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Report of the Directors About Unilever
22 Unilever Annual Report and Accounts 2010
Financial review 2010
The virtuous circle of growth is starting to work for us. We have
successfully accelerated our growth and at the same time have
continued the steady and sustainable expansion of our underlying
operating margin and strong cash flow.
Delivering against our priorities
Volume growth ahead of our markets
Underlying volume growth*
Volume growth: accelerated
Underlying volume growth accelerated in 2010 to 5.8%, the best that Unilever has
achieved for more than 30 years. We set out two years ago to reignite our volume
growth and to grow ahead of our markets. That is what we are starting to do; our
volume shares are up in all regions and in most categories.
Volume growth was broad based. In our emerging markets business we grew volumes
by around 10% over the year as a whole, with the key businesses of China, India and
Turkey all delivering growth well into double digits. Only in Central and Eastern Europe
did we see more subdued growth, although even here volumes were comfortably up in
difficult markets. In the developed world, where growth has been very hard to achieve
over the recent past, our volumes were also up by around 2%, again ahead of the
market, in both Western Europe and North America.
We gained volume share in all regions, with particularly strong performance in key emerging markets such as China, Indonesia, South
Africa and Argentina. Western Europe also saw strong volume share gains, led by the Netherlands, France and Italy. Volume shares
were also up in most of our core categories, with deodorants, skin cleansing, household care, ice cream and dressings all achieving
notable gains during the year.
Steady improvement in margin
Underlying Operating Margin for the year increased by 20 basis points. It was another year
ofthesteady and sustainable improvement that we have been targeting.
Cost saving programmes again delivered strongly, with €1.4 billion of savings in
theyearfollowing a similar amount in 2009. Much of the success in savings came in
thesupply chain, and as a result gross margin, at constant currency, improved for the year
despite negativeunderlying price growth and modestly higher commodity costs. Positive
mixandimprovedvolume leverage also contributed positively to gross margin.
At the same time as increasing underlying operating margin we also increased substantially
the advertising and promotions investment put behind our brands – at constant currency
the increase was more than €300million or 30 basis points in the year. This came after an
even bigger increasein 2009, meaning an additional €700 million behind the building of
our brandequities over the last two years. Aside from the gross margin increase, the key driver of margin improvement was a
reduction in indirect costs, withthe organisation now leaner and a new discipline exerted in all areas of the cost base.
Underlying operating margin:
increased
Change in underlying operating margin*
Healthy cash delivery
Working capital reduced as a percentage of turnover and has now been negative for
over 12 months. The cash conversion cycle improved by 17 days, from 20 days in 2009
to just three in 2010. We are close to best in class in our management of payables and
receivables, but in inventories we still see scope for further improvement.
This strong performance in working capital management was reflected in free cash flow,
which was again healthy at €3.4 billion. Over the last two years our combined free cash
flow of €7.4 billion represents around 90% of net profit. This is robust performance,
particularly at a time when we are investing heavily in the future growth of the business
in areas such as capital expenditure, as we build new capacity to support our rapid
volume growth in emerging markets. The €0.7 billion reduction versus 2009 reflected
a smaller inflow from working capital in 2010, following the exceptional benefit of
€1.7 billion taken in 2009.
Free cash flow*
Strong cash flow: delivered
€bn