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Unilever's Many Woes

By Beth Carney Consumer-staples maker Unilever tried to soften the release of another round of disappointing quarterly results on Feb. 10 by announcing a simplified management structure that executives hope will turn its fortunes around. The news, however, wasn't enough to change investors' opinion of the stock.

The European maker of products as varied as Dove soap, Vaseline, and Hellman's mayonnaise reported a fourth-quarter net loss of $318 million in constant exchange rates, down from a profit of $825 million last year. Fourth-quarter revenue increased by 1%, to $12 billion, in constant exchange rates, and net profit before exceptional items and amortisation for the period fell 1%.

For the year, in current exchange rates, turnover was down 6%, to $52 billion, and net profit before exceptional items and amortization was up 1%, to $5.1 billion. "We are not competing as effectively as we need to right across the business," said Chief Executive Patrick Cescau, on a conference call announcing the results. "We need to raise our game."

NOT FAR ENOUGH. Shaking up the management structure is one way Unilever plans to do that. Along with its earnings, the Anglo-Dutch company announced an end to its 75-year practice of having two chairmen, one in London and one in Rotterdam. Instead, current Dutch co-chairman Antony Burgmans will become a nonexecutive chairman of both operations, to be replaced in 2007 by an independent nonexecutive director. Cescau, formerly co-chairman, is now the group chief executive, presiding over a streamlined operating team.

Though investors have been clamoring for a simpler management structure to increase accountability and speed decision-making, the market barely reacted. After an initial boost the stocks, which are listed separately for the two sides of the company, fell 0.39% on the London Stock Exchange, to the equivalent of $9.62, and dropped 0.1% on the Amsterdam Stock Exchange, to the equivalent of $65.80. (The American depository receipts, which trade on the New York Stock Exchange, (UL) and (UN), were also flat.)

The changes apparently didn't go far enough in investors' eyes to tackle the problems. Credit Suisse researchers wrote in a note following the announcement: "We had hoped for something rather more far-reaching and rather sooner."

"PATH TO GROWTH"? With a stable of well-known brands, including Ben & Jerry's ice cream, Sunsilk shampoo, and Lipton Tea, Unilever is both the second-largest food company in the world behind Nestlé (NSRGY) and the second-largest consumer-products company, behind Procter & Gamble (PG), according to Unilever.

Even before P&G turned up the competitive heat in the consumer-products sector with its announced purchase of Gillette (G), Unilever was facing significant challenges. Its five-year "Path to Growth" plan, launched in 2000, failed to deliver its stated goal. In 2004, underlying sales grew by just 0.4%, and leading brands by 0.9%, according to the results, far short of the target of 5% to 6% growth. In September, Unilever issued its first-ever profit warning ahead of third-quarter results, which showed a 3% decline in profit before exceptional items and 4% drop in turnover.

Like other consumer-product makers, Unilever has been operating in a difficult environment. In addition to facing competition from slickly promoted rivals such as P&G and Nestlé, Unilever also vies for market share with increasingly popular store-specific value brands, which fill the shelves of Europe's "hard discounters" such as Aldi. High commodity costs have also put pressure on margins. In Europe, which accounts for 40% of Unilever's business, sales declined 2.8% last year.

UNCONVINCED. Yet Cescau acknowledged on Feb. 10 that it wasn't just business conditions but missed opportunities that have hindered Unilever's growth. A notable disappointment has been the Slim-Fast range of diet products. Exceptional charges for the fourth quarter of last year included a $835 million write-down of the value of that line, which Unilever bought for $2.3 billion in 2000. Slim-Fast was seriously hurt by Unilever's failure to capitalize on the low-carb trend soon enough. Analysts have noted that it has lagged behind its competitors both in terms of marketing and innovation.

In Feb. 10's presentation Cescau declined to give targets for the coming year, saying the specific goals outlined in the five-year "Path to Growth" plan "boxed in" the company. But he did say improving sales growth was a priority.

Still, the lack of specific details has left some unconvinced. Arnaud Langlois, analyst with J.P. Morgan, says he's disappointed with Unilever's failure to announce a plan to sharply increase spending on advertising and promotion, which has been seen as a weakness. "Management is just asking us to believe they can deliver, and unfortunately with the five-year track record now, I don't think anyone is willing to give them the benefit of the doubt," he says.

Victoria Buxton, analyst at Lehman Brothers, agrees that the presentation didn't show that Unilever was tackling the problems with its portfolio in a material way. "This isn't a quick turnaround story," she says.

NO SHOPPING SPREE. In the past five years, Unilever has managed to consolidate its business, trimming its brands from 1,600 to about 400 (see BW Online, 2/10/05, "A Crash Diet for Sara Lee"). Its operating margins of about 15% are also high, and it has a stable of well-known brands. Michael Steib, analyst with Morgan Stanley, says Unilever could be the recovery stock of the year, partly because feeling about it is so negative. "It's worth pointing out that this company is basically making a big break with its past, in terms of overall structure," he says.

Yet most analysts agree that the P&G-Gillette merger is likely to make the climate even tougher for Unilever in the consumer-products business. Notably, the bulked up P&G will have more leverage to bargain with large retailers such as Wal-Mart (WMT), although in the short-term P&G may be distracted by its own consolidation.

Despite talk of more consolidation, however, Unilever seems unlikely to go on its own shopping spree. Says Cescau: "Our No. 1 priority is making what we have work better." Investors would no doubt welcome the achievement of that goal. Carney is a correspondent for BusinessWeek Online in London

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