Committee’s terms of reference and Unilever’s principal risks and priorities, the Committee’s agenda covers the Code and third-party compliance, alongside litigation, occupational and product safety, the USLP and corporate reputation as well as a range of strategic and current issues. In addition to the areas listed below, in 2018 the Committee also reviewed topics such as media communications, the process for integrating business acquisitions and progress on alternatives to animal testing.
CODE OF BUSINESS 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 and is identified as an ethical and 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, the Corporate Responsibility Committee is responsible for 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 to any trends arising from these investigations.
The Chief Legal Officer and Group Secretary reports 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. The Committee studied how compliance was achieved during 2018. For further information please see notes 19 and 20 to the consolidated financial statements.
As another of its other priorities in 2018, the Committee also scrutinised the mechanisms for anti-bribery compliance. The primary mechanism is to understand the profiles of the markets Unilever operates in and to ensure that there are robust internal and third-party compliance programmes in place. These are complemented by training for all employees in tandem with advanced capacity building for those in the Business Integrity and Legal functions.
PRINCIPLES AND STANDARDS FOR THIRD PARTIES
The Committee retained its focus on third-party compliance in 2018. Extending Unilever’s values to third parties remains a priority, not only to generate continued responsible growth and a positive social impact on the importanceindustry, but to counter the significant risk thatnon-compliance by third parties can pose, particularly in the context of purposeincreasing regulation around the world.
The Committee tracks compliance with impact. Our developmentUnilever’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, openness and respect for universal human rights and core labour principles. Sourcing 100% of leadersUnilever’s procurement spend in line with the RSP is also a target within the USLP.
The policies enable Unilever to evaluate risk and provide the right measures to address the diversity of market conditions in which it operates and the range of third parties it works with. The Committee was briefed on progress. For the RSP, this detailed the number of suppliers making a positive commitment to the policy, greater alignment on industry standards via the process of mutual recognition and a substantial increase in site audits and resulting corrective action plans. Enhanced anti-bribery and corruption screening was also put in place. The training and enhancements developed for the connected world has never been more focused,RBPP include new IT tools launched in over 180 countries, simpler assessment processes, enhanced due diligence and more than 1,600 executives have attended leadership development programmes in 2016.risk mitigation plans.
| 46 | Governance Report | Annual Report on Form 20-F 2018 |
SAFETYHighlights for the year ended 31 December
We continue
| 2018 | 2017 | % change | ||||||||||
Turnover (€ million)
|
| 50,982
|
|
| 53,715
|
|
| (5.1
| )
| |||
Operating profit (€ million)
|
| 12,535
|
|
| 8,857
|
|
| 41.5
|
| |||
Underlying operating profit (€ million)*
|
| 9,359
|
|
| 9,400
|
|
| (0.4
| )
| |||
Profit before tax (€ million)
|
| 12,383
|
|
| 8,153
|
|
| 51.9
|
| |||
Net profit (€ million)
|
| 9,808
|
|
| 6,486
|
|
| 51.2
|
| |||
Diluted earnings per share (€)
|
| 3.48
|
|
| 2.15
|
|
| 62.0
|
| |||
Underlying earnings per share (€)*
|
| 2.36
|
|
| 2.24
|
|
| 5.2
|
| |||
Net finance costs were€481 million in 2018 compared with€877 million in 2017, which included aone-off cost of€382 million for the buyback of the Unilever NV preference shares. The cost of financing net borrowings was€57 million higher than 2017. The increase was primarily driven by an increase in net debt which was partially offset by lower interest rates and a prior yearone-off in Brazil relating to focusthe interest element of an indirect tax amnesty programme. The average interest rate on our Vision Zero strategy: Zero Fatalities; Zero Injuries; Zero Motor Vehicle Accidents; Zero Process Incidents; and Zero Tolerancenet debt reduced to 2.2% from 2.7% in 2017. The pensions financing charge was€25 million, down from€96 million in 2017 reflecting a lower pension deficit at the beginning of Unsafe Behaviour and Practices. Vision Zero is designed to ensure we meet our USLP commitment to reduce workplace injuries and accidents.
In 2015 we put new measures in place to create an interdependent safety culture. In 2016 we pressed ahead with adding capability, building professionalism and focusing on leadership responsibility to implement our safety culture.2018.
A prioritymonetary gain of€122 million was recorded following adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1) from 1 July 2018.
The effective tax rate was 21.1% compared with 20.8% in the prior year. In both years the rate was low relative to longer term norms, due to the significant impact on tax of the disposals of our spreads businesses in 2018 and US tax reform in 2017.
Net profit from joint ventures and associates was up 19% at€185 million, with the increase coming mainly from a gain on disposal of the spreads business of the Portuguese joint venture. Other income fromnon-current investments was€22 million versus€18 million in the prior year.
Diluted earnings per share were up 62.0% at€3.48. The increase was mainly driven by the€4,331 million gain on disposal for the spreads businesses, improvement in operating margin and the impact of the share buyback programmes.
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 67 to 74.
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 79 to 82 and are consistent with those applied in 2017.
| * | 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 23 to 26. |
| ^ | Wherever referenced in this report, underlying sales growth (USG) and underlying price growth (UPG) do not include price growth in Venezuela for the whole of 2018 and in Argentina from July 2018. USG and UPG for 2017 do not include Q4 2017 price growth in Venezuela. See pages 23 and 24 onnon-GAAP measures for further details. |
| 20 | Strategic Report | Annual Report on Form 20-F 2018 |
The Group has beenrevised its operating segments to ensure safetyalign with the new structure under which the business is managed. Operating segment information is now provided based on three product areas: Beauty & Personal Care, Foods & Refreshment and Home Care.
BEAUTY & PERSONAL CARE
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,624 | 20,697 | (0.3 | ) | ||||||||
| Operating profit (€ million) | 4,130 | 4,103 | 0.7 | |||||||||
| Underlying operating profit (€ million) | 4,508 | 4,375 | 3.0 | |||||||||
| Operating margin (%) | 20.0 | 19.8 | 0.2 | |||||||||
| Underlying operating margin (%) | 21.9 | 21.1 | 0.8 | |||||||||
| Underlying sales growth (%) | 3.1 | 2.9 | ||||||||||
| Underlying volume growth (%) | 2.5 | 1.4 | ||||||||||
| Underlying price growth (%) | 0.6 | 1.5 | ||||||||||
KEY DEVELOPMENTS
FOODS & REFRESHMENT
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,227 | 22,444 | (9.9 | ) | ||||||||
| Operating profit (€ million) | 7,245 | 3,616 | 100.4 | |||||||||
| Underlying operating profit (€ million) | 3,534 | 3,737 | (5.4 | ) | ||||||||
| Operating margin (%) | 35.8 | 16.1 | 19.7 | |||||||||
| Underlying operating margin (%) | 17.5 | 16.7 | 0.8 | |||||||||
| Underlying sales growth (%) | 2.0 | 2.7 | ||||||||||
| Underlying volume growth (%) | 1.3 | (0.2 | ) | |||||||||
| Underlying price growth (%) | 0.7 | 3.0 | ||||||||||
KEY DEVELOPMENTS
| • | Turnover declined by 9.9% including a negative currency impact of 5.6%. Acquisitions and disposals had an unfavourable impact of 6.4% reflecting the disposal of the spreads business. Underlying sales growth was 2.0% coming from volume growth of 1.3% and price growth of 0.7%. Ice cream had another strong year helped by innovations on our premium brands which included a new Magnum praline variant and anon-dairy range of Ben & Jerrys. The launch of Kinder® ice cream and good weather helped to drive strong ice cream growth in Europe. Sales in tea grew modestly: emerging markets growth was driven by good performance on core brands like Brooke Bond in India whilst in developed markets challenges in black tea offset good growth from Pukka and the new organic Lipton |
range. In savoury, Knorr was helped by good performance of cooking products in emerging markets and more organic and natural innovations such as a new ‘soup in glass’ range. In dressings, campaigns centred around Hellmann’s purpose to fight food waste helped to increase brand equity, but sales were held back by promotional intensity particularly in the US. Our actions to transform the portfolio are working: strong innovations including Knorr rice and pasta pots as well as our new brands Red Red, PrepCo and Mãe Terra helped us build scale in the fast growing snacking segment. |
Our processdate of its disposal on 2 July 2018. Underlying operating margin improvement reflects strong gross margin improvement and construction safety director, appointed in mid-2015, has delivered process safety training and certification programmes that are important career development qualifications for the supply chain. Additionally,lower overheads despite an enhanced set of process safety global standards will be launched in 2017. Process safety oversight compliance audits have been extended to all high and medium-hazard sites overseen and facilitated by the global Process Safety Leadership Team.
We continue to implement our mandatory Motor On Mobile Off policy through new training for joiners and refreshers for existing workers at risk from using mobile phones when driving. We also continue to integrate our BeSafE programme into our World Class Manufacturing (WCM) methodology.
Unilever reports safety data from October to September. Our Total Recordable Frequency Rate (TRFR) from 1 October 2015 to 30 September 2016 went from 1.12 accidents per 1 million hours worked to 1.01, as a result of the continuous focus on safety in WCM methodology and the BeSafE programme in our non-manufacturing sites.
HUMAN RIGHTS
Respecting human rights is enshrined in the USLP. To comprehensively implement and embed our human rights approach we have now integrated our human rights function into our supply chain organisation. The resulting team has been renamed Integrated Social Sustainability, reflecting our commitment to creating a positive socialadverse impact as part of Unilever’s Vision and highlighting the social dimension of the sustainability agenda.
Under the Global VP Integrated Social Sustainability, this team now has responsibility for all areas of Supply Chain Social Sustainability including accountability, compliance and audit which have moved from the procurement function. The team continues to lead on the global human rights agenda for Unilever.spreads disposal.
HOME CARE
We continue to work to strengthen certification, particularly relating to working conditions. In 2013 we gave Oxfam access to our supply chain in order to assess labour rights
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 10,131 | 10,574 | (4.2 | ) | ||||||||
| Operating profit (€ million) | 1,160 | 1,138 | 1.9 | |||||||||
| Underlying operating profit (€ million) | 1,317 | 1,288 | 2.3 | |||||||||
| Operating margin (%) | 11.5 | 10.8 | 0.7 | |||||||||
| Underlying operating margin (%) | 13.0 | 12.2 | 0.8 | |||||||||
| Underlying sales growth (%) | 4.2 | 4.4 | ||||||||||
| Underlying volume growth (%) | 2.3 | 2.1 | ||||||||||
| Underlying price growth (%) | 1.9 | 2.3 | ||||||||||
KEY DEVELOPMENTS
During 2016 we rolled out our new Framework for Fair Compensation to all our Country HR Leadership teams. The Framework outlines how the existing elements of our compensation packages deliver fair compensation to our employees. In 2016 we announced that we want to achieve full Living Wage compliance for all our employees by 2020. The Framework also reinforces our commitment to no discrimination between genders on pay or career development. We will build on our existing equal pay practices through gender pay gap analysis to identify future initiatives in support of this.
DIVERSITY AND INCLUSION
On gender equality we continue to make progress, although work remains. By the end of 2016, 46% of our total management were women, up from 45% in 2015. At the most senior levels, however, the ratios are not as high. Among the ‘Top 100’ executives, 22 (22%) were women compared with 23% in 2015. If you include employees who are statutory directors of the corporate entities whose financial information is included in the Group’s 2016 consolidated accounts in this Annual Reportbrand and Accounts, the number increases to 410 males and 157 (28%) females. 43% (six out of 14) of the Board is female, compared with 50% (six out of 12) in 2015.
Of our total workforce of 168,832, 112,618 (67%) were male and 56,214 (33%) were female at the end of 2016,
| Annual Report on Form 20-F | Strategic Report | 21 |
FINANCIAL REVIEWCONTINUED |
CASH FLOW
UNILEVER’S STRATEGY FOR LONG-TERM VALUE CREATION HAS ENSURED ANOTHER YEAR OF GROWTH THAT IS CONSISTENT, COMPETITIVE, PROFITABLE AND RESPONSIBLE – SUPPORTING CONTINUED GROWTH IN THE DIVIDEND FOR SHAREHOLDERS.
2016 broughtCash flow from operating activities was€9.0 billion, a decline of€0.5 billion compared to the foreprior year. Free cash flow was€5.0 billion, a reduction of€0.4 billion on the volatile, disruptiveprior year. The reductions reflected the impact of currency devaluation and complex forces at play that affecthigher working capital, including a€0.4 billion increase arising from the disposal of spreads.
| € million 2018 | € million 2017 | |||||||
| Operating profit | 12,535 | 8,857 | ||||||
Depreciation, amortisation and impairment |
| 1,747 |
|
| 1,538 |
| ||
Changes in working capital |
| (793 | ) |
| (68 | ) | ||
Pensions and similar obligations less payments |
| (128 | ) |
| (904 | ) | ||
Provisions less payments |
| 55 |
|
| 200 |
| ||
Elimination of (profits)/losses on disposals |
| (4,299 | ) |
| (298 | ) | ||
Non-cash charge for share-based compensation |
| 196 |
|
| 284 |
| ||
Other adjustments |
| (266 | ) |
| (153 | ) | ||
Cash flow from operating activities |
| 9,047 |
|
| 9,456 |
| ||
Income tax paid |
| (2,294 | ) |
| (2,164 | ) | ||
Net capital expenditure |
| (1,424 | ) |
| (1,621 | ) | ||
Net interest and preference dividends paid |
| (367 | ) |
| (316 | ) | ||
Free cash flow* |
| 4,962 |
|
| 5,355 |
| ||
Net cash flow (used in)/from investing activities |
| 4,644 |
|
| (5,879 | ) | ||
Net cash flow (used in)/from financing activities |
| (11,548 | ) |
| (1,433 | ) | ||
| * | 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 23 to 26. |
Net inflow from investing activities was€4.6 billion, an increase of€10.5 billion compared to the prior year. The increase reflects proceeds of€7.2 billion from the disposal of spreads and higher spend on acquisitions during the prior year.
The net outflow from financing activities was€11.5 billion, compared with€1.4 billion in the prior year. In 2018 there were repayments of financial liabilities of€6.6 billion compared with€2.6 billion in 2017; and an outflow from changes in short-term borrowings of€4.0 billion, compared with an inflow of€2.7 billion in 2017. The cash outflow in respect of the repurchase of shares in 2018 was€6.0 billion, compared with€5.0 billion in the prior year.
BALANCE SHEET
At 31 December 2018, Unilever’s business. Slower global economic growth and intensifying geopolitical instability provided a challenging backdrop to our operations while competitive pressures continued to intensify globally and locally.
Despite this uncertainty our priorities remain unchanged: to deliver consistent growth ahead of our markets, steady margin improvement, and strong free cash flow.
In delivering these priorities we are led by our Purpose – to make sustainable living commonplace – which inspires our Vision to accelerate growth in our business, while reducing our environmental footprint and increasing our positive social impact. To achieve these ambitions, we have placed the USLPcombined market capitalisation was€121.8 billion compared with€127.9 billion at the heartend of our business model2017.
Goodwill and weintangible assets increased by€1.1 billion mainly coming from the acquisition of Quala and restatement of goodwill in relation to adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1 and note 9). The increase was partially offset by impairment of Blueair. All material goodwill and indefinite-life intangible assets have based our strategybeen tested for long-term growth on it.
Thanksimpairment with no charge recognised during the year other than for Blueair. Othernon-current assets decreased by€0.4 billion mainly due to initiatives such as the Coalition for Inclusive Capitalism, which Unilever is part of, the importance of sustainabilitya reduction in driving returns has become a mainstream idea in capital markets, reinforced by research which also shows the increasing relevance of sustainability to consumers.
Sustainability is also integrated in our financial decision making – we have set an internal cost of carbon, so that greenhouse gas emissions are factored into capital projects.
PERFORMANCE
Despite volatility in the operating and financial environment, we delivered another year of steady returns for shareholders. Over the last 5 years our dividends have increased 7% per annum and our share price is up by around 50% for both PLC and NV shares.
This reinforces our medium-term performance over the past five years 2012-2016 which has witnessed underlying sales growth of 4.4% per year, which was ahead of our markets, and core operating margin up, on average 0.4 percentage points per year. Over the same period turnover growth averaged 2.7% per year and operating margin was up 0.2 percentage points per year; Core earnings per share grew 7% per year on average. Constant core EPS, which is at constant exchange rates, grew by an average of 10% per year. Average working capital as a percentage of turnover improved by 1 percentage point per year and we have delivered cumulative free cash flow of€21 billion over the 5 years. Return on invested capital has remained in the range of 18-19%.
Reliable long-term returns for shareholders result from our focus on four categories with distinct but complementary priorities that fulfil specific objectives across our portfolio of brands. The largest category is Personal Care, accounting for 38% of turnover in 2016 which has a strategy of growing its core business while extending into premium ranges. Foods, which accounts for 24% of turnover, has the objective of accelerating growth while preserving the value of its strong cash flows. Home Care, 19% of turnover, is improving profitability and scaling its household cleaning business while Refreshment, 19%, is tasked with growing ice cream Return on Invested Capital and accelerating top line growthpension assets.
| € million 2018 | € million 2017 | |||||||
| Goodwill and intangible assets | 29,493 | 28,401 | ||||||
Othernon-current assets |
| 14,482 |
|
| 14,901 |
| ||
Current assets |
| 15,481 |
|
| 16,983 |
| ||
Total assets |
| 59,456 |
|
| 60,285 |
| ||
Current liabilities |
| 19,772 |
|
| 23,177 |
| ||
Non-current liabilities |
| 27,392 |
|
| 22,721 |
| ||
Total liabilities |
| 47,164 |
|
| 45,898 |
| ||
Shareholders’ equity |
| 11,572 |
|
| 13,629 |
| ||
Non-controlling interest |
| 720 |
|
| 758 |
| ||
Total equity |
| 12,292 |
|
| 14,387 |
| ||
Total liabilities and equity |
| 59,456 |
|
| 60,285 |
| ||
Current assets decreased from€17.0 billion to€15.5 billion mainly reflecting the reduction in tea.
ACTIVE PORTFOLIO MANAGEMENT
Our brand portfolio is not set in stone and 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€2.8 billion of turnover, mainly in the lower growth Foods businesses. During that same period we have acquired€4 billion of turnover
mainly in higher-growth Personal Care brands, which has helped make Personal Care our biggest category.
Our categories are supported by innovation that targets high growth, on-trend segments, which are critical to staying aheadheld for disposals as a result of the competition, and our research and development capabilities which are embedded within each category. We are focusedcompletion of the spreads transactions on faster innovation so ideas reach market more quickly. We are aiming to make global roll-outs 30% faster and up to 50% faster for local innovations, while we are also simplifying innovation processes to have 30% fewer touch-points in decision-making.
Marketing drives consumer demand-led sales and requires content that is ever more personal and specific to consumers, served to them at the most appropriate time and place to trigger purchase intent and sales. Digital technology enables such targeted approaches and also adds more sophisticated data and insight into consumers’ habits and interests, which are crucial as e-commerce and direct-to-consumer channels become more significant.
Our broader customer development programmes further ensure our presence in the appropriate channels from supermarket chains to websites driven by our Perfect Stores programme2 July 2018. Current liabilities were€19.8 billion, a decrease of brilliant execution.
DEVELOPMENTS IN 2016
We have taken significant steps this year to support and enhance our growth model by responding€3.4 billion compared to the rapidly changing world inprior year. The decrease was due to repayment of short-term liabilities which we operate. The action we have taken means we can maintain our competitive advantage inwere replaced by long term borrowings.Non-current liabilities were€27.4 billion, an increase of€4.7 billion on the marketplace and maintain our track record for long-term delivery of steady and consistent shareholder returns.
prior year. During the year we continued our policythe Group issued bonds worth over€6.0 billion and repaid notes of investmentabout€1.0 billion. See note 15C for analysis of bonds and other loans.
The table below shows the movement in net pension liability during the year. The increase from€0.6 billion at the beginning of the year to€0.9 billion at the end of 2018 was primarily due to reduced pension assets, driven by adverse equity markets towards the end of 2018.
| € million 2018 | ||||
| 1 January | (561 | ) | ||
Current service cost | (220 | ) | ||
Employee contributions | 17 | |||
Actual return on plan assets (excluding interest) | (1,108 | ) | ||
Net interest cost | (25 | ) | ||
Actuarial gain | 671 | |||
Employer contributions | 383 | |||
Currency retranslation | 26 | |||
Other movements(a) | (57 | ) | ||
31 December | (874 | ) | ||
| (a) | Other movements relate to special termination benefits, past service costs including losses/(gains) on curtailment, settlements and other immaterial movements. For more details see note 4B on pages 87 to 92. |
FINANCE AND LIQUIDITY
Approximately€0.8 billion (or 26%) of the Group’s cash and cash equivalents are held in the business, including bolt-on acquisitions, rather than share buy backs or special dividends. Acquisitions playparent and central finance companies, for 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 110 to 115.
The remaining€2.4 billion (74%) of the Group’s cash and cash equivalents are held in foreign subsidiaries which repatriate distributable reserves on a key roleregular basis. For most countries, this is done through dividends free of tax. This balance includes€154 million (2017:€206 million, 2016:€240 million) of cash that is held in our quest for innovation alongside those breakthroughs we make ourselves through research and development. The brands we acquire take us into new growth segments but can also bring innovative business models that we continue to operate separately from the core where appropriate.
In Personal Care we have acquired the male grooming online subscription business, Dollar Shave Club. This is a direct-to-consumer modelfew 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 preserve its entrepreneurial approach, taking valuable lessons forgenerally be invested or held in the rest of our portfolio. We also announced an agreementrelevant country and, given the other capital resources available to acquire Living Proof in 2016, the US hair care brand which will also join our Prestige business. The deal completed on 1 February 2017.
In Home Care we acquired Seventh Generation, a Vermont-based business producing plant-based detergents and household cleaners, complementing our responsible growth goal and supplementing our own innovation efforts. We also bought Blueair,Group, does not significantly affect the Swedish air purifier business active in markets such as China and India, addressing the issue of air quality and pollution.
In Refreshment we announced an agreement to dispose of AdeS, the Latin American soy beverage business, continuing the active management of our brand portfolio.
The adoption of new flexible business models is one partability of the Connected 4 Growth transformation programme which will make us more agile with lower costs. This is a series of self-help changes that will make Group to meet its cash obligations.
We closely monitor all our exposures and counter-party limits.
Unilever fithas committed credit facilities in place for the future, maximising our global scale and expertise while making us quicker and more agile to respond locally where local competition is becoming more sophisticated and successful at growing market share. We are simplifying our organisation to empower Unilever people to be more experimental.
At the same time we are rolling out Zero-Based Budgeting, which benchmarks our expenditure against peers and identifies savings to further support our business. It is a deep dive into our cost base and, with the cost saving elements of the organisational change, aims to deliver savings of€1 billion by 2018. In addition, we are continuing to take a further€1 billion per year of costs out of our supply chain to offset cost inflation, reducing the need for price increases and making our brands more competitive.general corporate purposes. The undrawn bilateral committed credit facilities in place on 31 December 2018 were $7,865 million.
| 22 | Strategic Report | Annual Report on Form 20-F |
CONTRACTUAL OBLIGATIONS AT 31 DECEMBER 2018
€ million
Total | € million 1 year | € million | € million | € million | ||||||||||||||||
Long-term debt
|
| 24,428
|
|
| 2,950
|
|
| 4,533
|
|
| 4,683
|
|
| 12,262
|
| |||||
Interest on financial liabilities
|
| 3,723
|
|
| 467
|
|
| 800
|
|
| 628
|
|
| 1,828
|
| |||||
Operating lease obligations
|
| 2,464
|
|
| 481
|
|
| 758
|
|
| 501
|
|
| 724
|
| |||||
Purchase obligations(a)
|
| 520
|
|
| 421
|
|
| 94
|
|
| 1
|
|
| 4
|
| |||||
Finance leases
|
| 187
|
|
| 20
|
|
| 37
|
|
| 34
|
|
| 96
|
| |||||
Other long-term commitments
|
| 1,390
|
|
| 678
|
|
| 590
|
|
| 95
|
|
| 27
|
| |||||
Other financial liabilities
|
| 150
|
|
| 149
|
|
| 1
|
|
| –
|
|
| –
|
| |||||
Total
|
| 32,862
|
|
| 5,166
|
|
| 6,813
|
|
| 5,942
|
|
| 14,941
|
| |||||
| (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 100 and 101, note 15C on page 108 and 109, and note 20 on pages 120 to 122. 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
Included within operating profit is€21 million (2017:€20 million) paid to the external auditor, of which€16 million (2017:€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.
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 using the prior period average exchange rates into euro, except for countries where the impact of consumer price inflation rates has escalated to extreme levels. In these countries, the local currency amounts before the application of IAS 29 are translated into euros using the period closing exchange rate.
The table below shows exchange rate movements in our key markets.
Annual 2018 | Annual 2017 | |||||||
Brazilian real (€1 = BRL) | 4.282 | 3.573 | ||||||
Chinese yuan (€1 = CNY) |
| 7.807 |
|
| 7.608 |
| ||
Indian rupee (€1 = INR) |
| 80.730 |
|
| 73.258 |
| ||
Indonesia rupiah (€1 = IDR) |
| 16831 |
|
| 15011 |
| ||
Philippine peso (€ 1 = PHP) |
| 62.379 |
|
| 56.596 |
| ||
UK pound sterling (€1 = GBP) |
| 0.884 |
|
| 0.876 |
| ||
US dollar (€1 = US$) |
| 1.185 |
|
| 1.123 |
| ||
In the following sections we set out our definitions of the followingnon-GAAP measures and provide reconciliations to relevant GAAP measures:
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. 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. Also excluded is the impact of price growth from countries where the impact of consumer price inflation (CPI) rates has escalated to extreme levels.
There are two countries where we have determined extreme levels of CPI exist. The first is Venezuela where in Q4 2017 inflation rates exceeded 1,000% and management considered that the situation would persist for some time. Consequently, price growth in Venezuela has been excluded from USG since Q4 2017. The second is Argentina, which from Q3 2018 has been accounted for in accordance with IAS 29, and thus from Q3 2018 Argentina price growth is excluded from USG. The adjustment made at Group level as a result of these two exclusions was a reduction in price growth of 32.4% for the year. This treatment for both countries will be kept under regular review.
Prior to Q3 2018 USG only excluded the impact of price changes in countries where consumer price inflation has escalated to extreme levels of 1,000% or more. However, given the need to account for our Argentinian business in accordance with IAS 29, we have now also excluded price changes in countries that need to be accounted for in accordance with IAS 29. Prior to Q3 2018 there were no countries that were accounted for under IAS 29, so no restatements are necessary.
| Annual Report on Form 20-F 2018 | Strategic Report | 23 |
FINANCIAL REVIEWCONTINUED
The reconciliation of USG to changes in the GAAP measure turnover is as follows:
| TOTAL GROUP | 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (5.1 | ) |
| 1.9 |
| ||
Effect of acquisitions (%) |
| 2.0 |
|
| 1.3 |
| ||
Effect of disposals (%) |
| (3.0 | ) |
| (0.4 | ) | ||
Effect of exchange rates (%)(b) |
| (6.7 | ) |
| (2.1 | ) | ||
Underlying sales growth (%)(b) |
| 2.9 |
|
| 3.1 |
| ||
BEAUTY & PERSONAL CARE
| 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (0.3 | ) |
| 2.6 |
| ||
Effect of acquisitions (%) |
| 3.9 |
|
| 1.8 |
| ||
Effect of disposals (%) |
| – |
|
| (0.1 | ) | ||
Effect of exchange rates (%)(b) |
| (7.0 | ) |
| (1.9 | ) | ||
Underlying sales growth (%)(b) | 3.1 | 2.9 | ||||||
FOODS & REFRESHMENT
| 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (9.9 | ) |
| (0.4 | ) | ||
Effect of acquisitions (%) |
| 0.8 |
|
| 0.2 |
| ||
Effect of disposals (%) |
| (7.2 | ) |
| (0.8 | ) | ||
Effect of exchange rates (%)(b) |
| (5.6 | ) |
| (2.4 | ) | ||
Underlying sales growth (%)(b) |
| 2.0 |
|
| 2.7 |
| ||
| HOME CARE | 2018 vs 2017 | 2017 vs 2016 | ||||||
Turnover growth (%)(a) |
| (4.2 | ) |
| 5.6 |
| ||
Effect of acquisitions (%) |
| 0.5 |
|
| 3.1 |
| ||
Effect of disposals (%) |
| (0.2 | ) |
| (0.2 | ) | ||
Effect of exchange rates (%)(b) |
| (8.3 | ) |
| (1.7 | ) | ||
Underlying sales growth (%)(b) |
| 4.2 |
|
| 4.4 |
| ||
| (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) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying sales growth and an equal and opposite adjustment made in effect of exchange rate. For 2017 only Q4 price growth in Venezuela has been excluded. |
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 growth in Argentina and Venezuela as explained in USG above.
The relationship between USG, UVG and UPG is set out below:
| 2018 vs 2017 | 2017 vs 2016 | |||||||
Underlying volume growth (%) |
| 1.9 |
|
| 0.8 |
| ||
Underlying price growth (%)(a) |
| 0.9 |
|
| 2.3 |
| ||
Underlying sales growth (%) |
| 2.9 |
|
| 3.1 |
| ||
| (a) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying price in the table above and an equal and opposite adjustment made in the effect of exchange rates. For 2017 only Q4 price growth in Venezuela has been excluded. |
Refer to page 21 for the relationship between USG, UVG and UPG for each of the categories.
NON-UNDERLYING ITEMS
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 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 96 for reconciliation of net profit attributable to shareholders’ equity to underlying profit attributable to shareholders’ equity.
| 24 | Strategic Report | Annual Report on Form 20-F 2018 |
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 2018 | € million 2017 | |||||||
Operating profit
|
|
12,535
|
|
|
8,857
|
| ||
Non-underlying items within operating profit (see note 3)
|
| (3,176
| )
|
| 543
|
| ||
Underlying operating profit
|
| 9,359
|
|
| 9,400
|
| ||
Turnover
|
| 50,982
|
|
| 53,715
|
| ||
Operating margin
|
| 24.6
| %
|
| 16.5
| %
| ||
Underlying operating margin | 18.4 | % | 17.5 | % | ||||
Further details ofnon-underlying items can be found in note 3 on page 85 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. This is shown in the following table:
| € million 2018 | € million 2017 | |||||||
Taxation
|
|
2,575 |
|
|
1,667 |
| ||
Tax impact of:
| ||||||||
Non-underlying items within operating profit(a)
|
| (259
| )
|
| 77
|
| ||
Non-underlying items not in operating profit but within net profit(a)
|
| (29
| )
|
| 578
|
| ||
Taxation before tax impact ofnon-underlying | 2,287 | 2,322 | ||||||
Profit before taxation
|
| 12,383
|
|
| 8,153
|
| ||
Non-underlying items within operating profit before tax(a)
|
| (3,176
| )
|
| 543
|
| ||
Non-underlying items not in operating profit but within net profit before tax(b)
|
| (122
| )
|
| 382
|
| ||
Share of net (profit)/loss of joint ventures and associates
|
| (185
| )
|
| (155
| )
| ||
Profit before tax excludingnon-underlying items before tax and share of net profit/ (loss) of joint ventures and associates | 8,900 | 8,923 | ||||||
Underlying effective tax rate
| 25.7 | % | 26.0 | % | ||||
| (a) | Refer to note 3 for further details on these items. |
| (b) | 2018 amount excludes€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€32 million, totalnon-underlying items not in operating profit but within net profit before tax is€154 million. See note 3. |
CONSTANT 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 price inflation in Venezuela (for the whole of 2018) and Argentina (from July 2018) divided by the diluted average number of ordinary shares. This measure reflects the underlying earnings for each ordinary share of the Group in constant exchange rates.
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 2018 | € million 2017 | |||||||
Underlying profit attributable to shareholders’ equity(a)
|
|
6,365
|
|
|
6,315
|
| ||
Impact of translation from current to constant exchange rates and translational hedges
|
| 7,112
|
|
| 95
|
| ||
Impact of Venezuela and Argentina price inflation(b)
|
| (6,551
| )
|
| –
|
| ||
Constant underlying earnings attributable to shareholders’ equity
|
|
6,926
|
|
|
6,410
|
| ||
Diluted combined average number of share units (millions of units)
|
| 2,694.8
|
|
| 2,814.0
|
| ||
Constant underlying EPS (€)
|
| 2.57
|
|
| 2.28
|
| ||
| (a) | See note 7. |
| (b) | See pages 23 and 24 for further details. |
From 2018, in our reporting of growth in constant underlying EPS, we translate the prior period using an annual average exchange rate rather than monthly averages. This change has been made to align with the prior period constant exchange rate used for calculating USG. The impact of this is an increase of€0.01 per share in 2017 constant underlying EPS.
FREE CASH FLOW
Free cash flow (FCF) is defined as cash flow from operating activities, less income taxes paid, net capital expenditures and net interest payments and preference dividends paid. 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 2018 | € million 2017 | |||||||
Net profit
|
|
9,808
|
|
|
6,486
|
| ||
Taxation
|
| 2,575
|
|
| 1,667
|
| ||
Share of net profit of joint ventures/associates and other income fromnon-current investments
|
| (207
| )
|
| (173
| )
| ||
Net monetary gain arising from hyperinflationary economies
|
| (122
| )
|
| –
|
| ||
Net finance costs
|
| 481
|
|
| 877
|
| ||
Depreciation, amortisation and impairment
|
| 1,747
|
|
| 1,538
|
| ||
Changes in working capital
|
| (793
| )
|
| (68
| )
| ||
Pensions and similar obligations less payments
|
| (128
| )
|
| (904
| )
| ||
Provisions less payments
|
| 55
|
|
| 200
|
| ||
Elimination of (profits)/losses on disposals
|
| (4,299
| )
|
| (298
| )
| ||
Non-cash charge for share-based compensation
|
| 196
|
|
| 284
|
| ||
Other adjustments
|
| (266
| )
|
| (153
| )
| ||
Cash flow from operating activities
|
| 9,047
|
|
| 9,456
|
| ||
Income tax paid
|
| (2,294
| )
|
| (2,164
| )
| ||
Net capital expenditure
|
| (1,424
| )
|
| (1,621
| )
| ||
Net interest and preference dividends paid
|
| (367
| )
|
| (316
| )
| ||
Free cash flow
|
|
4,962
|
|
|
5,355
|
| ||
Net cash flow (used in)/from investing activities
|
| 4,644
|
|
| (5,879
| )
| ||
Net cash flow (used in)/from financing activities
|
| (11,548
| )
|
| (1,433
| )
| ||
| Annual Report on Form 20-F 2018 | Strategic Report | 25 |
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.
| € million | € million | € million | ||||||||||||||
| Beauty & | Foods & | Home | € million | |||||||||||||
| 2018 | Personal Care | Refreshment | Care | Total | ||||||||||||
Underlying operating profit before tax |
| 4,508 |
|
| 3,534 |
|
| 1,317 |
|
| 9,359 |
| ||||
Tax on underlying operating profit |
| (1,159 | ) |
| (908 | ) |
| (338 | ) |
| (2,405 | ) | ||||
Underlying operating profit after tax |
| 3,349 |
|
| 2,626 |
|
| 979 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,631 |
|
| 4,783 |
|
| 1,933 |
|
| 10,347 |
| ||||
Net assets held for sale |
| 1 |
|
| 25 |
|
| – |
|
| 26 |
| ||||
Inventories |
| 1,737 |
|
| 1,761 |
|
| 803 |
|
| 4,301 |
| ||||
Trade and other receivables |
| 2,319 |
|
| 3,027 |
|
| 1,139 |
|
| 6,485 |
| ||||
Trade payables and other current liabilities |
| (5,478 | ) |
| (5,984 | ) |
| (2,995 | ) |
| (14,457 | ) | ||||
Period end assets (net) |
| 2,210 |
|
| 3,612 |
|
| 880 |
|
| 6,702 |
| ||||
Average assets for the period (net) |
| 2,178 |
|
| 3,830 |
|
| 799 |
|
| 6,807 |
| ||||
Division return on assets |
| 154 | % |
| 69 | % |
| 123 | % |
| 102 | % | ||||
2017 | ||||||||||||||||
Underlying Operating Profit before tax |
| 4,375 |
|
| 3,737 |
|
| 1,288 |
|
| 9,400 |
| ||||
Tax on underlying operating profit |
| (1,139 | ) |
| (972 | ) |
| (335 | ) |
| 2,446 |
| ||||
Underlying Operating Profit after tax |
| 3,236 |
|
| 2,765 |
|
| 953 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,520 |
|
| 5,104 |
|
| 1,787 |
|
| 10,411 |
| ||||
Net assets held for sale |
| 1 |
|
| 742 |
|
| – |
|
| 743 |
| ||||
Inventories |
| 1,590 |
|
| 1,637 |
|
| 735 |
|
| 3,962 |
| ||||
Trade and other receivables |
| 2,018 |
|
| 2,172 |
|
| 1,032 |
|
| 5,222 |
| ||||
Trade payables and other current liabilities |
| (4,984 | ) |
| (5,606 | ) |
| (2,836 | ) |
| (13,426 | ) | ||||
Period end assets (net) |
| 2,145 |
|
| 4,049 |
|
| 718 |
|
| 6,912 |
| ||||
Average assets for the period (net) |
| 2,122 |
|
| 4,201 |
|
| 778 |
|
| 7,101 |
| ||||
Division return on assets |
| 152 | % |
| 66 | % |
| 122 | % |
| 98 | % | ||||
NET DEBT
Net debt is 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 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.
The reconciliation of total financial liabilities to net debt is as follows:
| € million 2018 | € million 2017 | |||||||
Total financial liabilities |
| (24,885
| )
|
| (24,430
| )
| ||
Current financial liabilities |
| (3,235 | ) |
| (7,968 | ) | ||
Non-current financial liabilities |
| (21,650 | ) |
| (16,462 | ) | ||
Cash and cash equivalents as per balance sheet |
| 3,230
|
|
| 3,317
|
| ||
Cash and cash equivalents as per cash flow statement |
| 3,090 |
|
| 3,169 |
| ||
Add bank overdrafts deducted therein |
| 140 |
|
| 167 |
| ||
Less cash and cash equivalents held for sale |
| – |
|
| (19 | ) | ||
Other current financial assets |
| 874 |
|
| 770 |
| ||
Net debt |
| (20,781 | ) |
| (20,343 | ) | ||
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 liabilities.
| € million 2018 | € million 2017 | |||||||
Underlying operating profit before tax(a) |
| 9,359 |
|
| 9,400 |
| ||
Tax on underlying operating profit(b) |
| (2,405 | ) |
| (2,446 | ) | ||
Underlying operating profit after tax |
| 6,954 |
|
| 6,954 |
| ||
Goodwill |
| 17,341 |
|
| 16,881 |
| ||
Intangible assets |
| 12,152 |
|
| 11,520 |
| ||
Property, plant and equipment |
| 10,347 |
|
| 10,411 |
| ||
Net assets held for sale |
| 108 |
|
| 3,054 |
| ||
Inventories |
| 4,301 |
|
| 3,962 |
| ||
Trade and other current receivables |
| 6,485 |
|
| 5,222 |
| ||
Trade payables and other current liabilities |
| (14,457 | ) |
| (13,426 | ) | ||
Period-end invested capital |
| 36,277 |
|
| 37,624 |
| ||
Average invested capital for the period |
| 36,951 |
|
| 36,222 |
| ||
Return on average invested capital |
| 18.8 | % |
| 19.2 | % | ||
| (a) | See reconciliation of operating profit to underlying operating profit on page 25. |
| (b) | Tax on underlying operating profit is calculated as underlying operating profit before tax multiplied by underlying effective tax rate of 25.7% (2017: 26.0%) which is shown on page 25. |
| 26 | Strategic Report | Annual Report on Form 20-F 2018 |
OUR 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 Board agenda, which is where we believe it should be.
Unilever adopts a risk profile that is aligned to our vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact. Our 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.
ORGANISATION
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. This organisational structure and distribution of accountabilities and responsibilities ensure that every country in which we operate has specific resources and processes for risk reviews 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 PRINCIPLES
Unilever’s approach to doing business is framed by our Purpose and values (see page 1). 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 underpins the Code of Business Principles and set 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.
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.
PROCESSES
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 ANDRE-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 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 43 to 45.
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 41 and 42.
| Annual Report on Form 20-F 2018 | Strategic Report | 27 |
RISKSCONTINUED
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 the Group together with the factors likely to affect the Group’s future development, performance, financial position, cash flows, liquidity position and borrowing facilities as described on pages 1 to 26. In addition, we describe in notes 15 to 18 on pages 104 to 120 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.
ASSESSMENT
In order to report on the long-term viability of 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 the Group, including those that would threaten its business model, future performance, solvency or liquidity. The assessment assumes that any debt maturing in the next three years can bere-financed at commercially acceptable terms or via our current standby facility. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks. The risk factors are summarised on pages 29 to 33.
The viability assessment has two parts:
First, the Directors considered the period over which they have a reasonable expectation that the Group will continue to operate and meet its liabilities, taking into account current debt facilities and debt headroom; and
Second, 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 and the lost cost and growth opportunities from not keeping up with technological changes; and
assessing scenarios that involve more than one principal risk 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 lower sales of products of this brand and the temporary closure of our largest sourcing unit. | A fine equal to 1% of Group turnover was considered along with damage to our largest brand and disruption to supply chain. | • 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 sourcing unit and significant water shortages in our key developing markets. | The complete loss of all of our turnover in our largest geographic market was considered along with destruction of a key sourcing unit and reduced demand for our products that require water. | • Economic and political instability • Supply chain • Climate change | ||
| Global economic downturn leading to an increase in funding costs and the loss of our three largest customers. | Significant business disruption in our largest emerging market was considered with the impact of losing our three key customers. | • Economic and political instability • Treasury and pensions • Customer relationships | ||
FINDINGS
| ��� | Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by the strategic 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 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 year horizon; and
the Group’s diverse product and geographical activities which are impacted by continuously evolving technology and innovation.
Secondly, 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.
CONCLUSION
On the basis described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
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 principal risks could impact our business within the next two years (ie short-term risks), or could impact our business over the next three to five years (ie medium-term risks). Some principal risks, such as climate change, could also impact over the longer term (ie beyond five years).
Our principal risks have not fundamentally changed this year apart from the addition of a plastic packaging risk. Given the nature of our business, a reduction in the amount of plastic packaging and increase in the use of recyclable content in our packaging is critical to our future success.
| 28 | Strategic Report | Annual Report on Form 20-F 2018 |
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. In addition to our plastic packaging risk there are three areas where we believe there is an increased level of risk:
Customer Relationships: technology is changing our channel landscape and hence changing the nature of the relationships with our traditional customers as well as requiring us to develop relationships with new customers who are drivinge-commerce development;
Systems and Information: the number of cybersecurity attacks is still increasing significantly, and incidents are becoming more sophisticated as technology further evolves; and
Business Transformation: this risk has increased as a result of the speed of technological change which means the pressure to digitalise our business to take advantage of the opportunities it presents, both in terms of growth and cost efficiency, is increasing.
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.
DESCRIPTION OF RISK |
BRAND PREFERENCE As a branded goods business, Unilever’s 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, and Unilever’s ability to identify and respond to these changes is vital to our business success. 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. If we are unable to innovate effectively, Unilever’s sales or margins could be materially adversely affected. |
| 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 categories, 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. |
| SUSTAINABILITY |
The success of our business depends on finding sustainable solutions to support long-term growth. Unilever’s vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact, will require more sustainable ways of doing business. In a world where resources are scarce and demand for them continues to increase, it is critical that we succeed in reducing our resource consumption and converting to sustainably sourced supplies. In doing this we are dependent on the efforts of partners and various certification bodies. We are also committed to improving health and well-being and enhancing livelihoods around the world so Unilever and our communities grow successfully together. There can be no assurance that sustainable business solutions will be developed and failure to do so could limit Unilever’s growth and profit potential and damage our corporate reputation. |
| Annual Report on Form 20-F 2018 | Strategic Report | 29 |
RISKSCONTINUED
DESCRIPTION OF RISK |
CLIMATE CHANGE |
Climate changes and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products. Climate changes are occurring around the globe which may impact our business in various ways. They could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. They 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. |
| PLASTIC PACKAGING |
A reduction in the amount of plastic and an increase in the use of recyclable content in our packaging is 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 globe. 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. |
| CUSTOMER RELATIONSHIPS |
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. |
| 30 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
TALENT |
A skilled workforce and agile ways of working are essential for the continued success of our business. Our ability to attract, develop and retain the right number of appropriately qualified 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. |
| 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. |
| 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. |
| 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. |
| Annual Report on Form 20-F 2018 | Strategic Report | 31 |
RISKSCONTINUED
DESCRIPTION OF RISK |
| 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. A number of key projects were announced in 2017 to accelerate sustainable shareholder value creation. 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. Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation. Failure to keep pace with such technological change would significantly impact our growth and profitability. |
| 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. |
| TREASURY AND PENSIONS |
Unilever is exposed to a variety of external financial risks in relation to Treasury and Pensions. 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. Unilever may face liquidity risk, ie difficulty in meeting its obligations, associated with its financial liabilities. A material and sustained shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and also restrict Unilever’s ability to raise funds. We are exposed to market interest rate fluctuations on our floating rate debt. Increases in benchmark interest rates could increase the interest cost of our floating rate debt and increase the cost of future borrowings. In times of financial market volatility, we are also potentially exposed to counter-party risks with banks, suppliers and customers. Certain businesses have defined benefit pension plans, most now closed to new employees, which are exposed to movements in interest rates, fluctuating values of underlying investments and increased life expectancy. Changes in any or all of these inputs could potentially increase the cost to Unilever of funding the schemes and therefore have an adverse impact on profitability and cash flow. |
| 32 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
| ETHICAL |
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. 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. Despite the commitment of Unilever to ethical business and the steps we take to adhere to this commitment, there remains a risk that activities or events cause us to fall short of our desired standard, resulting in damage to Unilever’s corporate reputation and business results. |
| 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. Tax, in particular, is a complex 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 & Profit Shifting project and further potential tax reform in the EU and Switzerland. |
IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIES
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL OVERVIEW 2016DISCLOSURES.
CONSOLIDATED INCOME STATEMENTUnilever recognises the importance of disclosing climate-related risks and opportunities. Adopting the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to alow-carbon economy.
Turnover declined 1.0%In this Annual Report and Accounts, we continue to€52.7 billion including a negative currency impact integrate climate-related disclosures throughout the Strategic Report narrative. However, in recognition of 5.1% (2015: 5.9% favourable currency impact) primarilythe growing significance of the impacts of climate change on our business, we have also summarised the risks and opportunities arising from Latin Americaclimate change, and our response below.
The Boards take overall accountability for the management of climate change risks and opportunities with support from the ULE and the UK. Underlying sales growth was 3.7% (2015: 4.1%) coming from volume growthUSLP Steering Team (see page 46). Chaired by Keith Weed in 2018, the USLP Steering Team includes nine members of 0.9% (2015: 2.1%)the ULE and price growth of 2.8% (2015: 1.9%). Acquisitionsmeets five times a year. During 2018, there were numerous agenda items on topics related to climate change including our overall climate strategy and disposals hadour renewable electricity target.
For management employees (including the ULE), incentives include fixed pay, a positive impact of 0.6% (2015: negative 0.1%) coming from the businesses acquired in the last two years including Dermalogica, Murad, Dollar Shave Club, Zest & Camay and Seventh Generation. Emerging markets contributed 57% of total turnover with underlying sales growth of 6.5% (2015: 7.1%) driven by price growth of 5.4% (2015: 4.3%). Developed markets underlying sales growth declined by 0.2% with volume growth in North America offset by negative pricing in Europe.
Core operating margin improved 0.5 percentage points to 15.3%. Gross margin improved 0.5 percentage points driven by margin-accretive innovation, acquisitions and savings programmes. Brand and marketing investmentbonus as a percentage of turnover was down 0.4 percentage pointsfixed pay and a long-term managementco-investment plan (MCIP) linked to financial and USLP performance. The USLP component accounts for 25% of total MCIP award. The sustainability component of MCIP includes consideration of our progress against climate change, water and palm oil targets, which among others, underpin our climate strategy. See pages 52 to 54 for more on MCIP.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever which has the potential to impact our business in the short, medium and long-term. Further details on the nature of climate risks and opportunities for Unilever can be found in our 2018 CDP Climate submission (see further climate change disclosures on pages 7 and 14).
To further understand the impact that climate change could have on Unilever’s business 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 and we have looked at the impact on our business in 2030 assuming we have the same business activities as we do today. We also made the following simplifying assumptions:
| Annual Report on Form 20-F 2018 | Strategic Report | 33 |
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 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 leverage and efficienciesour own manufacturing operations are relatively small.
The results of this analysis confirm the importance of doing further work 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.
During 2018 we developed and piloted an approach to assess the impact of climate change on our key commodities. We selected soy for this pilot based on its importance to Unilever (large purchased volume), it being ahigh-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. Climate change was the only price factor accounted for in the model used to calculate the impact. Other factors which impact price, such as technology and acreage, were excluded. The model considered the direct risks from Zero Based Budgeting. Higher gross marginclimate change to the price of soybean oil, such as change in yield and change in supply. 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 would need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as catastrophic 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. We have therefore decided to get broader understanding on the climate change risks to our agricultural sourcing and extend our analysis to two other important crops to Unilever: Palm Oil and Tea, for which suitable climate change models for yield predictions will be available in 2019.
RESPONDING TO RISKS AND OPPORTUNITIES
Unilever’s vision is to grow our business whilst decoupling our growth from our environmental footprint and increasing positive social impact. This vision explicitly recognises that sustainable growth – including management of climate-related risks and opportunities – is the only way to create long-term value for all our stakeholders.
The Unilever Sustainable Living Plan (USLP) was developed to deliver our vision. It is fully integrated with our business strategy. Climate-related issues are integral to the USLP. Two of our GHG reduction targets included in the USLP are recognised as science-based:
We are taking action across our value chain to reduce our emissions, creating growth opportunities and minimising risk. Our commitment to source 100% of our palm oil from sustainable sources is helping to avoid emissions from deforestation (see pages 14 and 47). Our efforts to reduce energy and GHG emissions in manufacturing are helping us to save costs. For example, by using less energy, we have already avoided energy costs in our factories of over€600 million since our baseline year of 2008.
Our divisions are taking action to reduce emissions. In Home Care we are focusing on concentrated liquid laundry detergents such as Persil, Omo and Surf Small & Mighty which help consumers to wash clothes at lower temperatures, reducing GHG by up to 50% per load. We have removed phosphates from all laundry powders worldwide, resulting in lower greenhouse gas emissions of up to 50% per consumer use. Our Foods & Refreshment division has prioritised reducing greenhouse gas emissions from ice cream freezers since 2008. As the world’s largest producer of ice cream, we have committed to accelerating theroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2018 our total purchase of these cabinets had increased to around 2.9 million.
Detailed Lifecycle Analysis has shown that our GHG contribution from animal-based agriculture, including fats and proteins, is relatively low: 7.5% for Foods & Refreshment and 2.5% for total Unilever. While emissions are comparatively low, the business opportunity is significant for natural and plant-based foods and beverages. We have a range of vegan and vegetarian variants such as Hellmann’s vegan mayonnaise, Ben & Jerry’snon-dairy ice creams, Magnum vegan and other options (see pages 11 to 12). We continue to actively promote vegetarian and vegan recipes, notably via our Knorr brand websites.
A number of our targets directly address risks and marketing investment were partially offsetopportunities related to water scarcity caused by climate change. We estimate that the sale of products which address water scarcity issues could increase in our Home Care and Beauty & Personal Care divisions where a number of products are available which address water scarcity and/ or have a lower GHG in use. For example, our Beauty & Personal Care division is investing in water smart product innovations such as dry shampoo and cleansing conditioner which help consumers use less water while also offering relevant benefits such as reduced colour loss and damage which can arise from frequent washing. Home Care is 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 help our consumers save water. Day2, the world’s first dry wash spray is made with only 0.02% of the water in a normal laundry load. Sunlight2-in-1 Handwashing Laundry Powder and Rin (Radiant) detergent bar are also helping to reduce water consumption at point of use in water-stressed countries.
| 34 | Strategic Report | Annual Report on Form 20-F 2018 |
Home Care is home to three brands, Pureit, Truliva/Qinyuan and Blueair, which are responding directly to issues related to climate change. Pureit and Truliva, our water purification businesses, offer products which provide safe drinking water to millions of people with a lower carbon footprint than alternatives. Our detailed lifecycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair, our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Several other targets in our USLP indirectly address climate risk and opportunities by aiming to support groups who are vulnerable to the effects of climate change and who are critical to our future growth, notably smallholder farmers and women in low income countries.
Unilever continues to support a number of policy measures to accelerate the transition to alow-carbon economy, including the pricing of carbon and removal of fossil fuel subsidies which act as negative carbon prices. We believe that carbon pricing is a fundamental part of the global response to climate change 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. In 2016, we implemented an internal price on carbon as part of the business case appraisal for large capital expenditure projects. The carbon price is also applied to emissions from our manufacturing sites to raise a clean-tech fund. So far,€73 million has been allocated to this fund for energy and water saving projects. In January 2018 the price of carbon was€40 per tonne.
MEASURING AND REPORTING
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 7 with commentary on page 13 and 14. Our website contains detailed commentary on our USLP targets as well as actions we are taking to achieve them.
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. We have a role to play as an industry leader to help shape those markets. We are working collaboratively with partners, suppliers and others to achieve our ambition.
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. The basis of this plan is the set of around 2,800 products representative of our global portfolio across all divisions for which we have full value-chain lifecycle analysis results.
We recalculated the footprint of these products using the latest 2030 projections on external transitions to alow-carbon economy (eg International Energy Agency 2030 projection on grid changes to renewable energy),low-carbon transition plans in our operations (eg achieving zero net deforestation by 2020, using 100% renewable energy by 2020) and Innovation Roadmaps (eg redesign for lower embedded carbon emissions, transforming the temperature-controlled supply chain).
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 (GHG) emissions are set out below. 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.
We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels and the operation of facilities (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). Each year PwC assure selected manufacturing environmental metrics including carbon emissions from energy use and energy use per tonne of production.
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.
UNILEVER GREENHOUSE GAS EMISSIONS BY ACTIVITY^
| 2018 | 2017 | |||||||
| Manufacturing (scope 1 and 2) | ||||||||
Scope 1 (tonnes CO2) | 711,875 | 773,856 | ||||||
Scope 2* (tonnes CO2) | 726,167 | 793,472 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 1,438,042 | 1,567,328 | ||||||
Intensity ratio (kg CO2 per tonne of production) | 70.46 | 76.77 | ||||||
| Distribution centres, research laboratories, marketing and sales offices (scope 1 and 2) |
| |||||||
Scope 1 (tonnes CO2) | 20,052 | 20,039 | ||||||
Scope 2* (tonnes CO2) | 100,924 | 102,292 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 120,976 | 122,331 | ||||||
| Upstream and downstream of Unilever operations – top 3 emissions sources (scope 3) |
| |||||||
Consumer use | ||||||||
(downstream) (tonnes CO2e)q | 39,895,946 | 38,697,432 | ||||||
Ingredients and packaging | ||||||||
(upstream) (tonnes CO2e)‡ | 14,985,897 | 15,000,941 | ||||||
Distribution and retail | ||||||||
(downstream) (tonnes CO2e) | 4,368,626 | 3,895,589 | ||||||
| ^ | 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). |
| + | 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. |
| * | 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). |
| q | 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. |
| ‡ | 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. |
| Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
FURTHER CLIMATE CHANGE DISCLOSURES
This Annual Report and Accounts contains additional disclosures on our climate change risks and opportunities:
Our website contains disclosures on our greenhouse gas and water USLP 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 (password required).
| www.cdp.net |
| Annual Report on Form 20-F 2018 | Strategic Report | 35 |
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* 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.
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 information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be found on our website.
| * | Throughout this report, when referring to NV shares or shareholders, the term ‘shares’ or ‘shareholder’ also encompasses a depositary receipt or a holder of depositary receipts. |
| www.unilever.com/investor-relations/agm-and-corporate- governance/legal-structure-and-foundation-agreements/ |
BOARDS
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, 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. In the normal course Unilever has two Executive Directors, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). On 31 December 2018 the current CEO resigned and his successor, Alan Jope, was appointed on 1 January 2019. Alan will be proposed to be appointed as an Executive Director at the 2019 AGMs. Consequently, between 1 January 2019 and the 2019 AGMs in May we have 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 out on page 3.
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, the Division Presidents, the Presidents for Europe and North America, and the Chief 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 COMMITTEES
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 2018, can be found on pages 43 to 65.
| www.unilever.com/investor-relations/agm-and-corporate- governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVER
Further details of the roles and responsibilities of the Chairman, Senior Independent Director/Vice-Chairman, CEO, CFO 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).
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 36 | Governance Report | Annual Report on Form 20-F 2018 |
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 of the Unilever Group; the development of and approval of the overall strategy of the Unilever Group; oversight of the performance of the business; review of risks and internal risk management and control systems; authorisation of major transactions; declaration of dividends; convening of shareholders’ meetings; succession planning; review of the functioning of the Boards and their Committees; culture; and review of corporate responsibility and sustainability, in particular the Unilever Sustainable Living Plan. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In 2018 the Boards met physically in January, March, May, 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 sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, and promotes effective relationships and open communication between the Executive andNon-Executive Directors.
ATTENDANCE
The table showing the attendance of current Directors at Board meetings in 2018 can be found on page 3. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Ann Fudge attended four of the Board meetings she was eligible to attend before retiring from the Boards on 3 May 2018.
NON-EXECUTIVE DIRECTOR MEETINGS
TheNon-Executive Directors usually meet as a group, without the Executive Directors present, when there is aface-to-face Board meeting. In 2018 they met five times. The Chairman, or in his absence the Senior Independent Director/Vice-Chairman, chairs such meetings.
BOARD EVALUATION
Each year the Boards formally assess their own performance 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. The last external evaluation was performed in 2017. The evaluation consists of individual interviews with the Directors by the Chairman and, when relevant, by the external evaluator. These interviews are complemented by the completion by all Directors of three confidential online evaluation questionnaires on the efficiency and effectiveness of our Boards, CEO and Chairman. The Boards evaluation questionnaire this year focused on a number of key areas including Strategy, Risk/Financial Controls, Board Effectiveness and Information/Knowledge. The Chairman’s statement on page 2 describes the key actions agreed by the Boards following the evaluation.
The evaluation of the performance of the Chairman and CEO is led by the Senior Independent Director/Vice-Chairman and Chairman respectively, and the bespoke questionnaires will be used to support these evaluations. 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 2018 evaluations can be found in each Committee Report.
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 48 and 49 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 0.4 percentage points increasesimple majority vote at each AGM.
| www.unilever.com/investor-relations/agm-and-corporate- governance/board-and-management-committees/ |
DIRECTOR INDUCTION AND TRAINING
All new Directors participate in overheads drivena comprehensive induction programme when they join the Boards. The Chairman ensures that ongoing training is provided for Directors by increased restructuring costsway 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 2018 the Directors received presentations on Information Security, Digital, the Supply Chain and Simplification.
INDEPENDENCE AND CONFLICTS
As theNon-Executive Directors make up the Committees of the Boards, it is important that they 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. A Director must without delay report any conflict of interest or potential conflict of interest to the Chairman and to the other Directors, or, in case any conflict of interest or potential conflict of interest of the Chairman, to the Senior Independent Director/Vice-Chairman and to the other Directors. The Director in question must provide all relevant information to the Boards, so that the Boards can decide whether a reported (potential) conflict of interest of a Director qualifies as a conflict of interest within the meaning of the relevant laws. A Director may not vote on, or be counted in a quorum in relation to, any resolution 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.
INDEMNIFICATION
The terms of NV Directors’ indemnification are provided for in NV’s Articles 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 2018 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.
| Annual Report on Form 20-F 2018 | Governance Report | 37 |
CORPORATE GOVERNANCECONTINUED
OUR SHARES
NV SHARES
SHARE CAPITAL
NV’s issued share capital on 31 December 2018* was made up of:
| * | When referred to the issued share capital on 31 December 2018 also€62,065,550 split into two classes (6% and 7%) of cumulative preference shares was outstanding. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon in the General Meeting of NV. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018 with the Dutch Trade Register and an announcement thereof in a daily and nationally distributed newspaper in the Netherlands was made on 5 December 2018. These shares were cancelled on 6 February 2019. |
LISTINGS
NV has ordinary shares (UNIA) and depositary receipts for such ordinary shares (UNA) listed on Euronext Amsterdam and, as 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 hold and can vote in person or by proxy. The voting rights attached to NV’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 99.63 | |||||
2,400 special shares |
| 6,428,550 |
|
| 0.37 |
| ||
As at 31 December 2018:
| (a) | 254,012,896 shares were held in treasury and 9,336,215 shares were held to satisfy obligations under share-based incentive schemes. These shares and the special shares are not voted on. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon, as described within the Share Capital section above. |
SHARE ISSUES AND PURCHASE OF SHARES
At the NV AGM held on 3 May 2018 the Board of NV was designated as the corporate body authorised to resolve on the issue of, or on the granting of rights to subscribe for, shares not yet issued and to restrict or exclude the statutorypre-emption rights that accrue to shareholders upon issue of shares, on the understanding that this authority is limited to 33% of NV’s issued ordinary share capital and to disapplypre-emption rights to 5% of NV’s issued share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at NV’s 2018 AGM the NV Board was designated as the corporate body authorised to purchase (i) ordinary shares with a maximum of 10% of the issued share capital as well as (ii) any and all 6% and 7% cumulative preference shares.
These authorities expire on the earlier of the conclusion of the 2019 NV AGM or the close of business on 30 June 2019 (the last date by which NV must hold an AGM in 2019). Such authorities (other than with respect to the 6% and 7% cumulative preference shares) are renewed annually.
During 2018 companies within the Unilever Group purchased 4,000,000 NV ordinary shares, representing 0.23% of the issued ordinary share capital, for€183,380,649. These purchases were made to facilitate grants made in connection with Unilever’s employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, NV conducted a share buyback programme during 2018 with an aggregate market value of approximately€3 billion bought back in the form of 62,202,168 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
Following a public offer and a subsequent squeeze out procedure, Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired all 6% cumulative preference shares and 7% cumulative preference shares. Unilever N.V. purchased these 6% cumulative preference shares and 7% cumulative preference shares on 2 October 2018. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018, as described within the Share Capital section above.
Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisions within the NV Articles of Association containing the rules for appointing NV Directors cannot be changed without the permission of the holders of the 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 OFFICE
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) is a trust office with a board independent of Unilever. As part of its corporate objects, the Trust Office issues depositary receipts in exchange for the NV ordinary shares. These depositary receipts are listed on Euronext Amsterdam, as are the NV ordinary shares themselves
Holders of depositary receipts can under all circumstances exchange their depositary receipts for 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 2018 were 1,268,051,254 NV ordinary shares (73.95%).
At the 2018 NV AGM, the Trust Office represented 36.95% 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.
| www.administratiekantoor-unilever.nl/eng/home |
| 38 | Governance Report | Annual Report on Form 20-F 2018 |
PLC SHARES
SHARE CAPITAL
PLC’s issued share capital on 31 December 2018 was made up of:
| • | £36,934,840 split into 1,187,191,284 ordinary shares of 31⁄9p each; and |
LISTINGS
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.
| * | One American Depository Receipt represents one PLC ordinary share with a nominal value of 31⁄9p. |
VOTING RIGHTS
PLC shareholders can cast one vote for each 31⁄9p nominal capital they hold and can vote in person or by proxy. The voting rights attached to PLC’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,187,191,284 ordinary shares | 1,187,191,284 | 99.73 | ||||||
£100,000 deferred stock |
| 3,214,285 |
|
| 0.27 |
| ||
As at 31 December 2018:
| (a) | 18,660,634 shares were held by PLC in treasury and 5,645,392 shares were held by NV group companies. These shares and the deferred stock are not voted on. |
SHARE ISSUES AND PURCHASE OF SHARES
At the 2018 PLC AGM held on 2 May 2018 the PLC Directors were authorised to issue new shares, up to a maximum of £12,755,555 nominal value (which at the time represented approximately 33% of PLC’s issued ordinary share capital) and to disapplypre-emption rights up to approximately 5% of PLC’s issued ordinary share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at PLC’s 2018 AGM the PLC Board was authorised to make market purchases of its ordinary shares, up to a maximum of just under 10% of PLC’s issued ordinary share capital and within the limits prescribed in the resolution until the earlier of the conclusion of PLC’s 2019 AGM and 30 June 2019. These authorities are renewed annually and authority will be sought at PLC’s 2019 AGM.
During 2018 companies within the Unilever Group purchased 2,222,000 PLC ordinary shares, representing 0.19% of the issued share capital, for £87,978,671. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, PLC conducted a share buyback programme during 2018 with an aggregate market value of approximately £3 billion bought back in the form of 63,236,433 PLC ordinary shares.
On 31 July 2018, PLC cancelled 110,493,623 PLC ordinary shares of 31⁄9p each held in treasury, representing 8.43% of the issued share capital. On 19 September 2018, PLC cancelled a further 12,471,454 PLC ordinary shares of 31⁄9p each held in treasury, representing 1.04% of the issued share capital.
PLC DEFERRED STOCK
To support unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the rules for appointing PLC Directors. 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.
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF NV
As far as Unilever is aware, the only holder of more than 3% of, or 3% of voting rights attributable to, NV’s share capital (‘Disclosable Interests’) on 31 December 2018 (apart from the Foundation Unilever N.V. Trust Office, see page 38) is BlackRock, Inc. (BlackRock) as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 66,947,018 | 3.90 | |||||||
BlackRock notified the AFM that its holding changed to 4.02% on
19 February 2019. Between 1 January 2016 and 21 February 2019, BlackRock, NN Group N.V. (NN), ASR Nederland N.V. (ASR) and UCHN, see page 38, have held more than 3% in the share capital of NV.
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 on 31 December 2018 (apart from shares held in treasury by PLC, see page 39), are BlackRock and the Leverhulme Trust as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 77,176,319 | 6.60 | |||||||
The Leverhulme Trust | ordinary shares | 46,931,182 | 4.02 | |||||||
As far as Unilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 2019 and 21 February 2019 (the latest practicable date for inclusion in this report). Between 1 January 2016 and 21 February 2019, (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.
STAKEHOLDER ENGAGEMENT
We value open and effective communication with our stakeholders. The primary responsibility for stakeholder engagement, which is generally related to the operations of the business, rests with our Executive Directors.Non-Executive Directors also actively engage with stakeholders as part of their oversight duties and responsibilities that have not been delegated to the Executive Directors.
SHAREHOLDERS
The CFO has lead responsibility for shareholder engagement, with the active involvement of the CEO and supported by the Investor Relations department.
The Executive Directors’ investor relations programme continued in 2018 with meetings held with institutional shareholders in major cities globally. The Executive Directors and members of the Investor Relations team also meet a large number of investors at the industry conferences they attend. In 2018 industry conferences attended by Unilever representatives included events in London, Paris, Stockholm, Boston and New York.
Our annual investor seminar in December also allowed investors to meet the Chairman, CEO,CEO-designate, CFO and other members of senior management. The event was held at the offices of Hindustan Unilever in Mumbai and focused on Unilever’s emerging markets expertise as well as the digital transformation of the business.
In 2018, as part of the strategic review of options to accelerate sustainable value creation and our proposal to simplify the Unilever corporate structure, the Chairman met and spoke with global investors during the year. The Chair of the Compensation Committee also extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
| Annual Report on Form 20-F 2018 | Governance Report | 39 |
CORPORATE GOVERNANCECONTINUED
On 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. Private shareholders are encouraged to give feedback via shareholder.services@unilever.com. Our shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/Vice-Chairman, 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.
OTHERS
Our Executive Directors andNon-Executive Directors also engage with a wide-ranging group of stakeholders during specific Unilever events. For example, we annually organise one or more Board Relationship meetings offering our Directors the opportunity to directly meet our key customers, suppliers, agencies, NGOs, trade associations and advisers. In 2018, such meetings were held in the Netherlands and the UK.
EMPLOYEES
In order to allow ourNon-Executive Directors to gainfirst-hand experience of our operations and to engage in a broader context, we organise one or more site visits annually. During these site visits,Non-Executive Directors are informed about local market conditions and operations as well as relevant local matters. Typically, the programme allowsNon-Executive to meet management and young talent at these sites. In 2018, such site visits were held in China, Germany, the Netherlands and the US. In terms of engaging with employees, ourNon-Executive Directors actively participate in our management development programme sharing knowledge and insight on a mutual basis.
| www.unilever.com/investor-relations/ |
GENERAL 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, 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 2018 AGMs were held in Rotterdam and London in May and the topics raised by shareholders included:e-commerce, mergers & acquisitions, sustainability, Simplification, remuneration, total shareholder return, Brexit and 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. 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 2019 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2019.
REQUIRED 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 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.
| 40 | Governance Report | Annual Report on Form 20-F 2018 |
CORPORATE GOVERNANCE COMPLIANCE
GENERAL
We conduct our operations in accordance with internationally accepted principles of good governance and best practice, while 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 CONTRACTS
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 36, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
In 2018, NV complied 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 in the General Meetings section above and the best practice provision set out below. The Dutch Code is available on the Monitoring Committee Corporate Governance Code’s website.
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.
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 paragraph 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 KINGDOM
In 2018, 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. The UK Code is available on the Financial Reporting Council’s (FRC) website.
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: Information on GHG emissions can be found on page 35.
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 discussing 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.
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/ | |
| Annual Report on Form 20-F 2018 | Governance Report | 41 |
CORPORATE GOVERNANCECONTINUED
THE 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 43 to 45. 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 2018 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 2018 were 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 156.
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.
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 42 | Governance Report | Annual Report on Form 20-F 2018 |
COMMITTEE MEMBERS AND ATTENDANCE | ||
| ATTENDANCE | ||
John RishtonChair | 8/8 | |
Nils Andersen | 8/8 | |
Judith Hartmann | 8/8 | |
This table shows the membership of the Committee together with their attendance at meetings during 2018. 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. | ||
HIGHLIGHTS OF 2018 |
• Annual Report and Accounts • Tax regulations, provisions and disclosure • Information security, including Cyber, and IT resilience • Supply Chain flexibility and continuity of supply • Accounting for significant Mergers and Acquisitions • Acquisition Review • Spreads Disposal • IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’ |
PRIORITIES FOR 2019 |
• Tax regulations, provisions and disclosure • Information Security, including Cyber, and IT resilience • IFRS 16 ‘Leases’ • Accounting for significant Mergers and Acquisitions |
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 and the other members are Nils Andersen and Judith Hartmann. 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.
ROLE 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:
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 2018, a session was held with Unilever Management on the acquisition of the Dollar Shave Club, which included a briefing on the acquisition case, recent performance, and key learnings that might be relevant for future acquisitions. In addition, John Rishton visited the Indian MCO in Mumbai, where the developments of routes to market, controls automation and centralisation were reviewed and discussed in detail. Mr Rishton also visited the Indian finance and IT hub in Bangalore where progress being made on monitoring systems of potential cyber threat and access controls were reviewed.
HOW THE COMMITTEE HAS DISCHARGED ITS RESPONSIBILITIES
During the year, the Committee’s principal activities were as follows:
FINANCIAL 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 2018. These reviews incorporated the accounting policies and significant judgements and estimates underpinning the financial statements as disclosed within note 1 on pages 79 to 82. Particular attention was paid to the following significant issues in relation to the financial statements:
| Annual Report on Form 20-F 2018 | Governance Report | 43 |
REPORT OF THE AUDIT COMMITTEECONTINUED
The external auditors have agreed the list of significant issues discussed by the Audit Committee. In addition to these risks KPMG, as required by auditing standards, also consider the risk of management override of controls. Nothing has come to either our attention or the attention of KPMG to suggest any material suspected or actual fraud relating to management override of controls.
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 and further information can be found on pages 67 to 74. The Committee was satisfied that there are relevant accounting policies in place in relation to these significant issues and management have correctly applied these policies.
At the request of the Boards the Committee undertook to:
At the request of the Boards the Committee also considered whether the Unilever Annual Report and Accounts 2018 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 2018 is fair, balanced and understandable.
RISK 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 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, the Committee reviewed the annual financial plan and Unilever’s dividend policy and dividend proposals.
During 2018 the Committee 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
The Committee reviewed Corporate Audit’s audit plan for the year and agreed its budget and resource requirements. It reviewed interim andyear-end summary reports and management’s response. The Committee engaged an independent third party to perform an effectiveness review of the function. The review concluded that the function is compliant with the IIA (Chartered Institute of Internal Auditors) Standards in all material aspects. The Committee also carried out an evaluation of the performance of the internal audit function and was satisfied with the effectiveness of the function. The Committee met independently with the Chief Auditor during the year and discussed the results of the audits performed during the year.
AUDIT OF THE ANNUAL 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 their 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 AUDITORS
KPMG have been the Group’s auditors since 2014 and shareholders approved theirre-appointment as the Group’s external auditors at the 2018 AGMs. On the recommendation of the Committee, the Directors will be proposing there-appointment of KPMG at the AGMs in May 2019.
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 will rotate off the assignment after completion of the 2018year-end financial statements. One of the new partners already has experience of the Unilever global audit, and the other partner underwent an induction programme through much of thisyear-end to ensure a smooth transition. KPMG has issued a formal letter to the Committee outlining the general procedures to safeguard independence and objectivity, disclosing the relationship with the Company and confirming their 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.
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:
| 44 | Governance Report | Annual Report on Form 20-F 2018 |
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, external developments and best practice. 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 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 higher overheads ratioSimplification project.
The Committee confirms that the Group is in compliance with The Statutory Audit Services for Large Companies Market Investigation (Mandatory use of acquired businesses.Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. The last tender for the audit of the annual accounts was performed in 2013.
Operating profitEVALUATION OF THE AUDIT COMMITTEE
As part of the internal Board evaluation carried out in 2018, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2018. 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
| Annual Report on Form 20-F 2018 | Governance Report | 45 |
RESPONSIBILITY COMMITTEE
COMMITTEE MEMBERS AND ATTENDANCE | ||
| ATTENDANCE | ||
Strive Masiyiwa(Member since April 2017)Chair | 4/4 | |
Youngme Moon | 4/4 | |
Feike Sijbesma | 3/4 | |
This table shows the membership of the Committee together with their attendance at meetings during 2018. 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. | ||
HIGHLIGHTS OF 2018 |
• Competition and anti-bribery compliance • Third-party compliance • Product quality and safety • Unilever Sustainable Living Plan (USLP) |
PRIORITIES FOR 2019 |
• Compliance with Unilever policies on fair competition and anti-bribery and requirements for third parties • Product quality and safety • Unilever Sustainable Living Plan (USLP) including plastic packaging |
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 Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. Therefore a central 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.
The Committee’s discussions are informed by the experience of the senior leaders 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. This enables the Boards to draw on a well-rounded view of issues.
During 2018 the Committee reviewed its terms of reference and 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 its remit to review risk management and for overseeing the independent assurance programme for the USLP.
The Committee’s terms of reference are set outwww.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 threeNon-Executive Directors: Strive Masiyiwa (Chair), Feike Sijbesma and Youngme Moon. The Chief Marketing & Communications Officer and the Chief Sustainability Officer attend the Committee’s meetings. The Chief Business Integrity Officer also attends to present Unilever’s company report that covers cases under Unilever’s Code of Business Principles (the Code) as well as updates on third-party compliance, product quality and safety.
MEETINGS
Meetings are held quarterly and ad hoc as required – four were held in 2018. The Committee Chairman is responsible for reporting the findings from meeting to the Boards, thus ensuring that the Boards can fulfil their oversight responsibilities.
Following the Committee’s terms of reference and Unilever’s principal risks and priorities, the Committee’s agenda covers the Code and third-party compliance, alongside litigation, occupational and product safety, the USLP and corporate reputation as well as a range of strategic and current issues. In addition to the areas listed below, in 2018 the Committee also reviewed topics such as media communications, the process for integrating business acquisitions and progress on alternatives to animal testing.
CODE OF BUSINESS 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 and is identified as an ethical and 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, the Corporate Responsibility Committee is responsible for 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 to any trends arising from these investigations.
The Chief Legal Officer and Group Secretary reports 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. The Committee studied how compliance was up 3.8% at€7.8 billion (2015:€7.5 billion) including€245 million (2015:€350 million)achieved during 2018. For further information please see notes 19 and 20 to the consolidated financial statements.
As another of non-core charges mainly being acquisitionits other priorities in 2018, the Committee also scrutinised the mechanisms for anti-bribery compliance. The primary mechanism is to understand the profiles of the markets Unilever operates in and disposal-related coststo ensure that there are robust internal and lossesthird-party compliance programmes in place. These are complemented by training for all employees in tandem with advanced capacity building for those in the Business Integrity and Legal functions.
PRINCIPLES AND STANDARDS FOR THIRD PARTIES
The Committee retained its focus on third-party compliance in 2018. 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 thatnon-compliance by third parties can pose, particularly in the context of increasing regulation around the world.
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 disposals.with integrity, openness and respect for universal 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.
The policies enable Unilever to evaluate risk and provide the right measures to address the diversity of market conditions in which it operates and the range of third parties it works with. The Committee was briefed on progress. For the RSP, this detailed the number of suppliers making a positive commitment to the policy, greater alignment on industry standards via the process of mutual recognition and a substantial increase in site audits and resulting corrective action plans. Enhanced anti-bribery and corruption screening was also put in place. The training and enhancements developed for the RBPP include new IT tools launched in over 180 countries, simpler assessment processes, enhanced due diligence and risk mitigation plans.
| 46 | Governance Report | Annual Report on Form 20-F 2018 |
Highlights for the year ended 31 December
| 2016 | 2015 | %
| 2018 | 2017 | % change | |||||||||||||||||||
Turnover (€ million) | 52,713 | 53,272 | (1 | ) |
| 50,982
|
|
| 53,715
|
|
| (5.1
| )
| |||||||||||
Operating profit (€ million) | 7,801 | 7,515 | 4 |
| 12,535
|
|
| 8,857
|
|
| 41.5
|
| ||||||||||||
Core operating profit (€ million)* | 8,046 | 7,865 | 2 | |||||||||||||||||||||
Underlying operating profit (€ million)*
|
| 9,359
|
|
| 9,400
|
|
| (0.4
| )
| |||||||||||||||
Profit before tax (€ million) | 7,469 | 7,220 | 3 |
| 12,383
|
|
| 8,153
|
|
| 51.9
|
| ||||||||||||
Net profit (€ million) | 5,547 | 5,259 | 6 |
| 9,808
|
|
| 6,486
|
|
| 51.2
|
| ||||||||||||
Diluted earnings per share (€) | 1.82 | 1.72 | 6 |
| 3.48
|
|
| 2.15
|
|
| 62.0
|
| ||||||||||||
Core earnings per share (€)* | 1.88 | 1.82 | 3 | |||||||||||||||||||||
Underlying earnings per share (€)*
|
| 2.36
|
|
| 2.24
|
|
| 5.2
|
| |||||||||||||||
Net finance costs were€481 million in 2018 compared with€877 million in 2017, which included aone-off cost of€382 million for the buyback of the Unilever NV preference shares. The cost of financing net borrowings was€46957 million compared with€372 million in 2015.higher than 2017. The increase was primarily driven by higher borrowing levelsan increase in net debt which was partially offset by lower interest rates and reduceda prior yearone-off in Brazil relating to the interest on cash deposits.element of an indirect tax amnesty programme. The average interest rate on net debt increasedreduced to 3.5% compared with 3.0%2.2% from 2.7% in 2015.2017. The pensions financing charge for pension financing decreased bywas€2725 million, todown from€9496 million (2015:€121 million) as a result ofin 2017 reflecting a lower netpension deficit at the beginning of the year.2018.
A monetary gain of€122 million was recorded following adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1) from 1 July 2018.
The effective tax rate was 26.2%21.1% compared with 27.6%20.8% in 2015. This included the prior year. In both years the rate was low relative to longer term norms, due to the significant impact on tax of favourablethe disposals of our spreads businesses in 2018 and US tax audit settlements.reform in 2017.
Net profit from joint ventures and associates contributedwas up 19% at€127185 million, compared with€107 million in 2015 due to higher profits the increase coming mainly from a gain on disposal of the Pepsi Liptonspreads business of the Portuguese joint venture. Other income fromnon-current investment and associates increased to investments was€10422 million compared withversus€9118 million in 2015, primarily driven by a gain of€107 million from the sale of financial assets. prior year.
Diluted earnings per share increasedwere up 62.0% at€3.48. The increase was mainly driven by 5.7% tothe€1.82 largely due to improved margin. Core earnings per share increased by 3.1% to€1.88 including an adverse currency4,331 million gain on disposal for the spreads businesses, improvement in operating margin and the impact of 3.7%.the share buyback programmes.
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 7967 to 83.74.
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 8879 to 9082 and are consistent with those applied in 2015.2017.
| * | 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 |
| ^ | Wherever referenced in this report, underlying sales growth (USG) and underlying price growth (UPG) do not include price growth in Venezuela for the whole of 2018 and in Argentina from July 2018. USG and UPG for 2017 do not include Q4 2017 price growth in Venezuela. See pages 23 and 24 onnon-GAAP measures for further details. |
| 20 | Strategic Report | Annual Report on Form 20-F 2018 |
The Group has revised its operating segments to align with the new structure under which the business is managed. Operating segment information is now provided based on three product areas: Beauty & Personal Care, Foods & Refreshment and Home Care.
BEAUTY & PERSONAL CARE
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,624 | 20,697 | (0.3 | ) | ||||||||
| Operating profit (€ million) | 4,130 | 4,103 | 0.7 | |||||||||
| Underlying operating profit (€ million) | 4,508 | 4,375 | 3.0 | |||||||||
| Operating margin (%) | 20.0 | 19.8 | 0.2 | |||||||||
| Underlying operating margin (%) | 21.9 | 21.1 | 0.8 | |||||||||
| Underlying sales growth (%) | 3.1 | 2.9 | ||||||||||
| Underlying volume growth (%) | 2.5 | 1.4 | ||||||||||
| Underlying price growth (%) | 0.6 | 1.5 | ||||||||||
KEY DEVELOPMENTS
FOODS & REFRESHMENT
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 20,227 | 22,444 | (9.9 | ) | ||||||||
| Operating profit (€ million) | 7,245 | 3,616 | 100.4 | |||||||||
| Underlying operating profit (€ million) | 3,534 | 3,737 | (5.4 | ) | ||||||||
| Operating margin (%) | 35.8 | 16.1 | 19.7 | |||||||||
| Underlying operating margin (%) | 17.5 | 16.7 | 0.8 | |||||||||
| Underlying sales growth (%) | 2.0 | 2.7 | ||||||||||
| Underlying volume growth (%) | 1.3 | (0.2 | ) | |||||||||
| Underlying price growth (%) | 0.7 | 3.0 | ||||||||||
KEY DEVELOPMENTS
| • | Turnover declined by 9.9% including a negative currency impact of 5.6%. Acquisitions and disposals had an unfavourable impact of 6.4% reflecting the disposal of the spreads business. Underlying sales growth was 2.0% coming from volume growth of 1.3% and price growth of 0.7%. Ice cream had another strong year helped by innovations on our premium brands which included a new Magnum praline variant and anon-dairy range of Ben & Jerrys. The launch of Kinder® ice cream and good weather helped to drive strong ice cream growth in Europe. Sales in tea grew modestly: emerging markets growth was driven by good performance on core brands like Brooke Bond in India whilst in developed markets challenges in black tea offset good growth from Pukka and the new organic Lipton |
range. In savoury, Knorr was helped by good performance of cooking products in emerging markets and more organic and natural innovations such as a new ‘soup in glass’ range. In dressings, campaigns centred around Hellmann’s purpose to fight food waste helped to increase brand equity, but sales were held back by promotional intensity particularly in the US. Our actions to transform the portfolio are working: strong innovations including Knorr rice and pasta pots as well as our new brands Red Red, PrepCo and Mãe Terra helped us build scale in the fast growing snacking segment. |
HOME CARE
| 2018 | 2017 | % change | ||||||||||
| Turnover (€ million) | 10,131 | 10,574 | (4.2 | ) | ||||||||
| Operating profit (€ million) | 1,160 | 1,138 | 1.9 | |||||||||
| Underlying operating profit (€ million) | 1,317 | 1,288 | 2.3 | |||||||||
| Operating margin (%) | 11.5 | 10.8 | 0.7 | |||||||||
| Underlying operating margin (%) | 13.0 | 12.2 | 0.8 | |||||||||
| Underlying sales growth (%) | 4.2 | 4.4 | ||||||||||
| Underlying volume growth (%) | 2.3 | 2.1 | ||||||||||
| Underlying price growth (%) | 1.9 | 2.3 | ||||||||||
KEY DEVELOPMENTS
| Annual Report on Form 20-F | Strategic Report |
FINANCIAL REVIEWCONTINUED
PERSONAL CARE
| 2016 | 2015 | % change | ||||||||||
Turnover (€ million) | 20,172 | 20,074 | 0.5 | |||||||||
Operating profit (€ million) | 3,704 | 3,637 | 1.8 | |||||||||
Core operating profit (€ million) | 3,844 | 3,788 | 1.5 | |||||||||
Operating margin (%) | 18.4 | 18.1 | 0.3 | |||||||||
Core operating margin (%) | 19.1 | 18.9 | 0.2 | |||||||||
Underlying sales growth (%) | 4.2 | 4.1 | ||||||||||
Underlying volume growth (%) | 1.6 | 2.3 | ||||||||||
Underlying price growth (%) | 2.6 | 1.8 | ||||||||||
KEY DEVELOPMENTS
HOME CARE
| 2016 | 2015 | % change | ||||||||||
Turnover (€ million) | 10,009 | 10,159 | (1.5 | ) | ||||||||
Operating profit (€ million) | 949 | 740 | 28.2 | |||||||||
Core operating profit (€ million) | 967 | 775 | 24.8 | |||||||||
Operating margin (%) | 9.5 | 7.3 | 2.2 | |||||||||
Core operating margin (%) | 9.7 | 7.6 | 2.1 | |||||||||
Underlying sales growth (%) | 4.9 | 5.9 | ||||||||||
Underlying volume growth (%) | 1.3 | 4.0 | ||||||||||
Underlying price growth (%)
| 3.6 | 1.9 | ||||||||||
KEY DEVELOPMENTS
FOODS
| 2016 | 2015 | % change | ||||||||||
Turnover (€ million) | 12,524 | 12,919 | (3.1 | ) | ||||||||
Operating profit (€ million) | 2,180 | 2,298 | (5.1 | ) | ||||||||
Core operating profit (€ million) | 2,240 | 2,354 | (4.8 | ) | ||||||||
Operating margin (%) | 17.4 | 17.8 | (0.4 | ) | ||||||||
Core operating margin (%) | 17.9 | 18.2 | (0.3 | ) | ||||||||
Underlying sales growth (%) | 2.1 | 1.5 | ||||||||||
Underlying volume growth (%) | (0.5 | ) | 0.8 | |||||||||
Underlying price growth (%)
| 2.6 | 0.8 | ||||||||||
KEY DEVELOPMENTS
REFRESHMENT
| 2016 | 2015 | % change | ||||||||||
Turnover (€ million) | 10,008 | 10,120 | (1.1 | ) | ||||||||
Operating profit (€ million) | 968 | 840 | 15.2 | |||||||||
Core operating profit (€ million) | 995 | 948 | 5.0 | |||||||||
Operating margin (%) | 9.7 | 8.3 | 1.4 | |||||||||
Core operating margin (%) | 9.9 | 9.4 | 0.5 | |||||||||
Underlying sales growth (%) | 3.5 | 5.4 | ||||||||||
Underlying volume growth (%) | 1.0 | 1.5 | ||||||||||
Underlying price growth (%)
| 2.6 | 3.9 | ||||||||||
KEY DEVELOPMENTS
CASH FLOW
Free cash flow of€4.8 billion was in line with the strong delivery in 2015. Cash flow from operating activities was in line with€9.0 billion, a decline of€0.5 billion compared to the prior year reflectingyear. Free cash flow was€5.0 billion, a reduction of€0.4 billion on the prior year. The reductions reflected the impact of currency devaluation and higher working capital, including a€0.30.4 billion increase in operating profit netarising from the disposal of outflows from trade payables and other liabilities within working capital. Net capital expenditure as a percentage of turnover was 3.6% (2015: 3.9%).spreads.
| € million 2016 | € million 2015 | € million 2018 | € million 2017 | |||||||||||||
Operating profit | 7,801 | 7,515 | 12,535 | 8,857 | ||||||||||||
Depreciation, amortisation and impairment | 1,464 | 1,370 |
| 1,747 |
|
| 1,538 |
| ||||||||
Changes in working capital | 51 | 720 |
| (793 | ) |
| (68 | ) | ||||||||
Pensions and similar obligations less payments | (327 | ) | (385 | ) |
| (128 | ) |
| (904 | ) | ||||||
Provisions less payments | 65 | (94 | ) |
| 55 |
|
| 200 |
| |||||||
Elimination of (profits)/losses on disposals | 127 | 26 |
| (4,299 | ) |
| (298 | ) | ||||||||
Non-cash charge for share-based compensation | 198 | 150 |
| 196 |
|
| 284 |
| ||||||||
Other adjustments | (81 | ) | 49 |
| (266 | ) |
| (153 | ) | |||||||
Cash flow from operating activities | 9,298 | 9,351 |
| 9,047 |
|
| 9,456 |
| ||||||||
Income tax paid | (2,251 | ) | (2,021 | ) |
| (2,294 | ) |
| (2,164 | ) | ||||||
Net capital expenditure | (1,878 | ) | (2,074 | ) |
| (1,424 | ) |
| (1,621 | ) | ||||||
Net interest and preference dividends paid | (367 | ) | (460 | ) |
| (367 | ) |
| (316 | ) | ||||||
Free cash flow* | 4,802 | 4,796 |
| 4,962 |
|
| 5,355 |
| ||||||||
Net cash flow (used in)/from investing activities | (3,188 | ) | (3,539 | ) |
| 4,644 |
|
| (5,879 | ) | ||||||
Net cash flow (used in)/from financing activities | (3,073 | ) | (3,032 | ) |
| (11,548 | ) |
| (1,433 | ) | ||||||
| * | 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 |
Net outflowinflow from investing activities was€3.24.6 billion, (2015:an increase of€3.5 billion) primarily being10.5 billion compared to the prior year. The increase reflects proceeds of€7.2 billion from the disposal of spreads and higher spend on business acquisitions and capital expenditure on property, plant and equipment.during the prior year.
NetThe net outflow from financing activities was€11.5 billion, compared with€1.4 billion in line withthe prior year atyear. In 2018 there were repayments of financial liabilities of€3.1 billion.6.6 billion compared with€2.6 billion in 2017; and an outflow from changes in short-term borrowings of€4.0 billion, compared with an inflow of€2.7 billion in 2017. The cash outflow in respect of the repurchase of shares in 2018 was€6.0 billion, compared with€5.0 billion in the prior year.
BALANCE SHEET
At 31 December 2016,2018, Unilever’s combined market capitalisation was€110.2121.8 billion compared with€113.4127.9 billion at the end of 2015.2017.
Goodwill and intangible assets increased by€2.41.1 billion mainly drivencoming from the acquisition of Quala and restatement of goodwill in relation to adoption of IAS 29 ‘Financial Reporting in Hyperinflationary Economies’ in Argentina (see note 1 and note 9). The increase was partially offset by the acquisitionsimpairment of Dollar Shave Club, Seventh Generation and Blueair. All material goodwill and indefinite-life intangible assets have been tested for impairment with no charge recognised during the year.year other than for Blueair. Othernon-current assets increaseddecreased by€0.50.4 billion primarilymainly due to increasesa reduction in deferred tax assets and a higher property, plant and equipment partly offset by a decrease inthe value of pension assets.
€ million 2016 | € million 2015 | € million 2018 | € million 2017 | |||||||||||||
Goodwill and intangible assets | 27,433 | 25,059 | 29,493 | 28,401 | ||||||||||||
Other non-current assets | 15,112 | 14,553 |
| 14,482 |
|
| 14,901 |
| ||||||||
Current assets | 13,884 | 12,686 |
| 15,481 |
|
| 16,983 |
| ||||||||
Total assets | 56,429 | 52,298 |
| 59,456 |
|
| 60,285 |
| ||||||||
Current liabilities | 20,556 | 20,019 |
| 19,772 |
|
| 23,177 |
| ||||||||
Non-current liabilities | 18,893 | 16,197 |
| 27,392 |
|
| 22,721 |
| ||||||||
Total liabilities | 39,449 | 36,216 |
| 47,164 |
|
| 45,898 |
| ||||||||
Shareholders’ equity | 16,354 | 15,439 |
| 11,572 |
|
| 13,629 |
| ||||||||
Non-controlling interest | 626 | 643 |
| 720 |
|
| 758 |
| ||||||||
Total equity | 16,980 | 16,082 |
| 12,292 |
|
| 14,387 |
| ||||||||
Total liabilities and equity | 56,429 | 52,298 |
| 59,456 |
|
| 60,285 |
| ||||||||
Current assets were higher by€1.2 billion primarily due to an improved cash and cash equivalent balance which increaseddecreased from€2.317.0 billion atto€15.5 billion mainly reflecting the beginningreduction in assets held for disposals as a result of the year to€3.4 billion at 31 December 2016 includingcompletion of the impact of favourable exchange rates. Trade and other current receivables also increased by€0.3 billion due to increased sales in some of our key markets, extended credit terms following challenging market conditions, and currency impact.
spreads transactions on 2 July 2018. Current liabilities were€20.6 billion. The19.8 billion, a decrease of€0.63.4 billion increase compared to 2015 is primarily from the recognitionprior year. The decrease was due to repayment of the portion of long-term financialshort-term liabilities that fall due within 2017.
which were replaced by long term borrowings.Non-current liabilities were€18.927.4 billion, compared with€16.2 billion at the end of 2015. Thean increase of€2.74.7 billion reflects additional borrowings to finance acquisitions. On 25 April 2016 weon the prior year. During the year the Group issued bonds worth over€700 million 1.125% fixed rate6.0 billion and repaid notes due on 29 April 2028,of about€500 million 0.5% fixed rate notes due on 29 April 20241.0 billion. See note 15C for analysis of bonds and€300 million 0.00% fixed rate notes due 29 April 2020. On 27 July 2016 we issued US$700 million 2% fixed rate notes due on 28 July 2026 and US$550 million 1.375% fixed rate notes due on 28 July 2021. other loans.
The table below shows the movement in net pension liability during the year. The increase from€2.30.6 billion at the beginning of the year to€3.20.9 billion at the end of 20162018 was primarily due to higher liabilitiesreduced pension assets, driven by lower discount rates. The increase was partly offset by investment returns and cash contributions. Cash expenditure on pensions was€0.7 billion,adverse equity markets towards the same as in the prior year.end of 2018.
€ million
2018 | ||||||
1 January | ( | ) | ||||
Current service cost | ( | ) | ||||
Employee contributions | 17 | |||||
Actual return on plan assets (excluding interest) | (1,108 | ) | ||||
Net interest cost | ( | ) | ||||
Actuarial | 671 | |||||
Employer contributions | 383 | |||||
Currency retranslation | 26 | |||||
Other movements(a) | (57 | ) | ||||
31 December |
| (874 | ) | |||
| (a) | Other movements relate to special termination benefits, past service costs including losses/(gains) on curtailment, settlements and |
FINANCE AND LIQUIDITY
Approximately€1.50.8 billion (or 43%26%) of the Group’s cash and cash equivalents are held in the parent and central finance companies, for 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 115110 to 120.115.
The remaining€1.92.4 billion (57%(74%) 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 which are in some cases subject to withholding or distributionfree of tax. This balance includes€240154 million (2015:(2017:€284206 million, 2014:2016:€452240 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. Thebusiness.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 20162018 were US$6,550$7,865 million.
| Strategic Report |
FINANCIAL REVIEWCONTINUED
CONTRACTUAL OBLIGATIONS AT 31 DECEMBER 20162018
€ 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 | € million
Total | € million 1 year | € million | € million | € million | |||||||||||||||||||||||||||||||
Long-term debt | 16,408 | 5,278 | 2,719 | 3,147 | 5,264 |
| 24,428
|
|
| 2,950
|
|
| 4,533
|
|
| 4,683
|
|
| 12,262
|
| ||||||||||||||||||||
Interest on financial liabilities | 2,793 | 335 | 540 | 377 | 1,541 |
| 3,723
|
|
| 467
|
|
| 800
|
|
| 628
|
|
| 1,828
|
| ||||||||||||||||||||
Operating lease obligations | 2,841 | 457 | 782 | 611 | 991 |
| 2,464
|
|
| 481
|
|
| 758
|
|
| 501
|
|
| 724
|
| ||||||||||||||||||||
Purchase obligations(a) | 414 | 346 | 68 | - | - |
| 520
|
|
| 421
|
|
| 94
|
|
| 1
|
|
| 4
|
| ||||||||||||||||||||
Finance leases | 220 | 24 | 36 | 33 | 127 |
| 187
|
|
| 20
|
|
| 37
|
|
| 34
|
|
| 96
|
| ||||||||||||||||||||
Other long-term commitments | 2,051 | 858 | 847 | 316 | 30 |
| 1,390
|
|
| 678
|
|
| 590
|
|
| 95
|
|
| 27
|
| ||||||||||||||||||||
Other financial liabilities
|
| 150
|
|
| 149
|
|
| 1
|
|
| –
|
|
| –
|
| |||||||||||||||||||||||||
Total
| 24,727 | 7,298 | 4,992 | 4,484 | 7,953 |
| 32,862
|
|
| 5,166
|
|
| 6,813
|
|
| 5,942
|
|
| 14,941
|
| ||||||||||||||||||||
| (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 106100 and 107,101, note 15C on page 114,108 and 109, and note 20 on pages 125 and 126.120 to 122. 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
Included within operating profit is€1521 million (2015:(2017:€1520 million) paid to the external auditor, of which€1416 million (2015:(2017:€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.
EXPLANATION AND RECONCILIATION
OFNON-GAAP MEASURES
Unilever uses ‘constant rate’, and ‘underlying’ and ‘core’ 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 period average exchange rates.rates into euro, except for countries where the impact of consumer price inflation rates has escalated to extreme levels. In these countries, the local currency amounts before the application of IAS 29 are translated into euros using the period closing exchange rate.
The table below shows exchange rate movements in our key markets.
Annual average rate in 2016 | Annual average rate in 2015 | Annual 2018 | Annual 2017 | |||||||||||||
Brazilian real (€1 = BRL) | 4.282 | 3.573 | ||||||||||||||
Chinese yuan (€1 = CNY) |
| 7.807 |
|
| 7.608 |
| ||||||||||
Indian rupee (€1 = INR) |
| 80.730 |
|
| 73.258 |
| ||||||||||
Indonesia rupiah (€1 = IDR) |
| 16831 |
|
| 15011 |
| ||||||||||
Philippine peso (€ 1 = PHP) |
| 62.379 |
|
| 56.596 |
| ||||||||||
UK pound sterling (€1 = GBP) |
| 0.884 |
|
| 0.876 |
| ||||||||||
US dollar (€1 = US$) | 1.111 | 1.111 |
| 1.185 |
|
| 1.123 |
| ||||||||
Indian rupee (€1 = INR) | 74.588 | 71.047 | ||||||||||||||
Brazilian real (€1 = BRL) | 3.889 | 3.607 | ||||||||||||||
UK pound sterling (€1 = GBP) | 0.815 | 0.725 | ||||||||||||||
Indonesia rupiah (€1 = IDR) | 14770 | 14820 | ||||||||||||||
Chinese yuan (€1 = CNY) | 7.355 | 6.967 | ||||||||||||||
Argentine peso (€ 1 = ARS) | 16.292 | 10.087 | ||||||||||||||
In the following sections we set out our definitions of the followingnon-GAAP measures and provide reconciliations to relevant GAAP measures:
UNDERLYING SALES GROWTH
Underlying sales growthSales Growth (USG) refers to the increase in turnover for the period, excluding any change in turnover resulting from acquisitions, disposals and changes in currency. 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 onAlso excluded is the underlying sales performanceimpact of price growth from countries where the impact of consumer price inflation (CPI) rates has escalated to extreme levels.
There are two countries where we have determined extreme levels of CPI exist. The first is Venezuela where in Q4 2017 inflation rates exceeded 1,000% and management considered that the situation would persist for some time. Consequently, price growth in Venezuela has been excluded from USG since Q4 2017. The second is Argentina, which from Q3 2018 has been accounted for in accordance with IAS 29, and thus from Q3 2018 Argentina price growth is excluded from USG. The adjustment made at Group level as a result of these two exclusions was a reduction in price growth of 32.4% for the year. This treatment for both countries will be kept under regular review.
Prior to Q3 2018 USG only excluded the impact of price changes in countries where consumer price inflation has escalated to extreme levels of 1,000% or more. However, given the need to account for our Argentinian business and is a key measure used internally.in accordance with IAS 29, we have now also excluded price changes in countries that need to be accounted for in accordance with IAS 29. Prior to Q3 2018 there were no countries that were accounted for under IAS 29, so no restatements are necessary.
| Annual Report on Form 20-F 2018 | Strategic Report | 23 |
FINANCIAL REVIEWCONTINUED
The reconciliation of USG to changes in the GAAP measure turnover is as follows:
| TOTAL GROUP | 2016 vs 2015 | 2015 vs 2014 | ||||||
Turnover growth (%)(a) | (1.0 | ) | 10.0 | |||||
Effect of acquisitions (%) | 0.8 | 0.7 | ||||||
Effect of disposals (%) | (0.2 | ) | (0.8 | ) | ||||
Effect of exchange rates (%) | (5.1 | ) | 5.9 | |||||
Underlying sales growth (%)
|
| 3.7
|
|
| 4.1
|
| ||
PERSONAL CARE
| 2016 vs 2015 | 2015 vs 2014 | ||||||
Turnover growth (%)(a) | 0.5 | 13.2 | ||||||
Effect of acquisitions (%) | 1.7 | 1.0 | ||||||
Effect of disposals (%) | (0.3 | ) | – | |||||
Effect of exchange rates (%) | (4.9 | ) | 7.6 | |||||
Underlying sales growth (%)
|
| 4.2
|
|
| 4.1
|
| ||
FOODS
| 2016 vs 2015 | 2015 vs 2014 | ||||||
Turnover growth (%)(a) | (3.1 | ) | 4.5 | |||||
Effect of acquisitions (%) | – | – | ||||||
Effect of disposals (%) | (0.3 | ) | (2.5 | ) | ||||
Effect of exchange rates (%) | (4.7 | ) | 5.6 | |||||
Underlying sales growth (%) | 2.1 | 1.5 | ||||||
| TOTAL GROUP | 2018 vs 2017 | 2017 vs 2016 | ||||||||||||||
Turnover growth (%)(a) |
| (5.1 | ) |
| 1.9 |
| ||||||||||
Effect of acquisitions (%) |
| 2.0 |
|
| 1.3 |
| ||||||||||
Effect of disposals (%) |
| (3.0 | ) |
| (0.4 | ) | ||||||||||
Effect of exchange rates (%)(b) |
| (6.7 | ) |
| (2.1 | ) | ||||||||||
Underlying sales growth (%)(b) |
| 2.9 |
|
| 3.1 |
| ||||||||||
BEAUTY & PERSONAL CARE
| 2018 vs 2017 | 2017 vs 2016 | ||||||||||||||
Turnover growth (%)(a) |
| (0.3 | ) |
| 2.6 |
| ||||||||||
Effect of acquisitions (%) |
| 3.9 |
|
| 1.8 |
| ||||||||||
Effect of disposals (%) |
| – |
|
| (0.1 | ) | ||||||||||
Effect of exchange rates (%)(b) |
| (7.0 | ) |
| (1.9 | ) | ||||||||||
Underlying sales growth (%)(b) | 3.1 | 2.9 | ||||||||||||||
FOODS & REFRESHMENT
| 2018 vs 2017 | 2017 vs 2016 | ||||||||||||||
Turnover growth (%)(a) |
| (9.9 | ) |
| (0.4 | ) | ||||||||||
Effect of acquisitions (%) |
| 0.8 |
|
| 0.2 |
| ||||||||||
Effect of disposals (%) |
| (7.2 | ) |
| (0.8 | ) | ||||||||||
Effect of exchange rates (%)(b) |
| (5.6 | ) |
| (2.4 | ) | ||||||||||
Underlying sales growth (%)(b) |
| 2.0 |
|
| 2.7 |
| ||||||||||
| HOME CARE | 2016 vs 2015 | 2015 vs 2014 | 2018 vs 2017 | 2017 vs 2016 | ||||||||||||
Turnover growth (%)(a) | (1.5 | ) | 10.9 |
| (4.2 | ) |
| 5.6 |
| |||||||
Effect of acquisitions (%) | 0.6 | 0.2 |
| 0.5 |
|
| 3.1 |
| ||||||||
Effect of disposals (%) | (0.2 | ) | (0.1 | ) |
| (0.2 | ) |
| (0.2 | ) | ||||||
Effect of exchange rates (%) | (6.5 | ) | 4.5 | |||||||||||||
Underlying sales growth (%) | 4.9 | 5.9 | ||||||||||||||
| REFRESHMENT | 2016 vs 2015 | 2015 vs 2014 | ||||||||||||||
Turnover growth (%)(a) | (1.1 | ) | 10.3 | |||||||||||||
Effect of acquisitions (%) | 0.2 | 1.3 | ||||||||||||||
Effect of disposals (%) | (0.1 | ) | (0.7 | ) | ||||||||||||
Effect of exchange rates (%) | (4.6 | ) | 4.1 | |||||||||||||
Underlying sales growth (%) | 3.5 | 5.4 | ||||||||||||||
Effect of exchange rates (%)(b) |
| (8.3 | ) |
| (1.7 | ) | ||||||||||
Underlying sales growth (%)(b) |
| 4.2 |
|
| 4.4 |
| ||||||||||
| (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) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying sales growth and an equal and opposite adjustment made in effect of exchange rate. For 2017 only Q4 price growth in Venezuela has been excluded. |
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 growth in Argentina and Venezuela as explained in USG above.
The relationship between USG, UVG and UPG is set out below:
2016 vs 2015 | 2015 vs 2014 | 2018 vs 2017 | 2017 vs 2016 | |||||||||||||
Underlying volume growth (%) | 0.9 | 2.1 |
| 1.9 |
|
| 0.8 |
| ||||||||
Underlying price growth (%) | 2.8 | 1.9 |
| 0.9 |
|
| 2.3 |
| ||||||||
Underlying sales growth (%) | 3.7 | 4.1 |
| 2.9 |
|
| 3.1 |
| ||||||||
| (a) | For 2018 underlying price growth in Venezuela (from January 2018) and Argentina (from July 2018) has been excluded from underlying price in the table above and an equal and opposite adjustment made in the effect of exchange rates. For 2017 only Q4 price growth in Venezuela has been excluded. |
Refer to page 2421 for the relationship between USG, UVG and UPG for each of the categories.
CORENON-UNDERLYING ITEMS
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 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 96 for reconciliation of net profit attributable to shareholders’ equity to underlying profit attributable to shareholders’ equity.
| 24 | Strategic Report | Annual Report on Form 20-F 2018 |
UNDERLYING OPERATING PROFIT AND COREUNDERLYING OPERATING MARGIN
CoreUnderlying operating profit and coreunderlying operating margin mean operating profit and operating margin respectively, before the impact of business disposals, acquisition and disposal-related costs, impairments and other one-offnon-underlying items which we collectively term non-core items, due to their nature and/or frequency of occurrence. Corewithin operating profit. 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 the segments.
The reconciliation of operating profit to coreunderlying operating profit is as follows:
| € million 2016 | € million 2015 | |||||||
Operating profit | 7,801 | 7,515 | ||||||
Acquisition and disposal related costs | 132 | 105 | ||||||
(Gain)/loss on disposal of group companies | 95 | 9 | ||||||
Impairments and other one-off items | 18 | 236 | ||||||
Core operating profit | 8,046 | 7,865 | ||||||
Turnover | 52,713 | 53,272 | ||||||
Operating margin | 14.8 | % | 14.1 | % | ||||
Core operating margin | 15.3 | % | 14.8 | % | ||||
| € million 2018 | € million 2017 | |||||||
Operating profit
|
|
12,535
|
|
|
8,857
|
| ||
Non-underlying items within operating profit (see note 3)
|
| (3,176
| )
|
| 543
|
| ||
Underlying operating profit
|
| 9,359
|
|
| 9,400
|
| ||
Turnover
|
| 50,982
|
|
| 53,715
|
| ||
Operating margin
|
| 24.6
| %
|
| 16.5
| %
| ||
Underlying operating margin | 18.4 | % | 17.5 | % | ||||
Further details of non-corenon-underlying items can be found in note 3 on pages 92 to 93page 85 of the consolidated financial statements.
CORE EARNINGS PER SHARE
Core earnings per share (core EPS) is calculated as core profit attributable to shareholders’ equity divided by the diluted combined average number of share units. In calculating core earnings, net profit attributable to shareholders’ equity is adjusted to eliminate the post-tax impact of non-core items. This measure reflects the underlying earnings for each share unit of the Group. Refer to note 7 on page 103 for reconciliation of core earnings to net profit attributable to shareholders’ equity.
COREUNDERLYING EFFECTIVE TAX RATE
The coreunderlying effective tax rate is calculated by dividing taxation excluding the tax impact of non-corenon-underlying items by profit before tax excluding non-corethe 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 non-coreexcludingnon-underlying items before tax and share of net profit/(loss) of joint ventures and associates.
The reconciliation Tax impact onnon-underlying items within operating profit is the sum of taxation to taxation before non-core itemsthe tax on eachnon-underlying item, based on the applicable country tax rates and tax treatment. This is as follows:shown in the following table:
| € million 2016 | € million 2015 | |||||||
Taxation | 1,922 | 1,961 | ||||||
Tax impact of non-core items | 60 | 49 | ||||||
Taxation before non-core items | 1,982 | 2,010 | ||||||
Profit before taxation | 7,469 | 7,220 | ||||||
Non-core items before tax | 245 | 350 | ||||||
Share of net profit/loss of joint ventures and associates | (127 | ) | (107 | ) | ||||
Profit before tax, joint ventures, associates and non-core items | 7,587 | 7,463 | ||||||
Core effective tax rate | 26.1% | 26.9 | % | |||||
| € million 2018 | € million 2017 | |||||||
Taxation
|
|
2,575 |
|
|
1,667 |
| ||
Tax impact of:
| ||||||||
Non-underlying items within operating profit(a)
|
| (259
| )
|
| 77
|
| ||
Non-underlying items not in operating profit but within net profit(a)
|
| (29
| )
|
| 578
|
| ||
Taxation before tax impact ofnon-underlying | 2,287 | 2,322 | ||||||
Profit before taxation
|
| 12,383
|
|
| 8,153
|
| ||
Non-underlying items within operating profit before tax(a)
|
| (3,176
| )
|
| 543
|
| ||
Non-underlying items not in operating profit but within net profit before tax(b)
|
| (122
| )
|
| 382
|
| ||
Share of net (profit)/loss of joint ventures and associates
|
| (185
| )
|
| (155
| )
| ||
Profit before tax excludingnon-underlying items before tax and share of net profit/ (loss) of joint ventures and associates | 8,900 | 8,923 | ||||||
Underlying effective tax rate
| 25.7 | % | 26.0 | % | ||||
| (a) | Refer to note 3 for further details on these items. |
| (b) | 2018 amount excludes€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€32 million, totalnon-underlying items not in operating profit but within net profit before tax is€154 million. See note 3. |
CONSTANT COREUNDERLYING EARNINGS PER SHARE
Constant coreunderlying earnings per share (constant coreunderlying EPS) is calculated as coreunderlying profit attributable to shareholders’ equity at constant exchange rates and excluding the impact of both translational hedges and price inflation in Venezuela (for the whole of 2018) and Argentina (from July 2018) divided by the diluted combined average number of share units.ordinary shares. This measure reflects the underlying earnings for each ordinary share unit of the Group in constant exchange rates.
The reconciliation of coreunderlying profit attributable to shareholders’ equity to constant coreunderlying earnings attributable to shareholders’ equity and the calculation of constant coreunderlying EPS is as follows:
€ million 2016 | € million 2015 | |||||||
Core profit attributable to shareholders’ equity (see note 7) | 5,370 | 5,210 | ||||||
Impact of translation of earnings between constant and current exchange rates and translational hedges | 169 | (125 | ) | |||||
Constant core earnings attributable to shareholders’ equity | 5,539 | 5,085 | ||||||
Diluted combined average number of share units (millions of units) | 2,853.9 | 2,855.4 | ||||||
Constant core EPS (€) | 1.94 | 1.78 | ||||||
| € million 2018 | € million 2017 | |||||||
Underlying profit attributable to shareholders’ equity(a)
|
|
6,365
|
|
|
6,315
|
| ||
Impact of translation from current to constant exchange rates and translational hedges
|
| 7,112
|
|
| 95
|
| ||
Impact of Venezuela and Argentina price inflation(b)
|
| (6,551
| )
|
| –
|
| ||
Constant underlying earnings attributable to shareholders’ equity
|
|
6,926
|
|
|
6,410
|
| ||
Diluted combined average number of share units (millions of units)
|
| 2,694.8
|
|
| 2,814.0
|
| ||
Constant underlying EPS (€)
|
| 2.57
|
|
| 2.28
|
| ||
In calculating the movement
| (a) | See note 7. |
| (b) | See pages 23 and 24 for further details. |
From 2018, in our reporting of growth in constant coreunderlying EPS, we translate the prior period using an annual average exchange rate rather than monthly averages. This change has been made to align with the prior period constant core EPSexchange rate used for 2016 is compared to the core EPS for 2015 as adjusted for thecalculating USG. The impact of translational hedges, which wasthis is an increase of€1.82.0.01 per share in 2017 constant underlying EPS.
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 expenditures and net interest payments and preference dividends paid. 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 2018 | € million 2017 | |||||||
Net profit
|
|
9,808
|
|
|
6,486
|
| ||
Taxation
|
| 2,575
|
|
| 1,667
|
| ||
Share of net profit of joint ventures/associates and other income fromnon-current investments
|
| (207
| )
|
| (173
| )
| ||
Net monetary gain arising from hyperinflationary economies
|
| (122
| )
|
| –
|
| ||
Net finance costs
|
| 481
|
|
| 877
|
| ||
Depreciation, amortisation and impairment
|
| 1,747
|
|
| 1,538
|
| ||
Changes in working capital
|
| (793
| )
|
| (68
| )
| ||
Pensions and similar obligations less payments
|
| (128
| )
|
| (904
| )
| ||
Provisions less payments
|
| 55
|
|
| 200
|
| ||
Elimination of (profits)/losses on disposals
|
| (4,299
| )
|
| (298
| )
| ||
Non-cash charge for share-based compensation
|
| 196
|
|
| 284
|
| ||
Other adjustments
|
| (266
| )
|
| (153
| )
| ||
Cash flow from operating activities
|
| 9,047
|
|
| 9,456
|
| ||
Income tax paid
|
| (2,294
| )
|
| (2,164
| )
| ||
Net capital expenditure
|
| (1,424
| )
|
| (1,621
| )
| ||
Net interest and preference dividends paid
|
| (367
| )
|
| (316
| )
| ||
Free cash flow
|
|
4,962
|
|
|
5,355
|
| ||
Net cash flow (used in)/from investing activities
|
| 4,644
|
|
| (5,879
| )
| ||
Net cash flow (used in)/from financing activities
|
| (11,548
| )
|
| (1,433
| )
| ||
| Annual Report on Form 20-F | Strategic Report |
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 reconciliationannual average is computed by adding the amounts at the beginning and the end of net profit to FCF is as follows:the calendar year and dividing by two.
| € million 2016 | € million 2015 | |||||||
Net profit | 5,547 | 5,259 | ||||||
Taxation | 1,922 | 1,961 | ||||||
Share of net profit of joint ventures/associates and other income from non-current investments | (231 | ) | (198 | ) | ||||
Net finance costs | 563 | 493 | ||||||
Depreciation, amortisation and impairment | 1,464 | 1,370 | ||||||
Changes in working capital | 51 | 720 | ||||||
Pensions and similar obligations less payments | (327 | ) | (385 | ) | ||||
Provisions less payments | 65 | (94 | ) | |||||
Elimination of (profits)/losses on disposals | 127 | 26 | ||||||
Non-cash charge for share-based compensation | 198 | 150 | ||||||
Other adjustments | (81 | ) | 49 | |||||
Cash flow from operating activities | 9,298 | 9,351 | ||||||
Income tax paid | (2,251 | ) | (2,021 | ) | ||||
Net capital expenditure | (1,878 | ) | (2,074 | ) | ||||
Net interest and preference dividends paid | (367 | ) | (460 | ) | ||||
Free cash flow | 4,802 | 4,796 | ||||||
Net cash flow (used in)/from investing activities | (3,188 | ) | (3,539 | ) | ||||
Net cash flow (used in)/from financing activities | (3,073 | ) | (3,032 | ) | ||||
| € million | € million | € million | ||||||||||||||
| Beauty & | Foods & | Home | € million | |||||||||||||
| 2018 | Personal Care | Refreshment | Care | Total | ||||||||||||
Underlying operating profit before tax |
| 4,508 |
|
| 3,534 |
|
| 1,317 |
|
| 9,359 |
| ||||
Tax on underlying operating profit |
| (1,159 | ) |
| (908 | ) |
| (338 | ) |
| (2,405 | ) | ||||
Underlying operating profit after tax |
| 3,349 |
|
| 2,626 |
|
| 979 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,631 |
|
| 4,783 |
|
| 1,933 |
|
| 10,347 |
| ||||
Net assets held for sale |
| 1 |
|
| 25 |
|
| – |
|
| 26 |
| ||||
Inventories |
| 1,737 |
|
| 1,761 |
|
| 803 |
|
| 4,301 |
| ||||
Trade and other receivables |
| 2,319 |
|
| 3,027 |
|
| 1,139 |
|
| 6,485 |
| ||||
Trade payables and other current liabilities |
| (5,478 | ) |
| (5,984 | ) |
| (2,995 | ) |
| (14,457 | ) | ||||
Period end assets (net) |
| 2,210 |
|
| 3,612 |
|
| 880 |
|
| 6,702 |
| ||||
Average assets for the period (net) |
| 2,178 |
|
| 3,830 |
|
| 799 |
|
| 6,807 |
| ||||
Division return on assets |
| 154 | % |
| 69 | % |
| 123 | % |
| 102 | % | ||||
2017 | ||||||||||||||||
Underlying Operating Profit before tax |
| 4,375 |
|
| 3,737 |
|
| 1,288 |
|
| 9,400 |
| ||||
Tax on underlying operating profit |
| (1,139 | ) |
| (972 | ) |
| (335 | ) |
| 2,446 |
| ||||
Underlying Operating Profit after tax |
| 3,236 |
|
| 2,765 |
|
| 953 |
|
| 6,954 |
| ||||
Property plant and equipment |
| 3,520 |
|
| 5,104 |
|
| 1,787 |
|
| 10,411 |
| ||||
Net assets held for sale |
| 1 |
|
| 742 |
|
| – |
|
| 743 |
| ||||
Inventories |
| 1,590 |
|
| 1,637 |
|
| 735 |
|
| 3,962 |
| ||||
Trade and other receivables |
| 2,018 |
|
| 2,172 |
|
| 1,032 |
|
| 5,222 |
| ||||
Trade payables and other current liabilities |
| (4,984 | ) |
| (5,606 | ) |
| (2,836 | ) |
| (13,426 | ) | ||||
Period end assets (net) |
| 2,145 |
|
| 4,049 |
|
| 718 |
|
| 6,912 |
| ||||
Average assets for the period (net) |
| 2,122 |
|
| 4,201 |
|
| 778 |
|
| 7,101 |
| ||||
Division return on assets |
| 152 | % |
| 66 | % |
| 122 | % |
| 98 | % | ||||
NET DEBT
Net debt is 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 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.
The reconciliation of total financial liabilities to net debt is as follows:
| € million 2016 | € million 2015 | |||||||
Total financial liabilities | (16,595 | ) | (14,643 | ) | ||||
Current financial liabilities | (5,450 | ) | (4,789 | ) | ||||
Non-current financial liabilities | (11,145 | ) | (9,854 | ) | ||||
Cash and cash equivalents as per balance sheet | 3,382 | 2,302 | ||||||
Cash and cash equivalents as per cash flow statement | 3,198 | 2,128 | ||||||
Add bank overdrafts deducted therein | 184 | 174 | ||||||
Other current financial assets | 599 | 836 | ||||||
Net debt | (12,614 | ) | (11,505 | ) | ||||
| € million 2018 | € million 2017 | |||||||
Total financial liabilities |
| (24,885
| )
|
| (24,430
| )
| ||
Current financial liabilities |
| (3,235 | ) |
| (7,968 | ) | ||
Non-current financial liabilities |
| (21,650 | ) |
| (16,462 | ) | ||
Cash and cash equivalents as per balance sheet |
| 3,230
|
|
| 3,317
|
| ||
Cash and cash equivalents as per cash flow statement |
| 3,090 |
|
| 3,169 |
| ||
Add bank overdrafts deducted therein |
| 140 |
|
| 167 |
| ||
Less cash and cash equivalents held for sale |
| – |
|
| (19 | ) | ||
Other current financial assets |
| 874 |
|
| 770 |
| ||
Net debt |
| (20,781 | ) |
| (20,343 | ) | ||
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 coreunderlying operating profit after tax divided by the annual average of: goodwill, intangible assets, property, plant and equipment, net non-current assets held for sale, inventories, trade and other current receivables, and trade payables and other current liabilities.
| € million 2016 | € million 2015 | € million 2018 | € million 2017 | |||||||||||||
Core operating profit before tax | 8,046 | 7,865 | ||||||||||||||
Tax on core operating profit(a) | (2,102 | ) | (2,118 | ) | ||||||||||||
Core operating profit after tax | 5,944 | 5,747 | ||||||||||||||
Underlying operating profit before tax(a) |
| 9,359 |
|
| 9,400 |
| ||||||||||
Tax on underlying operating profit(b) |
| (2,405 | ) |
| (2,446 | ) | ||||||||||
Underlying operating profit after tax |
| 6,954 |
|
| 6,954 |
| ||||||||||
Goodwill | 17,624 | 16,213 |
| 17,341 |
|
| 16,881 |
| ||||||||
Intangible assets | 9,809 | 8,846 |
| 12,152 |
|
| 11,520 |
| ||||||||
Property, plant and equipment | 11,673 | 11,058 |
| 10,347 |
|
| 10,411 |
| ||||||||
Net non-current assets held for sale | 205 | 173 | ||||||||||||||
Net assets held for sale |
| 108 |
|
| 3,054 |
| ||||||||||
Inventories | 4,278 | 4,335 |
| 4,301 |
|
| 3,962 |
| ||||||||
Trade and other current receivables | 5,102 | 4,804 |
| 6,485 |
|
| 5,222 |
| ||||||||
Trade payables and other current liabilities | (13,871 | ) | (13,788 | ) |
| (14,457 | ) |
| (13,426 | ) | ||||||
Period-end invested capital | 34,820 | 31,641 |
| 36,277 |
|
| 37,624 |
| ||||||||
Average invested capital for the period | 33,231 | 30,462 |
| 36,951 |
|
| 36,222 |
| ||||||||
Return on average invested capital | 17.9 | % | 18.9 | % |
| 18.8 | % |
| 19.2 | % | ||||||
| (a) | See reconciliation of operating profit to underlying operating profit on page 25. |
| (b) | Tax on |
| 26 | Strategic Report | Annual Report on Form 20-F 2018 |
OUR 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 Board agenda, which is where we believe it should be.
Unilever adopts a risk profile that is aligned to our vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact. Our 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.
ORGANISATION
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. This organisational structure and distribution of accountabilities and responsibilities ensure that every country in which we operate has specific resources and processes for risk reviews 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 PRINCIPLES
Unilever’s approach to doing business is framed by our Purpose and values (see page 1). 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 underpins the Code of Business Principles and set 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.
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.
PROCESSES
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 ANDRE-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 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 43 to 45.
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 41 and 42.
| Annual Report on Form 20-F 2018 | Strategic Report | 27 |
RISKSCONTINUED
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 the Group together with the factors likely to affect the Group’s future development, performance, financial position, cash flows, liquidity position and borrowing facilities as described on pages 1 to 26. In addition, we describe in notes 15 to 18 on pages 104 to 120 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.
ASSESSMENT
In order to report on the long-term viability of 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 the Group, including those that would threaten its business model, future performance, solvency or liquidity. The assessment assumes that any debt maturing in the next three years can bere-financed at commercially acceptable terms or via our current standby facility. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks. The risk factors are summarised on pages 29 to 33.
The viability assessment has two parts:
First, the Directors considered the period over which they have a reasonable expectation that the Group will continue to operate and meet its liabilities, taking into account current debt facilities and debt headroom; and
Second, 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 and the lost cost and growth opportunities from not keeping up with technological changes; and
assessing scenarios that involve more than one principal risk 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 lower sales of products of this brand and the temporary closure of our largest sourcing unit. | A fine equal to 1% of Group turnover was considered along with damage to our largest brand and disruption to supply chain. | • 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 sourcing unit and significant water shortages in our key developing markets. | The complete loss of all of our turnover in our largest geographic market was considered along with destruction of a key sourcing unit and reduced demand for our products that require water. | • Economic and political instability • Supply chain • Climate change | ||
| Global economic downturn leading to an increase in funding costs and the loss of our three largest customers. | Significant business disruption in our largest emerging market was considered with the impact of losing our three key customers. | • Economic and political instability • Treasury and pensions • Customer relationships | ||
FINDINGS
| ��� | Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by the strategic 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 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 year horizon; and
the Group’s diverse product and geographical activities which are impacted by continuously evolving technology and innovation.
Secondly, 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.
CONCLUSION
On the basis described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
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 principal risks could impact our business within the next two years (ie short-term risks), or could impact our business over the next three to five years (ie medium-term risks). Some principal risks, such as climate change, could also impact over the longer term (ie beyond five years).
Our principal risks have not fundamentally changed this year apart from the addition of a plastic packaging risk. Given the nature of our business, a reduction in the amount of plastic packaging and increase in the use of recyclable content in our packaging is critical to our future success.
| 28 | Strategic Report | Annual Report on Form 20-F 2018 |
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. In addition to our plastic packaging risk there are three areas where we believe there is an increased level of risk:
Customer Relationships: technology is changing our channel landscape and hence changing the nature of the relationships with our traditional customers as well as requiring us to develop relationships with new customers who are drivinge-commerce development;
Systems and Information: the number of cybersecurity attacks is still increasing significantly, and incidents are becoming more sophisticated as technology further evolves; and
Business Transformation: this risk has increased as a result of the speed of technological change which means the pressure to digitalise our business to take advantage of the opportunities it presents, both in terms of growth and cost efficiency, is increasing.
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.
DESCRIPTION OF RISK |
BRAND PREFERENCE As a branded goods business, Unilever’s 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, and Unilever’s ability to identify and respond to these changes is vital to our business success. 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. If we are unable to innovate effectively, Unilever’s sales or margins could be materially adversely affected. |
| 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 categories, 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. |
| SUSTAINABILITY |
The success of our business depends on finding sustainable solutions to support long-term growth. Unilever’s vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact, will require more sustainable ways of doing business. In a world where resources are scarce and demand for them continues to increase, it is critical that we succeed in reducing our resource consumption and converting to sustainably sourced supplies. In doing this we are dependent on the efforts of partners and various certification bodies. We are also committed to improving health and well-being and enhancing livelihoods around the world so Unilever and our communities grow successfully together. There can be no assurance that sustainable business solutions will be developed and failure to do so could limit Unilever’s growth and profit potential and damage our corporate reputation. |
| Annual Report on Form 20-F 2018 | Strategic Report | 29 |
RISKSCONTINUED
DESCRIPTION OF RISK |
CLIMATE CHANGE |
Climate changes and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products. Climate changes are occurring around the globe which may impact our business in various ways. They could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. They 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. |
| PLASTIC PACKAGING |
A reduction in the amount of plastic and an increase in the use of recyclable content in our packaging is 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 globe. 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. |
| CUSTOMER RELATIONSHIPS |
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. |
| 30 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
TALENT |
A skilled workforce and agile ways of working are essential for the continued success of our business. Our ability to attract, develop and retain the right number of appropriately qualified 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. |
| 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. |
| 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. |
| 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. |
| Annual Report on Form 20-F 2018 | Strategic Report | 31 |
RISKSCONTINUED
DESCRIPTION OF RISK |
| 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. A number of key projects were announced in 2017 to accelerate sustainable shareholder value creation. 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. Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation. Failure to keep pace with such technological change would significantly impact our growth and profitability. |
| 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. |
| TREASURY AND PENSIONS |
Unilever is exposed to a variety of external financial risks in relation to Treasury and Pensions. 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. Unilever may face liquidity risk, ie difficulty in meeting its obligations, associated with its financial liabilities. A material and sustained shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and also restrict Unilever’s ability to raise funds. We are exposed to market interest rate fluctuations on our floating rate debt. Increases in benchmark interest rates could increase the interest cost of our floating rate debt and increase the cost of future borrowings. In times of financial market volatility, we are also potentially exposed to counter-party risks with banks, suppliers and customers. Certain businesses have defined benefit pension plans, most now closed to new employees, which are exposed to movements in interest rates, fluctuating values of underlying investments and increased life expectancy. Changes in any or all of these inputs could potentially increase the cost to Unilever of funding the schemes and therefore have an adverse impact on profitability and cash flow. |
| 32 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
| ETHICAL |
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. 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. Despite the commitment of Unilever to ethical business and the steps we take to adhere to this commitment, there remains a risk that activities or events cause us to fall short of our desired standard, resulting in damage to Unilever’s corporate reputation and business results. |
| 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. Tax, in particular, is a complex 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 & Profit Shifting project and further potential tax reform in the EU and Switzerland. |
IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIES
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES.
Unilever recognises the importance of disclosing climate-related risks and opportunities. Adopting the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to alow-carbon economy.
In this Annual Report and Accounts, we continue to integrate climate-related disclosures throughout the Strategic Report narrative. However, in recognition of the growing significance of the impacts of climate change on our business, we have also summarised the risks and opportunities arising from climate change, and our response below.
The Boards take overall accountability for the management of climate change risks and opportunities with support from the ULE and the USLP Steering Team (see page 46). Chaired by Keith Weed in 2018, the USLP Steering Team includes nine members of the ULE and meets five times a year. During 2018, there were numerous agenda items on topics related to climate change including our overall climate strategy and our renewable electricity target.
For management employees (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. The USLP component accounts for 25% of total MCIP award. The sustainability component of MCIP includes consideration of our progress against climate change, water and palm oil targets, which among others, underpin our climate strategy. See pages 52 to 54 for more on MCIP.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever which has the potential to impact our business in the short, medium and long-term. Further details on the nature of climate risks and opportunities for Unilever can be found in our 2018 CDP Climate submission (see further climate change disclosures on pages 7 and 14).
To further understand the impact that climate change could have on Unilever’s business 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 and we have looked at the impact on our business in 2030 assuming we have the same business activities as we do today. We also made the following simplifying assumptions:
| Annual Report on Form 20-F 2018 | Strategic Report | 33 |
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 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 work 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.
During 2018 we developed and piloted an approach to assess the impact of climate change on our key commodities. We selected soy for this pilot based on its importance to Unilever (large purchased volume), it being ahigh-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. Climate change was the only price factor accounted for in the model used to calculate the impact. Other factors which impact price, such as technology and acreage, were excluded. The model considered the direct risks from climate change to the price of soybean oil, such as change in yield and change in supply. 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 would need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as catastrophic 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. We have therefore decided to get broader understanding on the climate change risks to our agricultural sourcing and extend our analysis to two other important crops to Unilever: Palm Oil and Tea, for which suitable climate change models for yield predictions will be available in 2019.
RESPONDING TO RISKS AND OPPORTUNITIES
Unilever’s vision is to grow our business whilst decoupling our growth from our environmental footprint and increasing positive social impact. This vision explicitly recognises that sustainable growth – including management of climate-related risks and opportunities – is the only way to create long-term value for all our stakeholders.
The Unilever Sustainable Living Plan (USLP) was developed to deliver our vision. It is fully integrated with our business strategy. Climate-related issues are integral to the USLP. Two of our GHG reduction targets included in the USLP are recognised as science-based:
We are taking action across our value chain to reduce our emissions, creating growth opportunities and minimising risk. Our commitment to source 100% of our palm oil from sustainable sources is helping to avoid emissions from deforestation (see pages 14 and 47). Our efforts to reduce energy and GHG emissions in manufacturing are helping us to save costs. For example, by using less energy, we have already avoided energy costs in our factories of over€600 million since our baseline year of 2008.
Our divisions are taking action to reduce emissions. In Home Care we are focusing on concentrated liquid laundry detergents such as Persil, Omo and Surf Small & Mighty which help consumers to wash clothes at lower temperatures, reducing GHG by up to 50% per load. We have removed phosphates from all laundry powders worldwide, resulting in lower greenhouse gas emissions of up to 50% per consumer use. Our Foods & Refreshment division has prioritised reducing greenhouse gas emissions from ice cream freezers since 2008. As the world’s largest producer of ice cream, we have committed to accelerating theroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2018 our total purchase of these cabinets had increased to around 2.9 million.
Detailed Lifecycle Analysis has shown that our GHG contribution from animal-based agriculture, including fats and proteins, is relatively low: 7.5% for Foods & Refreshment and 2.5% for total Unilever. While emissions are comparatively low, the business opportunity is significant for natural and plant-based foods and beverages. We have a range of vegan and vegetarian variants such as Hellmann’s vegan mayonnaise, Ben & Jerry’snon-dairy ice creams, Magnum vegan and other options (see pages 11 to 12). We continue to actively promote vegetarian and vegan recipes, notably via our Knorr brand websites.
A number of our targets directly address risks and opportunities related to water scarcity caused by climate change. We estimate that the sale of products which address water scarcity issues could increase in our Home Care and Beauty & Personal Care divisions where a number of products are available which address water scarcity and/ or have a lower GHG in use. For example, our Beauty & Personal Care division is investing in water smart product innovations such as dry shampoo and cleansing conditioner which help consumers use less water while also offering relevant benefits such as reduced colour loss and damage which can arise from frequent washing. Home Care is 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 help our consumers save water. Day2, the world’s first dry wash spray is made with only 0.02% of the water in a normal laundry load. Sunlight2-in-1 Handwashing Laundry Powder and Rin (Radiant) detergent bar are also helping to reduce water consumption at point of use in water-stressed countries.
| 34 | Strategic Report | Annual Report on Form 20-F 2018 |
Home Care is home to three brands, Pureit, Truliva/Qinyuan and Blueair, which are responding directly to issues related to climate change. Pureit and Truliva, our water purification businesses, offer products which provide safe drinking water to millions of people with a lower carbon footprint than alternatives. Our detailed lifecycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair, our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Several other targets in our USLP indirectly address climate risk and opportunities by aiming to support groups who are vulnerable to the effects of climate change and who are critical to our future growth, notably smallholder farmers and women in low income countries.
Unilever continues to support a number of policy measures to accelerate the transition to alow-carbon economy, including the pricing of carbon and removal of fossil fuel subsidies which act as negative carbon prices. We believe that carbon pricing is a fundamental part of the global response to climate change 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. In 2016, we implemented an internal price on carbon as part of the business case appraisal for large capital expenditure projects. The carbon price is also applied to emissions from our manufacturing sites to raise a clean-tech fund. So far,€73 million has been allocated to this fund for energy and water saving projects. In January 2018 the price of carbon was€40 per tonne.
MEASURING AND REPORTING
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 7 with commentary on page 13 and 14. Our website contains detailed commentary on our USLP targets as well as actions we are taking to achieve them.
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. We have a role to play as an industry leader to help shape those markets. We are working collaboratively with partners, suppliers and others to achieve our ambition.
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. The basis of this plan is the set of around 2,800 products representative of our global portfolio across all divisions for which we have full value-chain lifecycle analysis results.
We recalculated the footprint of these products using the latest 2030 projections on external transitions to alow-carbon economy (eg International Energy Agency 2030 projection on grid changes to renewable energy),low-carbon transition plans in our operations (eg achieving zero net deforestation by 2020, using 100% renewable energy by 2020) and Innovation Roadmaps (eg redesign for lower embedded carbon emissions, transforming the temperature-controlled supply chain).
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 (GHG) emissions are set out below. 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.
We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels and the operation of facilities (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). Each year PwC assure selected manufacturing environmental metrics including carbon emissions from energy use and energy use per tonne of production.
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.
UNILEVER GREENHOUSE GAS EMISSIONS BY ACTIVITY^
| 2018 | 2017 | |||||||
| Manufacturing (scope 1 and 2) | ||||||||
Scope 1 (tonnes CO2) | 711,875 | 773,856 | ||||||
Scope 2* (tonnes CO2) | 726,167 | 793,472 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 1,438,042 | 1,567,328 | ||||||
Intensity ratio (kg CO2 per tonne of production) | 70.46 | 76.77 | ||||||
| Distribution centres, research laboratories, marketing and sales offices (scope 1 and 2) |
| |||||||
Scope 1 (tonnes CO2) | 20,052 | 20,039 | ||||||
Scope 2* (tonnes CO2) | 100,924 | 102,292 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 120,976 | 122,331 | ||||||
| Upstream and downstream of Unilever operations – top 3 emissions sources (scope 3) |
| |||||||
Consumer use | ||||||||
(downstream) (tonnes CO2e)q | 39,895,946 | 38,697,432 | ||||||
Ingredients and packaging | ||||||||
(upstream) (tonnes CO2e)‡ | 14,985,897 | 15,000,941 | ||||||
Distribution and retail | ||||||||
(downstream) (tonnes CO2e) | 4,368,626 | 3,895,589 | ||||||
| ^ | 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). |
| + | 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. |
| * | 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). |
| q | 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. |
| ‡ | 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. |
| Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
FURTHER CLIMATE CHANGE DISCLOSURES
This Annual Report and Accounts contains additional disclosures on our climate change risks and opportunities:
Our website contains disclosures on our greenhouse gas and water USLP 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 (password required).
| www.cdp.net |
| Annual Report on Form 20-F 2018 | Strategic Report | 35 |
GOVERNANCE OF UNILEVERUNILEVER’S STRUCTURE
ABOUT UNILEVER
Unilever N.V. (NV) and Unilever PLC (PLC), together with their group companies have, sinceSince its formation in 1930, the Unilever Group was formed in 1930,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* 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. TheThis 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.
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 information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be found on our website.
| * | Throughout this report, when referring to NV shares or shareholders, the term ‘shares’ or ‘shareholder’ also encompasses a depositary receipt or a holder of depositary receipts. |
 | www.unilever.com/ governance/legal-structure-and-foundation-agreements/ |
BOARDS
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, 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. Until 21 April 2016In the normal course Unilever had onehas two Executive Director,Directors, the Chief Executive Officer (CEO), who chairs and the Unilever Leadership Executive (ULE). Our previous Chief Financial Officer (CFO). On 31 December 2018 the current CEO resigned with effect from 1 October 2015 and his successor, Graeme Pitkethly, became a member of the ULE and the CFOAlan Jope, was appointed on 1 October 2015. Graeme becameJanuary 2019. Alan will be proposed to be appointed as an Executive Director on 21 April 2016 upon his appointment at the 20162019 AGMs. As from that date Unilever continued toConsequently, between 1 January 2019 and the 2019 AGMs in May we have twoone Executive Directors.Director.
A list of our current Directors, their roles on the Boards, their dates of appointment, tenure and their other major appointments is set out on page 3.
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 disposals, capital expenditure, contracts, litigation, financing and pensions. The CEO is responsible to the Boards in relation to the operational running of the Group and is ableother powers delegated to him by the Boards. The CEO can delegate any of his powers and discretions, whichand he does so delegate to members of the ULE.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. 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, the Division Presidents, the Presidents for Europe and North America, and the Chief 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 COMMITTEES
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 2016,2018, can be found on pages 4243 to 77.65.
| www.unilever.com/ governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVER
Further details of the roles and responsibilities of the Chairman, Senior Independent Director/Vice-Chairman, CEO, CFO 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).
| www.unilever.com/ governance/our-corporate-governance/ |
| 36 | Governance Report | Annual Report on Form 20-F 2018 |
BOARD EFFECTIVENESS
BOARD MEETINGS
A minimum of six 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 of the GroupUnilever Group; the development of and approval of the overall strategy of the Group.Unilever Group; oversight of the performance of the business; review of risks and internal risk management and control systems; authorisation of major transactions; declaration of dividends; convening of shareholders’ meetings; succession planning; review of the functioning of the Boards and their Committees; culture; and review of corporate responsibility and sustainability, in particular the Unilever Sustainable Living Plan. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In 2018 the Boards met physically in January, March, May, 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 sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, and promotes effective relationships and open communication between the Executive andNon-Executive Directors.
In 2016 the Boards met physically in January, February, April, July, September and November and considered important corporate events and actions, such as:
CORPORATE GOVERNANCECONTINUED
ATTENDANCE
The table showing the attendance of current Directors at Board meetings in 20162018 can be found on page 3. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Both Michael Treschow and Hixonia NyasuluAnn Fudge attended four of the three Board meetings they wereshe was eligible to attend before retiring from the Boards on 21 April 2016.3 May 2018.
NON-EXECUTIVE DIRECTOR MEETINGS
TheNon-Executive Directors usually meet as a group, without the Executive Directors present, to consider specific agenda items set by them, usually four or five timeswhen there is a year.face-to-face Board meeting. In 20162018 they met sixfive times. The Chairman, or in his absence the Vice-Chairman/Senior Independent Director,Director/Vice-Chairman, chairs such meetings.
BOARD EVALUATION
Each year the Boards formally assess their own performance with the aim of helping to improve the effectiveness of both the Boards and the Committees and atCommittees. At least once every three years an independent third party facilitates the evaluation. The last external evaluation was performed in 2014.2017. The evaluation consists of individual interviews with the Directors by the Chairman and, when relevant, by the external evaluator. These interviews are complemented by the completion by all Directors of three confidential online evaluation questionnaires on the efficiency and effectiveness of our Boards, CEO and Chairman. However,The Boards evaluation questionnaire this year only two questionnaires were completed, on the CEO and the Boards, the latter questionnaire inviting commentsfocused on a number of key areas including strategy, board composition, effectiveness, trainingStrategy, Risk/Financial Controls, Board Effectiveness and knowledge. GivenInformation/Knowledge. The Chairman’s statement on page 2 describes the key actions agreed by the Boards following the evaluation.
The evaluation of the performance of the Chairman was only appointed in April 2016,and CEO is led by the Senior Independent Director/Vice-Chairman led a collective discussion with the Non-Executive Directors on the Chairman’s performanceand Chairman respectively, and the results of the Chairman’s effectiveness review were then discussed between the Chairman and the Vice-Chairman.bespoke questionnaires will be used to support these evaluations. Committees of the Boards evaluate themselves annually under supervision of their respective ChairmenChairs taking into account the views of respective Committee members and the Boards. The key actions agreed by each Committee in the 20162018 evaluations can be found in each Committee Report.
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 46 to 4748 and 49 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/ governance/board-and-management-committees/ |
DIRECTOR 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. Details of the training provided toFor example, in 2018 the Directors in 2016 can be found inreceived presentations on Information Security, Digital, the Chairman’s Statement on page 2.Supply Chain and Simplification.
INDEPENDENCE AND CONFLICTS
As theNon-Executive Directors make up the Committees of the Boards, it is important that they 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 appropriate, authorisationA Director must without delay report any conflict of situational conflicts is given by the Boardsinterest or potential conflict of interest 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. Situational conflicts are reviewed annually byto the Boards, so that the Boards can decide whether a reported (potential) conflict of interest of a Director qualifies as parta conflict of interest within the meaning of the determination of Director independence. In between those reviews Directors have a duty to inform the Boards of any relevant changes to their situation.laws. A Director may not vote on, or be counted in a quorum in relation to, any resolution 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.
INDEMNIFICATION
The terms of NV Directors’ indemnification are provided for in NV’s Articles 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 partyThird-party directors’ and officers’ liability insurance was in place for all Unilever Directors throughout 20162018 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.
| Annual Report on Form 20-F 2018 | Governance Report | 37 |
CORPORATE GOVERNANCECONTINUED
OUR SHARES
NV SHARES
SHARE CAPITAL
NV’s issued share capital on 31 December 20162018* was made up of:
| * | When referred to the issued share capital on 31 December 2018 also€62,065,550 split into two classes (6% and 7%) of cumulative preference shares was outstanding. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon in the General Meeting of NV. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018 with the Dutch Trade Register and an announcement thereof in a daily and nationally distributed newspaper in the Netherlands was made on 5 December 2018. These shares |
LISTINGS
NV has listings of ordinary shares 6% and 7% cumulative preference shares(UNIA) 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 hold and can vote in person or by proxy. The voting rights attached to NV’s outstanding shares are split as follows:
| Total number of votes | % of issued capital | Total number of votes | % of issued capital | |||||||||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 76.89 | 1,714,727,700 | (a) | 99.63 | ||||||||||
2,400 special shares | 6,428,550 | 0.29 |
| 6,428,550 |
|
| 0.37 |
| ||||||||
161,060 6% cumulative preference shares | 431,409,276 | (b) | 19.34 | |||||||||||||
29,000 7% cumulative preference shares | 77,678,313 | (c) | 3.48 | |||||||||||||
As at 31 December 2016:2018:
| (a) | 254,012,896 shares were held in treasury and |
The special shares and the shares under (a), (b) and (c) are not voted on.
SHARE ISSUES AND BUY BACKSPURCHASE OF SHARES
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 21 April 20163 May 2018 the Board of NV was designated as the corporate body authorised to resolve on the issue of, or on the granting of rights to subscribe for, shares not yet issued and to restrict or exclude the statutorypre-emption rights that accrue to shareholders upon issue of shares, on the understanding that this authority is limited to 33% of NV’s issued ordinary share capital and to disapplypre-emption rights to 5% of NV’s issued share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at NV’s 2018 AGM the NV Board was designated as the corporate body authorised to purchase (i) ordinary shares with a maximum of 10% of the issued share capital of NV, plus an additional 10% of the issued share capital of NV in connection with or on the occasion of mergers, acquisitions or strategic alliances.
At the 2016 NV AGM the Board of NV was also authorised to cause NV to buy back its own shares or depositary receipts thereof, with a maximum of 10% of issued share capital, either through purchase on a stock exchange or otherwise, at a price, excluding expenses, not lower than€0.01 (one euro cent)as well as (ii) any and not higher than 10% above the average of the closing price of the shares on the trading venue where the purchase is carried out for the five business days before the day on which the purchase is made.all 6% and 7% cumulative preference shares.
These authorities expire on the earlier of the conclusion of the 20172019 NV AGM or the close of business on 30 June 20172019 (the last date by which NV must hold an AGM in 2017)2019). Such authorities (other than with respect to the 6% and 7% cumulative preference shares) are renewed annually and authority will be sought at NV’s 2017 AGM.annually.
During 20162018 companies within the Unilever group companiesGroup purchased 2,930,0004,000,000 NV ordinary shares, representing 0.17%0.23% of the issued ordinary share capital, for€118,119,958 and 972,584 NV New York Registry Shares, representing 0.06% of the issued ordinary share capital, for€38,947,918.183,380,649. These purchases were made to facilitate grants made in connection with Unilever’s employee compensation programmes. No NV 6% cumulative preference shares nor NV 7% cumulative preference shares were purchased by Unilever group companies during 2016. Further information on these purchases can be found in note 4C to the consolidated accounts on pages 99page 93.
In addition, NV conducted a share buyback programme during 2018 with an aggregate market value of approximately€3 billion bought back in the form of 62,202,168 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
Following a public offer and a subsequent squeeze out procedure, Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired all 6% cumulative preference shares and 7% cumulative preference shares. Unilever N.V. purchased these 6% cumulative preference shares and 7% cumulative preference shares on 2 October 2018. The resolutions of the General Meeting of NV and the Board of NV to 100.cancel these shares were filed on 29 November 2018, as described within the Share Capital section above.
Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisions within the NV Articles of Association containing the rules for appointing NV Directors cannot be changed without the permission of the holders of the 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 OFFICE
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) is a trust office with a board independent 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 are the NV ordinary and 7% cumulative preference shares themselves.themselves
Holders of depositary receipts can under all circumstances exchange their depositary receipts for 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 20162018 were 1,366,248,4871,268,051,254 NV ordinary shares (79.68%) and 9,817 NV 7% cumulative preference shares (33.85%(73.95%).
At the 20162018 NV AGM, the Trust Office represented 28.86%36.95% of all votes present at the meeting.
The current members of the board at the Trust Office are Mr J H Schraven (chairman)(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 arrangements of the Trust Office to be appropriate and in the interests of NV and its shareholders given the size of the voting rights attached to the financing preference shares and the relatively low attendance of holders of ordinary shares at the General Meetings of NV.
 |
| 38 | Governance Report | Annual Report on Form 20-F 2018 |
PLC SHARES
SHARE CAPITAL
PLC’s issued share capital on 31 December 20162018 was made up of:
| • | £ |
LISTINGS
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.
| * | One American Depository Receipt represents one PLC ordinary share with a nominal value of 31 |
VOTING RIGHTS
PLC shareholders can cast one vote for each 31/⁄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 Receipt of Shares. Therefore, the total number ofThe voting rights attached to PLC’s outstanding shares isare split as follows:
| Total number of votes | % of issued capital | Total number of votes | % of issued capital | |||||||||||||
1,310,156,361 ordinary shares | 1,310,156,361 | (a) | 99.76 | |||||||||||||
1,187,191,284 ordinary shares | 1,187,191,284 | 99.73 | ||||||||||||||
£100,000 deferred stock | 3,214,285 | 0.24 |
| 3,214,285 |
|
| 0.27 |
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As at 31 December 2016:2018:
| (a) | 18,660,634 shares were held by PLC in treasury and |
CORPORATE GOVERNANCECONTINUED
SHARE ISSUES AND BUY BACKSPURCHASE OF SHARES
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 2018 PLC 2016 AGM held on 20 April 20162 May 2018 the PLC Directors were authorised to issue new shares, up to a maximum of £13,300,000£12,755,555 nominal value (which at the time represented approximately 33% of PLC’s issued ordinary share capital) and to disapplypre-emption rights up to approximately 5% of PLC’s issued ordinary share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at PLC’s 20162018 AGM the PLC Board was authorised to make market purchases of its ordinary shares, up to a maximum of 128,345,000 shares representing just under 10% of PLC’s issued ordinary share capital and within the limits prescribed in the resolution until the earlier of the conclusion of PLC’s 20172019 AGM and 30 June 2017.2019. These authorities are renewed annually and authority will be sought at PLC’s 20172019 AGM.
During 20162018 companies within the Unilever group companiesGroup purchased 2,268,6002,222,000 PLC ordinary shares, representing 0.17%0.19% of the issued share capital, for€91,805,226. £87,978,671. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on pages 99 to 100.page 93.
In addition, PLC conducted a share buyback programme during 2018 with an aggregate market value of approximately £3 billion bought back in the form of 63,236,433 PLC ordinary shares.
On 31 July 2018, PLC cancelled 110,493,623 PLC ordinary shares of 31⁄9p each held in treasury, representing 8.43% of the issued share capital. On 19 September 2018, PLC cancelled a further 12,471,454 PLC ordinary shares of 31⁄9p each held in treasury, representing 1.04% of the issued share capital.
PLC DEFERRED STOCK
To support unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the rules for appointing PLC Directors. 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.
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF NV
As far as Unilever is aware, the only holdersholder of more than 3% of, or 3% of voting rights attributable to, NV’s share capital (‘Disclosable Interests’) on 31 December 20162018 (apart from the Foundation Unilever N.V. Trust Office, see page 31, and shares held in treasury by NV, see page 31) are NN Group N.V. (NN), ASR Nederland N.V. (ASR) and38) is BlackRock, Inc. (BlackRock) as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | Class of shares | Total number of shares held | % of relevant class | ||||||||||||||
NN | ordinary shares | 5,432,423 | 0.32 | |||||||||||||||||
7% cumulative preference shares | 20,665 | 71.26 | ||||||||||||||||||
6% cumulative preference shares
| 74,088 | 46.0 | ||||||||||||||||||
ASR | ordinary shares | 2,348,205 | 0.14 | |||||||||||||||||
6% cumulative preference shares
| 46,000 | 28.56 | ||||||||||||||||||
BlackRock | ordinary shares
| 66,947,018 | 3.90 | ordinary shares | 66,947,018 | 3.90 | ||||||||||||||
As far as Unilever is aware, no disclosable changes in interests in the share capital of NV have beenBlackRock notified to the AFM betweenthat its holding changed to 4.02% on
19 February 2019. Between 1 January 20172016 and 21 February 2017 (the latest practicable date for inclusion in this report). Between 1 January 2014 and 21 February 2017, ING2019, BlackRock, NN Group N.V. (ING)(NN), BlackRockASR Nederland N.V. (ASR) and ASRUCHN, see page 38, have held more than 3% in the share capital of NV. During 2015, ING transferred its holdings to NN as part of the demerger of NN from ING.
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 on 31 December 20162018 (apart from shares held in treasury by PLC, see page 31)39), are BlackRock and the Leverhulme Trust as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | Class of shares | Total number of shares held | % of relevant class | ||||||||||||||
BlackRock | ordinary shares | 82,085,616 | 6.4 | ordinary shares | 77,176,319 | 6.60 | ||||||||||||||
The Leverhulme Trust | ordinary shares | 68,531,182 | 5.3 | ordinary shares | 46,931,182 | 4.02 | ||||||||||||||
No disclosable changes in interests in the share capital of PLCAs far as Unilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 20172019 and 21 February 20172019 (the latest practicable date for inclusion in this report). Between 1 January 20142016 and 21 February 2017,2019, (i) BlackRock, and (ii) togetherthe 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.
During 2014, the trustees of the Leverhulme Trust and the trustees of the Leverhulme Trade Charities Trust (comprising the same individuals (together the ‘Trustees’)) together held 70,566,764 ordinary shares amounting to 5.5% of the voting rights of PLC. On 31 December 2014 the Leverhulme Trust and the Leverhulme Trade Charities Trust became charitable incorporated organisations. As a consequence of these changes, the balance of shares held by the Trustees has reduced to zero and only the Leverhulme Trust has a disclosable interest as shown in the table above.
SHAREHOLDERSTAKEHOLDER ENGAGEMENT
Unilever valuesWe value open constructive and effective communication with our shareholders. Our shareholders can raise issues directlystakeholders. The primary responsibility for stakeholder engagement, which is generally related to the operations of the business, rests with our Executive Directors.Non-Executive Directors also actively engage with stakeholders as part of their oversight duties and responsibilities that have not been delegated to the Chairman and, if appropriate, the Vice-Chairman and Senior Independent Director. Executive Directors.
SHAREHOLDERS
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.department.
Principal shareholders: theThe Executive Directors’ investor relations programme continued in 20162018 with meetings held with institutional shareholders in eleven major cities in Europe, North America and Asia. In all, they met more than 100 investors during these roadshows. In addition, our new Chairman, Marijn Dekkers, was introduced to principal shareholders in September.
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 in our Research and Development centre and factory in Port Sunlight in the UK, in November. It focused on long-term value creation, innovation and agility.globally. 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 the industry conferences they attend. In 2016 the2018 industry conferences that were attended by Unilever representatives included broker sponsored conferencesevents in London, Paris, San Francisco,Stockholm, Boston and New York, TorontoYork.
Our annual investor seminar in December also allowed investors to meet the Chairman, CEO,CEO-designate, CFO and Singapore.other members of senior management. The event was held at the offices of Hindustan Unilever in Mumbai and focused on Unilever’s emerging markets expertise as well as the digital transformation of the business.
In 2018, as part of the strategic review of options to accelerate sustainable value creation and our proposal to simplify the Unilever corporate structure, the Chairman met and spoke with global investors during the year. The Chair of the Compensation Committee also extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
| Annual Report on Form 20-F | Governance Report | 39 |
CORPORATE GOVERNANCECONTINUED
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. In 2016 we also conducted an investor perception study among large institutional shareholders, as well as a broader investor survey. 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. TheOur shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/Vice-Chairman, and the Chairman, Executive Directors and ChairmenChairs of the Committees are also generally available to answer questions from the shareholders at the AGMs each year.
OTHERS
Our Executive Directors andNon-Executive Directors also engage with a wide-ranging group of stakeholders during specific Unilever events. For example, we annually organise one or more Board awareness:Relationship meetings offering our Directors the Boardsopportunity to directly meet our key customers, suppliers, agencies, NGOs, trade associations and advisers. In 2018, such meetings were held in the Netherlands and the UK.
EMPLOYEES
In order to allow ourNon-Executive Directors to gainfirst-hand experience of our operations and to engage in a broader context, we organise one or more site visits annually. During these site visits,Non-Executive Directors are briefedinformed about local market conditions and operations as well as relevant local matters. Typically, the programme allowsNon-Executive to meet management and young talent at these sites. In 2018, such site visits were held in China, Germany, the Netherlands and the US. In terms of engaging with employees, ourNon-Executive Directors actively participate in our management development programme sharing knowledge and insight on investor reactions to the Group’s quarterly results announcements and are briefed on any issues raised by shareholders that are relevant to their responsibilities.a mutual basis.
| www.unilever.com/ |
GENERAL 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, 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 20162018 AGMs were held in Rotterdam and LeatherheadLondon 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.
SHAREHOLDER PROPOSED RESOLUTIONSdata 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. 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 2019 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2019.
REQUIRED 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/ governance/legal-structure-and-foundation-agreements/ |
RIGHT 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.
| 40 | Governance Report | Annual Report on Form 20-F 2018 |
CORPORATE GOVERNANCE COMPLIANCE
GENERAL
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 CONTRACTS
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 29,36, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
In 2018, NV compliescomplied with almost all of the principles and best practice provisions of the Dutch Corporate Governance Code, (Dutch Code), whichwith the exception of Dutch Code Provision 4.1.8 as noted in the General Meetings section above and the best practice provision set out below. The Dutch Code is available on the CommissieMonitoring Committee Corporate Governance’sGovernance Code’s website.
Best Practice Provision 3.2.3
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Statements required by theThe Dutch Code and explanationsprovides that in case of the NV compliance position are set out below.
Non-Financial Performance Indicator: In determining the level and structure ofdismissal, the remuneration of thean Executive Directors, among other things, the results, the share price performance and non-financial indicators relevant to the long-term objectives of the Company, with due regard for the risks to which variable remuneration may expose the enterprise, shall be taken into account (bpp II.2.3).Director should not exceed one year’s salary.
Unilever places a great deal of importance on corporate responsibility and sustainability and is keen to ensure focus on key financial performance measures which we believe to be the drivers of shareholder value creation and relative total shareholder return. Unilever therefore believes that the interests of the business and shareholders are best served by linking our long-term share plans to such measures as described above, which are further set out in the Directors’ Remuneration Report (pages 48 to 77), and has therefore not included a non-financial performance indicator.
Risk Management and Control: With regard to financial reporting risks, as advised by the Audit Committee (as described in its report on pages 42 to 43), the NV Board believes that the risk management and control systems provide reasonable assurance that the financial statements do not contain any errors of material importance and the risk management and control systems have worked properly in 2016 (bpp II.1.5). The statements in this paragraph are not statements in accordance with the requirements of Section 404 of the US Sarbanes-Oxley Act of 2002.
CORPORATE GOVERNANCECONTINUED
Retention Period of Shares: The Dutch Code recommends that shares granted to the Executive Directors without financial consideration shall be retained for a period of at least five years or until at least the end of the employment, if this period is shorter (bpp II.2.5).
Our current Remuneration Policy requires Executive Directors to build and retain a personal shareholding in Unilever. In addition, Executive Directors are required to hold 100% of the shares needed to maintain their minimum shareholding requirement until 12 months after they leave Unilever and 50% of these shares for 24 months after they leave Unilever.
Severance Pay: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 (bpp II 2.8).law.
Financing Preference Shares: The voting rightsCorporate Governance Statements:
In addition to an explanation of the 6% and 7% cumulative preference shares issued by NV are based on their nominal value, as prescribed by Dutch law. NV agrees with the principle innon-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 paragraph are not statements in accordance with the requirements of Section 404 of the US Sarbanes-Oxley Act of 2002.
Corporate Governance Statement:Furthermore, NV is required to make a statement concerning corporate governance as referred to in article 2a of the decree on additional requirements for annual reports (Vaststellingsbesluit nadere voorschriftenthe content of the management report (Besluit inhoud jaarverslag) with effect from 1 January 2010bestuursverslag) (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 KINGDOM
In 2018, PLC being a company that is incorporatedcomplied with all UK Code provisions with the exception of UK Code Provision E.2.3 as noted in the General Meetings section above. The UK and listed on the London Stock Exchange, is required to state how it has applied the main principles and how far it has complied with the provisions set out in the 2014 UK Corporate Governance Code (UK Code), which is available on the Financial Reporting Council’s (FRC) website. In 2016 PLC complied with all UK Code provisions.
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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 after acquisition and to align them to the Unilever Group’s governance procedures as soon as is practicable.
Greenhouse Gas (GHG) Emissions: In line with the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 our greenhouse gas performance is set out below. We report our CO2 Information 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) for our manufacturing facilities.can be found on page 35.
Carbon emission factors are used to convert energy used in manufacturing to emissions of CO2. Carbon emission factors for fuels are provided by the Intergovernmental Panel 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 or sub-region where each manufacturing site is located and are provided by the International Energy Agency (IEA). 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 2015 to 30 September 2016. This period is different from that for which the remainder of the Directors’ Report is prepared (which is the calendar year 2016).
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Emissions data includes material sources of Scope 1 and 2 emissions that have been subject to external assurance, i.e. emissions of CO2 from energy used in manufacturing. Emissions from the combustion of biogenic fuels (biomass, fuel crops etc) at our manufacturing sites are reported separately to other Scope 1 and 2 emissions, as recommended by the GHG Protocol, and excluded from our intensity ratio calculation.
Our GHG data does not include minor emissions sources that are beyond our boundary of operational control or that are not material. For example, emissions of CO2 from energy used in our offices and warehouses are excluded, although we continue to drive improvements in these areas through our USLP targets. The data also excludes Scope 3 emissions (including consumer use of our products) which we report as part of our USLP.
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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 discussing issues relating to all 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.
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/ | |
| Annual Report on Form 20-F | Governance Report | 41 |
CORPORATE GOVERNANCECONTINUED
Independent Auditors and Disclosure of Information to Auditors: To the best of each of the Directors’ knowledge and belief, and having made appropriate enquiries, all information relevant to enabling the auditors to provide their opinions on PLC’s consolidated and parent company accounts has been provided. Each of the Directors has taken all reasonable steps to ensure their awareness of any relevant audit information and to establish that Unilever PLC’s auditors are aware of any such information.
THE UNITED STATESASSESSMENT
Both NV and PLC are listedIn order to report on the New York Stock Exchange (NYSE). As such, both companies must complylong-term viability of 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 the Group, including those that would threaten its business model, future performance, solvency or liquidity. The assessment assumes that any debt maturing in the next three years can bere-financed at commercially acceptable terms or via our current standby facility. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks. The risk factors are summarised on pages 29 to 33.
The viability assessment has two parts:
First, the Directors considered the period over which they have a reasonable expectation that the Group will continue to operate and meet its liabilities, taking into account current debt facilities and debt headroom; and
Second, 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 and the lost cost and growth opportunities from not keeping up with technological changes; and
assessing scenarios that involve more than one principal risk 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 lower sales of products of this brand and the temporary closure of our largest sourcing unit. | A fine equal to 1% of Group turnover was considered along with damage to our largest brand and disruption to supply chain. | • 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 sourcing unit and significant water shortages in our key developing markets. | The complete loss of all of our turnover in our largest geographic market was considered along with destruction of a key sourcing unit and reduced demand for our products that require water. | • Economic and political instability • Supply chain • Climate change | ||
| Global economic downturn leading to an increase in funding costs and the loss of our three largest customers. | Significant business disruption in our largest emerging market was considered with the impact of losing our three key customers. | • Economic and political instability • Treasury and pensions • Customer relationships | ||
FINDINGS
| ��� | Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by the strategic 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 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 year horizon; and
the Group’s diverse product and geographical activities which are impacted by continuously evolving technology and innovation.
Secondly, 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.
CONCLUSION
On the basis described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
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 principal risks could impact our business within the next two years (ie short-term risks), or could impact our business over the next three to five years (ie medium-term risks). Some principal risks, such as climate change, could also impact over the longer term (ie beyond five years).
Our principal risks have not fundamentally changed this year apart from the addition of a plastic packaging risk. Given the nature of our business, a reduction in the amount of plastic packaging and increase in the use of recyclable content in our packaging is critical to our future success.
| 28 | Strategic Report | Annual Report on Form 20-F 2018 |
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. In addition to our plastic packaging risk there are three areas where we believe there is an increased level of risk:
Customer Relationships: technology is changing our channel landscape and hence changing the nature of the relationships with our traditional customers as well as requiring us to develop relationships with new customers who are drivinge-commerce development;
Systems and Information: the number of cybersecurity attacks is still increasing significantly, and incidents are becoming more sophisticated as technology further evolves; and
Business Transformation: this risk has increased as a result of the speed of technological change which means the pressure to digitalise our business to take advantage of the opportunities it presents, both in terms of growth and cost efficiency, is increasing.
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.
DESCRIPTION OF RISK |
BRAND PREFERENCE As a branded goods business, Unilever’s 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, and Unilever’s ability to identify and respond to these changes is vital to our business success. 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. If we are unable to innovate effectively, Unilever’s sales or margins could be materially adversely affected. |
| 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 categories, 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. |
| SUSTAINABILITY |
The success of our business depends on finding sustainable solutions to support long-term growth. Unilever’s vision to grow our business, while decoupling our environmental footprint from our growth and increasing our positive social impact, will require more sustainable ways of doing business. In a world where resources are scarce and demand for them continues to increase, it is critical that we succeed in reducing our resource consumption and converting to sustainably sourced supplies. In doing this we are dependent on the efforts of partners and various certification bodies. We are also committed to improving health and well-being and enhancing livelihoods around the world so Unilever and our communities grow successfully together. There can be no assurance that sustainable business solutions will be developed and failure to do so could limit Unilever’s growth and profit potential and damage our corporate reputation. |
| Annual Report on Form 20-F 2018 | Strategic Report | 29 |
RISKSCONTINUED
DESCRIPTION OF RISK |
CLIMATE CHANGE |
Climate changes and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products. Climate changes are occurring around the globe which may impact our business in various ways. They could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. They 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. |
| PLASTIC PACKAGING |
A reduction in the amount of plastic and an increase in the use of recyclable content in our packaging is 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 globe. 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. |
| CUSTOMER RELATIONSHIPS |
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. |
| 30 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
TALENT |
A skilled workforce and agile ways of working are essential for the continued success of our business. Our ability to attract, develop and retain the right number of appropriately qualified 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. |
| 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. |
| 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. |
| 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. |
| Annual Report on Form 20-F 2018 | Strategic Report | 31 |
RISKSCONTINUED
DESCRIPTION OF RISK |
| 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. A number of key projects were announced in 2017 to accelerate sustainable shareholder value creation. 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. Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation. Failure to keep pace with such technological change would significantly impact our growth and profitability. |
| 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. |
| TREASURY AND PENSIONS |
Unilever is exposed to a variety of external financial risks in relation to Treasury and Pensions. 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. Unilever may face liquidity risk, ie difficulty in meeting its obligations, associated with its financial liabilities. A material and sustained shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and also restrict Unilever’s ability to raise funds. We are exposed to market interest rate fluctuations on our floating rate debt. Increases in benchmark interest rates could increase the interest cost of our floating rate debt and increase the cost of future borrowings. In times of financial market volatility, we are also potentially exposed to counter-party risks with banks, suppliers and customers. Certain businesses have defined benefit pension plans, most now closed to new employees, which are exposed to movements in interest rates, fluctuating values of underlying investments and increased life expectancy. Changes in any or all of these inputs could potentially increase the cost to Unilever of funding the schemes and therefore have an adverse impact on profitability and cash flow. |
| 32 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
| ETHICAL |
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. 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. Despite the commitment of Unilever to ethical business and the steps we take to adhere to this commitment, there remains a risk that activities or events cause us to fall short of our desired standard, resulting in damage to Unilever’s corporate reputation and business results. |
| 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. Tax, in particular, is a complex 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 & Profit Shifting project and further potential tax reform in the EU and Switzerland. |
IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIES
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES.
Unilever recognises the importance of disclosing climate-related risks and opportunities. Adopting the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to alow-carbon economy.
In this Annual Report and Accounts, we continue to integrate climate-related disclosures throughout the Strategic Report narrative. However, in recognition of the growing significance of the impacts of climate change on our business, we have also summarised the risks and opportunities arising from climate change, and our response below.
The Boards take overall accountability for the management of climate change risks and opportunities with support from the ULE and the USLP Steering Team (see page 46). Chaired by Keith Weed in 2018, the USLP Steering Team includes nine members of the ULE and meets five times a year. During 2018, there were numerous agenda items on topics related to climate change including our overall climate strategy and our renewable electricity target.
For management employees (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. The USLP component accounts for 25% of total MCIP award. The sustainability component of MCIP includes consideration of our progress against climate change, water and palm oil targets, which among others, underpin our climate strategy. See pages 52 to 54 for more on MCIP.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever which has the potential to impact our business in the short, medium and long-term. Further details on the nature of climate risks and opportunities for Unilever can be found in our 2018 CDP Climate submission (see further climate change disclosures on pages 7 and 14).
To further understand the impact that climate change could have on Unilever’s business 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 and we have looked at the impact on our business in 2030 assuming we have the same business activities as we do today. We also made the following simplifying assumptions:
| Annual Report on Form 20-F 2018 | Strategic Report | 33 |
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 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 work 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.
During 2018 we developed and piloted an approach to assess the impact of climate change on our key commodities. We selected soy for this pilot based on its importance to Unilever (large purchased volume), it being ahigh-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. Climate change was the only price factor accounted for in the model used to calculate the impact. Other factors which impact price, such as technology and acreage, were excluded. The model considered the direct risks from climate change to the price of soybean oil, such as change in yield and change in supply. 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 would need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as catastrophic 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. We have therefore decided to get broader understanding on the climate change risks to our agricultural sourcing and extend our analysis to two other important crops to Unilever: Palm Oil and Tea, for which suitable climate change models for yield predictions will be available in 2019.
RESPONDING TO RISKS AND OPPORTUNITIES
Unilever’s vision is to grow our business whilst decoupling our growth from our environmental footprint and increasing positive social impact. This vision explicitly recognises that sustainable growth – including management of climate-related risks and opportunities – is the only way to create long-term value for all our stakeholders.
The Unilever Sustainable Living Plan (USLP) was developed to deliver our vision. It is fully integrated with our business strategy. Climate-related issues are integral to the USLP. Two of our GHG reduction targets included in the USLP are recognised as science-based:
We are taking action across our value chain to reduce our emissions, creating growth opportunities and minimising risk. Our commitment to source 100% of our palm oil from sustainable sources is helping to avoid emissions from deforestation (see pages 14 and 47). Our efforts to reduce energy and GHG emissions in manufacturing are helping us to save costs. For example, by using less energy, we have already avoided energy costs in our factories of over€600 million since our baseline year of 2008.
Our divisions are taking action to reduce emissions. In Home Care we are focusing on concentrated liquid laundry detergents such as Persil, Omo and Surf Small & Mighty which help consumers to wash clothes at lower temperatures, reducing GHG by up to 50% per load. We have removed phosphates from all laundry powders worldwide, resulting in lower greenhouse gas emissions of up to 50% per consumer use. Our Foods & Refreshment division has prioritised reducing greenhouse gas emissions from ice cream freezers since 2008. As the world’s largest producer of ice cream, we have committed to accelerating theroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2018 our total purchase of these cabinets had increased to around 2.9 million.
Detailed Lifecycle Analysis has shown that our GHG contribution from animal-based agriculture, including fats and proteins, is relatively low: 7.5% for Foods & Refreshment and 2.5% for total Unilever. While emissions are comparatively low, the business opportunity is significant for natural and plant-based foods and beverages. We have a range of vegan and vegetarian variants such as Hellmann’s vegan mayonnaise, Ben & Jerry’snon-dairy ice creams, Magnum vegan and other options (see pages 11 to 12). We continue to actively promote vegetarian and vegan recipes, notably via our Knorr brand websites.
A number of our targets directly address risks and opportunities related to water scarcity caused by climate change. We estimate that the sale of products which address water scarcity issues could increase in our Home Care and Beauty & Personal Care divisions where a number of products are available which address water scarcity and/ or have a lower GHG in use. For example, our Beauty & Personal Care division is investing in water smart product innovations such as dry shampoo and cleansing conditioner which help consumers use less water while also offering relevant benefits such as reduced colour loss and damage which can arise from frequent washing. Home Care is 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 help our consumers save water. Day2, the world’s first dry wash spray is made with only 0.02% of the water in a normal laundry load. Sunlight2-in-1 Handwashing Laundry Powder and Rin (Radiant) detergent bar are also helping to reduce water consumption at point of use in water-stressed countries.
| 34 | Strategic Report | Annual Report on Form 20-F 2018 |
Home Care is home to three brands, Pureit, Truliva/Qinyuan and Blueair, which are responding directly to issues related to climate change. Pureit and Truliva, our water purification businesses, offer products which provide safe drinking water to millions of people with a lower carbon footprint than alternatives. Our detailed lifecycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair, our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Several other targets in our USLP indirectly address climate risk and opportunities by aiming to support groups who are vulnerable to the effects of climate change and who are critical to our future growth, notably smallholder farmers and women in low income countries.
Unilever continues to support a number of policy measures to accelerate the transition to alow-carbon economy, including the pricing of carbon and removal of fossil fuel subsidies which act as negative carbon prices. We believe that carbon pricing is a fundamental part of the global response to climate change 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. In 2016, we implemented an internal price on carbon as part of the business case appraisal for large capital expenditure projects. The carbon price is also applied to emissions from our manufacturing sites to raise a clean-tech fund. So far,€73 million has been allocated to this fund for energy and water saving projects. In January 2018 the price of carbon was€40 per tonne.
MEASURING AND REPORTING
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 7 with commentary on page 13 and 14. Our website contains detailed commentary on our USLP targets as well as actions we are taking to achieve them.
Our ability to meet our climate-related targets partly depends on changes in the energy markets worldwide, such as the Sarbanes-Oxleyrate of installation of renewable electricity in many countries. We have a role to play as an industry leader to help shape those markets. We are working collaboratively with partners, suppliers and others to achieve our ambition.
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. The basis of this plan is the set of around 2,800 products representative of our global portfolio across all divisions for which we have full value-chain lifecycle analysis results.
We recalculated the footprint of these products using the latest 2030 projections on external transitions to alow-carbon economy (eg International Energy Agency 2030 projection on grid changes to renewable energy),low-carbon transition plans in our operations (eg achieving zero net deforestation by 2020, using 100% renewable energy by 2020) and Innovation Roadmaps (eg redesign for lower embedded carbon emissions, transforming the temperature-controlled supply chain).
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 (GHG) emissions are set out below. 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 2002, regulations enacted under US securities lawsCO2 equivalents.
We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels and the Listing Standardsoperation of facilities (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). Each year PwC assure selected manufacturing environmental metrics including carbon emissions from energy use and energy use per tonne of production.
The GHG data below relates to emissions during the12-month period from 1 October to 30 September. This period is different from the NYSE, that are applicable to foreign private issuers, copies ofStrategic Report, Directors’ Report and Financial Statements which are calendar year.
UNILEVER GREENHOUSE GAS EMISSIONS BY ACTIVITY^
| 2018 | 2017 | |||||||
| Manufacturing (scope 1 and 2) | ||||||||
Scope 1 (tonnes CO2) | 711,875 | 773,856 | ||||||
Scope 2* (tonnes CO2) | 726,167 | 793,472 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 1,438,042 | 1,567,328 | ||||||
Intensity ratio (kg CO2 per tonne of production) | 70.46 | 76.77 | ||||||
| Distribution centres, research laboratories, marketing and sales offices (scope 1 and 2) |
| |||||||
Scope 1 (tonnes CO2) | 20,052 | 20,039 | ||||||
Scope 2* (tonnes CO2) | 100,924 | 102,292 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 120,976 | 122,331 | ||||||
| Upstream and downstream of Unilever operations – top 3 emissions sources (scope 3) |
| |||||||
Consumer use | ||||||||
(downstream) (tonnes CO2e)q | 39,895,946 | 38,697,432 | ||||||
Ingredients and packaging | ||||||||
(upstream) (tonnes CO2e)‡ | 14,985,897 | 15,000,941 | ||||||
Distribution and retail | ||||||||
(downstream) (tonnes CO2e) | 4,368,626 | 3,895,589 | ||||||
| ^ | 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). |
| + | 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. |
| * | 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). |
| q | 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. |
| ‡ | 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. |
| Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
FURTHER CLIMATE CHANGE DISCLOSURES
This Annual Report and Accounts contains additional disclosures on their websites.our climate change risks and opportunities:
Our website contains disclosures on our greenhouse gas and water USLP 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 (password required).
| www.cdp.net |
| Annual Report on Form 20-F 2018 | Strategic Report | 35 |
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* 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.
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 information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be found on our website.
| * |
|
| www.unilever.com/investor-relations/agm-and-corporate-
|
WeBOARDS
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, performance and long-term success of our business as a whole. The Boards are substantially compliantone-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. In the normal course Unilever has two Executive Directors, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). On 31 December 2018 the current CEO resigned and his successor, Alan Jope, was appointed on 1 January 2019. Alan will be proposed to be appointed as an Executive Director at the 2019 AGMs. Consequently, between 1 January 2019 and the 2019 AGMs in May we have 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 out on page 3.
The Boards have delegated the operational running of the Unilever Group to the CEO with the Listing Standardsexception of the NYSE applicable to foreign private issuers except as set out below.
Wefollowing matters which are required to disclose any significant ways in which ourreserved for the Boards: structural and constitutional matters, corporate governance, practices differ from those typically followed by US companies listed onapproval of dividends, approval and monitoring of overall strategy for the NYSE. Our corporate governance practices are primarily based onUnilever Group, approval of significant transactions or arrangements in relation to mergers, acquisitions, joint ventures and pensions. The CEO is responsible to the requirementsBoards in relation to the operational running of the UK Listing Rules,Group and other powers delegated to him by the UK CodeBoards. 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 Dutch Code but substantially conform to those required of US companies listed onCEO supervises and determines the NYSE. The only significant way in which our corporate governance practices differ from those followed by domestic companies under Section 303A Corporate Governance Standardsroles, activities and responsibilities of the NYSE is thatULE. While ULE members (other than the NYSE rules require that shareholders must be givenCEO and the opportunityCFO) are not part of the Boards’ decision-making process, to vote on all equity-compensation plans and material revisions thereto,provide the Boards with certain limited exemptions. The UK Listing Rules require shareholder approvaldeeper insights, ULE members often attend those parts 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 inBoard meetings which a director may participate. Amendments to plans approved by shareholders generally only require approval if they arerelate to the advantageoperational running of the plan participants. Furthermore, Dutch lawGroup. The ULE currently consists of the CEO, CFO, the Division Presidents, the Presidents for Europe 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 planNorth America, and the plan does not contain its own procedure for revisions.Chief Research and Development Officer, Chief HR Officer, Chief Legal Officer and Group Secretary, Chief Marketing and Communications Officer and Chief Supply Chain Officer.
Attention is drawn to the ReportThe biographies of ULE members are on page 5.
BOARD COMMITTEES
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 2018, can be found on pages 4243 to 43. In addition, further65.
| www.unilever.com/investor-relations/agm-and-corporate- governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVER
Further details aboutof the roles and responsibilities of the Chairman, Senior Independent Director/Vice-Chairman, CEO, CFO and other corporate officers and how our corporate governanceBoards effectively operate as one board, govern themselves and delegate their authorities are providedset out in the document entitled ‘The Governance of Unilever’, which can be found on our website.
All senior executivesThe Governance of Unilever also describes the Foundation Agreements, Directors’ appointment, tenure, induction and senior financial officers have declared their understanding oftraining, Directors’ ability to seek independent advice at Unilever’s expense and compliance with Unilever’s Code of Business Principlesdetails about Board and Management Committees (including the related Code Policies. No waiver from any provision of the Code of Business Principles or Code Policies was granted in 2016 to any of the persons falling within the scope of the SEC requirements. The Code of Business Principles and related Code Policies were refreshed in 2016, and for the first time the Code Policies were also published on our website together with the Code of Business Principles.Disclosure Committee).
| www.unilever.com/ governance/our-corporate-governance/ |
| 36 | Governance Report | Annual Report on Form 20-F 2018 |
Risk Management
BOARD EFFECTIVENESS
BOARD MEETINGS
A minimum of fiveface-to-face meetings are planned throughout the calendar year to consider important corporate events and Control: Following a review byactions, for example, the Disclosure Committee, Audit Committeehalf-year and Boards, the CEO and the CFO concluded that the design and operationfull-year results announcements of the Group’s disclosure controlsUnilever Group; the development of and procedures, including those defined in the United States Securities Exchange Act of 1934 – Rule 13a – 15(e), as at 31 December 2016 were effective, and that subsequently until 24 February 2017 (the dateapproval of the approvaloverall strategy of this Annual Reportthe Unilever Group; oversight of the performance of the business; review of risks and Accounts (andinternal risk management and control systems; authorisation of major transactions; declaration of dividends; convening of shareholders’ meetings; succession planning; review of the Additional Information for US Listing Purposes) byfunctioning of the Boards) there have been no significant changesBoards and their Committees; culture; and review of corporate responsibility and sustainability, in particular the Group’s internal controls,Unilever Sustainable Living Plan. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In 2018 the Boards met physically in January, March, May, July, October and November. Meetings of the Boards may be held either in London or in Rotterdam or such other factors that could significantly affect those controls.locations as the Boards think fit, with one or twooff-site Board meetings a year. The Chairman sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, and promotes effective relationships and open communication between the Executive andNon-Executive Directors.
Unilever is required by Section 404ATTENDANCE
The table showing the attendance of current Directors at Board meetings in 2018 can be found on page 3. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Ann Fudge attended four of the US Sarbanes-Oxley ActBoard meetings she was eligible to attend before retiring from the Boards on 3 May 2018.
NON-EXECUTIVE DIRECTOR MEETINGS
TheNon-Executive Directors usually meet as a group, without the Executive Directors present, when there is aface-to-face Board meeting. In 2018 they met five times. The Chairman, or in his absence the Senior Independent Director/Vice-Chairman, chairs such meetings.
BOARD EVALUATION
Each year the Boards formally assess their own performance with the aim of 2002helping to report onimprove the effectiveness of its internal control over financial reporting. This requirementboth the Boards and the Committees. At least once every three years an independent third party facilitates the evaluation. The last external evaluation was performed in 2017. The evaluation consists of individual interviews with the Directors by the Chairman and, when relevant, by the external evaluator. These interviews are complemented by the completion by all Directors of three confidential online evaluation questionnaires on the efficiency and effectiveness of our Boards, CEO and Chairman. The Boards evaluation questionnaire this year focused on a number of key areas including Strategy, Risk/Financial Controls, Board Effectiveness and Information/Knowledge. The Chairman’s statement on page 2 describes the key actions agreed by the Boards following the evaluation.
The evaluation of the performance of the Chairman and CEO is reportedled by the Senior Independent Director/Vice-Chairman and Chairman respectively, and the bespoke questionnaires will be used to support these evaluations. 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 2018 evaluations can be found in each Committee Report.
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 48 and 49 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 sectiondocument entitled ‘Management’s Report‘Appointment procedure for NV and PLC Directors’ which is available on Internal Control over Financial Reporting’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 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, page 167.among other things, Unilever’s business, environmental, social, corporate governance, regulatory developments and investor relations matters. For example, in 2018 the Directors received presentations on Information Security, Digital, the Supply Chain and Simplification.
In 2016INDEPENDENCE AND CONFLICTS
As theNon-Executive Directors make up the Committees of the Boards, it is important that they can be considered to be independent. Each year the Boards conduct a thorough review of theNon-Executive Directors’, and 2015,their related or connected persons’, relevant relationships referencing the Group didcriteria 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. A Director must without delay report any conflict of interest or potential conflict of interest to the Chairman and to the other Directors, or, in case any conflict of interest or potential conflict of interest of the Chairman, to the Senior Independent Director/Vice-Chairman and to the other Directors. The Director in question must provide all relevant information to the Boards, so that the Boards can decide whether a reported (potential) conflict of interest of a Director qualifies as a conflict of interest within the meaning of the relevant laws. A Director may not receivevote on, or be counted in a quorum in relation to, any public takeover offers by third partiesresolution of the Boards in respect of NVany situation in which he or PLC shares or make any public takeover offersshe has a conflict of interest. The procedures that Unilever has put in respectplace 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’ shares.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.
INDEMNIFICATION
The terms of NV Directors’ indemnification are provided for in NV’s Articles 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 2018 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.
| Annual Report on Form 20-F | Governance Report |
CORPORATE GOVERNANCECONTINUED
OUR RISK APPETITESHARES
NV SHARES
SHARE CAPITAL
NV’s issued share capital on 31 December 2018* was made up of:
| * | When referred to the issued share capital on 31 December 2018 also€62,065,550 split into two classes (6% and 7%) of cumulative preference shares was outstanding. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon in the General Meeting of NV. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018 with the Dutch Trade Register and an announcement thereof in a daily and nationally distributed newspaper in the Netherlands was made on 5 December 2018. These shares were cancelled on 6 February 2019. |
LISTINGS
NV has ordinary shares (UNIA) and depositary receipts for such ordinary shares (UNA) listed on Euronext Amsterdam and, as 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 hold and can vote in person or by proxy. The voting rights attached to NV’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 99.63 | |||||
2,400 special shares |
| 6,428,550 |
|
| 0.37 |
| ||
As at 31 December 2018:
| (a) | 254,012,896 shares were held in treasury and 9,336,215 shares were held to satisfy obligations under share-based incentive schemes. These shares and the special shares are not voted on. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon, as described within the Share Capital section above. |
SHARE ISSUES AND APPROACH TO RISK MANAGEMENTPURCHASE OF SHARES
Risk management is integralAt the NV AGM held on 3 May 2018 the Board of NV was designated as the corporate body authorised to Unilever’s strategyresolve on the issue of, or on the granting of rights to subscribe for, shares not yet issued and to restrict or exclude the achievementstatutorypre-emption rights that accrue to shareholders upon issue of Unilever’s long-term goals. Our successshares, on the understanding that this authority is limited to 33% of NV’s issued ordinary share capital and to disapplypre-emption rights to 5% of NV’s issued share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at NV’s 2018 AGM the NV Board was designated as an organisation depends on our abilitythe corporate body authorised 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 corepurchase (i) ordinary shares with a maximum of 10% of the leadership team agenda, which is where we believe it should be.
Unilever adopts a risk profile that is aligned to our Vision to accelerate growth in the business while reducing our environmental footprint and increasing our positive social impact. Our 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 mitigatedissued share capital as well as (ii) any and all information that may be required6% and 7% cumulative preference shares.
These authorities expire on the earlier of the conclusion of the 2019 NV AGM or the close of business on 30 June 2019 (the last date by which NV must hold an AGM in 2019). Such authorities (other than with respect to be disclosed is reported to Unilever’s senior management including, where appropriate, the Chief Executive Officer6% and Chief Financial Officer.7% cumulative preference shares) are renewed annually.
ORGANISATION
The Unilever 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. This organisational structure and distribution of accountabilities and responsibilities ensure that every country in which we operate has specific resources and processes for risk review and risk mitigation. This is supported byDuring 2018 companies within 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 extentGroup purchased 4,000,000 NV ordinary shares, representing 0.23% of the significant risks that Unilever is preparedissued ordinary share capital, for€183,380,649. These purchases were made to take to achieve its strategic objectives.
FOUNDATION AND PRINCIPLES
facilitate grants made in connection with Unilever’s approach to doing business is framed by our Purpose and values. Our Code of Business Principles sets out the standards of behaviour that we expect all employees to adhere to. Day-to-day responsibility for ensuringemployee compensation programmes. Further information on 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 underpin the Code of Business Principles and set out the non-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.
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.
PROCESSES
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 AND RE-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 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 report and up to the date of its approval by the Boards.
Details of the activities of the Audit Committee in relation to thispurchases can be found in note 4C to the Reportconsolidated accounts on page 93.
In addition, NV conducted a share buyback programme during 2018 with an aggregate market value of approximately€3 billion bought back in the form of 62,202,168 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
Following a public offer and a subsequent squeeze out procedure, Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired all 6% cumulative preference shares and 7% cumulative preference shares. Unilever N.V. purchased these 6% cumulative preference shares and 7% cumulative preference shares on 2 October 2018. The resolutions of the Audit CommitteeGeneral Meeting of NV and the Board of NV to cancel these shares were filed on pages 42 to 43.29 November 2018, as described within the Share Capital section above.
Further statementsinformation on compliancethese purchases can be found in note 4C to the consolidated accounts on page 93.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisions within the NV Articles of Association containing the rules for appointing NV Directors cannot be changed without the permission of the holders of the 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 OFFICE
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) is a trust office with a board independent of Unilever. As part of its corporate objects, the specific risk managementTrust Office issues depositary receipts in exchange for the NV ordinary shares. These depositary receipts are listed on Euronext Amsterdam, as are the NV ordinary shares themselves
Holders of depositary receipts can under all circumstances exchange their depositary receipts for the underlying shares (and vice versa) and control requirementsare 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 Dutch Corporate Governance Code,long-term interests of the UK Corporate Governance Code,holders of the US Securities Exchange Act (1934)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 2018 were 1,268,051,254 NV ordinary shares (73.95%).
At the 2018 NV AGM, the Trust Office represented 36.95% 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 Sarbanes-Oxley (2002) ActTrust Office, including its Articles of Association, Conditions of Administration and Voting Policy, can be found on pages 33its website.
| www.administratiekantoor-unilever.nl/eng/home |
| 38 | Governance Report | Annual Report on Form 20-F 2018 |
PLC SHARES
SHARE CAPITAL
PLC’s issued share capital on 31 December 2018 was made up of:
| • | £36,934,840 split into 1,187,191,284 ordinary shares of 31⁄9p each; and |
LISTINGS
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.
| * | One American Depository Receipt represents one PLC ordinary share with a nominal value of 31⁄9p. |
VOTING RIGHTS
PLC shareholders can cast one vote for each 31⁄9p nominal capital they hold and can vote in person or by proxy. The voting rights attached to 35.PLC’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,187,191,284 ordinary shares | 1,187,191,284 | 99.73 | ||||||
£100,000 deferred stock |
| 3,214,285 |
|
| 0.27 |
| ||
As at 31 December 2018:
| (a) | 18,660,634 shares were held by PLC in treasury and 5,645,392 shares were held by NV group companies. These shares and the deferred stock are not voted on. |
SHARE ISSUES AND PURCHASE OF SHARES
At the 2018 PLC AGM held on 2 May 2018 the PLC Directors were authorised to issue new shares, up to a maximum of £12,755,555 nominal value (which at the time represented approximately 33% of PLC’s issued ordinary share capital) and to disapplypre-emption rights up to approximately 5% of PLC’s issued ordinary share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at PLC’s 2018 AGM the PLC Board was authorised to make market purchases of its ordinary shares, up to a maximum of just under 10% of PLC’s issued ordinary share capital and within the limits prescribed in the resolution until the earlier of the conclusion of PLC’s 2019 AGM and 30 June 2019. These authorities are renewed annually and authority will be sought at PLC’s 2019 AGM.
During 2018 companies within the Unilever Group purchased 2,222,000 PLC ordinary shares, representing 0.19% of the issued share capital, for £87,978,671. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, PLC conducted a share buyback programme during 2018 with an aggregate market value of approximately £3 billion bought back in the form of 63,236,433 PLC ordinary shares.
On 31 July 2018, PLC cancelled 110,493,623 PLC ordinary shares of 31⁄9p each held in treasury, representing 8.43% of the issued share capital. On 19 September 2018, PLC cancelled a further 12,471,454 PLC ordinary shares of 31⁄9p each held in treasury, representing 1.04% of the issued share capital.
PLC DEFERRED STOCK
To support unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the rules for appointing PLC Directors. 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.
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF NV
As far as Unilever is aware, the only holder of more than 3% of, or 3% of voting rights attributable to, NV’s share capital (‘Disclosable Interests’) on 31 December 2018 (apart from the Foundation Unilever N.V. Trust Office, see page 38) is BlackRock, Inc. (BlackRock) as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 66,947,018 | 3.90 | |||||||
BlackRock notified the AFM that its holding changed to 4.02% on
19 February 2019. Between 1 January 2016 and 21 February 2019, BlackRock, NN Group N.V. (NN), ASR Nederland N.V. (ASR) and UCHN, see page 38, have held more than 3% in the share capital of NV.
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 on 31 December 2018 (apart from shares held in treasury by PLC, see page 39), are BlackRock and the Leverhulme Trust as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 77,176,319 | 6.60 | |||||||
The Leverhulme Trust | ordinary shares | 46,931,182 | 4.02 | |||||||
As far as Unilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 2019 and 21 February 2019 (the latest practicable date for inclusion in this report). Between 1 January 2016 and 21 February 2019, (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.
STAKEHOLDER ENGAGEMENT
We value open and effective communication with our stakeholders. The primary responsibility for stakeholder engagement, which is generally related to the operations of the business, rests with our Executive Directors.Non-Executive Directors also actively engage with stakeholders as part of their oversight duties and responsibilities that have not been delegated to the Executive Directors.
SHAREHOLDERS
The CFO has lead responsibility for shareholder engagement, with the active involvement of the CEO and supported by the Investor Relations department.
The Executive Directors’ investor relations programme continued in 2018 with meetings held with institutional shareholders in major cities globally. The Executive Directors and members of the Investor Relations team also meet a large number of investors at the industry conferences they attend. In 2018 industry conferences attended by Unilever representatives included events in London, Paris, Stockholm, Boston and New York.
Our annual investor seminar in December also allowed investors to meet the Chairman, CEO,CEO-designate, CFO and other members of senior management. The event was held at the offices of Hindustan Unilever in Mumbai and focused on Unilever’s emerging markets expertise as well as the digital transformation of the business.
In 2018, as part of the strategic review of options to accelerate sustainable value creation and our proposal to simplify the Unilever corporate structure, the Chairman met and spoke with global investors during the year. The Chair of the Compensation Committee also extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
| Governance Report | 39 |
CORPORATE GOVERNANCECONTINUED
On 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. Private shareholders are encouraged to give feedback via shareholder.services@unilever.com. Our shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/Vice-Chairman, 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.
OTHERS
Our Executive Directors andNon-Executive Directors also engage with a wide-ranging group of stakeholders during specific Unilever events. For example, we annually organise one or more Board Relationship meetings offering our Directors the opportunity to directly meet our key customers, suppliers, agencies, NGOs, trade associations and advisers. In 2018, such meetings were held in the Netherlands and the UK.
EMPLOYEES
In order to allow ourNon-Executive Directors to gainfirst-hand experience of our operations and to engage in a broader context, we organise one or more site visits annually. During these site visits,Non-Executive Directors are informed about local market conditions and operations as well as relevant local matters. Typically, the programme allowsNon-Executive to meet management and young talent at these sites. In 2018, such site visits were held in China, Germany, the Netherlands and the US. In terms of engaging with employees, ourNon-Executive Directors actively participate in our management development programme sharing knowledge and insight on a mutual basis.
| www.unilever.com/investor-relations/ |
GENERAL 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, 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 2018 AGMs were held in Rotterdam and London in May and the topics raised by shareholders included:e-commerce, mergers & acquisitions, sustainability, Simplification, remuneration, total shareholder return, Brexit and 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. 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 2019 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2019.
REQUIRED 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 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.
| 40 | Governance Report | Annual Report on Form 20-F |
VIABILITY STATEMENTCORPORATE GOVERNANCE COMPLIANCE
GENERAL
We conduct our operations in accordance with internationally accepted principles of good governance and best practice, while 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 CONTRACTS
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 36, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
In 2018, NV complied 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 in the General Meetings section above and the best practice provision set out below. The Dutch Code is available on the Monitoring Committee Corporate Governance Code’s website.
Best Practice Provision 3.2.3
The activitiesDutch 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 Group, togetherCompensation Committee, find this manifestly unreasonable given circumstances or unless otherwise dictated by applicable law.
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 paragraph are not statements in accordance with the factors likely to affect its future development, performance, the financial positionrequirements of Section 404 of the Group, its cash flows, liquidity positionUS 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 borrowing facilities are described3b of the Decree can be found on pages 1our website.
| www.commissiecorporategovernance.nl | |
| www.unilever.com/corporategovernance | |
THE UNITED KINGDOM
In 2018, 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. The UK Code is available on the Financial Reporting Council’s (FRC) website.
Risk Management and Control: Our approach to 28. In addition, we describe in notes 15 to 18 on pages 110 to 124 the Group’s objectives, policies and processes for managing its capital, its financial risk management objectives, detailsand systems of itsinternal control is in line with the recommendations in the FRC’s revised guidance ‘Risk management, internal control and related financial instruments and hedging activitiesbusiness reporting’ (the Risk Guidance). It is Unilever’s practice to review acquired companies’ governance procedures and its exposures to creditalign them to the Unilever Group’s governance procedures as soon as is practicable.
Greenhouse Gas (GHG) Emissions: Information on GHG emissions can be found on page 35.
Employee Involvement and liquidity risk.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 discussing 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.
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/ | |
| Annual Report on Form 20-F 2018 | Governance Report | 41 |
CORPORATE GOVERNANCECONTINUED
ASSESSMENT
In order to report on the long-term viability of 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 the Group, including those that would threaten its business model, future performance, solvency or liquidity. The assessment assumes that any debt maturing in the next three years can bere-financed at commercially acceptable terms or via our current standby facility. This assessment also included reviewing and understanding the mitigation factors in respect of each of those risks. The risks and mitigatingrisk factors are summarised on pages 3729 to 41.33.
The viability assessment has two parts:
First, the Directors considered the period over which they have a reasonable expectation that the Group will continue to operate and meet its liabilities;liabilities, taking into account current debt facilities and debt headroom; and
Second, 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 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 | A fine equal to 1% of Group turnover | • Safe and high-quality products • Brand preference • Supply chain | ||
Major global incident affecting one or more of the Group’s key locations resulting in | The complete loss of all of our turnover in our largest geographic market was considered along with destruction of a key sourcing unit and reduced demand for our products that require water. | • Economic and political instability • Supply chain • Climate change | ||
| Global economic downturn leading to an increase in funding costs and the loss of our three largest customers. | Significant business disruption in our largest emerging market was considered with the impact of losing our three key customers. | • Economic and political instability • Treasury and pensions • Customer relationships | ||
FINDINGS
| ��� | Firstly, a three-year period is considered appropriate for this viability assessment because it is the period covered by the strategic 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: |
A three-year period is considered appropriate for this assessment because it is the period covered by the strategic 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:
high cash generation by the Group’s operations;operations and access to the external debt markets;
flexibility of cash outflow includingwith respect to significant marketing programmes and capital expenditure;expenditure projects which usually have a2-3 year horizon; and
the Group’s diverse product and geographical operations.activities which are impacted by continuously evolving technology and innovation.
Taking into accountSecondly, for each of our 14 principal risks, worst case plausible scenarios have been assessed together with multiple risk scenarios. None of the Group’s current positon and plans, the Directors believe that there is no plausible scenario thatscenarios reviewed, either individually or in aggregate would threaten our business model, future performance, solvency or liquidity over the next three years.cause Unilever to cease to be viable.
CONCLUSION
On the basis described above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.
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 principal risks could impact our business within the next two years (ie short-term risks), or could impact our business over the next three to five years (ie medium-term risks). Some principal risks, such as climate change, could also impact over the longer term (ie beyond five years).
Our risk profile hasprincipal risks have not fundamentally changed this year but we have now more clearly highlighted that Climate Change is oneapart from the addition of a plastic packaging risk. Given the nature of our principal risk factors. Forbusiness, a numberreduction in the amount of years we have recognised that changesplastic packaging and increase in climate pose a riskthe use of recyclable content in our packaging is critical to our business and hence as a part of our Unilever Sustainable Living Plan we are trying to both reduce our impact on climate change and to prepare ourselves for the impact climate change will have on our business in the coming years, and this risk and our management approach were outlined within our Sustainability risk factor. However following discussions at the United Nations Convention on Climate Change, 21st Conference and the Financial Services Board Taskforce on Climate Related Financial Disclosures, it is clear that the impacts of climate change itself and the potential actions government may take are of such significance that Climate Risk should be separately identified.future success.
| 28 | Strategic Report | Annual Report on Form 20-F 2018 |
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 risk factorsrisks is increasing or decreasing. ThereIn addition to our plastic packaging risk there are twothree areas where we believe there is an increased level of risk:
Customer Relationships: technology is changing our channel landscape and hence changing the nature of the relationships with our traditional customers as well as requiring us to develop relationships with new customers who are drivinge-commerce development;
Systems and Information: the number of cybersecurity attacks is still increasing significantly, and incidents are becoming more sophisticated as technology further evolves; and
Business Transformation: this risk has increased as a result of the speed of technological change which are;
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.
RISKSCONTINUED
DESCRIPTION OF RISK |
BRAND PREFERENCE
As a branded goods business, Unilever’s 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 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
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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 categories, 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.
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SUSTAINABILITY |
The success of our business depends on finding sustainable solutions to support long-term growth.
Unilever’s
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| Annual Report on Form 20-F 2018 | Strategic Report | 29 |
RISKSCONTINUED
DESCRIPTION OF RISK |
CLIMATE CHANGE |
Climate changes and governmental actions to reduce such changes may disrupt our operations and/or reduce consumer demand for our products.
Climate changes are occurring around the globe which may impact our business in various ways. They could lead to water shortages which would reduce demand for those of our products that require a significant amount of water during consumer use. They 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.
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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 globe. 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. |
CUSTOMER RELATIONSHIPS |
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.
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| 30 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
TALENT |
A skilled workforce and agile
Our ability to attract, develop
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.
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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
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. |
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.
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RISKSCONTINUED
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Unilever’s operations are increasingly dependent on IT systems and the management of information.
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 |
| Annual Report on Form 20-F 2018 | Strategic Report | 31 |
RISKSCONTINUED
DESCRIPTION OF RISK |
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. A number of key projects were announced in 2017 to accelerate sustainable shareholder value creation. Failure to execute such Continued digitalisation of our business models and processes together with enhancing data management capabilities is a critical part of our transformation. Failure to keep pace with such technological change would significantly impact our growth and profitability.
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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.
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Unilever is exposed to a variety of external financial risks in relation to Treasury and Pensions.
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.
Unilever may face liquidity risk, ie difficulty in meeting its obligations, associated with its financial liabilities. A material and sustained shortfall in our cash flow could undermine Unilever’s credit rating, impair investor confidence and also restrict Unilever’s ability to raise funds.
We are exposed to market interest rate fluctuations on our floating rate debt. Increases in benchmark interest rates could increase the interest cost of our floating rate debt and increase the cost of future borrowings.
In times of financial market volatility, we are also potentially exposed to counter-party risks with banks, suppliers and customers.
Certain businesses have defined benefit pension plans, most now closed to new employees, which are exposed to movements in interest rates, fluctuating values of underlying investments and increased life expectancy. Changes in any or all of these inputs could potentially increase the cost to Unilever of funding the schemes and therefore have an adverse impact on profitability and cash flow.
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| 32 | Strategic Report | Annual Report on Form 20-F 2018 |
DESCRIPTION OF RISK |
ETHICAL |
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.
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. Despite the commitment of Unilever to ethical business and the steps we take to adhere to this commitment, there remains a risk that activities or events cause us to fall short of our desired standard, resulting in damage to Unilever’s corporate reputation and business results.
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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. Tax, in particular, is a complex 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 & Profit Shifting project and further potential tax reform in the EU and
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IN FOCUS: CLIMATE CHANGE RISKS AND OPPORTUNITIES
UNILEVER HAS PUBLICLY COMMITTED TO IMPLEMENTING THE RECOMMENDATIONS OF THE TASK FORCE ON CLIMATE-RELATED FINANCIAL DISCLOSURES.
Unilever recognises the importance of disclosing climate-related risks and opportunities. Adopting the Taskforce on Climate-Related Financial Disclosures (TCFD) recommendations is an important step forward in enabling market forces to drive efficient allocation of capital and support a smooth transition to alow-carbon economy.
In this Annual Report and Accounts, we continue to integrate climate-related disclosures throughout the Strategic Report narrative. However, in recognition of the growing significance of the impacts of climate change on our business, we have also summarised the risks and opportunities arising from climate change, and our response below.
The Boards take overall accountability for the management of climate change risks and opportunities with support from the ULE and the USLP Steering Team (see page 46). Chaired by Keith Weed in 2018, the USLP Steering Team includes nine members of the ULE and meets five times a year. During 2018, there were numerous agenda items on topics related to climate change including our overall climate strategy and our renewable electricity target.
For management employees (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. The USLP component accounts for 25% of total MCIP award. The sustainability component of MCIP includes consideration of our progress against climate change, water and palm oil targets, which among others, underpin our climate strategy. See pages 52 to 54 for more on MCIP.
UNDERSTANDING IMPACT
Climate change has been identified as a principal risk to Unilever which has the potential to impact our business in the short, medium and long-term. Further details on the nature of climate risks and opportunities for Unilever can be found in our 2018 CDP Climate submission (see further climate change disclosures on pages 7 and 14).
To further understand the impact that climate change could have on Unilever’s business 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 and we have looked at the impact on our business in 2030 assuming we have the same business activities as we do today. We also made the following simplifying assumptions:
| Annual Report on Form 20-F 2018 | Strategic Report | 33 |
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 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 work 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.
During 2018 we developed and piloted an approach to assess the impact of climate change on our key commodities. We selected soy for this pilot based on its importance to Unilever (large purchased volume), it being ahigh-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. Climate change was the only price factor accounted for in the model used to calculate the impact. Other factors which impact price, such as technology and acreage, were excluded. The model considered the direct risks from climate change to the price of soybean oil, such as change in yield and change in supply. 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 would need to consider a wider range of risk factors when determining our strategic response. Indirect risks from climate change, such as catastrophic 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. We have therefore decided to get broader understanding on the climate change risks to our agricultural sourcing and extend our analysis to two other important crops to Unilever: Palm Oil and Tea, for which suitable climate change models for yield predictions will be available in 2019.
RESPONDING TO RISKS AND OPPORTUNITIES
Unilever’s vision is to grow our business whilst decoupling our growth from our environmental footprint and increasing positive social impact. This vision explicitly recognises that sustainable growth – including management of climate-related risks and opportunities – is the only way to create long-term value for all our stakeholders.
The Unilever Sustainable Living Plan (USLP) was developed to deliver our vision. It is fully integrated with our business strategy. Climate-related issues are integral to the USLP. Two of our GHG reduction targets included in the USLP are recognised as science-based:
We are taking action across our value chain to reduce our emissions, creating growth opportunities and minimising risk. Our commitment to source 100% of our palm oil from sustainable sources is helping to avoid emissions from deforestation (see pages 14 and 47). Our efforts to reduce energy and GHG emissions in manufacturing are helping us to save costs. For example, by using less energy, we have already avoided energy costs in our factories of over€600 million since our baseline year of 2008.
Our divisions are taking action to reduce emissions. In Home Care we are focusing on concentrated liquid laundry detergents such as Persil, Omo and Surf Small & Mighty which help consumers to wash clothes at lower temperatures, reducing GHG by up to 50% per load. We have removed phosphates from all laundry powders worldwide, resulting in lower greenhouse gas emissions of up to 50% per consumer use. Our Foods & Refreshment division has prioritised reducing greenhouse gas emissions from ice cream freezers since 2008. As the world’s largest producer of ice cream, we have committed to accelerating theroll-out of freezer cabinets that use more climate-friendly natural (hydrocarbon) refrigerants. By 2018 our total purchase of these cabinets had increased to around 2.9 million.
Detailed Lifecycle Analysis has shown that our GHG contribution from animal-based agriculture, including fats and proteins, is relatively low: 7.5% for Foods & Refreshment and 2.5% for total Unilever. While emissions are comparatively low, the business opportunity is significant for natural and plant-based foods and beverages. We have a range of vegan and vegetarian variants such as Hellmann’s vegan mayonnaise, Ben & Jerry’snon-dairy ice creams, Magnum vegan and other options (see pages 11 to 12). We continue to actively promote vegetarian and vegan recipes, notably via our Knorr brand websites.
A number of our targets directly address risks and opportunities related to water scarcity caused by climate change. We estimate that the sale of products which address water scarcity issues could increase in our Home Care and Beauty & Personal Care divisions where a number of products are available which address water scarcity and/ or have a lower GHG in use. For example, our Beauty & Personal Care division is investing in water smart product innovations such as dry shampoo and cleansing conditioner which help consumers use less water while also offering relevant benefits such as reduced colour loss and damage which can arise from frequent washing. Home Care is 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 help our consumers save water. Day2, the world’s first dry wash spray is made with only 0.02% of the water in a normal laundry load. Sunlight2-in-1 Handwashing Laundry Powder and Rin (Radiant) detergent bar are also helping to reduce water consumption at point of use in water-stressed countries.
| 34 | Strategic Report | Annual Report on Form 20-F 2018 |
Home Care is home to three brands, Pureit, Truliva/Qinyuan and Blueair, which are responding directly to issues related to climate change. Pureit and Truliva, our water purification businesses, offer products which provide safe drinking water to millions of people with a lower carbon footprint than alternatives. Our detailed lifecycle analysis shows that Pureit’s total carbon footprint is at least 80% lower than boiled or bottled water. Blueair, our indoor air purification business acquired in 2016, removes contaminants from the air, including hazardous sooty particles associated with the combustion of fossil fuels.
Several other targets in our USLP indirectly address climate risk and opportunities by aiming to support groups who are vulnerable to the effects of climate change and who are critical to our future growth, notably smallholder farmers and women in low income countries.
Unilever continues to support a number of policy measures to accelerate the transition to alow-carbon economy, including the pricing of carbon and removal of fossil fuel subsidies which act as negative carbon prices. We believe that carbon pricing is a fundamental part of the global response to climate change 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. In 2016, we implemented an internal price on carbon as part of the business case appraisal for large capital expenditure projects. The carbon price is also applied to emissions from our manufacturing sites to raise a clean-tech fund. So far,€73 million has been allocated to this fund for energy and water saving projects. In January 2018 the price of carbon was€40 per tonne.
MEASURING AND REPORTING
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 7 with commentary on page 13 and 14. Our website contains detailed commentary on our USLP targets as well as actions we are taking to achieve them.
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. We have a role to play as an industry leader to help shape those markets. We are working collaboratively with partners, suppliers and others to achieve our ambition.
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. The basis of this plan is the set of around 2,800 products representative of our global portfolio across all divisions for which we have full value-chain lifecycle analysis results.
We recalculated the footprint of these products using the latest 2030 projections on external transitions to alow-carbon economy (eg International Energy Agency 2030 projection on grid changes to renewable energy),low-carbon transition plans in our operations (eg achieving zero net deforestation by 2020, using 100% renewable energy by 2020) and Innovation Roadmaps (eg redesign for lower embedded carbon emissions, transforming the temperature-controlled supply chain).
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 (GHG) emissions are set out below. 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.
We report our emissions with reference to the latest Greenhouse Gas Protocol Corporate Accounting and Reporting Standard (GHG Protocol) to calculate emissions of carbon dioxide from the combustion of fuels and the operation of facilities (Scope 1) and from purchased electricity, heat, steam and cooling (Scope 2, market-based method). Each year PwC assure selected manufacturing environmental metrics including carbon emissions from energy use and energy use per tonne of production.
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.
UNILEVER GREENHOUSE GAS EMISSIONS BY ACTIVITY^
| 2018 | 2017 | |||||||
| Manufacturing (scope 1 and 2) | ||||||||
Scope 1 (tonnes CO2) | 711,875 | 773,856 | ||||||
Scope 2* (tonnes CO2) | 726,167 | 793,472 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 1,438,042 | 1,567,328 | ||||||
Intensity ratio (kg CO2 per tonne of production) | 70.46 | 76.77 | ||||||
| Distribution centres, research laboratories, marketing and sales offices (scope 1 and 2) |
| |||||||
Scope 1 (tonnes CO2) | 20,052 | 20,039 | ||||||
Scope 2* (tonnes CO2) | 100,924 | 102,292 | ||||||
Total Scope 1 & 2* (tonnes CO2) | 120,976 | 122,331 | ||||||
| Upstream and downstream of Unilever operations – top 3 emissions sources (scope 3) |
| |||||||
Consumer use | ||||||||
(downstream) (tonnes CO2e)q | 39,895,946 | 38,697,432 | ||||||
Ingredients and packaging | ||||||||
(upstream) (tonnes CO2e)‡ | 14,985,897 | 15,000,941 | ||||||
Distribution and retail | ||||||||
(downstream) (tonnes CO2e) | 4,368,626 | 3,895,589 | ||||||
| ^ | 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). |
| + | 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. |
| * | 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). |
| q | 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. |
| ‡ | 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. |
| Downstream distribution is calculated using average distances and modes of transport derived from data collected from our distribution network and logistic providers. |
FURTHER CLIMATE CHANGE DISCLOSURES
This Annual Report and Accounts contains additional disclosures on our climate change risks and opportunities:
Our website contains disclosures on our greenhouse gas and water USLP 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 (password required).
| www.cdp.net |
| Annual Report on Form 20-F 2018 | Strategic Report | 35 |
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* 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.
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 information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be found on our website.
| * | Throughout this report, when referring to NV shares or shareholders, the term ‘shares’ or ‘shareholder’ also encompasses a depositary receipt or a holder of depositary receipts. |
| www.unilever.com/investor-relations/agm-and-corporate- governance/legal-structure-and-foundation-agreements/ |
BOARDS
The Boards of NV and PLC have ultimate responsibility for the management, general affairs, direction, 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. In the normal course Unilever has two Executive Directors, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). On 31 December 2018 the current CEO resigned and his successor, Alan Jope, was appointed on 1 January 2019. Alan will be proposed to be appointed as an Executive Director at the 2019 AGMs. Consequently, between 1 January 2019 and the 2019 AGMs in May we have 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 out on page 3.
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, the Division Presidents, the Presidents for Europe and North America, and the Chief 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 COMMITTEES
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 2018, can be found on pages 43 to 65.
| www.unilever.com/investor-relations/agm-and-corporate- governance/board-and-management-committees/ |
THE GOVERNANCE OF UNILEVER
Further details of the roles and responsibilities of the Chairman, Senior Independent Director/Vice-Chairman, CEO, CFO 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).
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 36 | Governance Report | Annual Report on Form 20-F 2018 |
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 of the Unilever Group; the development of and approval of the overall strategy of the Unilever Group; oversight of the performance of the business; review of risks and internal risk management and control systems; authorisation of major transactions; declaration of dividends; convening of shareholders’ meetings; succession planning; review of the functioning of the Boards and their Committees; culture; and review of corporate responsibility and sustainability, in particular the Unilever Sustainable Living Plan. Other ad hoc Board meetings are convened to discuss strategic, transactional and governance matters that arise. In 2018 the Boards met physically in January, March, May, 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 sets the Boards’ agenda, ensures the Directors receive accurate, timely and clear information, and promotes effective relationships and open communication between the Executive andNon-Executive Directors.
ATTENDANCE
The table showing the attendance of current Directors at Board meetings in 2018 can be found on page 3. If Directors are unable to attend a Board meeting they have the opportunity beforehand to discuss any agenda items with the Chairman. Ann Fudge attended four of the Board meetings she was eligible to attend before retiring from the Boards on 3 May 2018.
NON-EXECUTIVE DIRECTOR MEETINGS
TheNon-Executive Directors usually meet as a group, without the Executive Directors present, when there is aface-to-face Board meeting. In 2018 they met five times. The Chairman, or in his absence the Senior Independent Director/Vice-Chairman, chairs such meetings.
BOARD EVALUATION
Each year the Boards formally assess their own performance 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. The last external evaluation was performed in 2017. The evaluation consists of individual interviews with the Directors by the Chairman and, when relevant, by the external evaluator. These interviews are complemented by the completion by all Directors of three confidential online evaluation questionnaires on the efficiency and effectiveness of our Boards, CEO and Chairman. The Boards evaluation questionnaire this year focused on a number of key areas including Strategy, Risk/Financial Controls, Board Effectiveness and Information/Knowledge. The Chairman’s statement on page 2 describes the key actions agreed by the Boards following the evaluation.
The evaluation of the performance of the Chairman and CEO is led by the Senior Independent Director/Vice-Chairman and Chairman respectively, and the bespoke questionnaires will be used to support these evaluations. 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 2018 evaluations can be found in each Committee Report.
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 48 and 49 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 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 2018 the Directors received presentations on Information Security, Digital, the Supply Chain and Simplification.
INDEPENDENCE AND CONFLICTS
As theNon-Executive Directors make up the Committees of the Boards, it is important that they 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. A Director must without delay report any conflict of interest or potential conflict of interest to the Chairman and to the other Directors, or, in case any conflict of interest or potential conflict of interest of the Chairman, to the Senior Independent Director/Vice-Chairman and to the other Directors. The Director in question must provide all relevant information to the Boards, so that the Boards can decide whether a reported (potential) conflict of interest of a Director qualifies as a conflict of interest within the meaning of the relevant laws. A Director may not vote on, or be counted in a quorum in relation to, any resolution 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.
INDEMNIFICATION
The terms of NV Directors’ indemnification are provided for in NV’s Articles 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 2018 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.
| Annual Report on Form 20-F 2018 | Governance Report | 37 |
CORPORATE GOVERNANCECONTINUED
OUR SHARES
NV SHARES
SHARE CAPITAL
NV’s issued share capital on 31 December 2018* was made up of:
| * | When referred to the issued share capital on 31 December 2018 also€62,065,550 split into two classes (6% and 7%) of cumulative preference shares was outstanding. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon in the General Meeting of NV. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018 with the Dutch Trade Register and an announcement thereof in a daily and nationally distributed newspaper in the Netherlands was made on 5 December 2018. These shares were cancelled on 6 February 2019. |
LISTINGS
NV has ordinary shares (UNIA) and depositary receipts for such ordinary shares (UNA) listed on Euronext Amsterdam and, as 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 hold and can vote in person or by proxy. The voting rights attached to NV’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,714,727,700 ordinary shares | 1,714,727,700 | (a) | 99.63 | |||||
2,400 special shares |
| 6,428,550 |
|
| 0.37 |
| ||
As at 31 December 2018:
| (a) | 254,012,896 shares were held in treasury and 9,336,215 shares were held to satisfy obligations under share-based incentive schemes. These shares and the special shares are not voted on. All 6% and 7% cumulative preference shares were held in treasury as a result of which these shares cannot be voted upon, as described within the Share Capital section above. |
SHARE ISSUES AND PURCHASE OF SHARES
At the NV AGM held on 3 May 2018 the Board of NV was designated as the corporate body authorised to resolve on the issue of, or on the granting of rights to subscribe for, shares not yet issued and to restrict or exclude the statutorypre-emption rights that accrue to shareholders upon issue of shares, on the understanding that this authority is limited to 33% of NV’s issued ordinary share capital and to disapplypre-emption rights to 5% of NV’s issued share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at NV’s 2018 AGM the NV Board was designated as the corporate body authorised to purchase (i) ordinary shares with a maximum of 10% of the issued share capital as well as (ii) any and all 6% and 7% cumulative preference shares.
These authorities expire on the earlier of the conclusion of the 2019 NV AGM or the close of business on 30 June 2019 (the last date by which NV must hold an AGM in 2019). Such authorities (other than with respect to the 6% and 7% cumulative preference shares) are renewed annually.
During 2018 companies within the Unilever Group purchased 4,000,000 NV ordinary shares, representing 0.23% of the issued ordinary share capital, for€183,380,649. These purchases were made to facilitate grants made in connection with Unilever’s employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, NV conducted a share buyback programme during 2018 with an aggregate market value of approximately€3 billion bought back in the form of 62,202,168 NV ordinary shares (or depositary receipts in respect of such ordinary shares).
Following a public offer and a subsequent squeeze out procedure, Unilever Corporate Holdings Nederland B.V. (UCHN), an indirect wholly owned subsidiary of PLC, acquired all 6% cumulative preference shares and 7% cumulative preference shares. Unilever N.V. purchased these 6% cumulative preference shares and 7% cumulative preference shares on 2 October 2018. The resolutions of the General Meeting of NV and the Board of NV to cancel these shares were filed on 29 November 2018, as described within the Share Capital section above.
Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
NV SPECIAL ORDINARY SHARES
To ensure unity of management, the provisions within the NV Articles of Association containing the rules for appointing NV Directors cannot be changed without the permission of the holders of the 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 OFFICE
The Foundation Unilever N.V. Trust Office (Stichting Administratiekantoor Unilever N.V.) is a trust office with a board independent of Unilever. As part of its corporate objects, the Trust Office issues depositary receipts in exchange for the NV ordinary shares. These depositary receipts are listed on Euronext Amsterdam, as are the NV ordinary shares themselves
Holders of depositary receipts can under all circumstances exchange their depositary receipts for 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 2018 were 1,268,051,254 NV ordinary shares (73.95%).
At the 2018 NV AGM, the Trust Office represented 36.95% 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.
| www.administratiekantoor-unilever.nl/eng/home |
| 38 | Governance Report | Annual Report on Form 20-F 2018 |
PLC SHARES
SHARE CAPITAL
PLC’s issued share capital on 31 December 2018 was made up of:
| • | £36,934,840 split into 1,187,191,284 ordinary shares of 31⁄9p each; and |
LISTINGS
PLC has ordinary shares (ULVR) listed on the London Stock Exchange and, as American Depositary Receipts* (UL), on the New York Stock Exchange.
| * | One American Depository Receipt represents one PLC ordinary share with a nominal value of 31⁄9p. |
VOTING RIGHTS
PLC shareholders can cast one vote for each 31⁄9p nominal capital they hold and can vote in person or by proxy. The voting rights attached to PLC’s outstanding shares are split as follows:
Total number of votes | % of issued capital | |||||||
1,187,191,284 ordinary shares | 1,187,191,284 | 99.73 | ||||||
£100,000 deferred stock |
| 3,214,285 |
|
| 0.27 |
| ||
As at 31 December 2018:
| (a) | 18,660,634 shares were held by PLC in treasury and 5,645,392 shares were held by NV group companies. These shares and the deferred stock are not voted on. |
SHARE ISSUES AND PURCHASE OF SHARES
At the 2018 PLC AGM held on 2 May 2018 the PLC Directors were authorised to issue new shares, up to a maximum of £12,755,555 nominal value (which at the time represented approximately 33% of PLC’s issued ordinary share capital) and to disapplypre-emption rights up to approximately 5% of PLC’s issued ordinary share capital for general corporate purposes and an additional 5% authority only in connection with an acquisition or specified capital investment.
In addition, at PLC’s 2018 AGM the PLC Board was authorised to make market purchases of its ordinary shares, up to a maximum of just under 10% of PLC’s issued ordinary share capital and within the limits prescribed in the resolution until the earlier of the conclusion of PLC’s 2019 AGM and 30 June 2019. These authorities are renewed annually and authority will be sought at PLC’s 2019 AGM.
During 2018 companies within the Unilever Group purchased 2,222,000 PLC ordinary shares, representing 0.19% of the issued share capital, for £87,978,671. These purchases were made to facilitate grants made in connection with its employee compensation programmes. Further information on these purchases can be found in note 4C to the consolidated accounts on page 93.
In addition, PLC conducted a share buyback programme during 2018 with an aggregate market value of approximately £3 billion bought back in the form of 63,236,433 PLC ordinary shares.
On 31 July 2018, PLC cancelled 110,493,623 PLC ordinary shares of 31⁄9p each held in treasury, representing 8.43% of the issued share capital. On 19 September 2018, PLC cancelled a further 12,471,454 PLC ordinary shares of 31⁄9p each held in treasury, representing 1.04% of the issued share capital.
PLC DEFERRED STOCK
To support unity of management, the holders of PLC’s deferred stock have rights within PLC’s Articles of Association relating to any changes in the rules for appointing PLC Directors. 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.
OUR SHAREHOLDERS
SIGNIFICANT SHAREHOLDERS OF NV
As far as Unilever is aware, the only holder of more than 3% of, or 3% of voting rights attributable to, NV’s share capital (‘Disclosable Interests’) on 31 December 2018 (apart from the Foundation Unilever N.V. Trust Office, see page 38) is BlackRock, Inc. (BlackRock) as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 66,947,018 | 3.90 | |||||||
BlackRock notified the AFM that its holding changed to 4.02% on
19 February 2019. Between 1 January 2016 and 21 February 2019, BlackRock, NN Group N.V. (NN), ASR Nederland N.V. (ASR) and UCHN, see page 38, have held more than 3% in the share capital of NV.
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 on 31 December 2018 (apart from shares held in treasury by PLC, see page 39), are BlackRock and the Leverhulme Trust as indicated in the table below.
| Shareholder | Class of shares | Total number of shares held | % of relevant class | |||||||
BlackRock | ordinary shares | 77,176,319 | 6.60 | |||||||
The Leverhulme Trust | ordinary shares | 46,931,182 | 4.02 | |||||||
As far as Unilever is aware, no new Disclosable Interests have been notified to PLC between 1 January 2019 and 21 February 2019 (the latest practicable date for inclusion in this report). Between 1 January 2016 and 21 February 2019, (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.
STAKEHOLDER ENGAGEMENT
We value open and effective communication with our stakeholders. The primary responsibility for stakeholder engagement, which is generally related to the operations of the business, rests with our Executive Directors.Non-Executive Directors also actively engage with stakeholders as part of their oversight duties and responsibilities that have not been delegated to the Executive Directors.
SHAREHOLDERS
The CFO has lead responsibility for shareholder engagement, with the active involvement of the CEO and supported by the Investor Relations department.
The Executive Directors’ investor relations programme continued in 2018 with meetings held with institutional shareholders in major cities globally. The Executive Directors and members of the Investor Relations team also meet a large number of investors at the industry conferences they attend. In 2018 industry conferences attended by Unilever representatives included events in London, Paris, Stockholm, Boston and New York.
Our annual investor seminar in December also allowed investors to meet the Chairman, CEO,CEO-designate, CFO and other members of senior management. The event was held at the offices of Hindustan Unilever in Mumbai and focused on Unilever’s emerging markets expertise as well as the digital transformation of the business.
In 2018, as part of the strategic review of options to accelerate sustainable value creation and our proposal to simplify the Unilever corporate structure, the Chairman met and spoke with global investors during the year. The Chair of the Compensation Committee also extensively engaged with and sought feedback from investors in relation to our Remuneration Policy.
| Annual Report on Form 20-F 2018 | Governance Report | 39 |
CORPORATE GOVERNANCECONTINUED
On 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. Private shareholders are encouraged to give feedback via shareholder.services@unilever.com. Our shareholders are also welcome to raise any issues directly with the Chairman or the Senior Independent Director/Vice-Chairman, 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.
OTHERS
Our Executive Directors andNon-Executive Directors also engage with a wide-ranging group of stakeholders during specific Unilever events. For example, we annually organise one or more Board Relationship meetings offering our Directors the opportunity to directly meet our key customers, suppliers, agencies, NGOs, trade associations and advisers. In 2018, such meetings were held in the Netherlands and the UK.
EMPLOYEES
In order to allow ourNon-Executive Directors to gainfirst-hand experience of our operations and to engage in a broader context, we organise one or more site visits annually. During these site visits,Non-Executive Directors are informed about local market conditions and operations as well as relevant local matters. Typically, the programme allowsNon-Executive to meet management and young talent at these sites. In 2018, such site visits were held in China, Germany, the Netherlands and the US. In terms of engaging with employees, ourNon-Executive Directors actively participate in our management development programme sharing knowledge and insight on a mutual basis.
| www.unilever.com/investor-relations/ |
GENERAL 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, 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 2018 AGMs were held in Rotterdam and London in May and the topics raised by shareholders included:e-commerce, mergers & acquisitions, sustainability, Simplification, remuneration, total shareholder return, Brexit and 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. 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 2019 AGMs can be found within the NV and PLC AGM Notices which will be published in March 2019.
REQUIRED 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 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.
| 40 | Governance Report | Annual Report on Form 20-F 2018 |
CORPORATE GOVERNANCE COMPLIANCE
GENERAL
We conduct our operations in accordance with internationally accepted principles of good governance and best practice, while 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 CONTRACTS
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 36, we believe we do not have any such contracts or arrangements.
THE NETHERLANDS
In 2018, NV complied 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 in the General Meetings section above and the best practice provision set out below. The Dutch Code is available on the Monitoring Committee Corporate Governance Code’s website.
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.
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 paragraph 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 KINGDOM
In 2018, 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. The UK Code is available on the Financial Reporting Council’s (FRC) website.
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: Information on GHG emissions can be found on page 35.
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 discussing 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.
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/ | |
| Annual Report on Form 20-F 2018 | Governance Report | 41 |
CORPORATE GOVERNANCECONTINUED
THE 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 43 to 45. 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 2018 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 2018 were 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 156.
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.
| www.unilever.com/investor-relations/agm-and-corporate- governance/our-corporate-governance/ |
| 42 | Governance Report | Annual Report on Form 20-F 2018 |
COMMITTEE MEMBERS AND ATTENDANCE
| ||
| ATTENDANCE | ||
John RishtonChair | 8/8 | |
| ||
| ||
| ||
Judith Hartmann | ||
| ||
| ||
This table shows the membership of the Committee together with their attendance at meetings during
| ||
HIGHLIGHTS OF |
• Annual Report and Accounts •
•
• Supply Chain flexibility and continuity of supply • Accounting for significant Mergers and Acquisitions • Acquisition Review • Spreads Disposal • IFRS 15 ‘Revenue from Contracts with Customers’ and IFRS 16 ‘Leases’
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PRIORITIES FOR
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• Tax regulations, provisions and disclosure • Information Security, including Cyber, and IT resilience • •
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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 2016 when Hixonia Nyasulu retired from the Committee and Nils Andersen joined the Committee. The other members are Nils Andersen and Judith Hartmann and Mary Ma.Hartmann. 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 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, with a view to bringing anyand relevant issues are brought to the attention of the Boards:
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 2016,2018, a joint session was held with the Corporate Responsibility CommitteeUnilever Management on the Unilever Sustainable Living Plan (USLP),acquisition of the Dollar Shave Club, which included an updatea briefing on how the USLP has evolved, how it is governedacquisition case, recent performance, and how its progress is assessed.key learnings that might be relevant for future acquisitions. In addition, Committee membersJohn Rishton visited onethe Indian MCO in Mumbai, where the developments of our keyroutes to market, controls automation and centralisation were reviewed and discussed in detail. Mr Rishton also visited the Indian finance and IT accountinghub in Bangalore where progress being made on monitoring systems of potential cyber threat and reporting centres in Bangalore.access controls were reviewed.
HOW THE COMMITTEE HAS DISCHARGED ITS RESPONSIBILITIES
During the year, the Committee’s principal activities were as follows:
FINANCIAL 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 2016. 2018. These reviews incorporated the accounting policies and significant judgements and estimates underpinning the financial statements as disclosed within note 1 on pages 8879 to 90.82. Particular attention was paid to the following significant issues in relation to the financial statements:
| Annual Report on Form 20-F 2018 | Governance Report | 43 |
REPORT OF THE AUDIT COMMITTEECONTINUED
The external auditors have agreed the list of significant issues discussed by the Audit Committee. In addition to these risks KPMG, as required by auditing standards, also consider the risk of management override of controls. Nothing has come to either our attention or the attention of KPMG to suggest any material suspected or actual fraud relating to management override of controls.
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 and further information can be found on pages 7967 to 83.74. The Committee was satisfied that there are relevant accounting policies in place in relation to these significant issues and management have correctly applied these policies.
At the request of the Boards the Committee undertook to:
At the request of the Boards the Committee also considered whether the Unilever Annual Report and Accounts 20162018 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 20162018 is fair, balanced and understandable.
RISK 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 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, the Committee reviewed the annual financial plan and Unilever’s dividend policy and dividend proposals.
During 20162018 the Committee 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
The Committee reviewed Corporate Audit’s audit plan for the year and agreed its budget and resource requirements. It reviewed interim andyear-end summary reports and management’s response. The Committee engaged an independent third party to perform an effectiveness review of the function. The review concluded that the function is compliant with the IIA (Chartered Institute of Internal Auditors) Standards in all material aspects. The Committee also carried out an evaluation of the performance of the internal audit function and was satisfied with the effectiveness of the function. The Committee met independently with the Chief Auditor during the year and discussed the results of the audits performed during the year.
AUDIT OF THE ANNUAL 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 their 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 yearyear. The Committee considered these views and KPMG confirmed they werecomments and is satisfied that these had been treated appropriatelywith the treatment in the financial statements.
EXTERNAL AUDITORS
ShareholdersKPMG have been the Group’s auditors since 2014 and shareholders approved the theirre-appointment of KPMG as the Group’s external auditors at the 20162018 AGMs. On the recommendation of the Committee, the Directors will be proposing there-appointment of KPMG at the AGMs in April 2017.May 2019.
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. TheBoth the KPMG partners with overall responsibility for the audit of NV and PLC will rotate off the assignment after completion of the 2018year-end financial statements. One of the new partners already has experience of the Unilever global audit, and the other partner underwent an induction programme through much of thisyear-end to ensure a smooth transition. 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.
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:
| 44 |
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:
This policy was updated during 2016 to reflect the European Union Audit Directive and now additionally prohibits most services relating to Tax. 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, external developments and best practice. 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 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.
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 accounts was performed in 2013.
The FRC’s Audit Quality Review (AQR) team monitors the quality of audit work of certain UK audit firms through inspections of a sample of audits and related procedures at individual audit firms. During the year, the 2015 external audit of the Group by KPMG was reviewed by the AQR. The Committee and KPMG have discussed the review findings, which noted a small number of recommendations for improvement and also areas of high standard. The recommendations were incorporated into the 2016 audit work. The Committee do not consider any of the findings to have a significant impact on KPMG’s audit approach.
EVALUATION OF THE AUDIT COMMITTEE
As part of the internal Board evaluation carried out in 2016,2018, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2016. Whilst2018. 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 DirectorsCommittee members continued to develop their knowledge of business operations.the Group’s operations which would involve further knowledge sessions and site visits.
John Rishton
Chair of the Audit Committee
Nils Andersen
Judith Hartmann
Mary Ma
| Annual Report on Form 20-F | Governance Report |
RESPONSIBILITY COMMITTEE
COMMITTEE MEMBERS AND ATTENDANCE
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| ATTENDANCE | |||
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Strive Masiyiwa(Member since April 2017)Chair | |||
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Feike Sijbesma | |||
This table shows the membership of the Committee together with their attendance at meetings during | |||
HIGHLIGHTS OF
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• • Third-party compliance • Product quality and safety • Unilever Sustainable Living Plan (USLP)
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PRIORITIES FOR
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• Compliance with
• Product quality and safety • Unilever Sustainable Living Plan (USLP) including plastic packaging
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TERMSROLE OF REFERENCETHE COMMITTEE
The Corporate Responsibility Committee oversees Unilever’s conduct as a responsible multinationalglobal 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 Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. ATherefore a central element of the Committee’sits role is the need to identify any external developments that are likely to have an influence upon Unilever’s standing in society, and to bring theseensure that appropriate and effective communications policies are in place to support the attention of the Boards.
The Committee comprises four Non-Executive Directors: Louise Fresco, who chairs the Committee, Laura Cha, Feike Sijbesma and Youngme Moon, who was appointed to the Committee on 21 April 2016. The Chief Marketing & Communications Officer attends the Committee’s meetings.company’s reputation.
The Committee’s discussions are informed by the perspectivesexperience of the Group’s two sustainability leadership groups, bothsenior leaders invited to the Committee to share their views on a variety of whichtopics and external trends. Many of these leaders are chaired by the Chief Marketing & Communications Officer. The first is the Unilever Sustainable Living Plan Council – a groupmembers of experts from outside the Group who advise Unilever’s senior leadership on its sustainability strategy. The second is the Unilever Sustainable Living Plan Steering Team, – the group of Unilever’s senior executives who are accountable for driving sustainable growth. The insights from these groups,growth through Unilever’s brands and the subsequent reports fromoperations. These discussions ensure the Committee to the Boards, help to keep the Boards informedstays abreast of current and emerging trends and any potential risks arising from sustainability issues. This enables the Boards to draw on a well-rounded view of issues.
During 20162018 the Committee reviewed its terms of reference and on the recommendation of the Committee, 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 its remit to review risk management and for overseeing the independent assurance programme for the USLP.
The Committee’s terms of reference are set outwww.unilever.com/ corporategovernance and details of the Unilever Sustainable Living Plan Council are available on Unilever’s websiteUSLP Steering Team atwww.unilever.com/corporategovernance andwww.unilever.com/sustainable-living/governanceour-strategy/our-sustainability-governance/
MEMBERS OF THE COMMITTEE
The Corporate Responsibility Committee comprises three respectively.Non-Executive Directors: Strive Masiyiwa (Chair), Feike Sijbesma and Youngme Moon. The Chief Marketing & Communications Officer and the Chief Sustainability Officer attend the Committee’s meetings. The Chief Business Integrity Officer also attends to present Unilever’s company report that covers cases under Unilever’s Code of Business Principles (the Code) as well as updates on third-party compliance, product quality and safety.
MEETINGS
Meetings are held quarterly and ad hoc as required.required – four were held in 2018. The Committee Chairman reportsis responsible for reporting the conclusionsfindings from meeting to the Boards. Four meetings were held in 2016. Taking into accountBoards, thus ensuring that the Boards can fulfil their oversight responsibilities.
Following the Committee’s terms of reference and Unilever’s corporateprincipal risks and the priorities, the Committee sets itself for the year, the Committee works to a structured agenda, enabling members to focus in detail on the responsibilities assigned to them.
TheCommittee’s agenda covers Unilever’sthe Code of Business Principles (the Code),and third-party compliance, alongside litigation, and investigations alongside occupational safety,and product safety, and quality, the Unilever Sustainable Living Plan (USLP)USLP and corporate reputation as well as a range of strategic and current issues. In orderaddition to helpthe areas listed below, in 2018 the Committee meet its oversight responsibilities, each year management organise knowledge sessionsalso reviewed topics such as media communications, the process for the Committeeintegrating business acquisitions and progress on subject areas within its remit. In 2016 a joint session was held with the Audit Committee on the USLP, which included an update on how the USLP has evolved, how it is governed and how its progress is assessed.alternatives to animal testing.
CODE OF BUSINESS 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 and 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.
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. The Audit Committee also considers the Code as part of its remit to review financial and accounting issues. In 2016 the Code and updated Code Policies were published in a single document on Unilever’s website.
The CommitteeIt maintains close scrutiny of the mechanisms for implementing the Code and Code PoliciesPolicies. This is vital as ongoing 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 the information onan analysis of investigations into alleged non-compliance with the Code and Code Policies and is alerted to any trends arising from such investigations and findings.
In addition, the Committee monitors compliance with Unilever’s Responsible Sourcing Policy for suppliers and the roll-out of its Responsible Business Partner Policy for other third-party business partners.
The Committee studied the Group’s new roadmap to enhance business integrity, which has a particular focus on supporting responsible growth across Unilever’s businesses worldwide. This captures an enhanced understanding of priority focus areas and targeted solutions to address these. Alongside this, enhanced tools for reporting whistleblowing and tracking the review of alleged breaches of the Code have been put in place. To complement this improved capability, state of the art training materials have been developed – including specialist guidance for roll-out through Unilever’s Legal Academy.
Equally importantly, Unilever continues to push for collective action externally to uphold human rights and fight corruption. It is represented in key arenas and contributes to consolidating contacts between chief compliance officers from European multinationals to drive momentum in this field.
SAFETY
The Committee reviews quarterly scorecard analyses of progress on occupational safety and product safety. These scorecards are complemented by regular in-depth discussions so that Committee members may reassure themselves that Unilever’s systems and processes remain robust.
In 2016, the Committee noted that Unilever’s Security function is working hard to keep employees safe in a world where terror attacks and security challenges are on the increase. It works closely with country teams and Unilever’s Workplace Services function to ensure that its safe travel and security practices are adhered to.
UNILEVER SUSTAINABLE LIVING PLAN (USLP)
Unilever’s Purpose is to make sustainable living commonplace and the USLP is at the heart of Unilever’s vision to accelerate growth in the business whilst reducing its environmental footprint and increasing its positive social impact. Given its strategic importance, the Committee monitors progress against the USLP and any potential risks arising from it. In 2016 the Committee scrutinised performance across the ambitious environmental pillars of the USLP, studying in depth its progress and plans for combating greenhouse gas emissions and reducing water use and waste.
Unilever recognises that change needs to be driven on a much wider scale to tackle the world’s major social, environmental and economic issues – what is needed is fundamental ‘transformational’ change to broader systems. The adoption of the United Nations’ Sustainable Development Goals has brought new impetus to this agenda and reflects the growing support for an integrated approach to these issues. Unilever continues to combine its own actions with external advocacy on public policy and joint working with partners. It is tackling four areas where it has the scale, influence and resources to make a difference:
MONITORING REPUTATION
A global business working in many countries experiences numerous issues that may impact the business. It is crucial therefore that the Committee is briefed on the processes in place for managing these. Unilever has a well-established system for identifying and responding to issues, both short and longer-term. In addition, the Committee reviews a selection of the top issues in more detail each year.
LITIGATION REVIEWinvestigations.
The Chief Legal Officer and Group Secretary reports 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. The Committee studied how compliance was achieved during 2018. For further information please see notes 19 and 20 to the consolidated financial statements.
As another of its other priorities in 2018, the Committee also scrutinised the mechanisms for anti-bribery compliance. The primary mechanism is to understand the profiles of the markets Unilever operates in and to ensure that there are robust internal and third-party compliance programmes in place. These are complemented by training for all employees in tandem with advanced capacity building for those in the Business Integrity and Legal functions.
PRINCIPLES AND STANDARDS FOR THIRD PARTIES
The Committee retained its focus on third-party compliance in 2018. 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 thatnon-compliance by third parties can pose, particularly in the context of increasing regulation around the world.
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, openness and respect for universal 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.
The policies enable Unilever to evaluate risk and provide the right measures to address the diversity of market conditions in which it operates and the range of third parties it works with. The Committee was briefed on progress. For the RSP, this detailed the number of suppliers making a positive commitment to the policy, greater alignment on industry standards via the process of mutual recognition and a substantial increase in site audits and resulting corrective action plans. Enhanced anti-bribery and corruption screening was also put in place. The training and enhancements developed for the RBPP include new IT tools launched in over 180 countries, simpler assessment processes, enhanced due diligence and risk mitigation plans.
| 46 | Governance Report | Annual Report on Form 20-F 2018 |
SAFETY
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. Safe and high quality products are one of Unilever’s principal risks, see page 31.
Occupational safety continues to be the personal and everyday responsibility of all those working at Unilever. Reducing Unilever’s Total Recordable Frequency Rate (TRFR) is also a target within the USLP. In 2018 TRFR continued to decrease – from 0.89 accidents per 1 million hours worked in 2017 to 0.69 in 2018 (measured 1 October 2017 to 30 September 2018).
In factories, Unilever’s World Class Manufacturing programme hardwires safety into all aspects of the production process – by enabling good design principles, engineering and operating practices to be applied from the start of any project. This focus drove a reduction of 39.5% in process safety incidents in 2018. Capacity building and leadership also improved safety for contractors (those who work on Unilever sites under the direct supervision of their own management), reducing their recordable injuries by half 51% over 2014-2018 (measured by Lost-Time Injuries Frequency Rate, LTIFR).
Unilever’s approach to product safety is based on risk identification and mitigation. This approach covers all aspects of the value chain – from development, sourcing, manufacture and transport to consumer use and disposal of the product – and is centred on the application of rigorous standards based on sound science and the principle of Safe by Design and Safe in Execution. Thanks to a strong focus on product quality, a significant improvement was achieved in 2018 with potentially serious marketplace incidents reduced by 40%. Over 2017-2018, potentially serious marketplace incidents originating in manufacturing have been reduced by 88% and those originating in suppliers of raw and packing materials have been halved.
HUMAN RIGHTS
By addressing strategic human rights issues and helping the business tackle and prevent endemic abuses in global value chains, Unilever is seeking to deliver a positive social impact alongside business growth.
Unilever’s human rights aims are part of the Enhancing Livelihoods goal of the USLP and human rights are included within the company’s sustainability and ethical risks. See pages 29 and 33.
In 2018 Unilever continued to embed human rights with a focus on its eight salient issues (ie those at risk of the most severe negative impact through Unilever’s activities or business relationships). These are set out in Unilever’s Human Rights Report 2017, with an update on further progress at the end of 2018. The Committee noted that Unilever’s approach to this work is sophisticated and that while there is still much to do, it is making good progress in this complex field. See page 14 for more.
PALM OIL
Palm oil is one of Unilever’s most significant raw materials and Unilever is one of the world’s major buyers of palm oil. Alongside sustainability and supply chain, Unilever has identified climate change as one of its principal risks (see page [29]) and is committed to eliminating the deforestation associated with unsustainable palm oil production. Securing supplies of sustainable palm oil is therefore a critical element in Unilever’s business and climate strategy and represents a significant target in the USLP.
The Committee was briefed on plans for driving transformational change in the palm oil sector. Unilever’s Sustainable Palm Oil Sourcing Policy has a focus on the implementation of No Deforestation, No Peat, No Exploitation of people or communities (NDPE) commitments by 2020. However, implementation and enforcement remain challenging. To support the transformation of the sector and the implementation of its Policy, Unilever is investing in multiple initiatives. One example is the &Green Fund which is designed to kick-start investments in deforestation-free agriculture in countries that are working to reduce deforestation and peat degradation. Unilever was announced as the first investor. The Fund aims to protect over 5 million hectares of forest and peatlands by 2020, byde-risking private capital investments into large-scale deforestation-free production, protection and inclusion initiatives. With an aim to trigger $1.6 billion in private capital investments, the Fund is an opportunity to jointly shape solutions to mitigate deforestation and a good illustration of the collaborative, transformational approaches the company is seeking to scale.
To promote transparency and traceability of palm oil sourcing, in 2018 Unilever was also the first consumer goods company to publish the names of its suppliers and a map of the 1,400 palm oil mills in its extended supply chain on its website. This was accompanied by a more visible grievance mechanism to facilitate the reporting of issues ofnon-compliance in the supply chain.
Another important step was an industry-first partnership with Indonesian government-owned palm oil plantation company PT Perkebunan Nusantara (PTPN). The partnership is designed to support local mills and smallholder farmers to produce palm oil according to the NDPE standards that are key to multi-sector efforts to transform the palm oil industry.
PACKAGING WASTE
Packaging waste, particularly post-consumer plastic packaging waste in oceans and waterways, has never been higher on the global agenda than in 2018. Plastic packaging now sits alongside climate change as a major environmental challenge and is identified as a risk for Unilever’s business, see page 30.
Unilever has reduced the waste associated with the disposal of its products by 31% since 2010 (measured as impact per consumer use, towards a target of 50%) and is making strong progress in its own operations and product design. However, the challenge for post-consumer waste is in having the right infrastructure in place to ensure materials are collected and processed, while encouraging consumers to segregate and recycle them.
To support its specific, time-bound targets, at the beginning of 2018 Unilever introduced a new three-part framework designed to sharpen thinking on plastic packaging and innovation: i) Less Plastic means using lighter, stronger and better materials which have a lower environmental impact; ii) Better Plastic entails eliminating problematic materials and using recyclable plastics with a minimum 25% recycled content; iii) No Plastic involves using alternative materials, new packaging formats and alternative models of consumption such as vending – to help reduce use ofsingle-use plastics through innovation, behaviour change and new business models. See page 15 for more.
MCIP
Unilever’s Reward Framework includes the ManagementCo-investment Plan (MCIP), a long-term incentive plan that is linked to financial and USLP performance (see page 53). Corporate Responsibility Committee members shared their views on the context and progress of the USLP and sustainability initiatives with the Compensation Committee to help inform its recommendation on MCIP.
EVALUATION OF THE CORPORATE RESPONSIBILITY COMMITTEE
As part of the internal Boardboard evaluation carried out in 2016,2018, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2016. Whilst2018. While overall the Committee members concluded that the Committee is performing effectively, the Committee has agreed that to further enhance its effectiveness itby keeping close track on progress on the ambitious Unilever Sustainable Living Plan. This will step up oversight of safetyensure the Group maintains its sustainability momentum and security given the importance of protecting the people working for Unilever. The Corporate Responsibility Committee will maintain its independent view of Unilever, and will keep this view centre-stage in its critique of the Group’s reputation and standing in society.leadership.
Louise FrescoStrive Masiyiwa
ChairFeike Sijbesma
This table shows the membership of the Corporate Responsibility Committee together with their attendance at meetings during 2018. 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.
Laura Cha
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• Competition and anti-bribery compliance
• Product quality and safety • Unilever Sustainable Living
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• Compliance with Unilever policies on fair competition and anti-bribery and requirements for third parties • Product quality and safety • Unilever Sustainable Living Plan (USLP) including plastic packaging | ||||
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 Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. Therefore a central 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.
The Committee’s discussions are informed by the experience of the senior leaders 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. This enables the Boards to draw on a well-rounded view of issues.
During 2018 the Committee reviewed its terms of reference and 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 its remit to review risk management and for overseeing the independent assurance programme for the USLP.
The Committee’s terms of reference are set outwww.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 threeNon-Executive Directors: Strive Masiyiwa (Chair), Feike Sijbesma and Youngme Moon. The Chief Marketing & Communications Officer and the Chief Sustainability Officer attend the Committee’s meetings. The Chief Business Integrity Officer also attends to present Unilever’s company report that covers cases under Unilever’s Code of Business Principles (the Code) as well as updates on third-party compliance, product quality and safety.
MEETINGS
Meetings are held quarterly and ad hoc as required – four were held in 2018. The Committee Chairman is responsible for reporting the findings from meeting to the Boards, thus ensuring that the Boards can fulfil their oversight responsibilities.
Following the Committee’s terms of reference and Unilever’s principal risks and priorities, the Committee’s agenda covers the Code and third-party compliance, alongside litigation, occupational and product safety, the USLP and corporate reputation as well as a range of strategic and current issues. In addition to the areas listed below, in 2018 the Committee also reviewed topics such as media communications, the process for integrating business acquisitions and progress on alternatives to animal testing.
CODE OF BUSINESS 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 and is identified as an ethical and 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, the Corporate Responsibility Committee is responsible for 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 to any trends arising from these investigations.
The Chief Legal Officer and Group Secretary reports 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. The Committee studied how compliance was achieved during 2018. For further information please see notes 19 and 20 to the consolidated financial statements.
As another of its other priorities in 2018, the Committee also scrutinised the mechanisms for anti-bribery compliance. The primary mechanism is to understand the profiles of the markets Unilever operates in and to ensure that there are robust internal and third-party compliance programmes in place. These are complemented by training for all employees in tandem with advanced capacity building for those in the Business Integrity and Legal functions.
PRINCIPLES AND STANDARDS FOR THIRD PARTIES
The Committee retained its focus on third-party compliance in 2018. 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 thatnon-compliance by third parties can pose, particularly in the context of increasing regulation around the world.
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, openness and respect for universal 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.
The policies enable Unilever to evaluate risk and provide the right measures to address the diversity of market conditions in which it operates and the range of third parties it works with. The Committee was briefed on progress. For the RSP, this detailed the number of suppliers making a positive commitment to the policy, greater alignment on industry standards via the process of mutual recognition and a substantial increase in site audits and resulting corrective action plans. Enhanced anti-bribery and corruption screening was also put in place. The training and enhancements developed for the RBPP include new IT tools launched in over 180 countries, simpler assessment processes, enhanced due diligence and risk mitigation plans.
| 46 | Governance Report | Annual Report on Form 20-F 2018 |
CORPORATE GOVERNANCE COMMITTEE
SAFETY 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. Safe and high quality products are one of Unilever’s principal risks, see page 31. Occupational safety continues to be the personal and everyday responsibility of all those working at Unilever. Reducing Unilever’s Total Recordable Frequency Rate (TRFR) is also a target within the USLP. In 2018 TRFR continued to decrease – from 0.89 accidents per 1 million hours worked in 2017 to 0.69 in 2018 (measured 1 October 2017 to 30 September 2018). In factories, Unilever’s World Class Manufacturing programme hardwires safety into all aspects of the production process – by enabling good design principles, engineering and operating practices to be applied from the start of any project. This focus drove a reduction of 39.5% in process safety incidents in 2018. Capacity building and leadership also improved safety for contractors (those who work on Unilever sites under the direct supervision of their own management), reducing their recordable injuries by half 51% over 2014-2018 (measured by Lost-Time Injuries Frequency Rate, LTIFR). Unilever’s approach to product safety is based on risk identification and mitigation. This approach covers all aspects of the value chain – from development, sourcing, manufacture and transport to consumer use and disposal of the product – and is centred on the application of rigorous standards based on sound science and the principle of Safe by Design and Safe in Execution. Thanks to a strong focus on product quality, a significant improvement was achieved in 2018 with potentially serious marketplace incidents reduced by 40%. Over 2017-2018, potentially serious marketplace incidents originating in manufacturing have been reduced by 88% and those originating in suppliers of raw and packing materials have been halved. HUMAN RIGHTS By addressing strategic human rights issues and helping the business tackle and prevent endemic abuses in global value chains, Unilever is seeking to deliver a positive social impact alongside business growth. Unilever’s human rights aims are part of the Enhancing Livelihoods goal of the USLP and human rights are included within the company’s sustainability and ethical risks. See pages 29 and 33. In 2018 Unilever continued to embed human rights with a focus on its eight salient issues (ie those at risk of the most severe negative impact through Unilever’s activities or business relationships). These are set out in Unilever’s Human Rights Report 2017, with an update on further progress at the end of 2018. The Committee noted that Unilever’s approach to this work is sophisticated and that while there is still much to do, it is making good progress in this complex field. See page 14 for more. PALM OIL Palm oil is one of Unilever’s most significant raw materials and Unilever is one of the world’s major buyers of palm oil. Alongside sustainability and supply chain, Unilever has identified climate change as one of its principal risks (see page [29]) and is committed to eliminating the deforestation associated with unsustainable palm oil production. Securing supplies of sustainable palm oil is therefore a critical element in Unilever’s business and climate strategy and represents a significant target in the USLP. The Committee was briefed on plans for driving transformational change in the palm oil sector. Unilever’s Sustainable Palm Oil Sourcing Policy has a focus on the implementation of No Deforestation, No Peat, No Exploitation of people or communities (NDPE) commitments by 2020. However, implementation and enforcement remain challenging. To support the transformation of the sector and the implementation of its Policy, Unilever is investing in multiple initiatives. One example is the &Green Fund which is designed to kick-start investments in deforestation-free agriculture in countries that are working to reduce deforestation and peat degradation. Unilever was announced as the first investor. The Fund aims to protect over 5 million hectares of forest and peatlands by 2020, byde-risking private capital investments into large-scale deforestation-free production, protection and inclusion initiatives. With an aim to trigger $1.6 billion in private capital investments, the Fund is an opportunity to jointly shape solutions to mitigate deforestation and a good illustration of the collaborative, transformational approaches the company is seeking to scale. To promote transparency and traceability of palm oil sourcing, in 2018 Unilever was also the first consumer goods company to publish the names of its suppliers and a map of the 1,400 palm oil mills in its extended supply chain on its website. This was accompanied by a more visible grievance mechanism to facilitate the reporting of issues ofnon-compliance in the supply chain. Another important step was an industry-first partnership with Indonesian government-owned palm oil plantation company PT Perkebunan Nusantara (PTPN). The partnership is designed to support local mills and smallholder farmers to produce palm oil according to the NDPE standards that are key to multi-sector efforts to transform the palm oil industry. PACKAGING WASTE Packaging waste, particularly post-consumer plastic packaging waste in oceans and waterways, has never been higher on the global agenda than in 2018. Plastic packaging now sits alongside climate change as a major environmental challenge and is identified as a risk for Unilever’s business, see page 30. Unilever has reduced the waste associated with the disposal of its products by 31% since 2010 (measured as impact per consumer use, towards a target of 50%) and is making strong progress in its own operations and product design. However, the challenge for post-consumer waste is in having the right infrastructure in place to ensure materials are collected and processed, while encouraging consumers to segregate and recycle them. To support its specific, time-bound targets, at the beginning of 2018 Unilever introduced a new three-part framework designed to sharpen thinking on plastic packaging and innovation: i) Less Plastic means using lighter, stronger and better materials which have a lower environmental impact; ii) Better Plastic entails eliminating problematic materials and using recyclable plastics with a minimum 25% recycled content; iii) No Plastic involves using alternative materials, new packaging formats and alternative models of consumption such as vending – to help reduce use ofsingle-use plastics through innovation, behaviour change and new business models. See page 15 for more. MCIP Unilever’s Reward Framework includes the ManagementCo-investment Plan (MCIP), a long-term incentive plan that is linked to financial and USLP performance (see page 53). Corporate Responsibility Committee members shared their views on the context and progress of the USLP and sustainability initiatives with the Compensation Committee to help inform its recommendation on MCIP. EVALUATION OF THE CORPORATE RESPONSIBILITY COMMITTEE As part of the internal board evaluation carried out in 2018, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2018. While overall the Committee members concluded that the Committee is performing effectively, the Committee has agreed to further enhance its effectiveness by keeping close track on progress on the ambitious Unilever Sustainable Living Plan. This will ensure the Group maintains its sustainability momentum and leadership. Strive Masiyiwa
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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 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 2017.
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 2016 (or part thereof) were the Chief Executive Officer and the Chief HR Officer.
In 2016 the Committee met five times. At the start of the year the Committee considered the results of the Committee’s annual self-evaluation for 2015 and its priorities for the year and used these to help create an annual plan for meetings for 2016.
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 atwww.unilever.com/committees. In 2016, Hixonia Nyasulu and Michael Treschow did not put themselves forward for re-election at the 2016 AGMs in April 2016. They had each served nine years on the Boards. The Committee proposed the reappointment of all other Directors. Directors are 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 2016 AGMs, Ann Fudge remained the Vice-Chairman and Senior Independent Director and the following remained Chairs of their respective committees: John Rishton (Audit Committee), Ann Fudge (Compensation Committee), Feike Sijbesma (Nominating and Corporate Governance Committee) and Louise Fresco (Corporate Responsibility Committee).
Succession Planning and Appointment: In consultation with the Committee, the Boards review both the adequacy of succession planning processes and the actual succession planning at each of Board and ULE 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 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 qualities, the Boards should be in keeping with the size of Unilever, its strategy, portfolio, culture, geographical spread and its status as a listed company. The objective pursued by the Boards is to have a variety of nationality, race, gender and relevant expertise and the Non-Executive Directors in aggregate should reflect Unilever’s consumer base, have sufficient financial literacy and have sufficient understanding of the markets where Unilever is active in order to understand the key trends and developments relevant for Unilever.
In 2016, the Committee engaged the services of Russell Reynolds Associates and MWM Consulting (both executive search agencies which also assist Unilever with the recruitment of senior executives) to assist with the recruitment of the new Chairman and new Non-Executive Directors with the appropriate skills and expertise. The Committee, on behalf of the Boards, continued during 2016 to work on succession planning for the Boards.
Chairman Succession: As reported in last year’s Committee report, in view of Unilever’s objectives and activities it was important to the Committee and the Boards that the profile of Unilever’s new Chairman included a proven track record as a CEO, board experience, deep knowledge of industry, experience of working at more than one company, ability to spend sufficient time in Europe and support for the Unilever Sustainable Living Plan.
During the search, the experience of each potential candidate was matched against the profile agreed by the Board; the views of Russell Reynolds and MWM on the shortlists of candidates drawn up by the Committee were shared with the Boards; and Marijn Dekkers, the preferred candidate, met with all Directors.
2016 appointments: The Committee recommended to the Boards to nominate Marijn Dekkers as a new Non-Executive Director at the 2016 AGMs and, on his appointment, that he become Chairman. The Committee also recommended to the Boards that both Strive Masiyiwa and Youngme Moon be nominated as new Non-Executive Directors at the 2016 AGMs. In April 2016 the AGMs resolved to appoint Marijn, Strive and Youngme with immediate effect. Marijn, Strive and Youngme have further strengthened the financial and digital expertise and industry experience of the Boards and increased the diversity of nationality on the Boards.
Unilever Leadership Executive: During 2016, the Committee consulted with the Chief Executive Officer on the selection criteria and appointment procedures for senior management changes, including changes to the ULE. In particular, the Committee was consulted on the appointments of Marc Engel (Chief Supply Chain Officer) and Leena Nair (Chief HR Officer) to the ULE.
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. The Boards feel that, whilst gender is 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.
Unilever’s Board Diversity Policy, which is reviewed by the Committee each year, can be found on our website atwww.unilever.com/boardsofunilever. 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 2016 the subject of corporate culture, the impact of the new EU Market Abuse Regulation on Unilever’s compliance procedures and the draft Dutch Corporate Governance Code were all considered by the Committee.
EVALUATION
As part of the internal Board evaluation carried out in 2016, the Boards evaluated the performance of the Committee. The Committee also carried out an assessment of its own performance in 2016. The Committee members concluded that the Committee is performing well.
Feike Sijbesma
ChairThis table shows the membership of the NominatingCommittee together with their attendance at meetings during 2018. 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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• Competition and
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 Committee is also charged with ensuring that Unilever’s reputation is protected and enhanced. Therefore a central 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. The Committee’s discussions are informed by the experience of the senior leaders 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. This enables the Boards to draw on a well-rounded view of issues. During 2018 the Committee reviewed its terms of reference and 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 its remit to review risk management and for overseeing the independent assurance programme for the USLP. The Committee’s terms of reference are set outwww.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 threeNon-Executive Directors: Strive Masiyiwa (Chair), Feike Sijbesma and Youngme Moon. The Chief Marketing & Communications Officer and the Chief Sustainability Officer attend the Committee’s meetings. The Chief Business Integrity Officer also attends to present Unilever’s company report that covers cases under Unilever’s Code of Business Principles (the Code) as well as updates on third-party compliance, product quality and safety. MEETINGS Meetings are held quarterly and ad hoc as required – four were held in 2018. The Committee Chairman is responsible for reporting the findings from meeting to the Boards, thus ensuring that the Boards can fulfil their oversight responsibilities. Following the Committee’s terms of reference and Unilever’s principal risks and priorities, the Committee’s agenda covers the Code and third-party compliance, alongside litigation, occupational and product safety, the USLP and corporate reputation as well as a range of strategic and current issues. In addition to the areas listed below, in 2018 the Committee also reviewed topics such as media communications, the process for integrating business acquisitions and progress on alternatives to animal testing. CODE OF BUSINESS 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 and is identified as an ethical and 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, the Corporate Responsibility Committee is responsible for 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 to any trends arising from these investigations. The Chief Legal Officer and Group Secretary reports 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. The Committee studied how compliance was achieved during 2018. For further information please see notes 19 and 20 to the consolidated financial statements. As another of its other priorities in 2018, the Committee also scrutinised the mechanisms for anti-bribery compliance. The primary mechanism is to understand the profiles of the markets Unilever operates in and to ensure that there are robust internal and third-party compliance programmes in place. These are complemented by training for all employees in tandem with advanced capacity building for those in the Business Integrity and Legal functions. PRINCIPLES AND STANDARDS FOR THIRD PARTIES The Committee retained its focus on third-party compliance in 2018. 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 thatnon-compliance by third parties can pose, particularly in the context of increasing regulation around the world. 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, openness and respect for universal 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. The policies enable Unilever to evaluate risk and provide the right measures to address the diversity of market conditions in which it operates and the range of third parties it works with. The Committee was briefed on progress. For the RSP, this detailed the number of suppliers making a positive commitment to the policy, greater alignment on industry standards via the process of mutual recognition and a substantial increase in site audits and resulting corrective action plans. Enhanced anti-bribery and corruption screening was also put in place. The training and enhancements developed for the RBPP include new IT tools launched in over 180 countries, simpler assessment processes, enhanced due diligence and risk mitigation plans.
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