20-F 1 u51399-20f.htm  

As filed with the Securities and Exchange Commission on March 29, 2007

   

UNITED STATES

   
   
SECURITIES AND EXCHANGE COMMISSION
   
   
WASHINGTON, D.C. 20549
   
   
FORM 20-F
   
  (Mark One)
   
 
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
   
   
OR 12(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 31 DECEMBER 2005
   
   
OR
   
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
   
   

THE SECURITIES EXCHANGE ACT OF 1934

   
   
For the transition period from ______________ to ______________
   
   
   
   
Commission file number 1-4546
   
   
   
   

UNILEVER PLC

   
   

(Exact name of Registrant as specified in its charter)

   
   

ENGLAND
   
   
(Jurisdiction of incorporation or organization)
   
   

UNILEVER HOUSE, BLACKFRIARS, LONDON, ENGLAND
   
   
(Address of principal executive offices)
   
   
   







  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  
 
 
  American shares (evidenced by Depositary Receipts) New York Stock Exchange  
       
  each representing four Ordinary Shares of the nominal amount of 1.4p each    
 
 

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of class)

 
 
  The total number of outstanding shares of the Registrant’s capital at the close of the period covered by the Annual Report was 2 911 458 580 ordinary shares  
 
 
  Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 which financial statement item the Registrant has elected to follow.
 
     
 
Item 17                Item 18
 

 



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At a glance

 

Turnover (€ million)
Continuing operations
  Operating profit (€ million)
Continuing operations
     
 
     
Operating margin (%)
Continuing operations
  Earnings per share (€)
Tot
al operations
     
 
     



     
Dividends
Per Ordinary €0.16 share of
Unilever N.V. (€)
  Per Ordinary 31/9p share of
Unilever PLC
(pence)
     
 
     
Per €0.16 New York Registry share of
Unilever N.V.
($)
  Per 31/9p American Depositary Receipt of
Unilever PLC
($)
     
 
     

In addition to the dividends shown above, one-off dividends of the following amounts per share were paid in December 2006: €0.26 per ordinary NV share; 17.66p per ordinary PLC share; $0.3316 per NV New York Registry share; and $0.3372 per PLC American Depositary Receipt.

The dividend and earnings per share information given above, including comparative amounts for prior years, is expressed in terms of the nominal share values which have applied since 22 May 2006, following the split of NV shares and the consolidation of PLC shares which were approved at the 2006 AGMs.

Dividend figures for each year comprise dividends declared or proposed for that year. Under International Financial Reporting Standards (IFRS), dividends are only recorded against the year in which they become payable.

Actual dividends payable for 2006 on Unilever N.V. New York Registry Shares and American Depositary Receipts of Unilever PLC may differ from those shown above, which include final dividend values calculated using the rates of exchange ruling on 7 February 2007 (€1.00 = $1.2987, £1 = $1.9718) .

The term ‘shares’ as used in this document should, with respect to shares issued by Unilever N.V., be construed to include depositary receipts for shares issued by Foundation Unilever NV Trust Office, unless the context otherwise requires or unless it is clear from the context that this is not the case. For further information please refer to page 41.

 


The Unilever Group     Contents  
             
             
          Report of the Directors

Unilever N.V. (NV) is a public limited company registered in the Netherlands, which has listings of shares and depositary receipts for shares on Euronext Amsterdam and of New York Registry Shares on the New York Stock Exchange.

Unilever PLC (PLC) is a public limited company registered in England and Wales which has shares listed on the London Stock Exchange and, as American Depositary Receipts, on the New York Stock Exchange.

The two parent companies, NV and PLC, together with their group companies, operate as a single economic entity (the Unilever Group, also referred to as Unilever or the Group). NV and PLC and their group companies constitute a single reporting entity for the purposes of presenting consolidated accounts. Accordingly, the accounts of the Unilever Group are presented by both NV and PLC as their respective consolidated accounts.

Basis of reporting
Our accounting policies are based on International Financial Reporting Standards (IFRS) as adopted by the EU and UK and Dutch law. These differ in certain respects from accounting principles generally accepted in the United States (US GAAP). Certain measures used in our reporting are not defined under either IFRS or US GAAP. 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 the Operating review on page 13 and the Financial review on page 23. Variations from United States generally accepted accounting principles (US GAAP) and Securities and Exchange Commission Financial Statement Requirements Regulation S-X are outlined in notes 34 and 35 on pages 124 to 140.

The brand names shown in italics in this report are trademarks owned by or licensed to companies within the Unilever Group.

Reporting currency and exchange rates
Details of key exchange rates used in preparation of these accounts are given on page 146, together with Noon Buying Rates in New York for the equivalent dates.

Forward-looking statements
This document contains certain statements that are neither reported financial results nor other historical information. These statements are forward-looking statements, including within the meaning of the United States Private Securities Litigation Reform Act of 1995. For a description of factors that could affect future results, reference should be made to the full ‘Cautionary Statement’ on the inside back cover.

    Chairman’s report 3
    About Unilever 5
    Group Chief Executive 11
    Operating review – regions 13
    Operating review – categories 20
    Financial review 23
    Corporate governance 33
    Report of the Nomination Committee 48
    Report of the Remuneration Committee 49
    Report of the Audit Committee 63
    64
       
       
       
    Financial statements
    Statement of Directors’ responsibilities 66
    68
    Auditors’ report 69
    Consolidated income statement 70
    71
    Consolidated balance sheet 72
    Consolidated cash flow statement 73
    Notes to the consolidated accounts 74
    Selected financial data 141
    147
       
       
       
    Shareholder information
    Analysis of shareholding 149
    Exchange controls affecting security holders 150
    Nature of the trading market 151
   
Taxation for US residents holding shares in NV
153
    154
    Dividend record 155
    Glossary 156
    Cross reference to Form 20-F 157
    Financial calendar 158
    Contact details 158
    Website 159
    Publications 159
    Share registration 159
       
    Index 160

 

Unilever Annual Report on Form 20-F 2006 1

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A changing Unilever

 

Our mission is to add Vitality to life. We meet everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.

Unilever is changing – from the way we are structured and the way we operate, to the choices we make and the priorities we set.

We have a reformed governance, a new structure and a ‘One Unilever’ programme creating consistency, delivering cost savings and enabling us to leverage our global scale. We are developing and implementing brilliant consumer marketing. We are strengthening our relationships with retail customers. And we are outsourcing transactional operations in IT, finance and HR so we can focus on growing global brands.

In supporting our growth strategy, these changes are all making an impact on performance. 2006 was a year of progress, showing consistent broad-based growth, with all regions and all categories contributing, and savings programmes delivered ahead of plan, helping to offset higher input costs.

Our investment priorities – personal care, developing and emerging markets, and Vitality – are fuelling this growth. For example, our Vitality mission is shaping and directing our brand development, our partnerships and the way in which we operate around the world.

On the following pages you will recognise information about many of our world-famous brands and see how our values – our desire to improve people’s lives, our commitment to the communities in which we operate – are at the heart of our business. But you will also witness a new purpose, a new confidence and a new hunger to succeed.

Whether serving the world’s most affluent consumers or those with very limited disposable income, we always remember that respect and reputation have to be earned. And retaining the trust and credibility that Unilever has built up over many years is critical to our success in helping people ‘feel good, look good and get more out of life’.

 

2 Unilever Annual Report on Form 20-F 2006

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Report of the Directors  
   
Chairman’s report

 

In 2006 we regained the initiative in the marketplace resulting in top line growth of 3.8% and a stabilisation of our market shares.

Many initiatives such as ‘One Unilever’ were accelerated and executed with great skill and discipline.

On behalf of the Boards I would like to thank Patrick and his team, as well as all our 179 000 employees around the world, for their hard work and commitment.

Although economic activity has been favourable, in other business areas (for example raw material prices) the going has been tough. Therefore the words of appreciation from the Boards are well deserved.

I would like to report back to you on a number of issues concerning the dual structure, Board composition and Board evaluation.

Dual structure
In 2005 three proposals were put forward to change Unilever’s constitutional arrangements. All were approved by shareholders at the two Annual General Meetings (AGMs) which were held in May 2006.

As a result, we now have greater flexibility to allocate assets between the two parent companies. In addition, there is full transparency between our share prices since there is one-to-one equivalence in their economic interests in the Unilever Group. Finally, our shareholders have the right to nominate candidates to the Boards.

All of this means we have simplified the relationship between our NV and PLC shares, and strengthened several elements of Unilever’s corporate governance. At the same time, the Group continues to benefit from its dual structure.

I would like to remind you that the dual structure refers to the legal framework of Unilever. When it comes to the day-to-day management of Unilever’s operations the Group is run on the principle of one operating unit and as such the vast majority of employees are, quite properly, unaware of our legal structure.

Board succession
During 2006 we continued our search to identify candidates for the Boards who would strengthen its expertise and independence. We are very pleased that Genevieve Berger, Narayana Murthy and Hixonia Nyasulu have expressed their willingness to serve on Unilever’s Boards; they will be proposed as Non-Executive Directors at the AGMs in May 2007. Genevieve is a Professor of Biophysics and Medical Imaging at Paris University VI and Chairman of the Advisory Board ‘Health’ for the EU Commission for Research. Narayana is co-founder and Chairman of Infosys Technologies Limited. Hixonia is a Non-Executive Director of Sasol Limited and Anglo Platinum and an Advisory Board Member of JP Morgan South Africa. Their appointments will bring further diversity of background and experience to the Boards and we hope that their nominations will be approved by shareholders.

In addition to welcoming these new members to the Boards, we will be saying goodbye to two of the Directors. First, Rudy Markham. Rudy retires after 39 years of distinguished service with Unilever during which time he has successfully occupied a number of senior executive positions. In 1998 he joined the Boards as Strategy and Technology Director, being appointed Financial Director, now Chief Financial Officer, in 2000. On behalf of the Boards I would like to acknowledge his outstanding career and thank him for the significant contribution he has made to our business throughout that time.

Secondly, Lynda Chalker. Lynda retires as a Non-Executive Director after three terms of three years. She has served as Chair of the Corporate Responsibility and Reputation Committee and throughout her time on the Boards we have benefited from her wise counsel and expert knowledge of developing markets.

On your behalf I thank them both for their service.

In addition, the Nomination Committee led by its Chairman David Simon was given the task of searching for a new Chairman as my successor. We are delighted that Michael Treschow has agreed to succeed me as the first independent Chairman of the Boards of Unilever, subject to his appointment as a Non-Executive Director at the AGMs. Michael is a businessman with a formidable track record gained in some of the world’s most competitive consumer industries. He has also proved himself an effective Chairman at both Ericsson and Electrolux, and we trust that his appointment will be approved by shareholders.

When these changes are implemented we will have finalised a complete restructuring of our corporate governance arrangements. This change process was initiated in 2004 and it involved the elimination of Advisory Directors, the phase-out of the dual leadership system, the adoption of a one-tier board structure and the appointment of a fully independent Chairman of the Boards. We feel we will have Boards in place which will measure favourably against the highest corporate governance standards.

Board evaluation
During 2006 a full and thorough evaluation of how the Boards functioned was conducted by a specialist outside firm. Taken as a whole, the outcome was positive as it confirmed that the changes we have made since 2004, the move from Advisory Directors to Non-Executive Directors and the splitting of the Chairman and Chief Executive roles, have strengthened our governance structure. In addition, the amount of time spent on Unilever Board matters compares very favourably with general practice.

These conclusions support our belief that all the alterations to our governance structure and proceedings have been beneficial to Unilever overall and that we meet the very high standards expected of a group of our size and complexity.


 

Unilever Annual Report on Form 20-F 2006 3

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Report of the Directors (continued)  
   
Chairman’s report (continued)

 

Conclusion
I realise I a m writing to you for the last time after 35 years of service with Unilever.

The changes within Unilever over this period have been truly transformational both in terms of product portfolio and geographical spread. Our turnover in Western Europe has declined from 65% to 34% of Unilever sales. The expansion has been picked up by the developing countries which represent over 40% of our turnover.

Moreover, 35 years ago 25% of Unilever sales were outside the fast moving consumer goods sector. Spearheaded by disposals and acquisitions such as Chesebrough Pond’s and Bestfoods, Unilever turnover is now focused on around 400 brands, all in consumer goods categories. Especially spectacular has been the rise of turnover of our personal care business from 4% of sales in 1972 to 28% of sales today.

Perhaps the most impressive change since the early seventies is the step-up of the quality and strength of our brand portfolio. We have come from a position of no brand achieving a turnover of over €1 billion, to today’s position of twelve billion-euro brands, representing around 55% of Unilever’s turnover.

All these changes together with the underpinning of our Vitality mission position our company favourably for future growth.

What has not changed over the last four decades is the way Unilever conducts its business: integrity first and foremost in all things we undertake together with a keen interest for the communities and environment in which we work.

It has been a privilege to serve in Unilever over the last 35 years.


 

4 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
About Unilever

 

Description of business
Unilever is one of the world’s leading suppliers of fast moving consumer goods across Foods and Home and Personal Care categories. Unilever’s portfolio includes some of the world’s best known and most loved brands.

Strategy and long-term financial targets
At the heart of Unilever's strategy is a concentration of resources on areas where we have leading positions and on high growth spaces, especially in personal care, in developing and emerging markets and in Vitality. While the focus is on developing the business organically, acquisitions and disposals also have a role to play in accelerating the portfolio development.

To execute this strategy the business has been reorganised to simplify the management structure and to improve capabilities in marketing, customer management, and research and development. The result is better allocation of resources, better execution, faster decision-making and greater focus on efficiency. The new organisation, augmented by the successful 'One Unilever' project, allows us to leverage our scale both globally and locally.

Unilever's long-term ambition is to achieve top-third total shareholder return and our targets reflect this. Over the period 2005-2010 we target ungeared free cash flow of €25-30 billion. Disposals made in the past two years, with no significant acquisitions to date, have reduced the cash generation over the period by just over €1 billion. Return on invested capital is targeted to increase over the 2004 base of 11%. We expect underlying sales growth of 3-5% per annum and an operating margin in excess of 15% by 2010 after a normal level of restructuring of 0.5 to 1 percent of sales.

Key performance indicators
Underlying sales growth, operating margin, ungeared free cash flow, return on invested capital and total shareholder return are key performance indicators for the Group.

In the Operating review on pages 13 to 22 and the Financial review on pages 23 to 32 we explain why we regard these as important indicators of our progress against our strategic objectives, describe how we calculate them, and report on the results of these measures for the current and preceding years.

Regions
Three regional teams are responsible for managing Unilever’s business in the regions, and for market operations. They are primarily responsible for winning with customers and deploying brand events and innovations effectively. The regions are fully accountable for the profit performance of our business, as well as growth, short-term cash flows and the in-year development of market shares.

The Europe region includes our operations in Western Europe and in Central and Eastern Europe, and in 2006 accounted for approximately 38% of our business on a turnover basis. The Americas region includes our operations in North America and Latin America and represented around 35% of our business. Our Asia Africa region accounted for 27% of our business, and includes our operations in the Middle East, Turkey, Africa, Asia and Australasia.

Categories
Two category teams cover Foods and Home and Personal Care, and are responsible for each category and the brands therein. They are fully responsible for brand development and innovation, including research and development. Categories also lead the strategic elements of the supply chain and are accountable for long-term value creation in the business, as measured by market share development, category growth, innovation metrics and brand health.

For more information about our two categories and their innovation activities during 2006 please refer to pages 20 to 22.

Functions
Our five support functions (Finance, HR, IT, Communications and Legal) provide value-adding business partnership, strategic support and competitive services to the whole business (especially the regional and category organisations). They are organised around the model of business partners, shared services and expertise teams.

Operating environment

Competition
We have a wide and diverse set of competitors in our consumer goods businesses. Many of our competitors also operate on an international scale, but others have a narrower regional or local focus.

Competition is a normal part of business. We aim to compete and give value to our consumers, customers and shareholders in three ways:

by continually developing new and improved products;
by sharing our innovations and concepts with our businesses all around the world; and
by striving to lower the cost of our sourcing, manufacturing and distribution processes while still maintaining, and improving, the quality of our products.

We support efforts to create a more open competitive environment through the liberalisation of international trade. We support the full implementation of the Single European Market and inclusion in the European Union of other countries that fulfil the agreed criteria for membership.

Distribution
Unilever’s products are generally sold through its sales force and through independent brokers, agents and distributors to chain, wholesale, co-operative and independent grocery accounts, food service distributors and institutions. Products are distributed through distribution centres, satellite warehouses, company-operated and public storage facilities, depots and other facilities.


 

Unilever Annual Report on Form 20-F 2006 5

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Report of the Directors (continued)  
   
About Unilever (continued)

 

Exports
We sell our products in nearly all countries throughout the world and manufacture in many of them. We export a wide range of products to countries where we do not make them. For example, inside the European Union we make many of our products in only a few member countries, for sale in all of them. The chosen manufacturing configuration is generally determined by an optimised regional sourcing strategy which takes account of requirements for innovation, quality, service, cost and flexibility.

Seasonality
Certain of our businesses, such as ice cream, are subject to significant seasonal fluctuations in sales. However, Unilever operates globally in many different markets and product categories. No individual element of seasonality is likely to be material to the results of the Group as a whole.

Related party transactions
Transactions with related parties are conducted in accordance with agreed transfer pricing policies and include sales to joint ventures and associates. Other than those disclosed in this report, there were no related party transactions that were material to the Group or to the related parties concerned that are required to be reported in 2006 or the two preceding years.

For more information about related party transactions please refer also to note 30 on page 122.

Resources

Our brands – Foods
Our Foods category manages brands in two main groups:

Savoury, dressings and spreads includes sales of soups, bouillons, sauces, snacks, mayonnaise, salad dressings, olive oil, margarines, spreads and cooking products such as liquid margarines and the remaining frozen foods businesses. Among the leading brands are Knorr, Hellmann’s, Calvé, Wish-Bone, Amora, Bertolli, our healthy heart Becel and Flora ranges, and our family brands including Rama, Blue Band and Country Crock.

Ice cream and beverages includes our sales of ice cream under the international Heart brand, including Cornetto, Magnum, Carte d’Or and Solero, and also Ben & Jerry’s, Breyers, Klondike and Popsicle. It also includes sales of tea, where our brands include Lipton and Brooke Bond, weight management products, principally Slim•Fast, and nutritionally enhanced staples sold in developing markets, including our Annapurna and AdeS ranges.

Within these groups, our Unilever Foodsolutions business is a global food service business providing solutions for professional chefs and caterers. Its results are reported within those for the groups above.

Our brands – Home and Personal Care
Our Home and Personal Care category manages brands in two main groups:

In Personal Care, six global brands are the core of our business in the deodorants, skin cleansing, daily hair care and mass-market skin care categories – Axe, Dove, Lux, Pond’s, Rexona and Sunsilk. Other important brands include Suave, Clear, Lifebuoy and Vaseline, together with Signal and Close Up in oral care.

Our Home Care ranges include a series of laundry products, including tablets as well as traditional powders and liquids for washing by hand or machine. Tailored products including soap bars are available for lower-income consumers. Our brands include Comfort, Omo, Radiant, Skip, Snuggle and Surf. Our household care products are led by our Cif and Domestos brands.

Corporate venture activities
Unilever has allocated €350 million to its venturing activities in order to create business opportunities that will help build our core business interests in Foods and Home and Personal Care. These activities include:

  Unilever Technology Ventures, which invests in technology funds and start-up companies;
  Unilever Ventures, which is an early-stage business development fund for businesses from both inside and outside Unilever; and
  Langholm Capital, which is an independent fund investing in private European companies with above-average longer-term growth prospects.

Our employees
We set great store by our people. No matter what their level or individual responsibilities, they all make an important contribution to our success.

The following examples outline some of the initiatives we have instigated to help our people develop their skills, broaden their experience and – wherever they are in the world – improve their chances of progressing within Unilever.

Talented people are given opportunities to develop at every level. However, our new senior leadership programme, launched in 2006, is aimed at those with potential to reach the top roles. The programme includes a bespoke business simulation, based on one of our skincare businesses. It provides an exceptional opportunity for senior managers rapidly to gain the breadth and depth of business and leadership understanding required for our business’s most demanding roles.

We are always looking at new ways of working to drive business effectiveness. One example is in the area of business travel which can be time-consuming and tiring. Our current videoconferencing equipment is being upgraded to state-of-the-art facilities at five major Unilever sites worldwide and is expected to enable us to reduce travel. These facilities mean that complete teams can communicate effectively with one another across continents and time zones without anyone leaving the office – making better use of everyone’s time and energy, and limiting time spent away from home.

During 2006, as part of a graduate recruitment programme, Unilever Netherlands set an unusual work-experience challenge. Students spent two weeks in rural India on Hindustan Lever’s Project Shakti, helping women in remote areas who have set up small businesses as direct-to-consumer retailers and measuring the project’s success. By providing local women with training and business skills, Shakti creates a new distribution channel for our products while providing the women with opportunities to improve their income, standard of living and place in the community. It also helped open Dutch students’ eyes to the wide variety of activities that take place across the Unilever world.


 

6 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
About Unilever (continued)

 

Unilever employees whose skills are honed in developing and emerging (D&E) markets are reaching senior positions both at home and abroad, and 20% of our top 123 managers are from D&E regions. Andina/Central America, Argentina, Brazil, India, Indonesia, Japan, Mexico, Pakistan, the Philippines and South Africa all have either local nationals as their chairmen, or chairmen from within the D&E regions. Furthermore, 39% of all individuals on international secondment are from developing or emerging countries.

Hindustan Lever, Unilever’s business in India, has a Personal Vitality Programme which assesses individual employees’ body mass, blood pressure, cholesterol and blood sugar levels. And assistance is provided to those who have nutrition or health issues, or exercise requirements. Although voluntary, over 10 000 employees have taken part so far and each will be followed up annually to ensure they have every opportunity to improve their health.

Strong, effective leadership is at the heart of our transformation programme and is the key to sustaining high levels of business performance. Our new global Standards of Leadership framework clearly sets out the behaviours needed to align ‘hearts and minds’, inspire people to achieve excellence in strategy execution and develop the skills and capabilities we need for the future.

Maintaining health and fitness can be challenging for senior managers in demanding roles. During 2006, several senior leadership teams – including the Unilever Executive – took part in a well-being programme. Each received their own individual health and Vitality check, which was then used to design a personal plan to enhance their habits and practices in physical activity, nutrition and mental resilience. In 2007 a further ten leadership teams are expected to participate in a well-being programme.

Our total employee numbers over the last five years were as follows:

Year end in thousands 2006   2005   2004   2003   2002










Europe 44   49   52   55   60
The Americas 45   47   47   50   53
Asia Africa 90   110   124   129   134










Total 179   206   223   234   247










Of the overall reduction in numbers during 2006 of 27 000, the sale of a plantations business in India accounted for a reduction of 18 000. A further 3 000 resulted from the sale of the majority of our European frozen foods businesses, with the remainder of the reduction arising from other business disposals and a range of restructuring projects.

Included in the total reported numbers for 2006 were 26 000 part-time or seasonal employees (2005: 33 000).

Diversity
Diversity in Unilever is about inclusion, embracing differences, creating possibilities and growing together for better business performance. We embrace diversity in our workforce; this means giving full and fair consideration to all applicants and continuing development to all employees, regardless of gender, nationality, race, creed, disability, style or sexuality. Diversity plays a vital role in ensuring we understand consumers’ needs.

The commitment to diversity is set right at the top of our business. An important legacy of our Chairman, Antony Burgmans, is that he is leaving the most diverse Unilever Board in our history. Going forward, Group Chief Executive Patrick Cescau will lead our global diversity board that will drive the diversity strategy within the business.

Unilever is one of the world’s most culturally diverse companies with 24 different nationalities represented among our top 123 managers worldwide.

In 2006 we focused on practical diversity initiatives. These included the quarterly measurement and tracking of diversity against objectives and the integration of our diversity agenda into our people processes.

Gender continues to be the primary focus of our diversity strategy, as well as a way of improving business performance. Between 2000 and 2006, we have increased our female management profile from 25% to 33% and most of our senior leadership teams, such as Foods, Europe, The Americas and human resources include female leaders.

Information technology
Unilever IT is a global function headed by the Global Chief Information Officer with a strategy to deliver simpler, more cost effective IT solutions to support the business. Common technology framework and standards for architecture, key technologies, process, information and services, allow Unilever to leverage its scale. For example, this approach is supporting the integration of our businesses in each country under the ‘One Unilever’ programme, as well as the setting up of regional shared service centres for ‘back-office’ operations, which in some cases are being outsourced.

The development of ‘destination IT architecture’ is another example of simplifying and leveraging scale. The destination IT architecture is essentially a long-term view on the IT application and technology landscape for Unilever. This also fundamentally changes the way IT works with the business.

Unilever partners with a few major suppliers to develop the minimum number of non-overlapping systems needed to deliver the business objectives. This promotes radical simplification with flexibility and agility, faster implementation and reduced costs.

Intellectual property
We have a large portfolio of patents and trademarks, and we conduct some of our operations under licences which are based on patents or trademarks owned or controlled by others. We are not dependent on any one patent or group of patents. We use our best efforts to protect our brands and technology.


 

Unilever Annual Report on Form 20-F 2006 7

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Report of the Directors (continued)  
   
About Unilever (continued)

 

Property, plant and equipment
We have interests in properties in most of the countries where there are Unilever operations. However, none is material in the context of the Group as a whole. The properties are used predominantly to house production and distribution activities and as offices. There is a mixture of leased and owned property throughout the Group. There are no environmental issues affecting the properties which would have a material impact upon the Group, and there are no material encumbrances on our properties. Any difference between the market value of properties held by the Group and the amount at which they are included in the balance sheet is not significant. Please refer to the schedule of principal group companies and non-current investments on page 147 and 148 and details of property, plant and equipment in note 10 on page 90.

We currently have no plans to construct new facilities or expand or improve our current facilities in a manner that is material to the Group.

Laws and regulation
Unilever businesses are governed by laws and regulations designed to ensure that products may be safely used for their intended purpose and that labelling and advertising are truthful and not misleading. Unilever businesses are further regulated by data protection and anti-trust legislation. Important regulatory bodies in respect of our businesses include the European Commission and the US Food and Drug Administration.

We have processes in place to ensure that products, ingredients, manufacturing processes, marketing materials and activities comply with the above-mentioned laws and regulations.

Legal proceedings
We are not involved in any legal or arbitration proceedings which might lead to material loss or expenditure in the context of the Group results. Similarly we do not have any material obligations under environmental legislation. None of our Directors or Officers is involved in any legal proceedings which are material as aforesaid.

Preference shares
In 1999, NV issued 211 473 785 €0.05 (Fl.0.10) cumulative preference shares, with a notional value of €6.58 (Fl.14.50), as an alternative to a cash dividend. In March 2004, NV announced its intention to convert part (€6.53 – equivalent to Fl.14.40) of the notional value of the preference shares, in accordance with its Articles of Association, into NV ordinary shares in the first quarter of 2005. A number of holders of preference shares raised objections to the conversion, claiming that NV had created legitimate expectations that it would buy the preference shares back for an amount of €6.58, the amount of the cash dividend in 1999. A group of holders of preference shares requested the Enterprise Chamber of the Amsterdam Court of Appeal to conduct an inquiry into the course of affairs surrounding the preference shares. On 21 December 2004, the Enterprise Chamber ordered an inquiry; an additional request to forbid NV to convert the preference shares was rejected.

On 15 February 2005 NV converted part of the notional value of the preference shares into NV ordinary shares. The value, which the holders of the preference shares received upon conversion, was €4.55 for each preference share.

As a consequence of the conversion, the notional value of the preference shares was reduced to €0.05 (Fl.0.10) and pursuant to the Articles of Association of NV the preference shares could be cancelled upon repayment of this remaining notional value. On 4 May 2005, the Enterprise Chamber of the Amsterdam Court of Appeal rejected another request of a group of holders of preference shares who had bought their preference shares after 24 March 2004, which was aimed to prohibit NV from cancelling the preference shares. On 10 May 2005, NV’s Annual General Meeting decided to cancel the preference shares and cancellation took effect on 13 July 2005.

On 8 September 2006, the investigators published a report. Criticisms made in this report related to how Unilever had communicated with the preference shareholders but the criticisms did not extend to NV’s decision to convert part of the notional value of the preference shares into ordinary shares.

On 8 November 2006 NV announced that it had agreed a settlement with the main parties in the legal dispute over the preference shares. The settlement includes all former preference shareholders who had initiated the inquiry procedure. Unilever has provided €300 million in respect of the settlement. Further information is given in note 19 on page 102.

The group of former preference shareholders who had bought their preference shares after 24 March 2004 and who are not entitled to the settlement, have requested the Enterprise Chamber to rule that the report of the investigators demonstrates mismanagement of NV. They have requested an additional inquiry into the policy and affairs of NV in the period after 24 March 2004. This group of former preference shareholders has also instituted claims with the Rotterdam District Court for nullification of the NV Board’s decision to convert the preference shares and NV’s Annual General Meeting decision to cancel the preference shares. The Enterprise Chamber and the Rotterdam District Court have not yet decided on these claims.

On the grounds of NV’s alleged attributable failure to buy back the preference shares at €6.58, they also claim damages in the amount of approximately €81 million, which amount is based on the difference between €6.58 and €4.55, the value holders of the preference shares received upon conversion for each preference share. These claims will be vigorously contested.

Other
Unilever has businesses in many countries and from time to time these are subject to investigation by competition and other regulatory authorities. One such matter concerns ice cream distribution in Europe, notably the issues of outlet and cabinet exclusivity. In October 2003, the Court of First Instance in Luxembourg (‘CFI’) ruled in favour of the European Commission’s decision banning Unilever’s Irish ice cream business, HB Ice Cream, from seeking freezer cabinet exclusivity for their products in the Irish market. HB Ice Cream submitted an appeal to the European Court of Justice in Luxembourg (‘ECJ’) against the decision of the CFI. On 28 September 2006 the ECJ dismissed the appeal. Following the CFI decision freezer exclusivity in Ireland has not been enforceable from October 2003 onwards, in outlets which only have HB freezers. From 2003 Unilever Ireland has complied with the Commission decision. With the ECJ judgement this position has now become final. Similar consequences may apply in specific European markets with equivalent structures to those described in the Commission and CFI decisions. There is a


 

8 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
About Unilever (continued)

 

possibility of claims for damages, in the event of which Unilever will defend its position vigorously. The case between HB Ice Cream and Masterfoods, which has been before the Irish Courts since 1990 and which had been deferred pending the final determination of the appeal against the Commission decision, has been reopened at the request of Masterfoods. It is noted that in the UK since 2000, when cabinet exclusivity was effectively abandoned following undertakings given by Unilever to the UK competition authorities, there has not been any material change in Unilever’s relevant market share.

In 2006 the French competition authorities commenced an inquiry into potential competition law infringements in France involving a number of consumer goods companies in the home and personal care sector, including Unilever France and Lever Faberge France, both subsidiaries of the Unilever Group. To date, no statement of objections has been lodged against either Unilever France or Lever Faberge France and accordingly the potential financial implications, if any, of this investigation for such companies cannot yet be assessed.

On 8 March 2007 representatives from the Portuguese Competition Authority carried out an inspection at the offices of Unilever Jeronimo Martins and such company’s ice-cream factory in Portugal. The inspection was in relation to impulse ice-cream in Portugal. It is the policy of the Unilever Group to comply fully with the legal procedures involved in such inspections and any subsequent enquiry. It should be noted that no written statement of objections or other allegations has been received by Unilever Jeronimo Martins in respect of this matter and accordingly the potential financial implications, if any, of this inspection for such company cannot yet be assessed.

On 14 March 2007 representatives from the German Federal Cartel Office carried out an inspection at the offices of Unilever Deutschland GmbH in Hamburg. The inspection was in relation to the oral-care market in Germany. It is the policy of the Unilever Group to comply fully with the legal procedures involved in such inspections and any subsequent enquiry. It should be noted that no written statement of objections or other allegations has been received by Unilever Deutschland GmbH in respect of this matter and accordingly the potential financial implications, if any, of this inspection for such company cannot yet be assessed.

During 2004 the Federal Supreme Court in Brazil (local acronym STF) announced a review of certain cases that it had previously decided in favour of taxpayers. Because of this action we established a provision in 2004 for the potential repayment of sales tax credits in the event that the cases establishing precedents in our favour are reversed. Since that time we have continued to monitor the situation and have made reductions as appropriate to the amount provided.

Also during 2004 in Brazil, and in common with many other businesses operating in that country, one of our Brazilian subsidiaries received a notice of infringement from the Federal Revenue Service. The notice alleges that a 2001 reorganisation of our local corporate structure was undertaken without valid business purpose. If upheld, the notice could result in a tax claim in respect of prior years. The 2001 reorganisation was comparable with that used by many companies in Brazil and we believe that the likelihood of a successful challenge by the tax authorities is remote. This view is supported by the opinion of outside counsel but there can be no guarantee of success on the merits.

Corporate responsibility
We seek to manage and grow our business around the world in a responsible and sustainable way. The values and standards by which we expect to be judged are set out in our Code of Business Principles.

We aim to share these standards and values with our suppliers and contractors through our Business Partner Code, which sets out standards on ten key points of business integrity, labour standards, consumer safety and the environment.

The long-term success of our business is intimately linked with the vitality of the environment and communities in which we operate. Each year we report on our contribution to sustainable development. This is available online at the Environment & Society section of www.unilever.com. Our report describes how we are working in partnership to address issues such as poor nutrition and hygiene, how we continue to work on reducing our environmental impacts, and our contributions of €78 million to communities. The strength of our commitment to sustainable development is reflected in our leadership of the food industry category of the Dow Jones Sustainability Indexes for the eighth year running.

In our Operating review on pages 13 to 22 we give a glimpse of the ways in which our brands are addressing consumers’ social and environmental concerns.

Risk management
The following discussion about risk management activities includes ‘forward-looking’ statements that involve risk and uncertainties. The actual results could differ materially from those projected. See the ‘Cautionary Statement’ on the inside back cover.

Unilever’s system of risk management is outlined on page 66. Responsibility for establishing a coherent framework for the Group to manage risk resides with the Boards. The remit of the Boards is outlined on page 34.

Particular risks and uncertainties that could cause actual results to vary from those described in forward-looking statements within this document, or which could impact on our ability to meet our published targets, have been identified. In this context the following specific risks have been identified as areas of focus in 2007.

Sales and profit growth
The increasingly competitive environment, the further consolidation in the marketplace and continued growth of discounters could adversely impact our rate of sales growth and our profit margins. In the light of this, we will continue to invest in selected brands and high growth market areas to ensure that we deliver profitable sales growth. Our continued sales and profit growth depends in large part on our ability to generate and implement a stream of consumer-relevant improvements to our products. The contribution of innovation is affected by the level of funding that can be made available, the technical capability of the research and development functions, and the success of operating management in rolling out quickly the resulting improvements. Our focus will continue to be on developing our brands in ways that are distinctive and are relevant for our customers.


 

Unilever Annual Report on Form 20-F 2006 9

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Report of the Directors (continued)  
   
About Unilever (continued)

 

We have a number of large global brands, including 12 with an annual turnover greater than €1 billion, which often depend on global or regional development and supply chains. Any adverse event affecting consumer confidence or continuity of supply of such a brand could have an impact in many markets. The carrying value of intangible assets associated with our brands is significant, and depends on the future success of those brands. There remains a risk that events affecting one or more of our global brands could potentially impair the value of those brands.

As the retail market place through which our products are distributed continues to evolve, our growth and profitability can be threatened if we do not adapt our strategies and enhance our operational capabilities. It is important that we continue to build and deepen relationships with our customers. Plans to raise our effectiveness in the trade, where necessary, receive increasing attention at all levels.

Change initiatives
The continuing restructuring of the business which is designed to simplify our operations and leverage our scale more effectively, includes outsourcing back office support operations and converging regional processes and systems, and requires continuing close management attention in 2007. Building on the experiences of 2006, we will continue to manage the risks in this area diligently and ensure that there are clear action plans to mitigate them. Key to this is the establishment and maintenance of project management processes to monitor progress against milestones and targets together with appropriate communication programmes.

People
Unilever’s performance targets require it to have the right calibre of people at all levels. We must compete to obtain capable recruits for the business, and then train them in the skills and competencies that we need to deliver profitable growth. At a time of substantial change in the business there is a particular focus on creating alignment and energetic leadership, evidenced by the senior leadership programme that was launched in 2006.

Corporate reputation
Unilever has created a strong corporate reputation over many years and many of our businesses have a high local profile. This reputation is underpinned by ensuring that all employees embrace the principles prescribed in our Code of Business Principles. Unilever products carrying our well-known brand names are sold in over 100 countries. Should we fail to meet high product safety, social, environmental and ethical standards in all our operations and activities, Unilever’s corporate reputation could be damaged, leading to the rejection of our products by consumers, damage to our brands and diversion of management time into rebuilding our reputation.

Potential economic instability
Around 40% of Unilever’s turnover comes from the developing and emerging economies. We have long experience in these markets, which are also an important source of our growth. These economies are typically more volatile than those in the developed

world, and there is a risk of downturns in consumer demand that would reduce the sales of our products. We will continue to monitor closely performance in the most volatile markets and respond quickly to protect our business. In cases of extreme social disruption, protecting our people is always the priority.

Price and supply of raw materials and commodities contracts
Prices of raw materials and commodities increased significantly throughout 2006, adversely impacting margin where we were unable to pass on increased costs. To mitigate such risks, and where appropriate, we purchase forward contracts for raw materials and commodities, almost always for physical delivery. Where appropriate we also use futures contracts to hedge future price movements; however, the amounts are not material.

Insurance of risks
As a multinational group with diverse product offerings and operations in more than 100 countries, Unilever is subject to varying degrees of risk and uncertainty. It does not take out insurance against all risks and retains a significant element of exposure to those risks against which it does insure. However, it insures its business assets in each country against insurable risks as it deems appropriate.

Financial risks
In addition to the above, Unilever is exposed to various specific risks in connection with its financial operations and results. These include the following:

The impact of movement in equity markets, interest rates and life expectancy on net pension liabilities;
Maintenance of group cash flows at an appropriate level;
Exposure of debt and cash positions to changes in interest rates;
Potential impact of changes in exchange rates on the Group’s earnings and on the translation of its underlying net assets;
Liquidity and counterparty risks; and
Risks associated with the holding of our own shares in connection with share-based remuneration schemes.

Further information about these, including sensitivity analysis to changes in certain of the key measures, is given in note 17 on pages 100 and 101 and note 20 on page 105.

Other risks
Unilever’s businesses are exposed to varying degrees of risk and uncertainty related to other factors including competitive pricing, consumption levels, physical risks, legislative, fiscal, tax and regulatory developments, terrorism and economic, political, and social conditions in the environments where we operate. All of these risks could materially affect the Group’s business, our turnover, operating profit, net profit, net assets and liquidity. There may be risks which are unknown to Unilever or which are currently believed to be immaterial.


 

10 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Group Chief Executive

 

We are grateful to those shareholders and other stakeholders who responded to our invitation on the Unilever website to post questions for Patrick Cescau. A number of their questions are reflected in the Q&A below.

How do you look back on 2006?
We are on a journey to restore Unilever’s competitiveness and growth potential. That journey is ongoing but I think we can look back on 2006 with some pride and satisfaction.

The improving top-line performance recorded during the year suggests that the wide-ranging changes we made to the business in 2004 and 2005 – both to our organisation and to our strategy – were the right ones for Unilever. They are putting us firmly on the road to sustained growth.

I also believe that we will look back on 2006 as the year when the business regained its confidence and self-belief after the setbacks of recent years. There is a new energy and optimism flowing through the Group.

What pleased you most about the Group’s performance last year?
The quality and the broad-based nature of our growth. All parts of the business – all regions and all categories – contributed to healthy underlying sales growth of 3.8% . Our cash flow position in 2006 was also strong, and it was a sign of the growing financial health of the business that we were able to return an additional €750 million to shareholders in the form of a one-off dividend.

Our performance was particularly strong in those areas we had identified as growth priorities and where we had invested accordingly – for example, in developing and emerging markets (D&E) and in our personal care business, which grew by an impressive 6.3% . This is particularly pleasing and encouraging because it suggests the strategy we are following – investing heavily in order to obtain leadership positions in high growth areas – is the right one to take us forward.

I would also highlight our performance in Europe, which has been a tough market for us in recent years. Last year we re-doubled our efforts and this was rewarded in steadily improving results and a return to modest growth levels.

Were there any areas where you had hoped to make greater progress during 2006?
Restoring Unilever’s competitiveness has involved making a lot of changes to the business. In order to deliver sustained growth and create value for shareholders, we have reformed our governance, overhauled our organisation and put in place a whole new strategy to take the business forward.

Inevitably, changes on this scale are going to proceed at differing speeds. Overall I am satisfied with where we are at this stage in the transformation of the Group. Equally, I know that we have some challenges ahead, in particular delivering more profitable growth. While our operating margin in 2006 was satisfactory, we must strive for a better performance in the year ahead. We weren’t helped in 2006 by higher than expected costs resulting from sharp increases in commodity prices, but that has merely served to highlight the importance of the measures we are taking to simplify our business and to squeeze out unnecessary costs.

Since becoming Group Chief Executive you have embarked on a significant programme of organisational change and restructuring. Do you feel that you now have the right organisation in place to drive Unilever’s growth?
It is the nature of things today that you have to keep the workings of any organisation under constant review. As a business, that is the only way to ensure you are best serving the interests of shareholders and other stakeholders. But yes, I do believe we are well advanced with the organisational changes needed to support the next stage of our development.

Indeed, we are already deriving significant benefits from the changes we have made, not least from our more streamlined governance and management structures. Furthermore, our ‘One Unilever’ programme continues to deliver both greater clarity and significant savings as it is steadily rolled out across the whole business. These are all helping to deliver the speed and the scale we need to compete more effectively and could be seen reflected last year in more global brand platforms, the faster roll-out of products and the launch of bigger and better innovations.

But we are not complacent. We know that we will have to quicken the pace of change even further in the year ahead if we are to meet our goal of moving from competing to winning in the marketplace.

You have put the concept of ‘Vitality’ at the heart of the Group’s mission. What evidence is there that it has had a direct impact on performance in 2006?
Vitality is about directing our business towards the increasing desire and emphasis on the part of consumers the world over to feel good, look good and to get more out of life. As a business whose brands deliver health, hygiene and nutritional benefits, we are perhaps uniquely well placed to respond to these evolving consumer trends.

To that end, Vitality is already directly impacting our performance. It is a key element in guiding us to those high growth spaces we now regard as critical to Unilever’s long-term success. It is also perhaps the single biggest factor driving our innovation programme. The successful launch in the UK last year of AdeZ – a soya-based fruit drink – is a good example, one that can be traced directly to our Vitality mission and our determination to continue developing products with proven nutritional benefits.


 

Unilever Annual Report on Form 20-F 2006 11

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Report of the Directors (continued)  
   
Group Chief Executive (continued)

 

What did you mean when you said last year that the successful brands of the future would be those that not only satisfied consumers’ functional needs, but also addressed their concerns as citizens?
We have always believed that the health and prosperity of our business is linked to the health of the communities we serve, which is why we contributed €78 million to communities last year. However, we also know that consumers increasingly expect companies and brands to play a role in responding to their concerns as citizens around issues such as climate change, or helping to address poor nutrition and disease in some of the most impoverished parts of the world.

Working in partnership with governments, international agencies and NGOs is often the most effective way to help address these major global threats, and Unilever has already embarked on a number of such partnerships, including for example with UNICEF and with the United Nations World Food Programme.

However, individual brands can and do make a difference. The remarkable success of Surf Excel in India, for example, which is helping to reduce the amount of water used in laundry in some of the country’s most water-stressed regions, is a good case in point. So is our success in combating iodine deficiency in parts of Africa through our iodised salt brand Annapurna. These and other initiatives demonstrate that it is possible to do good and do well, and they have convinced us that this is the right direction for Unilever to take.

How do you intend to position Unilever so that it can benefit most from the huge rise in markets like China and India?
There is no doubt that the most significant growth opportunities for Unilever lie in the D&E economies, and not just in China and India. Already, D&E markets account for more than 40% of Unilever’s turnover and that proportion is set to go on rising.

Our history in these countries, going back to the very origins of the Group, combined with our existing scale and reach across much of the developing world, means we are very well positioned to benefit from the shifts taking place in the global economy. Our performance in 2006 certainly gives grounds for optimism. Last year, we grew by nearly 8% in D&E markets. That included some spectacular performances, not least in China where growth of nearly 30% was powered directly by the changes we are making to the business.

Unilever’s first independent Non-Executive Chairman takes up position in May. What are your expectations?
I think it marks a significant stage in the life of the Group. It is the latest in a series of important governance reforms that are bringing us into line with best corporate practice. At the personal level, I am very much looking forward to working with Michael Treschow, who brings a wealth of relevant experience to bear. We are all excited by his appointment. At the same time, I would like to thank Antony Burgmans, our current Chairman, for his significant contribution to Unilever over the last 35 years. I would also like to thank two members of the Unilever Executive who have also made a significant contribution to Unilever over a long period who will leave us in 2007 – Rudy Markham and John Rice.

What are your ambitions for Unilever as you look ahead to 2007 and beyond and what do you think will present the biggest challenges?
We have made clear that our long-term ambition is to be among the top third of our peer group in terms of total shareholder return (TSR). That is a stretching but achievable goal. In 2007 our aim is to continue delivering sustained underlying sales growth while at the same time improving our operating margin. We are all focused on that task.

One of the other key challenges we face in 2007 will be to ensure that we obtain an even greater return on the significant investment we have made in upgrading our skills and capabilities in those areas identified as critical to the long-term success of the business – marketing, customer management, and research and development. We have made enormous strides in each of these areas in recent years, but really have the opportunity now in 2007 to accelerate the level of performance.


 

12 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Operating review by region

 

Basis of reporting
In this Operating review we comment on our changes in revenue on the basis of underlying sales growth (USG). This measure reflects the change in revenue at constant rates of exchange, (average exchange rates for the preceding year) excluding the effects of acquisitions and disposals. It is a measure that provides valuable additional information on the underlying performance of the business. In particular, it presents the organic growth of our business year on year and is used internally as a core measure of sales performance.

USG is not a measure which is defined under either IFRS or US GAAP. It should not be considered in isolation from, or as a substitute for, financial information presented in compliance with either IFRS or US GAAP. This measure as reported by us may not be comparable with similarly titled measures reported by other companies.

The reconciliation of USG to turnover for each of our reporting regions is given in the following section, and for the Group in total on page 25.

The reporting in this section is based on results for continuing operations. Following the disposal of the majority of our European frozen foods businesses during 2006, the operations which we classify under this heading are different from those which were included as continuing operations in our Report and Accounts 2005.


 

Unilever Annual Report on Form 20-F 2006 13

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Report of the Directors (continued)  
   
Operating review by region Europe

 

Europe

Turnover (€ million)
Continuing operations
  Operating profit (€ million)
Continuing operations
  Operating margin (%)
Continuing operations
         
   
                             














 
                     
                     
  € million   € million   € million   Year on year change   Year on year change  
              at current exchange rates   at constant exchange rates  
Continuing operations             2006   2005   2006   2005  
at current rates of exchange 2006   2005   2004   vs 2005   vs 2004   vs 2005   vs 2004  














 
Turnover 15 000   14 940   15 252   0.4 % (2.0 )% 0.2 % (2.4 )%
Operating profit 1 903   2 064   2 045   (7.7 )% 0.8 % (7.9 )% 0.6 %
Operating margin 12.7 % 13.8 % 13.4 %                
Restructuring, business disposals,                            
impairment charges and one-time gain on UK                            
pension plans included in operating margin (1.4 )% (0.9 )% (2.7 )%                














 
  2006   2005                      
Turnover and underlying sales growth vs 2005   vs 2004                      




                     
Underlying sales growth (%) 1.0   (0.4 )                    
Effect of acquisitions (%) 0.1   0.0                      
Effect of disposals (%) (0.9 ) (2.1 )                    
Effect of exchange rates (%) 0.2   0.4                      
Turnover growth (%) 0.4   (2.0 )                    




                     

2006 compared with 2005    

Turnover at current rates of exchange rose by 0.4%, after the impact of acquisitions, disposals and exchange rate changes as set out in the table above. Operating profit at current rates of exchange fell by 7.7%, after including a favourable currency movement of 0.2% . The underlying performance of the business after eliminating these exchange translation effects and the impact of acquisitions and disposals is discussed below at constant exchange rates.

We have done much work in Europe to make our business more competitive. In particular there has been a single-minded drive to improve the value we offer consumers, plus a strong innovation programme targeted at the core of our portfolio. Simultaneously, the implementation of our ‘One Unilever’ programme, the building of capabilities and changes in leadership are all resulting in better execution.

These differences, combined with improved consumer demand, returned the region to modest growth. Underlying sales grew by 1% in the year – entirely from volume. Market shares were broadly stable with gains in ice cream, soups, deodorants and body care. However, there were losses in laundry, hair care and tea.

The UK, our largest European business, returned to growth in the year with good results across most Foods and personal care ranges. Although laundry sales declined, there have been promising signs of progress in recent market shares with Persil regaining its position as the country’s leading laundry brand.

The Netherlands had a strong year. A pioneer of ‘One Unilever’, it benefited from operating as a single company. Highlights were rapid growth for Lipton, Dove, Rexona and Axe.

 

France remained a difficult market with sales lower in spreads, laundry and hair care. New management is now in place and there was an improvement in the second half of the year.

Sales in Germany held up better in 2006. There was good growth for personal care brands but some turnover in Lipton ice tea was lost following changes in rules for bottle returns.

Central and Eastern Europe continued to do well, driven by double-digit growth in Russia.

The sale of the majority of our European frozen foods businesses to Permira was successfully completed during the year.

Our 2006 innovation programmes have resulted in our Foods brands wholeheartedly embracing the concept of Vitality, with new products designed to deliver the health benefits that consumers seek. Rama/Blue Band Idea! – spreads with added nutrients which are beneficial to children’s mental development – was launched in 2006 and is being rapidly rolled out in 2007. Throughout 2007 cause-related promotional activities associated with these brands will support the United Nations World Food Programme, improving awareness of child hunger and raising funds to alleviate it.

A range of Knorr bouillon cubes with selected natural ingredients and a better, richer taste has been rolled out across the region, while Vie one-shot fruit and vegetable products are now available in 12 countries. Meanwhile, Latin America’s AdeS drink, a healthy blend of fruit juices and soya, has been launched successfully in the UK as AdeZ.

 

14 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Operating review by region Europe (continued)

 

2006 compared with 2005 (continued)
Product launches with clear functional or emotional benefits in Home and Personal Care brands are being rolled out rapidly across the region. A range of new Dove launches included the moisturising self-tan Dove Summer Glow. Meanwhile in household care, Domestos 5x continues to kill germs even after several flushes and the cleaning power of Cif has been applied to a series of power sprays.

The operating margin, at 12.7%, was 1.1 percentage points lower than a year ago, with higher net costs for restructuring, disposals and impairments, partially offset by a one-time gain of €120 million from changes to the UK pensions plan. Before these items, the operating margin would have been 0.6 percentage points lower than in 2005. Margins in Foods were lower than in 2005 as we absorbed significant increases in commodity costs which were only partly compensated by savings programmes.

2005 compared with 2004
Turnover at current rates of exchange fell by 2.0%, mainly due to disposals, and including a positive impact from currency movements of 0.4% . Operating profit at current rates of exchange rose by 0.8%, including a favourable effect of currency movements of 0.2% . The underlying performance of the business after eliminating these exchange translation effects and the impact of acquisitions and disposals is discussed below at constant exchange rates.

Our priority in Europe was to regain momentum and improve competitiveness. The focus was on enhancing the value to consumers of our products through keener pricing, improved quality and more and better innovation.

Marketing support was raised to a more competitive level with additional spend deployed against our best opportunities, and the organisation was streamlined.

 

We made progress during the year. Volume was slightly positive, but investment in pricing meant that underlying sales declined by 0.4% in the year.

Central and Eastern Europe performed well in buoyant markets, notably in Russia which was ahead by nearly 20%.

Western Europe was challenging, with continued weak consumer demand. Our businesses grew in the Netherlands and Spain, but declined in France, Germany and the UK.

In Foods, we have held overall market share through the course of the year, with growth across all key categories apart from frozen foods.

In Home and Personal Care we had a disappointing year and we have lost market share, particularly in the UK.

New product launches in 2005 included Knorr Vie mini shots, extensions of the Becel/Flora pro·activ heart health range, soups fortified with vitamins and low-fat soups.

We introduced a Rexona Sport variant in deodorants, Axe shower gel and Sunsilk hair styling products. We further improved our home care product range with launches that address specific consumer needs, such as ‘no-need-to-pre-treat’ laundry detergents, Sun 4-in-1 dishwash and Domestos sink and drain unblocker.

The operating margin, at 13.8%, was 0.4 percentage points higher than in 2004. Increased advertising and promotions and pricing investment together with higher input costs were partly offset by productivity gains. Net restructuring, disposal and impairment costs, at 0.9% were 1.8 percentage points lower than in 2004.

 

Unilever Annual Report on Form 20-F 2006 15

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Report of the Directors (continued)  
   
Operating review by region The Americas

 

The Americas

Turnover (€ million)
Continuing operations
  Operating profit (€ million)
Continuing operations
  Operating margin (%)
Continuing operations
         
   
                             














 
                     
                     
  € million   € million   € million   Year on year change   Year on year change  
              at current exchange rates   at constant exchange rates  
Continuing operations             2006   2005   2006   2005  
at current rates of exchange 2006   2005   2004   vs 2005   vs 2004   vs 2005   vs 2004  














 
Turnover 13 779   13 179   12 296   4.6 % 7.2 % 3.1 % 3.4 %
Operating profit 2 178   1 719   896   26.7 % 91.9 % 25.0 % 83.6 %
Operating margin 15.8 % 13.0 % 7.3 %                
Restructuring, business disposals,                            
impairment charges and one-time gain on US                            
healthcare plans included in operating margin 0.0 % (3.4 )% (9.2 )%                














 
  2006   2005                      
Turnover and underlying sales growth vs 2005   vs 2004                      




                     
Underlying sales growth (%) 3.7   4.1                      
Effect of acquisitions (%) 0.1   0.0                      
Effect of disposals (%) (0.7 ) (0.7 )                    
Effect of exchange rates (%) 1.4   3.6                      
Turnover growth (%) 4.6   7.2                      




                     
     
2006 compared with 2005    

Turnover at current rates of exchange rose by 4.6%, after the impact of acquisitions, disposals and exchange rate changes as set out in the table above. Operating profit at current rates of exchange rose by 26.7%, after including a favourable currency movement of 1.4% . The underlying performance of the business after eliminating these exchange translation effects and the impact of acquisitions and disposals is discussed below at constant exchange rates.

Overall, we have maintained share in the US in markets which are growing at around 3%. Underlying sales growth in the US was 2.4%, partly reflecting the effect of trade de-stocking in personal care brands during the first half of the year and in ice cream in the second half. Degree, Dove and Axe – our three main deodorants brands – all gained share. The launch of Sunsilk drove growth in haircare. In laundry we initiated the move to concentrated liquids but have lost further share in conventional detergents.

Bertolli frozen meals, Lipton ready-to-drink tea, in our joint venture with Pepsi, and Slim•Fast all gained share in the US with the latter making weight loss accessible, affordable and achievable for consumers everywhere. Our share for the year as a whole was also up in ice cream, although sales were down. The sector has been heavily promoted in recent years but in 2006 the level of promotional intensity reduced. As a result, the trade used up stocks and bought less.

Sales in Brazil picked up well after a slow start, with very good innovation-driven performances in hair, deodorants and laundry. Indeed, Omo’s brand share was at its highest level for many years.

 

Sales in Mexico were lower for the year, affected by a combination of a decline in the traditional retail trade and local low-priced competition. In addition, there were several operational issues which have since been addressed. The business returned to growth in the fourth quarter. Elsewhere there was good growth in Argentina, Central America and Venezuela. Taken together, sales in Latin America were ahead by 5.8% with Home and Personal Care brands continuing to do well. However, there was more modest growth in Foods brands due to tough local competition.

New products introduced in the US included Wish-Bone Salad Spritzers with one calorie per spray, further development of the Bertolli premium frozen meal range, and Lipton pyramid tea bags. Across the region, new Knorr soups and bouillons cater for local tastes. The highly successful AdeS nutritional drink has been extended with a ‘light’ variant, new fruit flavours and the launch of soymilk in Brazil and Mexico.

We strengthened our hair portfolio with the launch of Sunsilk, improved both the Suave and Dove haircare lines and sold the Aquanet and Finesse brands. We had a good sales response to all Small & Mighty concentrated liquid detergents. These use reduced-size packaging to save water, cardboard and energy use in production, packaging and transport. They are also easier for consumers to carry, pour and store. We then applied all Small & Mighty’s product technology to fabric conditioners, creating Snuggle Exhilarations – a three-times more concentrated premium sub-range delivering superior fragrance. In Brazil, Omo has been further strengthened with a new top-performance product including baby and foam control variants.

 

16 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Operating review by region The Americas (continued)

 

2006 compared with 2005 (continued)
The operating margin, at 15.8%, was 2.8 percentage points higher than a year ago. There were lower costs for restructuring, disposals and impairments, and a one-time benefit in 2006 of €146 million from changes to US healthcare plans. In 2005 there was a gain on the sale of an office. Before these items the operating margin would have been 0.3 percentage points lower than last year. Innovation-driven marketing mix, pricing and productivity offset high commodity costs. Advertising and promotions were increased to support major brand launches.

2005 compared with 2004
Turnover at current rates of exchange rose by 7.2%, including a positive impact from currency movements of 3.6% . Operating profit at current rates of exchange was 92% higher than in 2004, including a favourable impact from currency movements of 8.3% . The underlying performance of the business after eliminating these exchange translation effects and the impact of disposals is discussed below at constant exchange rates.

Underlying sales grew by 4%, all coming from volume gains, broadly based across the region, underpinned by a successful innovation programme.

Consumer demand in the US showed a sustained recovery. Our sales in the US grew by 3.2%, accelerating through the year, and we gained market share in aggregate.

In Brazil and Mexico, a strong first half was followed by relatively weaker demand in the second half of the year. We grew in line with our markets in Home and Personal Care, but saw some share loss in Foods.

Growth in Personal Care across the region was driven by good consumer response to our initiatives, including Vitality innovation and consistent support. This was particularly evident in the deodorants and personal wash categories, with strong double-digit growth for Axe, now the number one deodorant in the US, and for the Dove and Rexona brands.

 

Another strong Foods performance in the US was driven by further share gains in ice cream, continued good results from the extension of the Country Crock and Bertolli brands into new categories, and from Lipton ready-to-drink and speciality teas. Slim•Fast continued to regain share, but in a much contracted weight management market and sales were well below the previous year.

New launches in the US included the well received Dove Cool Moisture range and the extension of Axe into male shower gels. In Latin America our brands were also very successful in connecting with younger consumers through Rexona ‘teens’ and innovative communication for Axe.

In the US we introduced all Small & Mighty laundry detergent, offering the convenience of the same cleaning power in a smaller bottle. We invested in communication of our Omo laundry brands, under the ‘Dirt is Good’ campaign in southern Latin America.

In Foods, we strengthened the Vitality credentials of our brands in the US with Promise heart health spread, Ragú organic and support for the anti-oxidant properties of Lipton teas. AdeS continued to build across Latin America with the distinctive nutrition benefits of ‘soy with fruit’.

The operating margin at current rates of exchange was 13.0%, 5.7 percentage points higher than in 2004. Net charges for restructuring, disposal and impairment were 3.4%, which was 5.8 percentage points lower than in the prior year. Cost savings offset a higher level of advertising and promotions and increased input costs. There were also gains from the sale of an office in the US, in US healthcare plans and from currency effects on capital reductions.

 

Unilever Annual Report on Form 20-F 2006 17

Back to Contents

   
Report of the Directors (continued)  
   
Operating review by region Asia Africa

 

Asia Africa

Turnover (€ million)
Continuing operations
  Operating profit (€ million)
Continuing operations
  Operating margin (%)
Continuing operations
         
   
                     














 
                     
                     
  € million   € million   € million   Year on year change   Year on year change  
              at current exchange rates   at constant exchange rates  
Continuing operations             2006   2005   2006   2005  
at current rates of exchange 2006   2005   2004   vs 2005   vs 2004   vs 2005   vs 2004  














 
Turnover 10 863   10 282   9 620   5.7 % 6.9 % 6.8 % 6.9 %
Operating profit 1 327   1 291   1 040   2.8 % 24.1 % 4.0 % 24.7 %
Operating margin 12.2 % 12.6 % 10.8 %                
Restructuring, business disposals and                            
     impairment charges included in                            
     operating margin (0.3 )% 0.0 % (2.9 )%                














 
  2006   2005                      
Turnover and underlying sales growth vs 2005   vs 2004                      




                     
Underlying sales growth (%) 7.7   8.7                      
Effect of acquisitions (%) 0.0   0.0                      
Effect of disposals (%) (0.8 ) (1.6 )                    
Effect of exchange rates (%) (1.1 ) 0.0                      
Turnover growth (%) 5.7   6.9                      




                     
     
2006 compared with 2005    

Turnover at current rates of exchange rose by 5.7%, after the impact of acquisitions, disposals and exchange rate changes as set out in the table above. Operating profit at current rates of exchange rose by 2.8%, after including an adverse currency movement of 1.2% . The underlying performance of the business after eliminating these exchange translation effects and the impact of acquisitions and disposals is discussed below at constant exchange rates.

Markets remained buoyant in most of the key countries though there was a slowdown in consumer spending in Thailand. Underlying sales growth of 7.7% was broadly based and our aggregate market shares remained stable.

India grew well across major sectors. A mix of global, regional and local brands is driving growth, notably Wheel and Surf Excel in laundry, and Clinic in haircare. A second year of excellent growth in China, stemmed from a combination of market growth, better distribution and innovations behind global brands such as Omo, Lux and Pond’s, as well as the local toothpaste brand, Zhonghua. Indeed, Unilever Oral Care and Zhonghua exhibited at the FDI World Dental Federation Congress in China to showcase ‘Live, Learn, Laugh’ – Unilever’s global partnership with the Federation to improve oral health globally.

Indonesia sustained good momentum, not only in the large Home and Personal Care ranges but also in Foods as a result of strong performances in ice cream and savoury. Thailand had a disappointing year through weak demand and intense competition. A major programme of activities is under way to correct this.

 

Australia experienced a much improved performance with share gains in a number of areas. In Japan, Lux Super Rich – the leading brand – performed well despite the launch of a competitor’s major brand. However, Dove and Mod’s lost share.

Savoury, ice cream, laundry and household care brands were the main drivers of strong growth in Turkey, while sales in Arabia were well ahead.

In South Africa, aggressive price promotions by a local competitor have reduced laundry sales, but there were strong growth and share gains in Foods.

Innovation is increasingly being driven globally and regionally, rather than locally. The new Sunsilk range has been introduced in most major markets and in laundry, the Dirt is Good positioning is now in place across the region. Pond’s Age Miracle, incorporating unique technology and designed specifically for Asian skin, has been launched in four countries. Meanwhile the latest global Axe/Lynx fragrance, Click, has been introduced in Australia and New Zealand.

As in the rest of the world, the Foods innovation programme focused on Vitality. Moo, a wholesome children’s ice cream range based on the goodness of milk, has been very well received by mothers and children alike and has proven a real success story in South East Asia. Healthy green tea innovations are being rolled out extensively, while in South Africa marketing for Rama margarine now communicates the product’s healthy oils. Addressing the needs of lower income consumers, low-priced Knorr stock cubes – already successful in Latin America – were also introduced in the region.

 

18 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued) 
   
Operating review by region Asia Africa (continued)

 

2006 compared with 2005 (continued)
The operating margin at 12.2% was 0.4 percentage points lower than a year ago. Before the impact of restructuring, disposals and impairments, the operating margin would have been in line with last year. The benefits to margin of strong volume growth and savings programmes were fully offset by higher commodity costs and other cost inflation which could not be fully recovered in pricing.

2005 compared with 2004
Turnover at current rates of exchange rose by 6.9%, with no net impact from currency movements. Operating profit at current rates of exchange was 24% higher than in 2004, after allowing for an adverse impact from currency movements of 0.6% . The underlying performance of the business after eliminating these exchange translation effects and the impact of disposals is discussed below at constant exchange rates.

We capitalised on our leading positions and buoyant consumer demand across most of the region, growing underlying sales by nearly 9%, in a competitive environment, and increasing market share in key battlegrounds.

The growth was broad-based in terms of both categories and geographies. There were notable performances in all major developing and emerging countries, including a strong recovery in India with market share gains, and significant contributions from China, which was up by over 20%, and from South East Asia, South Africa, Turkey and Arabia. Japan returned to growth. After a weak first half, Australia improved in the second half of the year.

Most of the increase came from volume, but price growth gained momentum through the year, as we moved selectively to recover increased commodity costs, especially in home care.

Growth was underpinned by a range of innovations. In skin care in India, Lux was strengthened with new soap bars from the global range and the introduction of limited editions. Innovations in Pond’s included a new ‘mud’ range in China.

In haircare we launched Dove in Indonesia, a Sunsilk summer range across South East Asia, a new variant for Lux Super Rich in China and a strengthened Sunsilk range across several key markets in Africa and the Middle East.

New formulations for our laundry products include improved whiteness delivery for Surf in Indonesia and Omo for sensitive skin in Turkey.

In tea, we substantially strengthened the Brooke Bond brand in India, while Lipton benefited from strong regional innovations, including Earl Grey and Green Tea variants in markets such as Turkey and Arabia.

The operating margin was 12.6%, 1.8 percentage points higher than in 2004. Increased investment in advertising and promotions was partly offset by productivity gains. The remaining difference was due to net restructuring, disposal and impairment charges which were insignificant in 2005 compared with a net charge of 2.9% in 2004.


 

Unilever Annual Report on Form 20-F 2006 19

Back to Contents

   
Report of the Directors (continued)  
   
Operating review – categories

 

We are passionate about developing great global brands and bringing them to market brilliantly. Our Foods and Home and Personal Care teams invest heavily in world-class innovation in order to create global brand ideas that can be rolled out fast. This involves close collaboration between our marketing and research teams, in order to develop breakthrough ideas that meet the changing needs of consumers the world over and fulfil our mission of adding Vitality to life.

Faster roll-out
Changes to our structure, our ‘One Unilever’ programme, and better collaboration across our business are helping us get new products to market faster than ever before, and this is having a big impact on brand growth.

Our Dirt is Good positioning including the Omo laundry brand now has sales of over €2.5 billion thanks to an alignment of the brand positioning and the rapid roll-out in Asia, where it delivered not only growth, but record market shares.

The new Rama/Blue Band Idea! spread was launched in 14 countries within only five months. Idea! is a breakthrough innovation with an advanced nutrient mix that supports children’s mental development – an issue of interest to parents around the globe, both in developed and developing markets.

Dove Summer Glow self-tanning lotion was rolled out across four European countries in just a few weeks. It became our most successful personal care innovation in Europe in 2006, gaining sector leadership in most markets through an outstanding team effort involving marketing, supply chain, R&D and customer development.

Brands with global missions
Throughout 2006 we continued to build brands with global missions and distinctive points of view. Our brands aim to communicate ideas that can be expressed wherever and whenever consumers encounter them, and play an active role in consumers’ lives.

Axe/Lynx is one of the best-known examples: the ‘Axe/Lynx effect’ – giving guys the edge in the dating game – underpins all the brand’s campaigns. In 2006 this led to an innovative launch for Axe Click, our most successful anti-perspirant variant since Pulse. More than 4 million consumers claimed a free hand-held clicker to keep track of the flirtatious looks they attracted as a result of using Axe Click, helping drive the brand’s growth in France, Germany and Mexico.

Overall, our deodorants business continues to grow. Rexona, with its ‘won’t let you down’ promise, played a big role in this success, and reached a major milestone by breaking the €1 billion sales barrier.

Flora/Becel has been fighting the spread of cardiovascular disease for over 40 years. Since 2003 the brand has joined forces with the World Heart Federation to educate consumers and encourage them to make heart-healthy changes to their diet and lifestyle. Flora/Becel pro•activ is the world’s best-selling cholesterol-lowering food brand and in 2006 the Three Week Challenge engaged with consumers in a number of countries to demonstrate to them the product’s effectiveness in lowering cholesterol.

Throughout the year, the Dove Campaign for Real Beauty continued to challenge conventional definitions of beauty. The strength of this global mission led to great examples of regional execution. For example, the Evolution advertisement, which exposed some of the tricks of the beauty trade, prompted much media attention in North America and was downloaded from YouTube.com a million times in a two-week period.

The Dove Self Esteem Fund works in partnership with schools and organisations such as Girl Scouts of America and the Eating Disorders Association to inspire girls to feel more confident about the way they look. So far, Dove self-esteem programmes have reached more than 750 000 young people and sales of Dove products are growing rapidly.

Lipton is committed to ensuring consumers everywhere are aware of the ‘goodness of tea', which is rich in theanine and antioxidants, and has zero calories. Popular all over the world, Lipton is the leading global tea brand. In 2006, the brand grew strongly, with leaf tea increasing by around 5% and ready-to-drink products, including sales through our joint venture with Pepsi, up by 25%.

Research & Development
We currently employ more than 6 000 scientists and product developers in Research & Development (R&D) worldwide, delivering total product solutions for Vitality innovations. In 2006 we spent over €900 million on R&D worldwide.

Following our Science & Technology Review, which looked at all aspects of our R&D activities, we are focusing resources on world-class R&D capabilities, working with clear innovation targets and concentrating on fewer – but bigger – projects, which in many cases involve patented technology. We have also embraced Open Innovation, which has involved creating new working relationships between our R&D teams, suppliers, customers, universities and other institutes worldwide.

Launched in Turkey in December, Amaze Brainfood is the result of four years of development, long-term clinical trials and €40 million of research. The range of lunchbox snacks and milk drinks contains one-third of the nutrients children need daily for brain development. It was developed through collaboration between our product development teams and the Unilever Food & Health Research Institute.


 

20 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued) 
   
Operating review – categories (continued)

 

In the Asia skincare market, Pond’s launched Age Miracle, a breakthrough patented innovation containing a plant extract called CLA (conjugated linoleic acid) which helps reduce signs of ageing and yields exceptional results in Asian complexions. Age Miracle has gone on sale across Asia, helping build Pond’s profile in fast-growing D&E markets.

We also developed Surf Excel, which enables consumers to achieve the same laundry cleaning results with less rinsing – a big advantage in areas where water supply is limited.

Following the theme of ‘less is more’ in laundry, new technology helped create all Small & Mighty concentrated liquid detergents, which were launched in the US. Small & Mighty is three times more concentrated than regular detergents, so you get a full load clean with just one-third of the amount. That means fewer packaging materials, cheaper transport and less space needed for storage – good news for consumers, retailers and the environment. During 2007 Small & Mighty will be rolled out across Europe.

In June we submitted a dossier to the UK FSA (Food Standards Agency) to seek regulatory approval under the EC Novel Foods Regulation for the use of Ice Structuring Protein (ISP) in ice cream products in Europe. This breakthrough ISP technology enables a multitude of innovations in ice cream, including significantly healthier options and better quality ice cream.

New Domestos 5x contains a molecule called C-TAC which clings to the toilet bowl flush after flush, killing germs up to five times longer than any other bleach or toilet product. As part of its launch, consumers were supplied with a test strip to prove how long it remains effective. Domestos 5x is due to be launched in all key countries for the brand.

Vitality
Our Vitality mission is at the heart of everything we do. It provides clear direction for meeting consumers’ changing needs, and helps us identify major growth opportunities for our Foods and Home and Personal Care brands.

For example, Knorr Vie shots pack lots of nutrition into each handy 100ml bottle. These smoothie-style products made from fruit and vegetables provide half the minimum daily intake of fruit and vegetables recommended by the World Health Organization. Launched in 2005, they are now available in 12 European countries – over 100 million bottles have been sold so far.

AdeZ – our soya-based drink with fruit juices – delivers 35% of the daily recommended intake of vitamins B6 and C, magnesium and calcium. AdeZ provides the goodness of soya in a great tasting range of flavours. AdeZ started in South America and, with the launch in the UK, this successful product has now been brought to Europe.

When it comes to hygiene, Lifebuoy has already helped around 70 million people in India become more aware of the importance of hand-washing with soap to control the spread of diarrhoeal disease and respiratory infections. The brand has been working in partnership with organisations such as the World Bank and UNICEF to promote hand-washing in other countries and as part of its roll-out in Africa.

In early 2005 we made a commitment to reduce the amount of fats, salt and sugar in our products – a pledge which won the praise of the European Health Commissioner. Since then we have achieved our original targets: by the end of 2006 we had assessed more than 16 000 products and taken out more than 37 000 tonnes of trans and saturated fats, 3 000 tonnes of sodium and 17 000 tonnes of sugars – without compromising flavour. This work continues through our ongoing Nutrition Enhancement Programme.

A great example is the nutritional improvements to our ice cream products. We have removed artificial colours and flavours, increased the fruit content and reduced sugar levels in water ices across our kids’ portfolio in Western Europe. It is an ongoing improvement process which will extend to more products and regions in the future.

Through our global partnership with the FDI World Dental Federation we are helping to improve oral health around the world with practical, sustainable community programmes. To support these initiatives we have developed a low-cost toothbrush, the Pepsodent Fighter, which retails at a price equivalent to just €0.20 and is proving a great success in India and Indonesia.

Meanwhile our Choices programme is helping busy shoppers make quick purchasing decisions for healthier eating. The front-of-pack stamp helps identify products which are in line with international recommendations for trans fats, saturated fats, salt and sugar. The programme has been launched in the Netherlands, Belgium and the US, and is now being rolled out globally to a total of 40 countries. We are also encouraging its adoption more widely in the foods industry.

Innovations in 2006
The following are some examples of our brand innovations and similar activities in 2006.

Lipton, the world’s biggest tea brand, is creating drinks that help people live healthier lives. The brand has been rolling out a communication programme to inform consumers of its antioxidant health benefits and is influencing the wider tea industry with its commitments to sustainability – for example, sustainable farming practices – and education and health. In 2006 Unilever Tea Kenya won a Global Business Coalition on HIV/AIDS award for its work on the education, prevention and treatment of HIV/AIDS in the workplace and beyond. The brand has shown consistent high growth over the past few years.


 

Unilever Annual Report on Form 20-F 2006 21

Back to Contents

   
Report of the Directors (continued)  
   
Operating review – categories (continued)

 

Dove Summer Glow self-tanning lotion keeps a body beautiful all year round. A great example of how a strong global platform can help a brand extend into new categories, Dove Summer Glow was launched in the US and rolled out in four European countries in a matter of weeks. Its advertising continued to target women who, through earlier campaigns, already know that Dove is committed to real beauty for real women. Dove Summer Glow helps them feel good about their skin, whatever the weather.

The healthy-heart foods market is growing fast. And backed by our Goodness of Margarine campaign, Flora/Becel continues to lead the way. Unilever has been a partner of the World Heart Federation since 2003, and works closely with them to increase awareness of cardio-vascular disease. Throughout 2007, Flora/Becel is planning to take the message further than ever before, with its global Love Your Heart campaign which is intended to inspire and empower people to make heart-healthy choices.

Backed by a passion-packed advertising campaign linked to the energy and excitement of football and the 2006 World Cup, Rexona scored this year when annual sales passed the €1 billion mark for the first time. The goal now is to promote the brand’s market-leading body-responsive deodorant, with its technology-based ‘won’t let you down’ promise, and turn Rexona into an iconic brand worldwide for men and women.

Test-marketed in Ireland and Belgium in 2006, Frusì – our new frozen snack – is proving very popular. Frusì was created to provide guilt-free pleasure for people who take their health seriously. With Frusì they have the best of both worlds: real natural goodness without compromise on taste, pleasure or convenience. Sales of Frusì have beaten targets for market penetration and share, and repeat purchases. Following the success of this test-market, Frusì is being rolled out to more countries in 2007.

Developed with ‘empty nesters’ in mind and launched in the UK in January 2006, Comfort Crème has shown thousands of older women that it’s good to wear softer clothes that help you look and feel great. With its gold-topped bottles and fragrances of

jojoba and sweet almond oil, Comfort Crème is now used in over a million UK households. Its success has overturned the idea that fabric conditioners are only popular with mothers with young children.

With each bottle able to dress more salad than a bottle twice its size – 26 salads in all – Wish-Bone Salad Spritzers are helping Americans count the calories. The easy-to-use bottles allow consumers to dress their salads perfectly with just one calorie per spray. Available in three flavours – Italian, Balsamic Breeze and Red Wine Mist – Wish-Bone Salad Spritzers are good for salads, vegetables – and waistlines.

Bad hair dramas are becoming a thing of the past for America’s 20-something women. Launched nationwide in 2006 with a witty, $200 million campaign, the Sunsilk ‘Get Hairapy’ approach to the dramas of kinky, flat or frizzy hair is bringing this global brand to an entirely new market. Backed by innovative marketing, the campaign has led to more and more women solving their hair issues with some serious ‘hairapy’.

In 2001, when Unilever signed a joint venture with Indonesia’s Kecap company, Bango soy sauce had a national market share of less than 5%. Today, following an imaginative programme designed to preserve Indonesia’s culinary heritage and enhance the livelihood of the country’s soy bean farmers, the brand has sales of around €100 million – and is growing by 10% year on year. Unilever’s guaranteed market, technical assistance and access to finance, combined with improved work opportunities for women and localised community involvement, have all helped develop the brand.

Right across Asia, from Pakistan to China, the Dirt is Good positioning with Omo (Rinso) has been washing well with consumers. Based on the simple premise that, for children, dirt and stains are a natural part of being active and learning through play, the campaign promotes the brand through community-endorsed playgrounds, outdoor games and competitions involving both children and parents. The campaign’s success has led to Omo becoming Unilever’s first-ever billion RMB (Renminbi) sales brand in China.


 

22 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Financial review

 

The Financial review for the year ended 31 December 2006 is presented below. The Financial review is presented to provide an overview of key influences on Unilever’s financial performance for the year and the financial position as at 31 December 2006. Background sections, such as the overview of Unilever’s critical accounting policies and non-GAAP measures are included to provide some additional context.

Critical accounting policies
The accounts presented comply in all material respects with IFRS and UK and Dutch law. To prepare these accounts, we are required to make estimates and assumptions, using judgement based on available information, including historical experience. These estimates and assumptions are reasonable and are reevaluated on an ongoing basis. However, actual amounts and results could differ. Critical accounting policies are those which are most important to the portrayal of Unilever’s financial position and results of operations. Some of these policies require difficult, subjective or complex judgements from management, the most important being:

Goodwill and intangible assets
Impairment reviews in respect of goodwill and indefinite-lived intangible assets are performed at least annually. More regular reviews, and impairment reviews in respect of other assets, are performed if events indicate that this is necessary. Examples of such triggering events would include a significant planned restructuring, a major change in market conditions or technology, expectations of future operating losses, or negative cash flows.

Impairment reviews are performed by comparing the carrying value of the asset concerned to that asset’s recoverable amount (being the higher of value in use and fair value less costs to sell). Value in use is a valuation derived from discounted future cash flows. Significant assumptions, such as long-term growth rates and discount rates, are made in preparing these forecast cash flows; although these are believed to be appropriate, changes in these assumptions could change the outcomes of the impairment reviews.

The most significant balances of goodwill and intangible assets relate to the global savoury and dressings sub-product group. We have reviewed the carrying value of this cash generating unit by considering expected future cash flows based on historical experience and planned growth rates and margins for this product group. No significant impairment losses have been identified in 2006.

Please refer also to note 9 on page 88.

Financial instruments
Financial instruments are classified according to the purpose for which the instruments were acquired. This gives rise to the following categories: held-to-maturity investments, loans and receivables, available-for-sale financial assets and financial assets at fair value through profit or loss. Please refer to note 1 on page 75 for a description of each of these categories.

Derivative financial instruments are reported at fair value, with changes in fair values booked through profit or loss unless the derivatives are designated and effective as hedges of future cash flows, in which case the changes are recognised directly in equity. At the time the hedged cash flow results in the recognition of an asset or a liability, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedged items that do not result in the recognition of an asset or liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss.

Changes in fair value of net investment hedges in relation to foreign subsidiaries are recognised directly in equity.

Pensions and similar obligations
The assets and liabilities of the plans are recognised at fair values in the balance sheet.

Pension accounting requires certain assumptions to be made in order to value our obligations and to determine the charges to be made to the income statement. These figures are particularly sensitive to assumptions for discount rates, inflation rates, mortality rates and expected long-term rates of return on assets. Information about sensitivity to certain of these assumptions is given in note 20 on page 105.

The following table sets out these assumptions (except for mortality rates), as at 31 December 2006, in respect of the four largest Unilever pension plans. Further details of assumptions (including mortality rates) made are given in note 20 on pages 103 and 104.

  %   %   %   %  
      Nether-   United      
  UK   lands   States   Germany  








 
Discount rate 5.1   4.6   5.8   4.6  
Inflation 2.9   1.9   2.5   1.9  
Expected long-term rate of return:                
   Equities 8.0   7.6   8.3   7.6  
   Bonds 5.2   4.4   5.2   4.4  
   Property 6.5   6.1   6.8   6.1  
   Others 7.2   4.0   4.8   3.0  








 

These assumptions are set by reference to market conditions at the valuation date. Actual experience may differ from the assumptions made. The effects of such differences are recognised through the statement of recognised income and expense.


 

Unilever Annual Report on Form 20-F 2006 23

Back to Contents

   
Report of the Directors (continued)  
   
Financial review (continued)

 

Demographic assumptions, such as mortality rates, are set having regard to the latest trends in life expectancy, plan experience and other relevant data. The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuation of the pension plans. Mortality assumptions for the four largest plans are given in more detail in note 20 on page 104.

Provisions
Provision is made, amongst other reasons, for legal matters, disputed indirect taxes, employee termination costs and restructuring where a legal or constructive obligation exists at the balance sheet date and a reliable estimate can be made of the likely outcome.

Advertising and promotion costs
Expenditure on items such as consumer promotions and trade advertising is charged against profit in the year in which it is incurred. At each balance sheet date, we are required to estimate the part of expenditure incurred but not yet invoiced based on our knowledge of customer, consumer and promotional activity.

Deferred tax
Full provision is made for deferred taxation at the rates of tax prevailing at the year-end unless future rates have been substantively enacted, as detailed in note 1 on page 76. Deferred tax assets are regularly reviewed for recoverability, and a valuation allowance is established to the extent that recoverability is not considered likely.

Reporting currency and exchange rates
Foreign currency amounts for results and cash flows are translated from underlying local currencies into euros using annual average exchange rates; balance sheet amounts are translated at year-end rates except for the ordinary capital of the two parent companies. These are translated at the rate prescribed by the Equalisation Agreement of 31/9p = €0.16 (see Corporate governance on page 39).

Non-GAAP measures
Certain discussions and analyses set out in this Annual Report on Form 20-F include measures which are not defined by generally accepted accounting principles (GAAP) such as IFRS or US GAAP. We believe this information, along with comparable GAAP measurements, is useful to investors because it provides a basis for measuring our operating performance, 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. Non-GAAP financial measures as reported by us may not be comparable to similarly titled amounts reported by other companies.

In the following sections we set out our definitions of the following non-GAAP measures and provide reconciliations to relevant GAAP measures:

Underlying sales growth;
Ungeared free cash flow;
Return on invested capital; and
Net debt.

We set out ‘Measures of long-term value creation’ as an introduction to the following section, in order to explain the relevance of the above measures. At the end of this section on non-GAAP measures, we summarise the impact on Total Shareholder Return (TSR) which is our key metric.

Measures of long-term value creation
Unilever’s ambition for the creation of value for shareholders is measured by Total Shareholder Return over a rolling three-year period compared with a peer group of 20 other companies. Unilever believes that the contribution of the business to this objective can best be measured and communicated to investors through the following measures:

The delivery, over time, of Ungeared Free Cash Flow (UFCF), which expresses the translation of profit into cash, and thus longer-term economic value; and
The development, over time, of Return on Invested Capital (ROIC), which expresses the returns generated on capital invested in the Group.

Unilever communicates progress against these measures annually, and management remuneration is aligned with these objectives. The UFCF over a three-year period is incorporated as a performance element of Unilever’s management incentive scheme.

UFCF and ROIC are non-GAAP measures under IFRS and US GAAP. We include them in this respect since they are the way in which we communicate our ambition and monitor progress towards our longer-term value creation goals and in order to:

Improve transparency for investors;
Assist investors in their assessment of the long-term value of Unilever;
Ensure that the measures are fully understood in the light of how Unilever reviews long-term value creation for shareholders;
Properly define the metrics used and confirm their calculation;
Share the metrics with all investors at the same time; and
Disclose UFCF as it is one of the drivers of management remuneration and therefore management behaviour.

As investor measures, we believe that there are no GAAP measures directly comparable with UFCF and ROIC. However, in the tables on page 26, we reconcile each as follows: UFCF to cash flow from operating activities and also to net profit; ROIC to net profit.


 

24 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Financial review (continued)

 

Caution
Unilever cautions that, while UFCF and ROIC are widely used as tools for investment analysis, they are not defined terms under IFRS or US GAAP and therefore their definition should be carefully reviewed and understood by investors. Investors should be aware that their application may vary in practice and therefore these measures may not be fully comparable between companies. In particular:

We recognise that the usefulness of UFCF and ROIC as indicators of investment value is limited, as such measures are based on historical information;
   
UFCF and ROIC measures are not intended to be a substitute for, or superior to, GAAP measures in the financial statements;
   
The fact that ROIC is a ratio inherently limits its use, and management uses ROIC only for the purposes discussed above. The relevance and use of net profit for the year (being the most relevant comparable GAAP measure) is clearly more pervasive; and
   
UFCF is not the residual cash available to pay dividends but represents cash generated by the business and broadly available to the providers of finance, both debt and equity.

Underlying sales growth
USG reflects the change in revenue from continuing operations at constant rates of exchange, excluding the effects of acquisitions and disposals. It is a measure that provides valuable additional information on the underlying performance of the business. In particular, it presents the organic growth of our business year on year and is used internally as a core measure of sales performance.

The reconciliation of USG to the GAAP measure turnover is as follows:

  2006   2005  
  vs 2005   vs 2004  




 
Underlying sales growth (%) 3.8   3.4  
Effect of acquisitions (%) 0.1   0.0  
Effect of disposals (%) (0.8 ) (1.5 )
Effect of exchange rates (%) 0.3   1.4  
Turnover growth (%) 3.2   3.3  




 

Ungeared free cash flow
Ungeared free cash flow (UFCF) expresses the generation of profit by the business and how this is translated into cash, and thus economic value. It is therefore not used as a liquidity measure within Unilever. The movement in UFCF is used by Unilever to measure progress against our longer-term value creation goals as outlined to investors.

UFCF is cash flow from group operating activities, less capital expenditure, less charges to operating profit for share-based compensation and pensions, and less tax (adjusted to reflect an ungeared position and, in 2006, for the impact on profit on sales of frozen foods businesses), but before the financing of pensions.

In 2006, UFCF was €4.2 billion (2005: €4.0 billion). The reconciliation of UFCF to the GAAP measures net profit and cash flow from operating activities is shown on page 26.

The tax charge used in determining UFCF can be either the income statement tax charge or the actual cash taxes paid. Our consistently applied definition uses the income statement tax charge in order to eliminate the impact of volatility due to the variable timing of payments around the year end. For 2006 the income statement tax charge on this basis is materially impacted by the tax effect of non-cash charges for the provision for preference shares and certain other non-cash items. UFCF based on actual cash tax paid would be €4.5 billion (2005: €3.7 billion).

Return on invested capital
Return on invested capital (ROIC) expresses the returns generated on capital invested in the Group. The progression of ROIC is used by Unilever to measure progress against our longer-term value creation goals outlined to investors.

ROIC is profit after tax but excluding net interest on net debt and impairment of goodwill and indefinite-lived intangible assets both net of tax, divided by average invested capital for the year. Invested capital is the sum of property, plant and equipment and other non-current investments, software and finite-lived intangible assets, working capital, goodwill and indefinite-lived intangible assets at gross book value and cumulative goodwill written off directly to reserves under an earlier accounting policy.

In 2006, ROIC was 14.6% (2005: 12.5%) . The reconciliation of ROIC to the GAAP measure net profit is shown on page 26.

ROIC reported in 2005 and 2006 has been based on total business profit, including profit on disposals. The impact on profit after tax of material disposals was €1 170 million (2005: €458 million). ROIC excluding this impact is 11.5% (2005: 11.3%).


 

Unilever Annual Report on Form 20-F 2006 25

Back to Contents

   
Report of the Directors (continued)  
   
Financial review (continued)

 

  € million   € million   € million  
Ungeared free cash flow 2006   2005   2004  






 
Net profit 5 015   3 975   2 941  
Taxation 1 332   1 301     836  
Share of net profit of joint ventures/associates and other income from non-current investments (144 )   (55 )   (95 )
Net finance costs   725     618     631  
Depreciation, amortisation and impairment   982   1 274   2 063  
Changes in working capital   87     193     547  
Pensions charges in operating profit less payments (1 038 )   (532 )   (472 )
Movements in provisions less payments   107     (230 )   574  
Elimination of profits on disposals (1 620 )   (789 )   (308 )
Non-cash charge for share-based compensation   120     192     218  
Other adjustments   8     (23 )   (10 )
 




 
Cash flow from operating activities 5 574   5 924   6 925  
             
Less charge for share-based compensation (120 )   (192 )   (218 )
Add back pension payments less pension charges in operating profit 1 038     532     472  
Less net capital expenditure (934 )   (813 )   (869 )
             
Less tax charge adjusted to reflect an ungeared position (1 336 ) (1 440 )   (964 )
             
     Taxation on profit (1 332 ) (1 301 )   (836 )
     Taxation on profit on sales of frozen foods businesses   159          
     Tax relief on net finance costs (163 )   (139 )   (128 )
             
Ungeared free cash flow 4 222   4 011   5 346  






 
             
  € million   € million   € million  
Return on invested capital 2006   2005   2004  






 
Net profit 5 015   3 975   2 941  
Add back net interest expense net of tax   365     424     431  
Add back impairment charges net of tax(a)    15     245     536  
 




 
Profit after tax, before interest and impairment of goodwill and indefinite-lived intangible assets 5 395   4 644   3 908  
 




 
Year-end positions for invested capital:                  
     Property, plant and equipment and other non-current investments 7 142   7 333   6 966  
     Software and finite-lived intangible assets   608     642     623  
     Inventories 3 796   4 107   3 756  
     Trade and other receivables 4 667   5 185   4 410  
     Trade payables and other creditors due within one year (8 513 ) (8 782 ) (8 232 )
     Elements of invested capital included in assets and liabilities held for sale   15     200      
     Goodwill and indefinite-lived intangible assets at gross book value 20 705   21 621   19 854  
 




 
Total 28 420   30 306   27 377  
Add back cumulative goodwill written off directly to reserves 6 427   6 870   7 246  
 




 
Year-end invested capital 34 847   37 176   34 623  
 




 
Average invested capital for the year 36 850   37 012   36 444  
 




 
Return on average invested capital 14.6 % 12.5 % 10.7 %






 
(a) Excluding write-downs of goodwill and indefinite-lived intangible assets taken in connection with business disposals.

 

26 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Financial review (continued)

 

Net debt
Net debt is defined as the excess of total borrowings, bank overdrafts, relevant derivatives and finance leases over cash, cash equivalents and financial assets, excluding amounts held for sale. 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 net debt to the GAAP measure total borrowings is as follows:

  € million   € million  
  2006   2005  




 
Total borrowings (8 601 ) (12 399 )
         
Borrowings due within one year (4 362 ) (5 942 )
Borrowings due after one year (4 239 ) (6 457 )
         
Cash and cash equivalents as per balance sheet 1 039   1 529  
         
Cash and cash equivalents as per cash flow statement 710   1 265  
Add bank overdrafts deducted therein 329   265  
Less cash and cash equivalents in    
   assets/liabilities held for sale   (1 )
         
Other financial assets 237   335  
Derivatives and finance leases included in other receivables and other liabilities
(198 ) 33  




 
Net debt (7 523 ) (10 502 )




 

Total Shareholder Return
Total Shareholder Return (TSR) measures the returns received by a shareholder, capturing both the increase in share price and the value of dividend income (assuming dividends are re-invested). Unilever’s TSR performance is compared with a peer group of competitors over a three-year rolling performance period. This period is sensitive enough to reflect changes but long enough to smooth out short-term volatility. The return is expressed in US dollars, based on the equivalent US dollar share price for NV and PLC. US dollars were chosen to facilitate comparison with companies in Unilever’s chosen reference group. The choice of currency affects the absolute TSR but not the relative ranking.

Unilever’s TSR target is to be in the top third of a reference group including 20 other international consumer goods companies on a three-year rolling basis. At the end of 2005 we were positioned 14th, and at the end of 2006 the ranking was 13th. In 2006, the following companies formed the peer group of comparative companies:

Avon Kraft
Beiersdorf Lion
Cadbury Schweppes L’Oréal
Clorox Nestlé
Coca-Cola Orkla
Colgate Pepsico
Danone Procter & Gamble
Heinz Reckitt Benckiser
Kao Sara Lee
Kimberly-Clark Shiseido

Unilever’s position relative to the TSR reference group


The reference group, including Unilever, consists of 21 companies. Unilever’s position is based on TSR over a three-year rolling period.


 

Unilever Annual Report on Form 20-F 2006 27

Back to Contents

   
Report of the Directors (continued)  
   
Financial review (continued)

 

Results and earnings per share
The following discussion summarises the results of the Group during the years 2004, 2005 and 2006. The figures quoted are in euros, at current rates of exchange, being the average or year-end rates of each period, unless otherwise stated. Information about exchange rates between the euro, pound sterling and the US dollar is given on page 146.

The results reflected in the consolidated income statement and supporting notes arise from the Group’s continuing operations. In November 2006, we successfully completed the sale of the majority of our European frozen foods businesses. The results of the businesses disposed of have been presented as discontinued operations for 2004 and 2005, and in 2006, for the period up to the date of sale. During July 2005, we completed the sale of Unilever Cosmetics International (UCI) to Coty Inc., United States. The results of UCI are presented as discontinued operations for the 2004 year and, in 2005, for the period up to the date of sale.

  € million   € million   € million  
  2006   2005   2004  






 
Continuing operations:            
   Turnover 39 642   38 401   37 168  
   Operating profit 5 408   5 074   3 981  
   Net profit 3 685   3 335   2 728  
Net profit from discontinued operations 1 330   640   213  
Net profit – total 5 015   3 975   2 941  
             
       
  2006   2005   2004  






 
EPS – continuing operations 1.19   1.07   0.87  
EPS – total 1.65   1.29   0.94  






 

Results for 2006 compared with 2005
Turnover for the period increased by 3.2% to €39 642 million. The increase is driven by underlying sales growth of 3.8%, with contributions from both volume and price, as well as favourable currency effects of 0.3% . Offsetting the increase is the impact of disposals (0.8)% in the period.

Operating profit for the period increased by 7% to €5 408 million with operating margin increasing to 13.6%, up by 0.4 percentage points compared with 2005. This was after charging restructuring, disposals and impairments costs equivalent to 1.3 percentage points of sales (compared with 1.5 percentage points in 2005). It also included €266 million of one-off gains from changes to US healthcare and UK pension plans, equivalent to 0.7 percentage points of sales. Before these items, and the profit on the sale of an office in the US in 2005, the operating margin would have been 0.3 percentage points lower than last year. Gross margins held steady during the year, with supply chain savings programmes, pricing action and a positive mix fully offsetting around €600 million of higher input costs. Investment in advertising and promotions increased by nearly €300 million, from 12.8% to 13.1% of sales. An overview of performance by regions is included in the Operating review on pages 13 to 19.

Net finance costs were 18% higher in the year at €721 million. 2006 includes the provision of €300 million relating to preference shares. The costs of financing net borrowings were lower than last year with the benefit of a lower level of debt. Pensions financing, which was a net expense of €53 million in 2005, showed a net income of €41 million in 2006, reflecting a lower gross pension fund deficit.

The tax rate for the year was 24%, compared with 26% in 2005, including the benefits of a better country mix.

Share of net profit from joint ventures was ahead of last year due to the continued growth in the partnerships between Lipton and Pepsi for ready-to-drink tea. Share of net profit from associates increased significantly compared with prior year, principally because of the placement of equity by one of our venture capital fund investments.

Net profit and earnings per share from continuing operations grew by 10% and 11% respectively in the year. Including the profits of the discontinued operations, net profit and earnings per share increased by 26% and 27% in the year, respectively.

Return on invested capital (ROIC) increased from 12.5% in 2005 to 14.6% in 2006. Both years included significant profits from the sale of discontinued operations. Excluding these, the ROIC increased from 11.3% to 11.5% .

Results for 2005 compared with 2004
Reported turnover grew by 3.3% in the year to €38 401 million. This increase includes a favourable effect from movements of the average euro exchange rate against the basket of Unilever currencies, which amounted to 1.4% of turnover. The net impact of disposals less acquisitions was a decline in turnover of 1.5% . This arose principally from the sale of European olive oil and other foods businesses. Underlying sales growth in the year of 3.4% was the result of volume increases.

Operating profit increased by 27% in the year to €5 074 million with operating margin increasing to 13.2% (2004: 10.7%) . Before the impact of net costs of restructuring, business disposals and impairments, the operating margin for 2005 would have been 0.9 percentage points lower than the previous year. Advertising and promotions were 1.1 percentage points of sales higher than last year. Cost savings and an improved mix more than offset the effect of an increase of nearly €600 million in input costs. Operating charges for restructuring, business disposals and impairments include the impairment of the Slim•Fast business in both 2005 and 2004 amounting to €363 million and €791 million respectively. An overview of performance by region is included in the Operating review on pages 13 to 19.

Net finance costs were 2% lower in the year at €613 million, through lower levels of borrowings.


 

28 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Financial review (continued)

 

A reduced contribution was generated from our shares in joint ventures and associates, most significantly from our associate JohnsonDiversey. Profit from discontinued operations includes the gain of €458 million arising from the sale of UCI.

The Group’s effective tax rate of profit for the year was 26%, compared with 21% in 2004, which reflected resolution of a higher level of outstanding prior year tax issues.

Net profit and earnings per share from continuing operations increased by 22% and 23% respectively in the year. Including the profits of the discontinued operations, total earnings per share increased by 37% in the year.

Return on invested capital (ROIC) for the year was 12.5%, up from 10.7% in 2004. This reflects the lower restructuring costs and higher profits on business disposals included in net profit. ROIC retains all goodwill and intangibles in invested capital, regardless of impairment.

Acquisitions and disposals
2006
On 4 September 2006, Unilever announced a public offer to purchase all ordinary shares of Elais-Unilever S.A. held by third party shareholders. Elais-Unilever S.A. is reported as a subsidiary and is Unilever’s main foods business in Greece. The offer price was €24.50 per share, with the public offer closing on 25 October 2006. A total of 2 234 692 shares were purchased by the end of 2006, increasing Unilever’s ownership of Elais-Unilever S.A. to 83.52% .

On 3 November 2006 we announced the completion of the sale of the majority of our frozen foods businesses in Europe to the Permira Funds. Unilever received proceeds of €1.7 billion, and recorded a profit on disposal of €1.2 billion. The businesses sold included operations in Austria, Belgium, France, Germany, Ireland, the Netherlands, Portugal and the United Kingdom.

In 2006 we disposed of various other businesses and brands with a combined turnover of around €280 million, including Mora in the Netherlands and Belgium, Finesse in North America and Nihar in India.

2005
There were no material acquisitions during 2005.

On 11 July 2005, we completed the sale of our Prestige fragrance business, UCI, to Coty Inc. of the United States. Unilever received US $800 million in cash, with the opportunity for further deferred payments contingent upon future sales.

Business disposals in 2005 included Stanton Oil in the UK and Ireland, Dextro in various countries in Europe, Opal in Peru, Karo and Knax in Mexico, spreads and cooking products in Australia and New Zealand, Crispa, Mentadent, Marmite, Bovril and Maizena in South Africa, frozen pizza in Austria, Biopon in Hungary and tea plantations in India. The combined annual turnover of these businesses was approximately €200 million.

In March 2005 Unilever carried out a restructuring of its Portuguese foods business. Before the restructuring Unilever Portugal held an interest in FIMA/VG – Distribuição de Produtos Alimentares, Lda. (FIMA) foods business, a joint venture with Jerónimo Martins Group, in addition to its wholly owned Bestfoods business acquired in 2000. As a result of the transaction the two foods businesses – FIMA and Unilever Bestfoods Portugal – were unified and the joint venture stakes were re-balanced so that Unilever now holds 49% of the combined foods business and Jerónimo Martins Group 51%. See page 123 for further details on the Portuguese businesses whose ownership was further reorganised as at 1 January 2007.

2004
There were no material acquisitions during 2004.

In 2004 we disposed of more than 20 businesses with total turnover in excess of €700 million. Significant disposals included the sale of certain household care brands in North America, our edible oils business under the Capullo, Inca and Mazola brands in Mexico, the Dalda brand in Pakistan and the sale of our European frozen pizza and baguette business. Our chemicals business in India (Hindustan Lever Chemicals) was merged with Tata Chemicals.

For further information on the impact of acquisitions and disposals refer to note 26 on page 113.

Dividends and market capitalisation

Dividends per share

      Per €0.16       Per 3 1/9p  
      NV ordinary share       PLC ordinary share  
      £   £  
  2006   2005   2006   2005  








 
Interim 0.23   0.22   15.62   15.04  
Final   0.44     30.09  
Proposed final 0.47     32.04    
 






 
  0.70   0.66   47.66   45.13  
One-off 0.26     17.66    
 






 
  0.96   0.66   65.32   45.13  








 

Final dividends for 2006 are subject to approval at the Annual General Meetings. If approved, this will bring the total regular dividend, excluding the additional one-off payment, to €0.70 per share for NV and 47.66p for PLC, an increase of 6% in each case. In accordance with IFRS, no provision for the amount of this dividend, estimated as €1 358 million, has been recognised in the financial statements for the year ended 31 December 2006. The additional one-off dividend of €751 million was paid during December 2006.

Unilever’s combined market capitalisation at 31 December 2006 was €63.4 billion (2005: €57.5 billion).


 

Unilever Annual Report on Form 20-F 2006 29

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Report of the Directors (continued)  
   
Financial review (continued)

 

Balance sheet

  € million   € million  
  2006   2005  




 
Goodwill and intangible assets 17 206   18 055  
Other non-current assets 10 365   10 303  
Current assets 9 501   11 142  
Current liabilities (13 884 ) (15 394 )
 


 
  23 188   24 106  
 


 
Non-current liabilities 11 516   15 341  
Shareholders’ equity 11 230   8 361  
Minority interest 442   404  
 


 
  23 188   24 106  




 

Goodwill and intangibles as at 31 December 2006 were €0.8 billion lower than in 2005. This was almost solely a consequence of currency movements. Currency movements also explain the reduction of inventories and trade receivables when compared with prior year. The other significant movements in non-current assets relate to pension assets for funded schemes in surplus and deferred tax assets. The increase in pension fund assets was due to improvements in asset yields and increased contributions. The decrease of non-current deferred tax assets from €1.7 billion as at 31 December 2005 to €1.3 billion as at 31 December 2006 was a result of the decrease in pension liabilities.

The overall funding shortfall before tax of pensions and health care plans reduced significantly from €5.6 billion at the end of 2005 to €3.1 billion at the end of 2006. Within this, there was at 31 December 2006 an aggregated surplus of €0.3 billion on our funded plans, reflecting a combination of strong equity returns, increased contributions and higher real interest rates, partly offset by increased life expectancy assumptions. The value of our unfunded obligations reduced from €4.2 billion to €3.4 billion due to rises in interest rates, favourable exchange movements and changes to various retiree medical benefits.

We made a number of changes to our pensions and post-retirement healthcare plans during 2006. In particular, in the US retiree healthcare plan we introduced an annual cap on the benefits which each participant can claim. In the UK we updated assumptions on pension commutations and now reduce some deferred pensions if they are taken early, to align with market practice. See page 32 for details on Unilever’s pension investment strategy.

Total equity has increased by €2.9 billion in the year. Net profit added €5.0 billion and currency and fair value/actuarial gains added €0.5 billion. Dividends paid in the year totalled €2.7 billion.

As at 31 December 2006, cash and cash equivalents and other financial assets amounted to €1.3 billion, a decrease of €0.6 billion. Borrowings, (including finance leases amounting to €0.2 billion and the negative fair value of derivatives relating to borrowings) amounted to €8.8 billion a reduction of €3.8 billion.

The net debt position, see page 27, as at 31 December 2006 was €7.5 billion, a reduction of €3.0 billion since 1 January 2006. This was driven by the cash generated by the business during the year, the proceeds of disposals (particularly from the sale of the majority of the European frozen foods businesses) and currency effects, specifically the weakening of the US dollar.

Unilever manages interest rate and currency exposures based on the net debt position. Taking into account the various cross currency swaps and other derivatives, 81% of Unilever’s net debt was in US dollars (2005: 60%) and 25% in euros (2005:17%) and ((33)% - financial assets) in sterling, with the remainder spread over a large number of other currencies. The currency distribution of total borrowings was as follows: 70% in US dollars (2005: 51%), and 24% in euros (2005: 20%) with the remainder spread over a large number of other currencies. Further details of the currency analyses are given in note 15 on page 95 and note 16 on page 98.

Unilever has committed credit facilities in place to support its commercial paper programmes and for general corporate purposes. The undrawn committed credit facilities in place at the end of 2006 were: bilateral committed credit facilities totalling US $4.6 billion, bilateral notes commitments totalling US $0.2 billion and bilateral money market commitments totalling US $1.4 billion. Further details regarding these facilities are given in note 16 on page 98.

During 2006, a US $300 million bond with a fixed interest rate of 6.15% was repaid, as was a €1 billion bond with a fixed interest rate of 5.125% and a US $500 million bond with a fixed interest rate of 5.125% . Three floating rate bonds denominated in Japanese yen for a total of ¥37 billion (approximately €250 million) were repaid and Unilever issued a new floating rate bond for a similar amount with a maturity date of June 2008.

Unilever is satisfied that its financing arrangements are adequate to meet its working capital needs for the foreseeable future.

Unilever’s contractual obligations at the end of 2006 included capital expenditure commitments, borrowings, lease commitments and other commitments. A summary of certain contractual obligations at 31 December 2006 is provided in the table below. Other long-term commitments have increased compared with prior year due to the outsourcing contracts which Unilever has entered into during 2006. Further details are set out in the following notes to the accounts; note 10 on page 90, note 16 on page 96, note 17 on pages 99 to 101 and note 25 on page 112.


 

30 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Financial review (continued)

 

Contractual obligations at 31 December 2006

  € million   € million   € million   € million   € million  
      Due           Due in  
      within   Due in   Due in   over  
  Total   one year   1-3 years   3-5 years   5 years  










 
Long-term debt 6 183   1 944   696   1 346   2 197  
Operating lease obligations 1 617   342   537   338   400  
Purchase obligations(a)  233   156   58   16   3  
Finance leases 296   71   90   27   108  
Other long-term commitments 1 547   315   395   312   525  










 
(a) Raw and packaging materials and finished goods.
 

Off-balance sheet arrangements
IFRS interpretation SIC 12 and US GAAP FIN 46R require that entities with which we have relationships are considered for consolidation in the consolidated accounts based on relative sharing of economic risks and rewards rather than based solely on share ownership and voting rights. We periodically review our contractual arrangements with potential special purpose entities (SPEs) or variable interest entities (VIEs) as defined by SIC 12 and FIN 46R respectively. The most recent review has concluded that that there are no significant SPE or VIE relationships which are not already appropriately reflected in the accounts. Information concerning guarantees given by the Group is stated in note 25 on page 112.

Cash flow

  € million   € million   € million  
  2006   2005   2004  






 
Net cash flow from operating activities 4 511   4 353   5 547  
Net cash flow from/(used in) investing activities
1 155   515   (120 )
Net cash flow from/(used in) financing activities
(6 572 ) (4 821 ) (5 938 )
Net increase/(decrease) in cash and cash equivalents
(906 ) 47   (511 )






 

Cash and cash equivalents at 31 December 2006 were €0.6 billion lower than as at 31 December 2005. Cash from operating activities was €0.3 billion lower than in 2005 due to significantly higher contributions to pension schemes. This was offset to some extent by the improvements in the level of working capital, with a further reduction of €0.1 billion as at 31 December 2006. Income tax paid was substantially lower through a combination of tax relief on the higher pension contributions, structural improvements in the tax rate and timing differences. As a result, net cash flow from operating activities was €0.2 billion higher than last year.

Net cash flow from investing activities was €0.6 billion higher due to the impact of the disposals in the year which had a positive impact of €1.8 billion (2005: €0.8 billion), offset by increased capital expenditure of €0.1 billion compared with the prior year.

Net cash flow used in financing activities increased by €1.8 billion, reflecting dividend payments and repayment of debt.

Finance and liquidity
Unilever aims to be in the top third of a reference group including 20 other international consumer goods companies for Total Shareholder Return, as explained on page 27. The Group’s financial strategy supports this objective and provides the financial flexibility to meet its strategic and day-to-day needs. The key elements of the financial strategy are:

Appropriate access to equity and debt capital;
Sufficient flexibility for acquisitions that we fund out of current cash flows;
A1/P1 short-term credit rating;
Sufficient resilience against economic turmoil; and
Optimal weighted average cost of capital, given the constraints above.

Unilever aims to concentrate cash in the parent and finance companies in order to ensure maximum flexibility in meeting changing business needs. Operating subsidiaries are financed through the mix of retained earnings, third-party borrowings and loans from parent and group financing companies that is most appropriate to the particular country and business concerned. Unilever maintains access to global debt markets through an infrastructure of short-term debt programmes (principally US domestic and euro commercial paper programmes) and long-term debt programmes (principally a US Shelf registration and euromarket Debt Issuance Programme). Debt in the international markets is, in general, issued in the name of NV, PLC, Unilever Finance International BV or Unilever Capital Corporation. NV and PLC will normally guarantee such debt where they are not the issuer.

Treasury
Unilever Treasury’s role is to ensure that appropriate financing is available for all value-creating investments. Additionally, Treasury delivers financial services to allow operating companies to manage their financial transactions and exposures in an efficient, timely and low-cost manner.

Unilever Treasury operates as a service centre and is governed by policies and plans approved by the Boards. In addition to policies, guidelines and exposure limits, a system of authorities and extensive independent reporting covers all major areas of activity. Performance is monitored closely. Reviews are undertaken by the corporate internal audit function.


 

Unilever Annual Report on Form 20-F 2006 31

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Report of the Directors (continued)  
   
Financial review (continued)

 

The key financial instruments used by Unilever are short- and long-term borrowings, cash and cash equivalents and certain straightforward derivative instruments, principally comprising interest rate swaps and foreign exchange contracts. The accounting for derivative instruments is discussed in note 1 on page 74. The use of leveraged instruments is not permitted.

Other relevant disclosures are given in notes 15, 16 and 17 on pages 95, 96 and 99.

Unilever Treasury manages a variety of market risks, including the effects of changes in foreign exchange rates, interest rates and liquidity. Further details of the management of these risks are given in note 17 on pages 100 and 101.

Pensions investment strategy
The Group’s investment strategy in respect of its funded pension plans is implemented within the framework of the various statutory requirements of the territories where the plans are based. The Group has developed policy guidelines for the allocation of assets to different classes with the objective of controlling risk and maintaining the right balance between risk and long-term returns in order to limit the cost to the company of the benefits provided. To achieve this, investments are well diversified, such that the failure of any single investment would not have a material impact on the overall level of assets. The

plans invest the largest proportion of the assets in equities, which the Group believes offer the best returns over the long term commensurate with an acceptable level of risk. The pension funds also have a proportion of assets invested in property, bonds and cash. The majority of the assets are managed by a number of external fund managers with a small proportion managed in-house. Unilever has a pooled investment vehicle (Univest) which it believes offers its pension plans around the world a simplified externally managed investment solution to implement their strategic asset allocation models initially for equities. The aim is to provide a high quality, well diversified risk controlled solution.

Significant changes after the balance sheet date
On 1 January 2007, Unilever completed the restructuring of its Portuguese businesses. The result of the reorganisation is that Unilever now has a 55% share of the consolidated Portuguese entity, called Unilever Jerónimo Martins. The consolidated business includes the foods and home and personal care businesses. The remaining 45% interest is held by Jerónimo Martins Group. The structure of the agreement is such that there is joint control of the newly formed entity and so it will be accounted for by Unilever as a joint venture.

On 12 March 2007, Unilever announced the commencement of a share buy-back programme. This will involve the purchase in 2007 of ordinary shares of NV or PLC, or a combination of the two, up to an aggregate market value of €1.5 billion. The value of the shares purchased will be booked against equity under the heading of Other reserves, in line with established practice. As at 19 March 2007, 1 967 782 ordinary shares of NV had been purchased at prices between €19.55 and €21.41 per share. These shares will be held as treasury shares.


 

32 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Corporate governance

 

Introduction

Unilever constantly keeps its corporate governance arrangements under review. NV and PLC are subject to various corporate governance requirements and best practice codes, the most relevant being those in the Netherlands, the United Kingdom and the United States. It is Unilever’s practice to comply, where practicable, with the highest level of these codes and respond to developments appropriately.

The Unilever Group
Unilever N.V. and Unilever PLC are the two parent companies of the Unilever Group. Together with the group companies, NV and PLC operate effectively as a single economic entity. This is achieved by a series of agreements between NV and PLC (the Foundation Agreements, see page 39), together with special provisions in the Articles of Association of NV and PLC. NV and PLC have the same Directors and adopt the same accounting principles. Shareholders of both companies receive dividends on an equalised basis. NV and PLC and their group companies constitute a single reporting entity for the purposes of presenting consolidated accounts. Accordingly, the accounts of the Unilever Group are presented by both NV and PLC as their respective consolidated accounts.

NV and PLC have agreed to co-operate in all areas and ensure that all group companies act accordingly. NV and PLC are holding and service companies, and the business activity of Unilever is carried out by their subsidiaries around the world. Shares in group companies may ultimately be held wholly by either NV or PLC, or jointly by the two companies, in varying proportions.

NV was incorporated under the name Naamlooze Vennootschap Margarine Unie in the Netherlands in 1927. Its objects and purposes are set out in Article 2 of its Articles of Association. PLC was incorporated under the name Lever Brothers Limited in England and Wales in 1894. Its objects and purposes can be found in Clause 3 of its Memorandum of Association. The two companies have different shareholder constituencies and shareholders cannot convert or exchange the shares of one company for shares of the other. NV is listed in Amsterdam and New York. PLC is listed in London and New York.

Unilever policies
The implementation of and compliance with our governance structure is facilitated through a business orientated policy framework. Unilever policies are characterised by being universally applicable within the Unilever Group. They are mandatory in effect and have been developed to ensure consistency in key areas within our worldwide operations. They cover operational and functional matters, and govern how we run our business, in order to comply with applicable laws and regulations.

Unilever policies include: the Code of Business Principles; the Code of Ethics for Senior Financial Officers, the Compliance Manual for the Listing Rules and Disclosure and Transparency Rules (including the Unilever Share Dealing Code), the Risk Management Policy, the Corporate Pensions Policy and the Accounting and Reporting Policy.

The Code of Business Principles is Unilever’s statement of values and represents the standard of conduct we require from all of our employees. Our Code of Ethics applies to the senior executive, financial and accounting officers and comprises the standards prescribed by the US Securities and Exchange Commission (SEC). The Code of Business Principles Hotline provides for a confidential hotline, not only to ensure that employees can anonymously submit concerns regarding accounting and auditing issues but to handle all alleged violations of the Code of Business Principles. Copies of the Code of Business Principles, the Code of Ethics and the Share Dealing Code are posted on our website at www.unilever.com/investorcentre/corpgovernance.

Our internal risk management and control systems are described on page 9.

Developments in corporate governance
In recent years there have been significant developments in Unilever’s corporate governance structure.

In 2004, the NV and PLC shareholders adopted proposals to create one-tier boards with a majority of independent Non-Executive Directors.

In 2005, shareholders approved a series of further changes to streamline management and leadership. A separate Non-Executive Chairman and Group Chief Executive were appointed. The Group Chief Executive established the Unilever Executive (UEx) which comprises three Regional Presidents (for Europe, The Americas and Asia Africa), two Category Presidents (for Foods and Home and Personal Care), the Chief Financial Officer and the Chief HR Officer.

The regions are responsible for performance, implementing proven brand mixes and focusing on building capabilities with customers. The categories are responsible for the entire brand development process, including innovation, brand positioning and communication and category strategies. The interdependence between the regions and categories allows us to exploit our global scale, while building on our deep roots in local markets. Our HR and Finance functions concentrate on excellence in human capabilities and cost-efficiencies across the Group.

In 2006, following a thorough review of our corporate structure, shareholders approved proposals to:

adapt Unilever’s constitutional arrangements to allow greater flexibility to allocate assets between both parent companies;
   
simplify the relationship between NV and PLC shares by establishing a one-to-one equivalence in their economic interest in the Unilever Group (this was achieved by a split of the NV shares and a consolidation of the PLC shares); and
   
allow shareholders the right to nominate candidates to the Boards, taking into account the need to ensure the unity of management.

 

Unilever Annual Report on Form 20-F 2006 33

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Report of the Directors (continued)  
   
Corporate governance (continued)

 

In 2007, Unilever plans to appoint its first independent Non-Executive Chairman, Michael Treschow, subject to his appointment as a Non-Executive Director at the AGMs.

The text that follows describes the corporate governance arrangements since the 2006 AGMs. More information on our corporate governance arrangements is set out in ‘The Governance of Unilever’, the Boards’ statement of their internal arrangements, which can be found at www.unilever.com/investorcentre/corpgovernance.

The Boards
The Boards of NV and PLC comprise the same Directors and have the same Chairman. This ensures unity of governance and management by ensuring that all matters are considered by the Boards as a single intellect, reaching the same conclusions on the same set of facts (save where specific local factors apply).

The Boards are one-tier boards, comprising Executive Directors and, in a majority, Non-Executive Directors. The Boards have ultimate responsibility for the management, general affairs, direction and performance of the business as a whole. The responsibility of the Directors is collective, taking into account their respective roles as Executive Directors and Non-Executive Directors. The Executive Directors have additional responsibilities for the operation of our business as determined by the Group Chief Executive.

Our Directors have set out a number of areas of responsibility which are reserved to themselves and other areas for which matters are delegated to the Group Chief Executive and committees whose actions are regularly reported to and monitored by the Boards. These are described on pages 35 to 38. Further details of how our Boards effectively operate as one board, govern themselves and delegate their authorities are set out in ‘The Governance of Unilever’, which can be found at www.unilever.com/investorcentre/corpgovernance.

Appointment of Directors
Directors are appointed by shareholders at the AGMs. All existing Directors unless they are retiring submit themselves for election every year and shareholders can remove any of them by a simple majority vote.

In order to seek 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. This is achieved through a nomination procedure operated by the Boards of NV and PLC through Unilever’s Nomination Committee.

The Nomination Committee, based on the evaluation of the Boards, its Committees and its individual members, recommends to the Boards a list of candidates for nomination at both the Annual General Meetings of NV and of PLC. In addition, since 2006 shareholders have been able to nominate Directors for this list but to do so they must put a resolution to both meetings in line with

local requirements for requisitioning a resolution. In order to ensure that the Boards remain identical, anyone being elected as a Director of NV must also be elected as a Director of PLC and vice versa. If an individual fails to be elected to both companies then he or she will be unable to take their place on the Boards.

The provisions in the Articles of Association for appointing Directors cannot be changed without the permission, in the case of NV, of the holders of the special ordinary shares numbered 1 - 2400 inclusive and, in the case of PLC, of the holders of PLC's deferred stock. The NV special ordinary shares may only be transferred to one or more other holders of such shares. The joint holders of both the NV special ordinary shares and the PLC deferred stock are N.V. Elma and United Holdings Limited, which are joint subsidiaries of NV and PLC. The boards of N.V. Elma and United Holdings Limited comprise the members of the Nomination Committee.

Board meetings
Our Boards meet at least seven times a year to consider important corporate events and actions, such as:

approval of corporate strategy;
approval of the corporate Annual Plan;
review of risks and controls;
authorisation of major transactions;
review of the functioning of the Boards and their Committees;
preparation of the Annual Report and Accounts;
declaration of dividends;
agreement of quarterly results announcements;
convening of shareholders’ meetings;
nominations for Board appointments; and
approval of Board remuneration policy.

In 2006 the Boards of NV and PLC met eight times. All our Executive Directors attended all meetings. All the Non-Executive Directors attended all meetings, except for Wim Dik who missed one meeting; Lynda Chalker, David Simon and Jean-Cyril Spinetta who each missed two meetings, and Jeroen van der Veer who missed three meetings. Board meetings are normally held either in London or Rotterdam. The Chairman is assisted by the Joint Secretaries, who ensure that the Boards are supplied with all the information necessary for their deliberations. The Chairman and the Joint Secretaries involve the Senior Independent Director (see page 36) in the arrangements for Board meetings.

Board induction and training
Upon election, Directors receive a comprehensive Directors’ Manual and are briefed thoroughly on their responsibilities. Updates on corporate governance developments and investor relations matters are frequent items at Board meetings. On-going training is provided for Directors by way of site visits, presentations, circulated updates, teach-ins and agenda items at Board or Board committee meetings on, among other things, Unilever’s business, corporate governance, regulatory developments, and investor relations matters. In 2006, a Board meeting was held at Port Sunlight which included a visit to one of Unilever’s Research and Development facilities.


 

34 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Corporate governance (continued)

 

Board evaluation
In 2006, an independent firm, Board Consultants International (BCI), was commissioned to carry out an evaluation of the Boards, the Board committees, the Chairman and individual Directors. As part of the evaluation, Dr Florian Schilling from BCI conducted interviews with all Directors, the Joint Secretaries and two former Directors who had retired in 2006. He reported the outcome of the evaluation to the Chairman and the Senior Independent Director and to the Boards in February 2007.

Board support
The Joint Secretaries are available to advise all Directors and ensure that Board procedures are complied with. They are appointed and can be removed by the Boards.

A procedure is in place to enable Directors, if they so wish, to seek independent professional advice at Unilever’s expense.

Board changes
The current Directors, with their biographies, are shown on page 46. All the Executive Directors held office throughout the year.

Leon Brittan, Lynda Chalker, Wim Dik, David Simon and Jeroen van der Veer were re-elected as Non-Executive Directors of NV and PLC at the 2006 AGMs. In addition, Charles Golden, Byron Grote, Jean-Cyril Spinetta and Kees Storm were appointed as Non-Executive Directors.

In 2006, David Simon became our Senior Independent Director, Vice-Chairman of NV and PLC, and Chairman of our Remuneration and Nomination Committees. Kees Storm became a member and Chairman of the Audit Committee. Charles Golden and Byron Grote became members of the Audit Committee. Jean-Cyril Spinetta became a member of the Remuneration and Nomination Committee.

At the 2006 AGMs, Bertrand Collomb, Oscar Fanjul and Hilmar Kopper retired as Non-Executive Directors.

At the 2007 AGMs all of the Executive Directors and the Non-Executive Directors, with the exception of Antony Burgmans, Lynda Chalker and Rudy Markham, who will be retiring at these meetings, will be nominated for re-election. Their colleagues would like to thank Antony, Lynda and Rudy for the enormous contribution they have made to Unilever during their association with the Group.

In addition, four new Non-Executive Directors will be proposed for election at the 2007 AGMs. These are Genevieve Berger, Narayana Murthy, Hixonia Nyasulu and Michael Treschow. Genevieve Berger is a Professor of Biophysics and Medical Imaging at Paris University VI and Chairman of the Advisory Board ‘Health’ for the EU Commission for Research. Narayana Murthy is co-founder and Chairman of Infosys Technologies Limited. Hixonia Nyasulu is a Non-Executive Director of Sasol Limited and Anglo Platinum and an Advisory Board Member of JP Morgan South Africa. Michael Treschow, who, if appointed, will become Unilever’s new independent Chairman, is currently Chairman of Ericsson and Electrolux. He will be stepping down as Chairman

of Electrolux in April 2007. Their appointments will, should their nominations be approved by shareholders, bring further diversity of background and experience to the Boards. Professor Berger, Mr Murthy and Ms Nyasulu will, subject to their election as Directors, become members of the Corporate Responsibility and Reputation Committee.

Biographical details for the new Non-Executive Directors are contained in the 2007 AGM Notices, and on our website at www.unilever.com/ourcompany/investorcentre.

Chairman and Group Chief Executive
Unilever has a separate Non-Executive Chairman and Group Chief Executive. There is a clear division of responsibilities between their roles. The Chairman is primarily responsible for leadership of the Boards, ensuring their effectiveness and setting their agendas. He is also responsible for ensuring that the Boards receive accurate, timely and clear information.

The Group Chief Executive has been entrusted, within the parameters set out in the Articles of Association of NV and PLC and ‘The Governance of Unilever’, with all the Boards’ powers, authorities and discretions in relation to the operational management of Unilever. The Group Chief Executive has the authority to determine which duties regarding the operational management of the companies and their business enterprises will be carried out under his responsibility by one or more Executive Directors or by one or more other persons. This provides a basis for the Unilever Executive team (UEx) that reports to the Group Chief Executive. For UEx members’ biographies see page 47. For our business structure, please refer to ‘About Unilever’ on page 5.

Executive Directors
All four Executive Directors are members of the UEx: the Group Chief Executive, the Chief Financial Officer, the President, Europe and the President, Home and Personal Care. Details on their responsibilities can be found in ‘The Governance of Unilever’.

The Executive Directors are full-time employees of Unilever. Information about their remuneration can be found in the report of the Remuneration Committee and on our website. We are currently updating our Directors’ service contract to take into account recent changes in the law and best practice, for example, those relating to age limits for directors.

The Remuneration Committee takes the view that the entitlement of the Executive Directors to the security of twelve months’ notice of termination of employment is in line both with the practice of many comparable companies and the entitlement of other senior executives within Unilever. It is our policy to set the level of severance payments for Directors to no more than one year’s salary, unless the Boards, at the proposal of the Remuneration Committee, find this manifestly unreasonable given circumstances or unless dictated by applicable law.

The Executive Directors submit themselves for re-election at the AGMs each year. The Nomination Committee carefully considers each nomination for reappointment.


 

Unilever Annual Report on Form 20-F 2006 35

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Report of the Directors (continued)  
   
Corporate governance (continued)

 

The Directors stop holding executive office on ceasing to be Directors. Those appointed prior to 2004 retire at the latest by the age of 62. Appointees from 2004 onwards retire at an age between 60 and 65, as decided by either them or Unilever.

We do not grant our Executive Directors any personal loans or guarantees.

There are no family relationships between any of our Executive Directors, other key management personnel or Non-Executive Directors. None of our Executive Directors are elected or appointed under any arrangement or understanding. Executive Directors are to obtain approval from the Chairman for all outside Board appointments. Normally not more than one such appointment should be accepted. For Executive Directors’ biographies see page 46.

Non-Executive Directors
The Non-Executive Directors share responsibility for the execution of the Boards’ duties, taking into account their specific responsibilities, which are essentially supervisory. In particular, they comprise the principal external presence in the governance of Unilever, and provide a strong independent element. See page 46 for their biographies.

Role and Responsibility
The key elements of the role and responsibilities of our Non-Executive Directors are:

supervision of and advice to the Group Chief Executive;
developing strategy with the Group Chief Executive;
scrutiny of performance;
controls;
reporting of performance;
remuneration of and succession planning for Executive Directors; and
governance and compliance.

Our Non-Executive Directors are chosen for their broad and relevant experience and international outlook, as well as their independence. They form the Audit Committee, the Nomination Committee, the Remuneration Committee and the Corporate Responsibility and Reputation Committee (formerly External Affairs and Corporate Relations Committee). The roles and membership of these key Board committees are described on page 37. The profile set by the Boards for the Non-Executive Directors and the chart used for orderly succession planning can be seen on our website at www.unilever.com/investorcentre/corpgovernance.

Meetings
The Non-Executive Directors meet as a group, without the Executive Directors present, under the chairmanship of the Senior Independent Director. In 2006 they met twice as a group. In addition, the Non-Executive Directors usually meet before each Board meeting with the Chairman, the Group Chief Executive and the Joint Secretaries.

Senior Independent Director
Our Non-Executive Directors have appointed David Simon as Senior Independent Director. He acts as their spokesman. The Senior Independent Director is consulted by the Chairman on the agenda and arrangements for Board meetings. He is also, in appropriate cases, a point of contact for shareholders and other stakeholders.

Tenure
Our Non-Executive Directors submit themselves for re-election each year. Their nomination for re-election is subject to continued good performance which is evaluated by the Boards, based on the recommendations of the Nomination Committee. The Nomination Committee carefully considers each nomination for reappointment. The Non-Executive Directors normally serve for a maximum of nine years.

Remuneration
The remuneration of the Non-Executive Directors is determined by the Boards, within the overall limit set by the shareholders at the AGMs in 2006, and it is reported on page 61. Details of the engagement of our Non-Executive Directors can be seen on the Unilever website.

Independence
Taking into account the role of Non-Executive Directors, which is essentially supervisory, and the fact that they make up the key committees of the Boards, it is important that our Non-Executive Directors can be considered to be independent.

Our definition of ‘independence’ for Directors is set out in ‘The Governance of Unilever’. It is derived from the applicable definitions in use in the Netherlands, UK and US. Our current Non-Executive Directors are considered to be independent of Unilever, with the exception of Antony Burgmans. Our Boards reached this conclusion after conducting a thorough review of all relevant relationships of the Non-Executive Directors, and their related or connected persons.

A number of relationships, such as non-executive directorships, exist between various of our Non-Executive Directors and companies that provide banking, insurance or financial advisory services to Unilever. Our Boards considered in each case the number of other companies that also provide or could readily provide such services to Unilever, the significance to those companies of the services they provide to Unilever, the roles of the Non-Executive Directors within those companies and the significance of that role to our Non-Executive Directors. It concluded that none of these relationships threaten the independence of the Non-Executive Directors concerned. For example, the Boards have satisfied themselves that Leon Brittan’s position at UBS Investment Bank does not involve him in any way in its broking relationship with Unilever. They have noted that Lynda Chalker’s involvement in consultancy services for Unilever had been terminated before she was elected a Non-Executive Director in May 2004. The Boards have formed the view that the fact that Antony Burgmans was a member of the Supervisory Board of ABN AMRO until April 2006 and that David Simon is a senior adviser of Morgan Stanley International, were not material.


 

36 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Corporate governance (continued)

 

The Boards consider that the Executive Directorship of Byron Grote combined with the Non-Executive Directorship of Antony Burgmans of BP p.l.c. does not affect Dr Grote’s status as independent in relation to his Non-Executive Directorship of Unilever. The Boards also consider that Jean-Cyril Spinetta’s position as Chairman/CEO of Air France-KLM SA combined with Kees Storm’s Chairmanship of the Supervisory Board of KLM Royal Dutch Airlines N.V. does not affect their status as independent in relation to their Non-Executive Directorships of Unilever.

Antony Burgmans, who before May 2005 was an Executive Director, is not considered to be independent. The Nomination Committee and the Boards nominated him for election as a Non-Executive Director in 2005 because of his thorough knowledge of Unilever and its operations. Antony Burgmans will be succeeded by Michael Treschow as an independent Chairman at the AGMs in 2007, subject to his election as a Non-Executive Director.

None of our Non-Executive Directors are elected or appointed under any arrangement or understanding.

Board committees
The Boards have established the following committees, all formally set up by Board resolution with carefully defined remits. They are made up solely of Non-Executive Directors with the exception of the Corporate Responsibility and Reputation Committee which has an Executive Director as a member, and report regularly to the Boards. The remits can be found on our website.

Audit Committee
The Audit Committee is comprised only of independent Non-Executive Directors with a minimum requirement of three. It is chaired by Kees Storm, and its other members are Wim Dik, Charles Golden and Byron Grote. The Committee met five times in 2006, and the members attended all meetings. The Boards have satisfied themselves that all the current members of the Committee are competent in financial matters and have recent and relevant experience and that, for the purposes of the US Sarbanes-Oxley Act of 2002, Kees Storm is the Audit Committee’s financial expert. The Committee’s meetings are attended, by invitation, by the Chief Financial Officer, the General Counsel, the Deputy Chief Financial Officer, the Chief Auditor and our external auditors.

The Audit Committee assists the Boards in fulfilling their oversight responsibilities in respect of the integrity of Unilever’s financial statements; risk management and internal control arrangements; compliance with legal and regulatory requirements; the performance, qualifications and independence of the external auditors; and the performance of the internal audit function. The Committee is directly responsible, subject to local laws regarding shareholder approval, for the nomination, compensation and oversight of the external auditors.

The Audit Committee is fully compliant with the rules regarding audit committees that are applicable in the Netherlands, UK and US. The Committee’s responsibilities and powers are fully aligned with all requirements in the UK, US and the Netherlands.

The Audit Committee is supplied with all information necessary for the performance of its duties by the Chief Auditor, Chief Financial Officer, and Deputy Chief Financial Officer. Both the Chief Auditor and the external auditors have direct access to the Audit Committee separately from management.

See page 63 for the Report of the Audit Committee to the shareholders.

Nomination Committee
Our Nomination Committee comprises a minimum of three independent Non-Executive Directors. It is chaired by David Simon and its other members are Jean-Cyril Spinetta, Jeroen van der Veer and Antony Burgmans. It met six times in 2006 and the members attended all meetings except that David Simon was absent for one meeting. The Committee recommends to the Boards candidates for the positions of Director. It also has responsibilities for succession planning and oversight of corporate governance matters. It is supplied with information by the Joint Secretaries.

See page 48 for the Report of the Nomination Committee to shareholders.

Remuneration Committee
Our Remuneration Committee comprises three independent Non-Executive Directors. It is chaired by David Simon and its other members are Jean-Cyril Spinetta and Jeroen van der Veer. It met six times in 2006 and the members attended all meetings except that David Simon was absent for one meeting.

The Committee reviews Directors’ remuneration and is responsible for the executive share-based incentive plans. It determines, within the parameters set by our shareholders, specific remuneration arrangements for each of the Executive Directors, the remuneration scales and arrangements for Non-Executive Directors and the remuneration of the tier of management directly below the Boards. The Committee is supplied with information by Jan van der Bijl, Joint Secretary of Unilever.

The detailed report of the Remuneration Committee to shareholders on Directors’ remuneration is on pages 49 to 62.

Corporate Responsibility and Reputation Committee
The Corporate Responsibility and Reputation Committee currently comprises four Non-Executive Directors and one Executive Director. It is chaired by Lynda Chalker and its other members are Leon Brittan, Antony Burgmans, Wim Dik and Ralph Kugler. Following the 2007 AGMs, subject to their election, Leon Brittan will chair the Committee and its members will be Genevieve Berger, Ralph Kugler, Narayana Murthy and Hixonia Nyasulu. The Committee, which replaced the External Affairs and Corporate Relations Committee, has responsibility for the oversight of Unilever’s conduct with regard to its corporate and societal obligations and its reputation as a responsible corporate citizen.

See page 64 for the Report of the Corporate Responsibility and Reputation Committee to shareholders.


 

Unilever Annual Report on Form 20-F 2006 37

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Report of the Directors (continued)  
   
Corporate governance (continued)

 

Routine business committees
Committees are also set up to conduct routine business as and when they are necessary. They comprise any two of the Directors and certain senior executives and officers. They administer or implement certain matters previously agreed by our Boards or the Group Chief Executive. The Joint Secretaries are responsible for the operation of these committees.

Disclosures Committee
The Boards have set up a Disclosures Committee which is responsible for helping the Boards ensure that financial and other information that ought to be disclosed publicly is disclosed in a timely manner and that the information that is disclosed is complete and accurate. The Committee comprises the Deputy Chief Financial Officer, the Joint Secretaries and the Group Treasurer.

Directors – Various formal matters
The borrowing powers of NV Directors on behalf of NV are not limited by the Articles of Association of NV. PLC Directors have the power to borrow on behalf of PLC up to three times the adjusted capital and reserves of PLC, as defined in its Articles of Association, without the approval of shareholders (any exceptions requiring an ordinary resolution).

The Articles of Association of NV and PLC do not require Directors of NV or Directors of PLC to hold shares in NV or PLC. However, the remuneration arrangements applicable to our Executive Directors require our Executive Directors to build and retain a personal shareholding in Unilever equal to at least 150% of their annual base pay.

Directors – Indemnification
Directors’ indemnification, including the terms thereof, is provided for in Article 19 of NV’s Articles of Association. The power to indemnify directors is provided for in PLC’s Articles of Association. Deeds of indemnity have been issued to all PLC Directors. Appropriate Directors’ and Officers’ liability insurance is in place for all Unilever Directors.

Directors – Conflicts of interest
We attach special importance to avoiding conflicts of interest between on the one hand NV and PLC and on the other hand their Directors. The Boards are responsible for ensuring that there are rules in place to avoid conflicts of interest by Board members.

Shareholder matters

Relations with shareholders and other investors
We believe it is important both to explain our business developments and financial results to investors and to understand their objectives.

The Chief Financial Officer has lead responsibility for investor relations, with the active involvement of the Group Chief Executive. They are supported by our Investor Relations department which organises presentations for analysts and investors. Such presentations are generally made available on our website. Briefings on quarterly results are given via teleconference and are accessible by telephone or via our website. For further information visit our website at www.unilever.com/investorcentre.

The Boards are regularly briefed on reactions to the quarterly results announcements. They, or the relevant Board Committee, are briefed on any issues raised by shareholders that are relevant to their responsibilities.

Our shareholders can, and do, raise issues directly with the relevant Executive Director or the Chairman and, if appropriate, a relevant Non-Executive Director or the Senior Independent Director.

Both NV and PLC communicate with their respective shareholders through the AGMs as well as responding to their questions and enquiries during the course of the year. We take the views of our shareholders into account and, in accordance with all applicable legislation and regulations, may consult them in an appropriate way before putting major new proposals to our AGMs.

General Meetings of shareholders
The business to be conducted at the AGMs of NV and PLC is set out in the separate Notices of AGM for NV and PLC. It includes appointment of Directors, declaration/approval of final dividend, appointment of external auditors, approval of changes to the Articles of Association, and authorisation for the Boards to allot and repurchase shares, and to restrict pre-emptive rights of shareholders.

At the AGMs, a full account is given of the progress of the business over the last year and there is a review of current issues. Shareholders are encouraged to attend the meetings and ask questions, and the question-and-answer sessions form an important part of the meetings.

General Meetings of shareholders of NV and PLC are held at times and places decided by our Boards. NV meetings are held in Rotterdam and PLC meetings are held in London on consecutive days. The notices calling the meeting normally go out more than thirty days prior to the meetings and include further information on how to gain access to the AGMs and how to vote by proxy.

We welcome our external auditors to the AGMs and they are entitled to address the meetings.

We are committed to efforts to establish more effective ways of communication with our shareholders around the AGMs. Electronic communication is becoming an important medium for shareholders, providing ready access to shareholder information and reports, and for voting purposes.

NV was one of the founders of the Dutch Shareholders’ Communication Channel. NV shareholders participating in the Dutch Shareholders’ Communication Channel are able to appoint electronically a proxy to vote on their behalf at the NV AGM and NV shareholders who wish to participate should contact their bank or broker. Shareholders of PLC in the United Kingdom can choose to receive electronic notification that the Annual Review, Annual Report and Accounts and Notice of AGMs have been published on our website, instead of receiving printed copies, and can also electronically appoint a proxy to vote on their behalf at the AGM. Registration for electronic communication by shareholders of PLC can be made at www.unilever.com/shareholderservices.


 

38 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Corporate governance (continued)

 

Voting rights
To be entitled to attend and vote at NV General Meetings shareholders must hold their NV shares on the record date, which is set by the Directors and is not more than thirty days before the meeting. Shareholders do not need to block their shares. NV shareholders can cast one vote for each €0.16 nominal capital that they hold. This means that they can cast one vote for each NV ordinary share, or NV New York Registry Share. Shareholders can vote in person or by proxy. Similar arrangements apply to holders of depositary receipts issued for NV shares and the holders of NV preference shares (see pages 41 and 42).

PLC shareholders can cast one vote for each 1.4p nominal capital that they hold. This means that one vote equals 9/20ths of a share. Shareholders can vote in person at the meeting or by proxy. Proxies should be submitted to the Registrars, Computershare Investor Services PLC, whose details can be found on page 159, at least 48 hours before the AGM. Shareholders at the PLC 2007 AGM are, however, being asked to approve a change in the voting rights of PLC’s ordinary shares designed to bring the voting arrangements into line with the consolidation of ordinary shares of 31/9p approved at the 2006 AGM. This will result in one vote for each 31/9p of nominal capital instead of 1.4p of nominal capital.

More information on the exercise of voting rights can be found in NV’s and PLC’s Articles of Association and in the respective Notices of Meetings.

Holders of NV New York Registry Shares or PLC American Depositary Receipts of shares will receive a proxy form enabling them to authorise and instruct ABN AMRO N.V. or Citibank, N.A. respectively to vote on their behalf at the shareholders’ meeting of NV or PLC. N.V. Elma and United Holdings Limited (the holders of NV’s special shares), other group companies of NV which hold ordinary or preference shares, and United Holdings Limited, which owns half of PLC’s deferred stock, are not permitted to vote at General Meetings.

Voting on each of the resolutions contained in the Notice of AGMs is conducted by poll. The final vote is published at the meetings and the outcome of the votes, including the proxy votes, is put on Unilever’s website. For each resolution, proxy appointment forms in 2006 provided PLC shareholders with the option to direct their proxy to vote either for or against the resolution or to abstain. In 2007, proxy appointment forms will replace the abstain option with a vote withhold option. Future PLC proxy forms and voting result announcements will make it clear that a vote withheld is not a vote in law, and will not be counted in the calculation of the proportion of votes for and against the resolution voted on.

Shareholder proposed resolutions
Shareholders of NV may propose resolutions if they individually or together hold 1% of NV’s issued capital in the form of shares or depositary receipts for shares, or if they individually or together hold shares or depositary receipts worth at least €50 million. They must submit these requests at least 60 days before the date of the General Meeting, and the request will be honoured unless, in the opinion of the Boards, it is against a substantive interest of the Company. Shareholders who together represent at least 10% of the issued capital of NV can also requisition Extraordinary General Meetings to deal with specific resolutions.

Shareholders who 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 capital, can require PLC to propose a resolution at a General Meeting. PLC shareholders holding in aggregate one-tenth of the issued ordinary shares of PLC are able to convene a general meeting of PLC.

Required majorities
Resolutions are usually adopted at NV and PLC shareholder 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 (see below).

A proposal to alter the Articles of Association of NV can only be made by the Board of Directors. Such a proposal requires the prior approval of the meeting of the holders of the special shares. A proposal to alter the Memorandum and Articles of Association of PLC can be made either by the Board of Directors or by shareholders in the manner permitted under the United Kingdom Companies Act 1985. Proposals to alter the provisions in the Articles of Association of NV and PLC relating to the unity of management require the prior approval of meetings of the holders of the NV special shares and the PLC deferred stock. Copies of the Articles of Association of NV and the Memorandum and Articles of Association of PLC can be found on our website.

Right to hold shares
Unilever places no limitations on the right to hold NV and PLC shares.

Foundation Agreements

Equalisation Agreement
The Equalisation Agreement makes the position of the shareholders of NV and PLC, as far as possible, the same as if they held shares in a single company. The Agreement regulates the mutual rights of the shareholders of NV and PLC. Under the Equalisation Agreement, NV and PLC must adopt the same financial periods and accounting policies. Dividends are paid in accordance with a formula relating to the nominal values of NV’s and PLC’s issued share capital.

Since the AGMs in 2006, each NV Ordinary share represents the same underlying economic interest in the Unilever Group as each PLC Ordinary share.

We pay ordinary dividends for NV and PLC on the same day. NV and PLC allocate funds for the dividend from their parts of our current profits and free reserves. We pay the same amount on each NV share as on one PLC share calculated at the relevant exchange rate. For interim dividends this exchange rate is the average rate for the quarter before we declare the dividend. For final dividends it is the average rate for the year. In arriving at the equalised amount we include any tax payable by the Company in respect of the dividend, but calculate it before any tax deductible by the Company from the dividend.

The Equalisation Agreement provides that if one company had losses, or was unable to pay its preference dividends, the loss or shortfall would be made up out of:


 

Unilever Annual Report on Form 20-F 2006 39

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Report of the Directors (continued)  
 
Corporate governance (continued)

 

the current profits of the other company (after it has paid its own preference shareholders);
then its own free reserves; and
then the free reserves of the other company.

If either company could not pay its ordinary dividends, we would follow the same procedure, except that the current profits of the other company would only be used after it had paid its own ordinary shareholders and if the Directors thought this more appropriate than, for example, using its own free reserves.

So far, NV and PLC have always been able to pay their own dividends, so we have never had to follow this procedure. If we did, the payment from one company to the other would be subject to any United Kingdom and Dutch tax and exchange control laws applicable at that time.

Under the Equalisation Agreement, the two companies are permitted to pay different dividends in the following exceptional circumstances:

If the average annual sterling/euro exchange rate changed so substantially from one year to the next that to pay equal dividends at the current exchange rates, either NV or PLC would have to pay a dividend that was unreasonable (that is to say, substantially larger or smaller in its own currency than the dividend it paid in the previous year); or
   
The governments of the Netherlands or the United Kingdom could in some circumstances place restrictions on the proportion of a company’s profits which can be paid out as dividends. This could mean that in order to pay equal dividends one company would have to pay out an amount which would breach the limitations in place at the time, or that the other company would have to pay a smaller dividend.

In either of these rare cases, NV and PLC could pay different amounts of dividend if the Boards thought it appropriate. The company paying less than the equalised dividend would put the difference between the dividends into a reserve: an equalisation reserve in the case of exchange rate fluctuations, or a dividend reserve in the case of a government restriction. The reserves would be paid out to its shareholders when it became possible or reasonable to do so, which would ensure that the shareholders of both companies would ultimately be treated the same.

If both companies were to go into liquidation, NV and PLC would each use any funds available for shareholders to pay the prior claims of their own preference shareholders. Then they would use any surplus to pay each other’s preference shareholders, if necessary. After these claims had been met, they would pay out any equalisation or dividend reserve to their own shareholders before pooling the remaining surplus. This would be distributed to the ordinary shareholders of both companies on an equal basis. If one company were to go into liquidation, we would apply the same principles as if both had gone into liquidation simultaneously.

In principle, issues of bonus shares and rights offerings can only be made in ordinary shares. Again we would ensure that shareholders of NV and PLC received shares in equal proportions. The subscription price for one new NV share would have to be the same, at the prevailing exchange rate, as the price for one

new PLC share. Neither company can issue or reduce capital without the consent of the other.

The Articles of Association of NV establish that any payment under the Equalisation Agreement will be credited or debited to the income statement for the financial year in question.

Under Article 2 of the Articles of Association of NV and Clause 3 of the Memorandum of Association of PLC, each company is required to carry out the Equalisation Agreement with the other. Both documents state that the Agreement cannot be changed or terminated without the approval of shareholders. For NV, the General Meeting can decide to alter or terminate the Equalisation Agreement at the proposal of the Board. The necessary approval of the General Meeting is then that at least one half of the total issued ordinary capital must be represented at an ordinary shareholders’ meeting, where the majority must vote in favour; and (if they would be disadvantaged or the agreement is to be terminated), at least two-thirds of the total issued preference share capital must be represented at a preference shareholders’ meeting, where at least three-quarters of them must vote in favour. For PLC, the necessary approval must be given by the holders of a majority of all issued shares voting at a General Meeting and the holders of the ordinary shares, either by three-quarters in writing, or by three-quarters voting at a General Meeting where the majority of the ordinary shares in issue are represented.

In addition, Article 3 of the PLC Articles of Association states that PLC’s Board must carry out the Equalisation Agreement and that the other provisions of the Articles of Association are subject to it.

We are advised by counsel that these provisions oblige our Boards to carry out the Equalisation Agreement, unless it is amended or terminated with the required approval of the shareholders of both companies. If the Boards fail to enforce the Agreement, shareholders can compel them to do so under Dutch and United Kingdom law.

A copy of the Equalisation Agreement can be found on our website at www.unilever.com/investorcentre/corpgovernance.

The Deed of Mutual Covenants
The Deed of Mutual Covenants provides that NV and PLC and their respective subsidiary companies shall co-operate in every way for the purpose of maintaining a common operating policy. In addition, 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. The Deed of Mutual Covenants illustrates some of the information which makes up this common platform, such as the mutual exchange and free use of know-how, patents, trade marks and all other commercially valuable information. The Deed contains provisions which allow the Directors of NV and PLC to take any actions to ensure that the dividend-generating capacity of each of NV and PLC is aligned with the economic interests of their respective shareholders. These provisions also allow assets to be transferred between NV and PLC and their associated companies (as defined in the Deed of Mutual Covenants) to ensure that assets are allocated in the most efficient manner. These arrangements are designed to create a balance between the two parent companies and the funds generated by them, for the benefit of their respective sets of shareholders.


 

40 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
 
Corporate governance (continued)

 

The Agreement for Mutual Guarantees of Borrowing
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. The two companies can also agree jointly to guarantee the borrowings of their subsidiaries. These arrangements are used, as a matter of financial policy, for certain significant public borrowings. They enable lenders to rely on our combined financial strength.

Combined earnings per share
We calculate earnings per share on a combined basis. The calculation is based on the average amount of NV’s and PLC’s ordinary share capital in issue during the year.

In our combined earnings per share calculation, we assume that both companies will be able to pay their dividends out of their part of our profits. This has always been the case in the past, but if we did have to make a payment from one to the other it could result in additional taxes, and reduce our combined earnings per share.

Further information about the calculation of earnings per share, including the calculation on a diluted basis, can be found in note 7 on page 87.

Share capital
NV’s issued share capital on 31 December 2006 was made up of:

€274 356 432 split into 1 714 727 700 ordinary shares of €0.16 each;
€1 028 568 split into 2 400 ordinary shares numbered 1 to 2 400, known as special shares; and
€113 599 014 split into several classes (4%, 6% and 7%) cumulative preference shares (‘financing preference shares’).

The total number of voting rights attached to NV's outstanding shares is shown hereunder:

  Total number of votes % of issued capital  



 
1 714 727 700 ordinary shares 1 714 727 700 70.53  
2 400 special shares 6 428 550 0.26  
750 000 4% cumulative      
preference shares 200 906 250 8.26  
161 060 6% cumulative      
preference shares 431 409 276 17.75  
29 000 7% cumulative      
preference shares 77 678 312 3.20  



 

NV may issue shares not yet issued and grant rights to subscribe for shares only pursuant to a resolution of the General Meeting of Shareholders or of another corporate body designated for such purpose by a resolution of the General Meeting. At the Annual General Meeting held on 8 May 2006 the Board of Directors was designated, in accordance with Articles 96 and 96a of Book 2 of the Netherlands Civil Code, as the corporate body which is authorised until 8 November 2007 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 statutory pre-emption rights that accrue to shareholders upon issue of shares, on the understanding that this authority is limited to 10% of the issued share capital of the Company, plus an additional 10% of the issued share capital of the Company in connection with or on the occasion of mergers and acquisitions.

At the 2006 AGM the Board of Directors of NV was authorised, in accordance with Article 98 of Book 2 of the Netherlands Civil Code, until 8 November 2007 to cause the Company to buy in its own shares and depositary receipts therefor, within the limits set by law (10% of the issued share capital), either through purchase on a stock exchange or otherwise, at a price, excluding expenses, not lower than the nominal value of the shares and not higher than 10% above the average of the closing price of the shares on Eurolist by Euronext Amsterdam for the five business days before the day on which the purchase is made.

PLC’s issued share capital on 31 December 2006 was made up of:

£40 760 420 split into 1 310 156 361 ordinary shares of 31/9p each; and
£100 000 of deferred stock.

The total number of voting rights attached to PLC’s outstanding shares are shown hereunder:

  Total number of votes % of issued capital  



 
1 310 156 361 ordinary shares 2 911 458 580 99.76  
£100 000 deferred stock 7 142 857 0.24  



 

Article 83 sets out the voting rights of members which are currently one vote for every 1.4p of capital. At the 2007 PLC AGM, a resolution will be proposed to amend Article 83 to state that every member shall have one vote for every 31/9p nominal of capital held of whatever class.

The Board of Directors of PLC under sections 80 and 89 United Kingdom Companies Act 1985 may, subject to the passing of the appropriate resolutions at a meeting of shareholders, issue shares within the limits prescribed within the resolutions. At the 2006 AGM the Directors were authorised to issue new shares pursuant to section 80 of that Act, limited to a maximum of £13 450 000 nominal value, and pursuant to section 89 of that Act, to disapply pre-emption rights up to approximately 5% of PLC’s issued ordinary share capital. These authorities are renewed annually.

At the 2006 AGM the Board of Directors of PLC was authorised in accordance with its Articles of Association to make market purchases of its ordinary shares within the limits prescribed within the resolution until the earlier of the 12 months anniversary after the passing of the resolution or the conclusion of the 2007 AGM.

Depositary receipts for NV shares
As at 1 March 2007, the majority (around 75%) of NV’s ordinary shares and around 34% of NV’s 7% cumulative preference shares are held by the Foundation Unilever NV Trust Office (Stichting Administratiekantoor Unilever N.V.), a trust office with a Board independent from Unilever. As part of its corporate objects, the Foundation issues depositary receipts in exchange for these shares. These depositary receipts are listed on Euronext Amsterdam, as are the NV ordinary and 7% preference shares themselves.

Holders of depositary receipts can under all circumstances exchange their depositary receipts for the underlying shares (and vice versa).


 

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Report of the Directors (continued)  
 
Corporate governance (continued)

 

Holders of depositary receipts are entitled to dividends that are paid on the underlying shares held by the Foundation.

Foundation Unilever NV Trust Office’s board
The members of the board are Mr J H Schraven (Chairman), Mr P P de Koning, Prof Dr L Koopmans and Mr A A Olijslager. Their Biographies can be found on the website of the Foundation www.administratiekantoor-unilever.nl.

The Foundation reports periodically, but at least once a year, on its activities.

Voting by holders of depositary receipts
Although the depositary receipts themselves do not formally have voting rights, holders of depositary receipts are in practice equated with shareholders. Holders of depositary receipts can attend NV’s General Meetings, either personally or by proxy, and will then automatically, without limitation and under all circumstances, receive a voting proxy on behalf of the Foundation to vote on the underlying shares.

Holders of depositary receipts not attending a shareholders’ meeting and who participate in the Dutch Shareholders’ Communication Channel can also issue binding voting instructions to the Foundation. The Foundation is obliged to follow these instructions. The same applies to holders of depositary receipts who instruct the Foundation outside the Shareholders Communication Channel.

Voting by the Foundation Unilever NV Trust Office
Shares for which the Foundation has not granted voting proxies or for which it has not received voting instructions are voted on by the Foundation in such a way as it deems to be in the 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. Both the Articles of Association and the Conditions of Administration can be found on the Foundation’s website.

Specific provisions apply in the event that a meeting of holders of NV 7% cumulative preference shares is convened.

If a change to shareholders’ rights is proposed, the Foundation will let shareholders know if it intends to vote, at least 14 days in advance if possible. It will do this by advertising in the press.

Hitherto the majority of votes cast by ordinary shareholders at NV meetings have been cast by the Foundation. Unilever and the Foundation have a policy of actively encouraging holders of depositary receipts to exercise their voting rights in NV meetings.

Unilever considers the arrangements of the Foundation appropriate and in the interest of NV and its shareholders given the voting rights attached to the financing preference shares and the relatively low attendance of the ordinary shares in its AGMs.

Foundation Unilever NV Trust Office’s shareholding
Foundation NV Trust Office’s shareholding fluctuates daily – its holdings on 1 March 2007 were:

NV ordinary shares of €0.16: 1 285 189 970 (74.95%);
NV 7% cumulative preference shares of €428.57: 9 790 (33.76%);
NV 6% cumulative preference shares of €428.57: 5 (0.00%); and
NV 4% cumulative preference shares of €42.86: 23 (0.00%).

Further information on the Foundation, its arrangements and its activities can be found on its website at www.administratiekantoor-unilever.nl.

Margarine Union (1930) Limited: Conversion Rights
The first Viscount Leverhulme was the founder of the company which became PLC. When he died in 1925, he left in his will a large number of PLC shares in various trusts.

When the will trusts were varied in 1983, the interests of the beneficiaries of his will were also preserved. Four classes of special shares were created in Margarine Union (1930) Limited, a subsidiary of PLC. One of these classes can be converted at the end of the year 2038 into 70 875 000 PLC ordinary shares of 31/9p each. This currently represents 5.4% of PLC’s issued ordinary capital. These convertible shares replicate the rights which the descendants of the first Viscount would have had under his will. This class of the special shares only has a right to dividends in specified circumstances, and no dividends have yet been paid. PLC guarantees the dividend and conversion rights of the special shares.

Requirements and compliance – general
Unilever is subject to corporate governance requirements in the Netherlands, the UK and as a foreign private issuer in the US. In the following section we report on our compliance with the corporate governance regulations and best practice codes applicable in the Netherlands and the UK and we also describe compliance with corporate governance regulations in the US.

Our governance arrangements are designed and structured to promote and further the interests of our companies and their shareholders. The Boards reserve the right, in cases where they decide such to be conducive to the interests of the companies and the enterprise connected therewith or our shareholders, to depart from that which is set out in the present and previous sections in relation to our corporate governance. Further changes will be reported in future Annual Reports and Accounts and, when necessary, through changes to the relevant documents published on our website. As appropriate, proposals for change will be put to our shareholders for approval.

Further information can be found on our website and in ‘The Governance of Unilever’, the Boards’ own constitutional document. This describes the terms of reference of our Board Committees, including their full responsibilities. It will be kept up to date with changes in our internal constitutional arrangements that our Boards may make from time to time and it is available on our website and upon request.


 

42 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
 
Corporate governance (continued)

 

Requirements – the Netherlands

General
NV is required to state in its Annual Report and Accounts whether it complies or will comply with the Principles (‘P’) and best practice provisions (‘bpp’) of the Dutch Corporate Governance Code (the Dutch Code) and, if it does not comply, to explain the reasons for this. As will be clear from the preceding description of our governance arrangements, NV complies with almost all of the principles and best practice provisions of the Dutch Code. The text that follows sets out areas of non-compliance, as well as certain statements that the Dutch Code invites us to make to our shareholders that are not included elsewhere in this Annual Report and Accounts.

Board and Committee structures
NV is a multinational company with activities and shareholders located all over the world. It has a one-tier board, consisting of both Executive and, as a majority, Non-Executive Directors. We achieve compliance of our board arrangements with the Dutch Code, which is for the most part based on the customary two-tier structure in the Netherlands, by, as far as is possible and practicable, applying the provisions of the Dutch Code relating to members of a management board to our Executive Directors and the provisions relating to members of a supervisory board to our Non-Executive Directors. Management tasks not capable of delegation are performed by the Board. Reference is made to Ps II and III and corresponding bpps. Reference is also made to the UK Combined Code on Corporate Governance, which is fully tailored to the one-tier board model (see page 34).

Role of the Chairman
The Dutch Code recommends that in a one-tier board the chairman should neither be, nor have been, responsible for the day-to-day conduct of the business (bpp III.8.1) . Before his appointment as Non-Executive Chairman, Antony Burgmans was jointly responsible for the daily operations of NV and PLC. Thus he is not independent from Unilever. He was nominated as Non-Executive Chairman in 2005 because of his thorough knowledge of Unilever and its operations. In addition to his role as Chairman, the Board considered his knowledge of the business to be essential to see through the changes resulting from the structure review. Antony Burgmans will be succeeded by Michael Treschow as an independent Chairman at the AGMs in 2007, subject to his appointment as Non-Executive Director.

As Antony Burgmans was the only Non-Executive Director who is not independent from Unilever, NV complies with bpp. III.2.1 of the Dutch Code.

In addition to the Chairman, the Boards of NV and PLC have a Senior Independent Director who is appointed by the Non-Executive Directors and acts as their spokesperson.

Risk management and control
Reference is made to page 66 where Unilever’s control framework is described. This incorporates risk management, internal control procedures and disclosure controls and procedures. Our procedures cover financial, operational, social, strategic and environmental risks and regulatory matters. They are in line with the latest recommendations of ‘Internal Control – Revised Guidance for Directors on the Combined Code’ published by the Internal Control Working Party of the Institute of Chartered Accountants in England and Wales in October 2005 (‘The Turnbull Guidance’). On pages 9 and 10 we have identified certain specific risks that are areas of focus in 2007. Unilever has designed its internal risk management and control systems to provide reasonable (not absolute) assurance to ensure compliance with regulatory matters and to safeguard reliability of the financial reporting and its disclosures.

The Board considers that the internal risk management and control systems are appropriate for our business and in compliance with bpp II.1.3.

In bpp II.1.4 the Dutch Code invites our Board to make a statement on our internal risk management and control systems. In its report, published on 20 December 2005, the Corporate Governance Code Monitoring Committee has made recommendations concerning the application of this best practice provision. In accordance with its recommendation and in the light of the above, the Board believes that, as regards financial reporting risks:

the risk management and control systems provide reasonable assurance that this Annual Report does not contain any material inaccuracies;
the risk management and control systems have worked properly in 2006;
there are no indications that the risk management and control systems will not work properly in 2007;
no material failings in the risk management and control systems were discovered in the year under review or the current year until the signing of these accounts; and, as regards financial, operational, social, strategic, environmental and regulatory risks; and
no material failings in the risk management and control systems were discovered in the year under review.

This statement is not a statement in accordance with the requirements of Section 404 of the US Sarbanes-Oxley Act.

Share options and awards
In line with bpp II.2.2, the awards and grants of shares and options to our Executive Directors are in the material cases subject to performance criteria, as referred to on pages 51 and 52 of the Report of the Remuneration Committee. The exception is the options over 150 NV shares granted each year to our Executive Directors under the all-employee share option plan in the Netherlands, as described on pages 117 and 118. The Directors’ participation in this plan is seen as a stimulus for all employees to participate.


 

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Report of the Directors (continued)  
   
Corporate governance (continued)

 

Retention period of shares
The Dutch Code recommends that shares granted to executive directors without a financial consideration must be retained for a period of at least five years (bpp II.2.3) . In 2001 we introduced a new remuneration policy with shareholder approval which requires our Executive Directors to build and retain a personal shareholding in Unilever equal to at least 150% of their annual base pay. We believe that this is in line with the spirit of the Dutch Code.

Severance pay
It is our policy to set the level of severance payments for Directors to no more than one year’s salary, unless the Board, at the proposal of the Remuneration Committee, finds this manifestly unreasonable given circumstances or unless otherwise dictated by applicable law (bpp II.2.7) .

Regulations for transactions in securities in other
companies
The Dutch Code recommends that a director shall give periodic notice of any changes in his holding of securities in other Dutch listed companies (bpp II.2.6 and bpp III.7.3) . Our Share Dealing Code provides that Directors are required, upon request, to disclose to the compliance officer their holdings and transactions in securities in other listed companies. We believe this requirement constitutes an appropriate arrangement.

Conflicts of interest
In the event of a (potential) conflict of interest, the provisions of the Dutch Code (P II.3 and III.6) are applied. Conflicts of interest are not understood to include transactions and other activities between companies in the Unilever Group.

Financing preference shares
NV issued 4%, 6% and 7% cumulative preference shares between 1927 and 1970. Their voting rights are based on their nominal value, as prescribed by Dutch law. The Dutch Code recommends that the voting rights on such shares should, in any event when they are newly issued, be based on their economic value rather than on their nominal value (bpp IV.1.2) . NV agrees with this principle but cannot unilaterally reduce voting rights of its outstanding shares.

Anti-takeover constructions and control over the company
With reference to bpp IV.3.9, NV has no anti-takeover constructions, in the sense of constructions that are intended solely, or primarily, to block future hostile public offers for its shares. Nor does it have any constructions whose specific purpose is to prevent a bidder, after acquiring 75% of the capital, from appointing or dismissing members of the Board and subsequently altering the Articles of Association. The acquisition through a public offer of a majority of the shares in a company does not under Dutch law preclude in all circumstances the continued right of the board of the company to exercise its powers. The relevant information which NV is required to disclose in accordance with the Decree dated 5 April 2006 to implement Article 10 of Directive 2004/25/EC can be found in this document.

Provision of information
We consider it important to comply with all applicable statutory regulations on the equal treatment of shareholders and provision of information and communication with shareholders and other parties (P IV.2 and P IV.3).

Meetings of analysts and presentations to investors
We have extensive procedures for handling relations with and communicating with shareholders, investors, analysts and the media (see description on page 38). The important presentations and meetings are conducted as far as practicable in accordance with bpp IV.3.1. Due to their large number and overlap in information, some of the less important ones are not announced in advance, made accessible to everyone or put on our website.

Requirements – the United Kingdom
PLC is required, as a company that is incorporated in the United Kingdom and listed on the London Stock Exchange, to state how it has applied the principles and how far it has complied with the provisions set out in Section 1 of the Combined Code issued in 1998, as revised in 2003 (‘the Combined Code’), appended to the United Kingdom Listing Rules.

In the preceding pages we have described how we have applied the Principles and the provisions in the Combined Code. In 2006, Unilever complied with the Combined Code except in the following two areas:

Antony Burgmans, who before May 2005 was an Executive Director, is not considered to be independent. The Nomination Committee and the Board nominated him for election as a Non-Executive Director in 2005 because of his thorough knowledge of Unilever and its operations. However, with the appointment of Michael Treschow as Chairman, subject to his appointment as a Non-Executive Director at the AGMs, Unilever will comply with the provision that requires the Chairman to be independent on appointment; and
   
Due to the requirement for Unilever to hold two AGMs for its respective companies on consecutive days, it may not always be possible for all Directors, and possibly the Chairmen of the Audit, Remuneration and Nomination Committees, to be present at both meetings. The Chairman therefore ensures that a majority of Directors attend both meetings and that at least one member of each Committee attends each AGM.

Requirements – the United States
Both NV and PLC are listed on the New York Stock Exchange and must therefore comply with such of the requirements of US legislation, such as the Sarbanes-Oxley Act of 2002, regulations enacted under US securities laws and the Listing Standards of the New York Stock Exchange as are applicable to foreign private issuers. In some cases the requirements are mandatory and in other cases the obligation is to ’comply or explain’.


 

44 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Corporate governance (continued)

 

We have complied with the requirements concerning corporate governance that were in force during 2006. Attention is drawn in particular to the remit of the Audit Committee on page 37 and the Report of the Audit Committee on page 63.

Actions already taken to ensure compliance that are not specifically disclosed elsewhere or otherwise clear from reading this document include:

the issuance of a Code of Ethics for senior financial officers;
the issuance of instructions restricting the employment of former employees of the audit firm; and
the establishment of a policy on reporting requirements under the US Securities and Exchange Commission (SEC) relating to the standards of professional conduct for US attorneys.

In each of these cases, existing practices were revised and/or documented in such a way as to conform to the new requirements.

The Code of Ethics applies to the senior executive, financial and accounting officers and comprises the standards prescribed by the SEC, and a copy has been posted on our website at www.unilever.com/investorcentre/corpgovernance.

The Code of Ethics comprises an extract of the relevant provisions of Unilever’s Code of Business Principles and the more detailed rules of conduct that implement it. The only amendment to these pre-existing provisions and rules that was made in preparing the Code of Ethics was made at the request of the Audit Committee and consisted of a strengthening of the explicit requirement to keep proper accounting records. No waiver from any provision of the Code of Ethics was granted to any of the persons falling within the scope of the SEC requirement in 2006.

We are required by US securities laws and the Listing Standards of the New York Stock Exchange to have an Audit Committee that satisfies Rule 10A-3 under the Exchange Act and the Listing Standards of the New York Stock Exchange (NYSE). We are fully compliant with these requirements. We are also required to disclose any significant ways in which our corporate governance practices differ from those typically followed by US companies listed on the NYSE. In addition to the information we have given you in this document about our corporate governance arrangements, further details are provided in ‘The Governance of Unilever’, which is on our website at www.unilever.com/investorcentre/corpgovernance.

We are fully compliant with the Listing Standards of the New York Stock Exchange applicable to foreign private issuers. Our corporate governance practices do not significantly differ from those followed by US companies listed on the New York Stock Exchange.

We would also confirm that it is our practice, in accordance with our home country laws and practices, to give our shareholders the opportunity to vote on equity compensation plans.


 

Unilever Annual Report on Form 20-F 2006 45

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Report of the Directors (continued)  
   
Corporate governance Biographical details

 

Executive Directors

Patrick Cescau
Group Chief Executive
Nationality: French. Aged 58. Group Chief Executive since April 2005. Joined Unilever 1973. Appointed Director 4 May 1999. Previous posts include: Chairman, Unilever PLC and Vice-Chairman, Unilever N.V. 2004-2005. Foods Director 2001. Financial Director 1999. Controller and Deputy Financial Director 1998-1999. President, Lipton USA 1997-1998. President and CEO, Van den Bergh Foods USA 1995-1997. Chairman, Indonesia 1991-1995. External appointments include: Non-Executive Director, Pearson plc and Conseiller du Commerce Extérieur de la France in the Netherlands.

Kees van der Graaf
President Europe
Nationality: Dutch. Aged 56. President Europe since April 2005. Joined Unilever 1976. Appointed Director 12 May 2004. Previous posts include: Foods Director 2004, Business Group President, Ice Cream and Frozen Foods 2001. Executive Vice-President, Foods and Beverages Europe 1998. Senior Vice-President, Global Ice Cream category 1995. External appointments include: Board member, ECR (Efficient Consumer Response) and Member, IAB (International Advisory Board of the City of Rotterdam). Member, Supervisory Boards of ANWB Club (Algemene Nederlandse Wielrijdersbond) and ANWB B.V.

Ralph Kugler1
President Home and personal care
Nationality: British. Aged 51. President Home and Personal Care since 1 April 2005. Joined Unilever 1979. Appointed Director 11 May 2005. Previous posts include: President Home and Personal Care Europe 2001. Business Group President, Latin America 1999. Chairman, Unilever Thai Holdings 1995. Chairman, Unilever Malaysia 1992. External appointments include: Non-Executive Director, InterContinental Hotels Group PLC.

Rudy Markham
Chief Financial Officer
Nationality: British. Aged 61. Chief Financial Officer since April 2005. Joined Unilever 1968. Appointed Director 6 May 1998. Previous posts include: Financial Director 2000. Strategy & Technology Director 1998. Business Group President, North East Asia 1996-1998. Chairman, Nippon Lever Japan 1992-1996. Chairman, Unilever Australasia 1989-1992. Group Treasurer 1986-1989. External appointments include: Non-Executive Director, Standard Chartered PLC and Legal & General Group Plc.

Non-Executive Directors

Antony Burgmans1,2
Chairman
Nationality: Dutch. Aged 60. Appointed 2005. Joined Unilever 1972. Appointed Director 8 May 1991. Previous posts include: Chairman, Unilever N.V. and Vice-Chairman, Unilever PLC 1999-2005. Vice-Chairman, Unilever N.V. 1998. Business Group President, Ice Cream and Frozen Foods – Europe and Chairman, Unilever Europe Committee 1996-1998. Responsible for South European Foods business 1994-1996. Personal Products Co-ordinator 1991-1994. External appointments include: Member, Supervisory Board of Akzo Nobel N.V. and Non-Executive Director, BP p.l.c.

The Rt Hon The Lord Brittan of Spennithorne QC, DL1
Nationality: British. Aged 67. Appointed 2000. Vice-Chairman, UBS Investment Bank and Chairman, UBS Limited. Member, International Advisory Committee of Total. Member, European
Commission and Vice-President 1989-1999. Member, UK Government 1979-1986. Home Secretary 1983-1985 and Secretary of State for Trade and Industry 1985-1986.

The Rt Hon The Baroness Chalker of Wallasey3
Nationality: British. Aged 64. Appointed 1998. Non-Executive Director, Group 5 (Pty) Ltd. and Equator Energy Limited. Member, International Advisory Board of Lafarge S.A. and Merchant Bridge & Co Ltd. UK Minister of State at the Foreign and Commonwealth Office 1986-1997.

Professor Wim Dik1,7
Nationality: Dutch. Aged 68. Appointed 2001. Professor at Delft University of Technology. Chairman, Supervisory Boards of Tele Atlas N.V., Zesko Holding B.V. and N.V. Casema. Non-Executive Director, Aviva plc and LogicaCMG plc. Chairman and CEO, Koninklijke PTT Nederland (KPN) 1988-1998 and Koninklijke KPN N.V. (Royal Dutch Telecom) 1998-2000. Minister for Foreign Trade, Netherlands 1981-1982.

Charles Golden7
Nationality: American. Aged 60. Appointed 2006. Executive Vice-President, Chief Financial Officer and Director, Eli Lilly and Company 1996-2006. Non-Executive Director, Clarian Health Partners, Hillenbrand Industries, Inc. and Eaton Corporation. Member of Finance Committee, Indianapolis Museum of Art.

Byron Grote7
Nationality: American/British. Aged 59. Appointed 2006. Chief Financial Officer, BP p.l.c. Member of Advisory Council, Cornell University Johnson Graduate School of Management.

The Lord Simon of Highbury CBE4,5,6,
Vice-Chairman
Nationality: British. Aged 67. Appointed 2000. Non-Executive Director, Suez Group. Senior Advisor, Morgan Stanley International. UK Government Minister 1997-1999. Group Chief Executive, BP p.l.c. 1992-1995 and Chairman 1995-1997.

Jean-Cyril Spinetta2,9
Nationality: French. Aged 63. Appointed 2006. Chairman and CEO of Air France – KLM S.A. Director, Saint-Gobain and Alitalia S.p.A 2002-2006. Permanent representative of Air France on Board of Directors of Le Monde Enterprises S.A.

Kees Storm8
Nationality: Dutch. Aged 64. Appointed 2006. Chairman Executive Board AEGON N.V. 1993-2002. Chairman Supervisory Board KLM Royal Dutch Airlines N.V. Board member and Chairman of Audit Committee, InBev S.A. Board member and Audit Committee member, Baxter International Inc. Member, Supervisory Board, Pon Holdings B.V. Member, Supervisory Board, AEGON N.V.

Jeroen van der Veer2,9
Nationality: Dutch. Aged 59. Appointed 2002. Chief Executive Royal Dutch Shell plc. Former Member, Supervisory Board of De Nederlandsche Bank 2000-2004.


 

 

1 Member Corporate Responsibility and Reputation Committee
2 Member Nomination Committee
3 Chairman Corporate Responsibility and Reputation Committee
4 Chairman Nomination Committee
5 Chairman Remuneration Committee

 

6 Senior Independent Director
7 Member Audit Committee
8 Chairman Audit Committee
9 Member Remuneration Committee

 

46 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued) 
   
Corporate governance Biographical details (continued)

 

 
Unilever Executive (UEx)*
 
Patrick Cescau
Group Chief Executive
(see previous details on page 46)
 
Vindi Banga
President Foods
Nationality: Indian. Aged 52. Appointed President Foods April 2005.
Joined Unilever 1977. Previous posts include: Business Group President
Home and Personal Care Asia 2004 in addition to Non-Executive
Chairman, Hindustan Lever 2004-2005. Chairman and Managing
Director Hindustan Lever 2000-2004.
 
Kees van der Graaf
President Europe
(see previous details on page 46)
 
Ralph Kugler
President Home and Personal Care
(see previous details on page 46)
 
Harish Manwani
President Asia Africa
Nationality: Indian. Aged 53. Appointed President Asia Africa April
2005. Joined Unilever 1976. He is also Non-Executive Chairman,
Hindustan Lever. Previous posts include: Business Group President,
Home and Personal Care, North America 2004. Business Group
President, Home and Personal Care, Latin America 2001 and Senior
Vice President, Hair Care and Oral Care 2000.
Rudy Markham
Chief Financial Officer
(see previous details on page 46)
 
Sandy Ogg
Chief Human Resources Officer
Nationality: American. Aged 53. Appointed Chief HR Officer April
2005. Joined Unilever 2003. Previous posts include: SVP Human
Resources, Foods 2003. Prior to joining Unilever he worked for
Motorola in Change Management/Organisation Effectiveness to
assist in the transformation of all Communications businesses.
 
John Rice** 
President The Americas
Nationality: American. Aged 55. Appointed President The Americas
April 2005. Joined Unilever 1981. Previous posts include: Business
Group President, Unilever Foods, North America 2002 and Unilever
Bestfoods Latin America 2000.
 

 

* UEx members are treated as executive officers and senior management for US purposes and key management personnel for IFRS purposes. Although Unilever intends to offer revised service agreements to members of UEx, the agreements are currently under negotiation with these individuals. All members of the UEx have existing agreements with varying terms, however, all agreements include a notice period of twelve months. Details of the remuneration paid and share awards are shown in aggregate in note 31 on page 122
  .
** Unilever announced on 19 December 2006 that John Rice had decided to retire from Unilever in March 2007. He will be replaced on the Unilever Executive Team and as President, The Americas by Michael Polk. Michael is currently Group Vice President and President Unilever United States. Michael joined Unilever in 2003 after 16 years at Kraft.

 

Unilever Annual Report on Form 20-F 2006 47

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Report of the Directors (continued)  
   
Report of the Nomination Committee

 

Composition
During 2006 the Nomination Committee comprised three Independent Non-Executive Directors and the Chairman of Unilever. David Simon chaired the Committee from 9 May 2006, taking over from Bertrand Collomb. Other members in 2006 were Jean-Cyril Spinetta, as from 9 May 2006, and Jeroen van der Veer and Antony Burgmans. The Joint Secretaries act as secretaries to the Committee.

The Boards are of the view that it is appropriate that the Chairman is included as a member of the Committee on the express condition that he does not participate in any discussion of his own position.

Remit
The Committee recommends to the Boards candidates for the positions of Executive and Non-Executive Director, Chairman, Vice-Chairman and Senior Independent Director. The Committee is concerned with succession planning within the Boards. The Committee also has responsibility for oversight of all matters relating to corporate governance and brings any issues to the attention of the Boards. The Committee uses the services of recruitment consultants and other external experts. The Boards conduct a process of evaluation of their own performance each year. This includes a review of each Board Committee’s performance.

The remit of the Committee and the information used by it for succession planning are available on our website www.unilever.com/investorcentre/corpgovernance. Also on the website are the procedures for evaluation of the Boards and individual Directors. The results of the evaluations are provided to the Committee when it discusses the nominations for election as Directors, who offer themselves for re-election every year.

In nominating Directors to the Boards, the Committee follows an agreed Board Profile of potential Non-Executive Directors, which takes into account the roles of Non-Executive Directors set out in the Dutch Corporate Governance Code and the UK Combined Code. Under the terms of the Governance of Unilever the Boards should comprise a majority of Non-Executive Directors and the Profile provides that three of these have strong financial experience, and staff the Audit Committee. To represent Unilever’s areas of interest, the Profile also indicates there should be a strong representation from Developing and Emerging markets as well as from Europe and North America. Non-Executives should be independent of Unilever and free from any conflicts of interest. The Profile looks at diversity in terms of nationality, race, gender and relevant expertise and directs that, wherever possible, the Boards should reflect Unilever’s consumer base. For more details see www.unilever.com/investorcentre/corpgovernance.

Meetings of the Committee
The Committee met six times in 2006. All but one meeting were fully attended. The Committee proposed the nomination of all Directors offering themselves for re-election at the AGMs in 2006. In 2006, the Committee also proposed the nomination of four new Non-Executive Directors.

These were Charles Golden, Byron Grote, Kees Storm and Jean-Cyril Spinetta. They were chosen specifically for their financial and general business expertise. The first three are members of the Audit Committee, with Kees Storm in the chair. Jean-Cyril Spinetta is a member of the Nomination Committee and the Remuneration Committee.

During the year the Committee conducted the search for a new Chairman to succeed Antony Burgmans, who retires at the 2007 AGMs. The Committee followed a thorough process supported by an independent consultant. The process resulted in the Committee’s recommendation to the Boards to nominate Michael Treschow as Antony Burgmans’ successor. The Committee is pleased to have identified an excellent candidate, who fully meets the criteria set for the Chairman’s role. Upon appointment Michael Treschow will be the first independent non-executive Chairman of Unilever.

The Committee has initiated the search process aimed at identifying candidates for the role of Chief Financial Officer, following the retirement of Rudy Markham at the 2007 AGMs. For this purpose an outside executive search firm has been engaged.

Also with the support of independent consultants the Committee continued its search for new Non-Executive Directors to strengthen the Boards’ knowledge in IT and science as well as to increase representation from the D&E markets and enhance diversity of both background and expertise.

The nominations of Genevieve Berger, Hixonia Nyasulu and Narayana Murthy are the result of this search. The Committee is of the view that they, if appointed, would be a very valuable addition to the Boards’ composition.

The Committee commissioned an outside consultant to support it in carrying out the 2006 evaluation of the Boards, the Chairman, the individual Directors and the Board Committees. The results of this evaluation have been presented to and discussed by the Boards. The overall conclusion is that Boards and Board Committee performance is in line with that of its peer group.



David Simon Chairman of the Nomination Committee
Antony Burgmans
Jean-Cyril Spinetta
Jeroen van der Veer


 

48 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Report of the Remuneration Committee

 

During 2006 the Committee has reviewed the remuneration policy and practice of the past few years, and on the basis of this experience has decided to prioritise five strategic principles to serve as the platform for Unilever’s approach to remuneration. This strategy is not only for our Executive Directors but for all Unilever’s leadership levels. These principles, which improve the structure of our existing remuneration framework as explained in greater detail in the following pages, are that pay should be:

robustly linked to performance;
aligned with strategic priorities;
aligned with shareholders’ interests;
market competitive; and
finally, easy to understand and communicate.

Our overriding objective is to ensure that Unilever recruits and retains the best performers and then optimises the return on investment from the reward system for Unilever’s leadership group. It is also our aim to manage the differing elements of total remuneration in a fully integrated manner.

The five principles will from 2007 provide the foundation of some important changes to executive remuneration that we are proposing for the level and structure of Unilever incentive plans. Our proposals have been the subject of consultation with our major shareholders and their representatives. In summary, these changes enhance variable rewards relative to fixed pay and simplify the share-based incentives.

The details of the proposed changes to Unilever’s long-term incentive arrangements are described in the Notices to Shareholders for the 2007 AGMs.

In short, we believe that we have developed an approach which incorporates the right mix and level of incentives for our leadership team which also aligns with shareholders’ interests. It would also be more understandable and simpler to communicate to our staff.

The year 2006 showed a continuing improvement in top-line growth, whilst trading contribution was proximate to but slightly below the targets we had set.

To remain competitive the base salaries for the Unilever Executive team were increased by an average of 3.9% from the beginning of 2006. Based on the performance over 2006 the annual incentive awards were on average 52% of base salary across the Unilever Executive team. However, in industry ranked terms we are not yet in a payout position for the TSR Long-Term Incentive Plan.

In 2007, we are strengthening the linkage between business performance and executive rewards.

We hope to see continued improvement in business results in 2007, with the leadership team appropriately rewarded commensurate with these improved results.

 

David Simon Chairman of the Remuneration Committee
Jean-Cyril Spinetta
Jeroen van der Veer


 

Definition of auditable part of the report of the Remuneration Committee
In compliance with the UK Directors’ Remuneration Report Regulation 2002, and under Title 9, Book 2 of the Civil Code in the Netherlands, the auditable part of the report of the Remuneration Committee comprises the ‘Aggregate remuneration for Executive Directors’ on page 55, the ‘Remuneration for individual Executive Directors’ on page 55, the ‘Executive Directors’ Global Performance Share Plan’ on page 56, the ‘Executive Directors’ conditional share awards under the TSR Long-Term Incentive Plan’ on page 56, the ‘Executive Directors’ Share Matching Plan’ on page 57, ‘Executive Directors’ share options’ on page 58, ‘Executive Directors’ pensions’ on page 59, ‘Executive Directors’ interests – share capital’ on page 60, ‘Non-Executive Directors’ remuneration on page 61 and ‘Non-Executive Directors’ interests – share capital’ on page 62.

 

Unilever Annual Report on Form 20-F 2006 49

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Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Unilever reward policy table 2006

    Indicative levels at face          
Element Payment vehicle value as % of base pay   Plan objectives/Key drivers   Performance measures  







 
Short-term (one year)              
               
Base salary Cash Market competitive   Attraction and retention of   Individual performance  
        key executives    







 
Annual incentive

Cash (75%)

Shares (25%)

Executive Director: 60% on target
(range of 0% – 100%)

Group Chief Executive: 90% on target
(range of 0% – 150%)

 

Delivery of trading contribution (Unilever’s primary internal measure of economic value added – see page 51) and top-line growth targets


Individual responsibility for
key Unilever business objectives

 

Trading contribution (Executive Director: 40%, Group Chief Executive: 50%)

Underlying sales growth (Executive Director: 40%, Group Chief Executive: 50%)

Individual contribution to Unilever business strategy (Executive Director: 20%, Group Chief Executive: 50%)

 







 
Long-term (three years)              
               
Global
Performance
Share Plan
Shares

Grant level: around 25%

Vesting level: 0% – 200% of grant

 

Ungeared Free Cash Flow as the basic driver of Unilever shareholder returns

Top-line growth as essential to Unilever’s long-term value creation

 

Ungeared Free Cash Flow (50%)

Underlying sales growth (50%)

 







 
TSR Long-Term
Incentive Plan
 
Shares   

Grant level: around 60%

Vesting level: 0% – 200% of grant

  Shareholder return at upper half of peer group with 20 other companies   Relative total shareholder return  







 
Share Matching
Plan
Shares 25% of annual incentive earned in return for the deferral of 25% of bonus earned   Alignment with shareholders’ interests    







 

 

A significant proportion of the Executive Directors’ total reward is linked to a number of key measures of Group performance to create alignment with the strategy and business priorities.

Depending on the level of performance the variable component could vary between 0% and around 70% of the total reward package (excluding pensions).

Unilever’s reward policy is benchmarked regularly against arrangements of other global companies based in Europe. This ensures that Executive Directors’ reward levels remain competitive. An internal comparison is made with the reward arrangements for other senior executives within Unilever to support consistent application of Unilever’s executive reward policies.

In setting targets for the performance measures, the Committee is guided by what needs to happen to drive underlying performance. This is reflected in both the short-term and long-term performance targets.


 

50 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

Base salary
The Remuneration Committee reviews base salary levels annually, taking into account external benchmarks in the context of Group and individual performance.

Annual incentive
The annual incentive arrangement rewards Executive Directors for the delivery of trading contribution (Unilever’s primary internal measure of economic value added) and top-line growth targets, as well as for their individual contribution to Unilever’s business strategy.

In 2006, the Group Chief Executive had a maximum opportunity of 150% of base salary. The maximum level is only payable in the case of exceptional performance. The opportunity for other Executive Directors in 2006 was between 0% and 100%.

The performance criteria for the annual incentive are:

Trading contribution: Unilever’s primary internal measure of economic value added. It is calculated from Trading Result after a deduction for tax and a charge for asset use. (Trading result is the internal management measure of profit that is the most consistent with operating profit). Increases in trading contribution reflect the combined impact of top-line growth, margin improvement and capital efficiency gains. It is well aligned with our objective of a progressive improvement in return on invested capital and with shareholder value creation;
Underlying sales growth: focus on the organic growth of Unilever’s turnover; and
Individual business targets: tailored to each individual’s responsibilities to deliver certain business objectives supporting the strategy. Individual contribution is assessed against robustly set measures and targets to ensure both objectivity and ‘stretch’.

Achievement of targets is measured at the end of the year and the payment takes place the following March. Part of the annual incentive (25%) is delivered to the Executive Directors in the form of shares in NV and PLC, which are matched by a conditional award of ‘matching shares’, as further described under the section on long-term incentives below.

Long-term incentives
The long-term incentives for Executive Directors in 2006 consist of three elements, all of which are delivered in shares:

Global Performance Share Plan;
TSR Long-Term Incentive Plan; and
Share Matching Plan (linked to the annual incentive).

Executive Directors are required to demonstrate a significant personal shareholding commitment to Unilever. Within five years of appointment, they are expected to hold shares worth 150% of their annual base salary. This reinforces the link between the executives and other shareholders.

Global Performance Share Plan (GPSP)
Under the GPSP conditional rights over shares in NV and PLC are awarded annually to Executive Directors. For Executive Directors the value of a grant of conditional shares will not exceed 50% of base salary. The number of shares actually received at the end of the performance periods of the three years depends on the satisfaction of the performance targets.

The performance measures for vesting are underlying sales growth (for 50% of the award) and ungeared free cash flow (for 50% of the award). These are key performance measures in Unilever’s external reporting. Underlying sales growth focuses on the organic growth of Unilever’s turnover. Ungeared free cash flow expresses the translation of profit into cash and thus longer-term economic value.

In respect of performance targets, there is a minimum and a maximum performance range for each of the two measures and associated vesting levels. Each year, the Remuneration Committee reviews the performance targets by taking account of market conditions and internal financial planning.

Total Shareholder Return (TSR) Long-Term Incentive Plan
This plan rewards Executive Directors for creating more value for Unilever’s shareholders when compared with the investment returns generated by competitors.

Under this plan conditional rights over shares in NV and PLC are awarded annually to Executive Directors.

The level of conditional annual award in 2006 is as follows:

Group Chief Executive: Shares in NV and PLC to the combined value of €800 000; and
Other Executive Directors: Shares in NV and PLC to the combined value of €500 000.

Vesting is subject to Unilever’s relative TSR performance. TSR measures the returns received by a shareholder, capturing both the increase in share price and the value of dividend income (assuming dividends are reinvested). Unilever’s TSR performance is compared with a peer group of competitors over a three-year performance period. The TSR results are compared on a single reference currency basis.

No shares will vest if Unilever is ranked below position 11 of the TSR ranking table over the three-year period. Between 25% and 200% of the shares will vest if Unilever is ranked in the top half of the table as shown below:

Vested award    
  % of original conditional  
TSR peer group ranking award that will vest  


 
12th to 21st 0%  
10th or 11th 25%  
8th or 9th 50%  
5th to 7th 100%  
3rd or 4th 150%  
1st or 2nd 200%  


 

 

Unilever Annual Report on Form 20-F 2006 51

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Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Peer group:  
Avon Kraft
Beiersdorf Lion
Cadbury Schweppes L’Oréal
Clorox Nestlé
Coca-Cola Orkla
Colgate Pepsico
Danone Procter & Gamble
Heinz Reckitt Benckiser
Kao Sara Lee
Kimberly-Clark Shiseido

Share Matching Plan (linked to the annual incentive) The Share Matching Plan enhances the alignment with shareholders’ interests and supports the retention of key executives. In addition, the necessity to hold the shares for a minimum period of three years supports the shareholding requirements set out on page 51.

The Executive Directors receive 25% of their annual incentive in the form of NV and PLC shares. These are matched with an equivalent number of matching shares. The matching shares will vest after three years provided that the underlying shares have been retained during this period and the Executive Director has not resigned or been dismissed.

The Remuneration Committee considers that there is no need for further performance conditions on the vesting of the matching shares because the number of shares is directly linked to the annual incentive (which is itself subject to demanding performance conditions). In addition, during the three-year vesting period the share price of NV and PLC will be influenced by the performance of Unilever. This, in turn, will affect the ultimate value of the matching shares on vesting.

Executive Directors’ pensions
The Remuneration Committee has decided that from 2007 new Executive Directors will be members of the all-employee pension arrangement of their home country. Executive Directors appointed prior to 2007 have a defined benefit pension of two-thirds of final salary payable at retirement from age 60. Annual incentive is not pensionable except for Executive Directors appointed prior to the change of policy for Executive Directors in 2005 for whom annual incentive is pensionable up to a maximum of 20% of base salary.

Other benefits and allowances
Executive Directors enjoy similar benefits to many other employees of Unilever. For example, like other employees, Executive Directors are able to participate in the UK Employee ShareSave Plan, the UK Share Incentive Plan (‘ShareBuy’) and the All Employee Option Plan in the Netherlands.

Some of the Executive Directors serve as a non-executive on the Board of another company. Unilever requires that all remuneration and fees earned from outside directorships are paid directly to Unilever.

Future developments
Changes will be proposed for the structure and level of the Unilever incentive plans. In summary these changes enhance variable awards relative to fixed pay and simplify the share-based incentives.

Details of the proposed changes to Unilever’s long-term incentive arrangements are described in the notice to shareholders for the 2007 AGMs.

The Remuneration Committee intends to continue monitoring trends and changes in the market. It keeps a watching brief on the continuing alignment between Unilever’s strategic objectives and the reward policy for Executive Directors.

Commentary on Executive Directors’ Remuneration paid in 2006
The tables on pages 55 to 60 give details of the specific elements of Executive Directors’ reward packages in 2006.

Base salary
In 2006, base salary levels were benchmarked against those paid in other major global companies based in Europe, excluding companies in the financial sector. The increases for 2006 reflect the change in market levels as well as individual and Group performance. The 2006 annual base salary levels for the Executive Directors are set out below:



Based in the UK  
Patrick Cescau   £ 972 500


Ralph Kugler £ 587 500


Rudy Markham £ 664 500


Based in the Netherlands  
Kees van der Graaf  798 000


Annual incentive
The annual incentive awards for 2006 were subject to achievement of underlying sales growth and trading contribution targets in combination with individual key strategic business targets. The Committee measured the results against the targets set and determined the annual incentive amounts for 2006.

Long-term incentive arrangements

Global Performance Share Plan
  The performance period of the first award ends on 31 December 2007 and therefore no award vested in 2006.The second award was made in 2006 for the performance period 2006-2008.
 
TSR Plan
  The conditional shares awarded in 2003 lapsed in 2006 because the vesting was based on the TSR performance of Unilever (when ranked against its defined peer group with competitors) over the three-year performance period which ended 31 December 2005. For this period, Unilever was ranked 14 in this peer group and therefore no vesting occurred for this award in March 2006 and the shares lapsed.

 

52 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

Share Matching Plan
  The matching shares originally granted in 2003 on a conditional basis vested in 2006, subject to fulfilment of the retention conditions.
   
Executive Share Options
  The grants of executive share options made in 2003 became exercisable as from 2006. As the 2003 grant was based on Unilever’s EPS performance, the options at vesting were subject to no further conditions.

Pensions
The Netherlands all-employee pension plan benefit basis was changed from final salary to career average earnings at 31 December 2006. This had a small impact on the accrued pension of the Netherlands-based Executive Director.

During 2006, in line with the treatment adopted for other UK-based employees, individual contributions paid by Executive Directors in the UK are now paid through a salary sacrifice arrangement.

Non-Executive Directors
The Non-Executive Directors receive fees from both NV and PLC. No other remuneration is given in respect of their Non-Executive duties from either NV or PLC, such as annual incentives, share-based incentives or pension benefits.

The level of their fees reflects their commitment and contribution to the companies. The levels were increased in 2006 as a market analysis against Unilever’s peers showed that Unilever had fallen behind in this area. The Remuneration Committee believes that the levels outlined below are fair in the light of the responsibilities carried out by Non-Executive Directors and in view of the need to attract and retain Non-Executive Directors of the appropriate calibre and standing.

The current fee levels are set out below:

Non-Executive Role Fees payable by PLC Fees payable by NV



Chairman £175 000 255 000



Senior Independent Director £45 000 65 000



Chairman of Audit Committee £38 000 55 000



Board Committee Chairman £35 000 50 000



Other Non-Executive Directors £31 000 45 000



An additional £5 000 per meeting will be paid to Non-Executive Directors who have to travel to meetings from outside Europe.

Other items

Unilever’s share performance relative to broad-based equity indices
The UK Companies Act 1985 (schedule 7A) requires us to show Unilever’s relative share performance, based on Total Shareholder Return, against a holding of shares in a broad-based equity index for the last five years. The Remuneration Committee has decided to show Unilever’s performance against two indices, namely the FTSE 100 Index, London, and the Euronext AEX Index, Amsterdam as these are the most generally used indices in the UK and the Netherlands, where we have our principal listings.

Five-Year Historical TSR Performance

Growth in the value of a hypothetical £100 holding over five years FTSE 100 comparison based on 30 trading day average values


Growth in the value of a hypothetical investment over five years AEX comparison based on 30 day average values


 

Unilever Annual Report on Form 20-F 2006 53

Back to Contents

   
Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Remuneration committee

Role and responsibilities
The Committee is responsible for making proposals to the Boards on the reward policy for Executive Directors. It is also responsible for setting individual reward packages for Executive Directors and for monitoring and approving all share-based incentive arrangements. The Committee meets at least three times a year and, during 2006, it met on six occasions.

Structure and role
Bertrand Collomb stepped down as Chairman of the Committee at the AGM 2006. At the same time David Simon became the new Chairman of the Committee and Jean-Cyril Spinetta joined as member of the Committee. The other Non-Executive Director of the Committee is Jeroen van der Veer.

Advice and assistance
The Committee does not formally retain remuneration consultants. It seeks professional advice from external advisers as and when required. During 2006, the Committee sought advice from Towers Perrin (an independent firm of human resources specialists) on market data, reward trends and performance-related pay. Towers Perrin also provides general consultancy advice to Unilever group companies on employee rewards, pension, communications and other human resource matters.

The Group Chief Executive can be invited to attend Committee meetings to provide his own insights to the Committee on business objectives and the individual performance of his direct reports. Naturally, he does not attend when his own remuneration is being discussed.

The Non-Executive Chairman can, in his role as Chairman of the Board, also attend the meetings.


 

54 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

The following section contains detailed information on the Executive Directors’ annual remuneration, long-term incentives, pension benefits and share interests in respect of 2006.

Aggregate remuneration for Executive Directors
The following table gives details of the aggregate remuneration (including value of the vesting of matching shares and exercise of options) as a group.

  € ’000   € ’000  
  2006   2005  




 
Annual emoluments        
Base salary 4 061   5 219  




 
Allowances and other payments:        
       Allowances 178   255  
       Other payments(a) 735   2 586  




 
Benefits 111   264  




 
Performance-related payments (annual incentive) 2 409   2 752  




 
Sub-total of annual emoluments 7 494   11 076  




 
Other income arising from vesting/exercise of long-term incentives(b)         
Gains on exercise of share options 427   10  




 
Vesting of matching shares 566   1 149  




 
Vesting of TSR Long-Term Incentive Plans    




 
Total of annual emoluments and other income arising from long-term incentives 8 487   12 235  




 
(a) Other payments include payments to Antony Burgmans and André van Heemstra following contractual obligations.
(b) Includes the gains realised in 2006 following the exercise of share options granted in earlier years and the value of matching shares vested in 2006. No value is attributed to TSR Long-Term Incentive Plan as the shares which were conditionally granted in 2003 did not vest and lapsed in 2006.

Remuneration for individual Executive Directors
The following table gives details of the remuneration received in 2006 (including the value of vested share match and options exercised at the end of the exercise period) by each Executive Director individually.

                          Other income arising from          
                          long-term incentives and          
  Annual Emoluments 2006       exercise of options in 2006          
 




     
         
      Allowances                               Grand   Grand  
  Base   and other           Total   Total   Option   Share       total   total  
  salary   payments (a) Benefits (b) Bonus (c)  2006   2005   gains   match   TSR/LTIP   2006   2005  
Name and Base Country € ’000   € ’000   € ’000   € ’000   € ’000   € ’000   € ’000   € ’000   000   € ’000   € 000  






















 
Patrick Cescau (UK)(d)  1 426   109   51   1 141   2 727   2 544     213     2 940   2 742  






















 
Kees van der Graaf (NL) 798   14   23   367   1 202   1 119     85     1 287   1 173  






















 
Ralph Kugler (UK) 862   27   10   414   1 313   817     101     1 414   827  






















 
Rudy Markham (UK) 975   28   27   487   1 517   1 425   427 (e)  167     2 111   1 610  






















 
               
Following notice period payments made to former Executive Directors:  













 
Antony Burgmans ( NL) Jan – May   674           674                   674      





















 
André van Heemstra (NL) January   61           61                   61      






















 
(a) Include: allowance in lieu of company car; blind trust fees compensation; compensation for loss of net income because part of the salary had to be paid in the Netherlands; entertaining allowance; allowance for cost on chauffeur driven cars and employers cost for the all-employee savings plan in the Netherlands. All allowances are taxable in the country of residence apart from the entertaining allowance which is currently tax free in the Netherlands. Also includes payments to Antony Burgmans and André van Heemstra following contractual obligations.
(b) Include: benefits for company car; medical insurance; private use chauffeur driven cars; and housing (for business use) instead of hotel. Included are benefits that are taxable in the country of residence. In addition, Unilever provides support to Executive Directors in relation to spouse’s travel expenses when travelling together on company business. This amount is capped at 5% of base salary and for 2006 totalled €206 083 (including related taxes payable).
(c) Bonus of the year 2006. Include: the value of both the cash element and the element paid in shares of Unilever N.V. and PLC. In addition to the element of the bonus paid in shares each Executive Director is awarded, on a conditional basis, an equivalent number of matching shares.
(d) Group Chief Executive.
(e) All shares under option purchased and retained.

Figures have been translated into euros using the following exchange rate: €1 = £0.6818 (2005: €1 = £0.6837)

 

Unilever Annual Report on Form 20-F 2006 55

Back to Contents

   
Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Executive Directors’ Global Performance Share Plan
The following conditional shares were outstanding, awarded or vested during 2006 under the Global Performance Share Plan:

                  Balance of  
      Balance of conditional   Conditional grant made 21 March 2006   conditional shares at  
      shares at 1 January 2006   (Performance period 2006 to 2008 (b) 31 December 2006  
     
 
 
 
  Share type   No. of shares (a) No. of shares (a) Price at award (a) No. of shares  










 
Patrick Cescau NV   9 000          9 000   €19.10   18 000  
  PLC   9 000          9 000   1 301.11 p 18 000  










 
Kees van der Graaf NV   6 000          6 000   €19.10   12 000  
  PLC   6 075          6 075   1 301.11 p 12 150  










 
Ralph Kugler NV   6 000          6 000   €19.10   12 000  
  PLC   6 075          6 075   1 301.11 p 12 150  










 
Rudy Markham NV   6 000          6 000   €19.10   12 000  
  PLC   6 075          6 075   1 301.11 p 12 150  










 
(a) Number of shares and share prices have been recalculated following the share split and consolidation.
(b) Each award of performance shares is conditional and vests subject to certain conditions three years after the date of the award. The 2006 awards are subject to the performance period 1 January 2006 to 31 December 2008.

Executive Directors’ conditional share awards under the TSR Long-Term Incentive Plan
Conditional rights to ordinary shares in NV and PLC were outstanding, granted or vested/lapsed in 2006 as shown in the table below:

      Balance of                   Balance of  
      conditional   Conditional award   Conditional awards   conditional  
      shares   made 21 March 2006   lapsed 25 March 2006   shares at  
      at 1 January   (Performance period   (Performance period   31 December  
      2006   2006 to 2008 )(a)     2003 to 2005 )(b) 2006  
     
 
 
 
 
 
                      Original      
  Share   No. of   No. of   Price at   No. of   price   No. of  
  type   shares (c) shares (c) award (c) shares (c) at award) (c) shares  














Patrick Cescau NV   51 144   20 943   €19.10   (13 611 ) €18.37   58 476  
  PLC   52 118   21 326     1 301.11 p (12 995 ) 1 300 p 60 449  














 
Kees van der Graaf NV   31 281   13 089   €19.10   (8 169 ) €18.37   36 201  
  PLC   31 888   13 329   1 301.11 p (7 795 ) 1 300 p 37 422  














 
Ralph Kugler NV   31 281   13 089   €19.10   (8 169 ) €18.37   36 201  
  PLC   31 888   13 329   1 301.11 p (7 795 ) 1 300 p 37 422  














 
Rudy Markham NV   42 267   13 089   €19.10   (13 611 ) €18.37   41 745  
  PLC   42 845   13 329   1 301.11 p (12 995 ) 1 300 p 43 179  














(a) The end date of the performance period in respect of the conditional award made in 2006 is 31 December 2008.
(b) The conditional awards made in 2003, which vested in 2006 were based on the TSR performance of Unilever (when ranked against its defined peer group) over the three-year performance period ending 31 December 2005. For this period, Unilever was ranked 14 out of its peer group and therefore no vesting occurred for this award in March 2006 and the awarded shares of the award 2003 lapsed.
(c) The numbers of shares and prices have been converted following the share split and share consolidation which took place on 22 May 2006.

Antony Burgmans changed from Executive to Non-Executive Director at the 2005 AGMs and assumed his new role of Non-Executive Chairman. In his capacity as an Executive Director Antony Burgmans was granted conditional shares under the TSR Long-Term Incentive Plan.

Below are details of the balances and vesting of shares under this Plan:

      Conditional      
  Balance   award lapsed   Balance  
  1 January   25 March   31 December  
  2006 (a) 2006(a) (b) 2006  






 
NV 43 962   (21 780 ) 22 182  
PLC 43 814   (20 790 ) 23 024  






 
(a) The number of shares and prices have been converted following the share split and share consolidation which took place on 22 May 2006.
(b) The conditional shares awarded in 2003 lapsed in March 2006.

In his capacity as a Non-Executive Chairman, Antony Burgmans does not participate in any share-based remuneration.

 

56 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

Executive Directors’ conditional share awards under the TSR Long-Term Incentive Plan (continued)
Unilever’s position relative to the TSR reference group

   
The reference group, including Unilever, consists of 21 companies. Unilevers position is based on TSR over a three-year rolling period.    

Executive Directors’ Share Matching Plan
The following conditional shares were outstanding, awarded or vested during 2006 under the share matching plan:

      Balance of                       Balance of  
      conditional                       conditional  
      shares                       shares at  
      at 1 January   Conditional shares       Shares vested on   31 December  
      2006   awarded in 2006 (a)(b)     24 March 2006 (a)(c) 2006  
     
 
 


 
 
                          Market   Original  
  Share   No. of   No. of   Price at   No. of   price   price   No. of  
  type   shares (a) shares   award   shares   at vesting   at award   shares  
















Patrick Cescau NV   7 932   6 552   €19.10   (5 706 ) €19.15   €18.37   8 778  
  PLC   7 770   6 671   1 301.11 p (5 449 ) 1 298.89 p 1 300 p 8 992  
















 
Kees van der Graaf NV   4 293   2 211   €19.10   (2 238) (d) €19.15   €18.37   4 266  
  PLC   4 439   2 254   1 301.11 p (2 299) (d) 1 298.89 p 1 300 p 4 394  
















 
Ralph Kugler NV   4 359   2 175   €19.10   (2 703 ) €19.15   €18.37   3 831  
  PLC   4 305   2 215   1 301.11 p (2 584 ) 1 298.89 p 1 300 p 3 936  
















 
Rudy Markham NV   6 675   2 739   €19.10   (4 482 ) €19.15   €18.37   4 932  
  PLC   6 552   2 788   1 301.11 p (4 269 ) 1 298.89 p 1 300 p 5 071  
















(a) The numbers of shares and prices have been converted following the share split and share consolidation which took place on 22 May 2006.
(b) Each award of matching shares is conditional and vests three years after the date of the award subject to certain conditions. The 2006 award was made on 21 March 2006 and will vest on 21 March 2009.
(c) The conditional shares awarded on 25 March 2003 (relating to the 2002 performance period) vested on 24 March 2006.
(d) Includes conditional shares awarded in 2001: 1 041 NV (original granted at €20.97) and 1 155 PLC (original granted at 1 174p).

Antony Burgmans changed from Executive to Non-Executive Director at the 2005 AGMs and assumed his new role of Non-Executive Chairman. In his capacity as an Executive Director Antony Burgmans was granted conditional share under the Executive Directors’ Share Plan.

Below details of the balances and vesting of shares under this Plan:

      Conditional          
  Balance   shares   Shares vested   Balance  
  1 January   awarded   24 March   31 December  
  2006 (a) in 2006 (a)(b) 2006 (a)(c) 2006  








 
NV 9 909   1 743   (7 083 ) 4 569  
PLC 9 698   1 773   (6 759 ) 4 712  








 
(a) The number of shares and prices have been converted following the share split and share consolidation which took place on 22 May 2006.
(b) The award was made 21 March 2006 and related to the period January to May 2005. The award will vest on 21 March 2009.
(c) The conditional shares awarded 25 March 2003 vested on 24 March 2006.

In his capacity as a Non-Executive Chairman, Antony Burgmans does not participate in any share-based remuneration.

 

Unilever Annual Report on Form 20-F 2006 57

Back to Contents

   
Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Executive Directors’ share options
Details of the option plans under which Executive Directors and employees are able to acquire ordinary shares of NV and PLC are shown in note 29 on pages 117 to 121.

Options to acquire NV ordinary shares of €0.16 each and options to acquire PLC ordinary shares of 31/9p each were granted, exercised, lapsed and held during 2006 as follows:

                      Options outstanding   Options outstanding          
                      below market price   above market price          
                      at 31 December 2006   at 31 December 2006          
                     
 
       
              Number                              
      Balance of   Number   of options   Balance of       Weighted       Weighted          
      options at   of options   exercised/   options at       average       average   First   Final  
  Share   1 January   granted   lapsed   31 December   Number   exercise   Number   exercise   exercisable   expiry  
  type   2006 (a) in 2006   in 2006   2006   of shares   price   of shares   price   date   date  




















Patrick Cescau                                            
Executive Plan NV   269 166       269 166   135 237   €17.66   133 929   €22.08   08/05/01   08/11/15  
Executive Plan PLC   272 967       272 967   245 967   1 175 p 27 000   1 483 p 08/05/01   08/11/15  
NL All-Employee Plan NV   750   150 (b) (150) (c) 750   600   €17.53   150   €22.63   12/06/02   17/05/11  
UK ShareSave Plan PLC     1 374 (d)   1 374   1 374   1 171 p       01/10/11   31/03/12  




















 
Kees van der Graaf                                            
Executive Plan NV   135 450       135 450   83 250   €18.30   52 200   €21.94   24/03/02   08/11/15  
Executive Plan PLC   135 450       135 450   135 450   1 203 p     24/03/02   08/11/15  
NL All-Employee Plan NV   750   150 (b) (150) (c) 750   600   €17.53   150   €22.63   12/06/02   17/05/11  
UK ShareSave Plan PLC   1 374       1 374   1 374   1 202 p     01/10/10   31/03/11  




















 
Ralph Kugler                                            
Executive Plan NV   176 625       176 625   120 600   €18.19   56 025   €22.04   24/03/02   20/03/15  
Executive Plan PLC   176 625       176 625   176 625   1 163 p     24/03/02   20/03/15  
NL All-Employee Plan NV   150   150 (b)   300   300   €17.59       18/05/05   17/05/11  
UK ShareSave Plan PLC   1 374       1 374   1 374   1 202 p     01/10/10   31/03/11  




















 
Rudy Markham                                            
Executive Plan NV   264 150     (27 000) (e) 237 150   130 500   €17.60   106 650   €22.21   08/05/01   20/03/15  
Executive Plan PLC   278 682     (41 532) (f)(g) 237 150   203 400   1 167 p 33 750   1 483 p 08/05/01   20/03/15  
NL All-Employee Plan NV   750   150 (b) (150) (c) 750   600   €17.53   150   €22.63   12/06/02   17/05/11  
UK ShareSave Plan PLC   1 373       1 373   1 373   1 190 p     01/10/09   31/03/10  




















(a) The number of shares and the share prices have been converted following the share split and share consolidation which took place on 22 May 2006.
(b) Grants made under the Dutch All-Employee Option Plan on 18 May 2006 at an option price of €17.50.
(c) Options lapsed without value on 30 May 2006.
(d) Grants made under the UK All-Employee ShareSave Plan on 3 July 2006 at an option price of 1 171p.
(e) Options exercised on 1 December 2006 at a market price of €19.97. The options had originally been granted on 2 June 1997 at a price (after taking into account the share split in May 2006) of €14.26.
(f) Options in respect of 14 532 shares exercised on 2 June 2006 at a market price of 1 188p. The options had originally been granted on 6 December 1996 at a price (after taking into account the share consolidation in May 2006) of 762p.
(g) Options in respect of 27 000 shares exercised on 1 December 2006 at a market price of 1 363p. The options had originally been granted on 2 June 1997 at a price (after taking into account the share consolidation in May 2006) of 904p.

The value, calculated in accordance with an adjusted Black-Scholes pricing method in respect of options granted in 2006 to the current Executive Directors was as follows: Patrick Cescau €6 155; Kees van der Graaf €432; Ralph Kugler €432; and Rudy Markham €432.

The term ‘Executive Plan’ refers to options granted under the PLC or NV Executive Option Plans.

The closing market prices of ordinary shares at 31 December 2006 were €20.70 (NV shares) and 1 428p (PLC shares). During 2006 the highest market prices were €20.84 and 1 428p respectively, and the lowest market prices were €16.53 and 1 125p respectively.

Antony Burgmans changed from Executive to Non-Executive Director at the 2005 AGMs and assumed his new role of Non-Executive Chairman. In his capacity as an Executive Director Antony Burgmans was granted share options under the Executive Plan and the Dutch All-Employee Plan.

Below are details of his outstanding options under the Option plans:

              Number                              
      Balance of   Number   of options   Balance of   Balance   Weighted   Balance   Weighted          
      options at   of options   exercised/   options at   below   average   above   average   First   Final  
  Share   1 January   granted   lapsed   31 December   market   exercise   market   exercise   exercisable   expiry  
Plan type   2006   in 2006   in 2006   2006   price   price   price   price   date   date  






















 
Executive Option NV   316 800       316 800   203 400   €17.61   113 400   €21.78   24/03/02   13/02/09  
Executive Option PLC   316 800       316 800   316 800   1 163 p     24/03/02   13/02/09  
NL All-Employee Plan     600     (150 )(a) 450   300   €17.47   150   €22.63   12/06/02   12/05/09  






















 
(a) Options lapsed without value on 30 May 2006.

In his capacity as a Non-Executive Chairman, Antony Burgmans does not participate in any share-based remuneration.

 

58 Unilever Annual Report on Form 20-F 2006

Back to Contents

   
  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

Executive Directors’ pensions(a)
Pension values for the year ended 31 December 2006 are set out below.

                      Increase          
          Increase in       Transfer   in transfer       Transfer  
          accrued       value of   value during   Individual   value of  
      Accrued   pension   Accrued   accrued   2006 (less   contributions   accrued  
      pension at   during   pension at   pension at   individual   made during   pension at  
  Age at   31/12/05 (b) 2006 (c)  31/12/06 (b) 31/12/05 (d) contributions) (e) 2006 (f) 31/12/06 (d)
Name and base country 31/12/06   €’000 pa   €’000 pa   €’000 pa   €’000   €’000   €’000   €’000  
















 
Patrick Cescau (UK) 58 933   67   1 000   16 770 1 874   18   18 662  
















 
Kees van der Graaf (g) (NL) 56 538   64   602   6 942 1 147   9   8 098  
















 
Ralph Kugler (UK) 50 396   45   441   5 411 862   10   6 283  
















 
Rudy Markham (UK) 60 752   41   793   15 147 741   21   15 909  
















 
(a)  Figures have been translated into euros where necessary using the following exchange rates: 31 December 2005 €1.00 = £0.6864; 31 December 2006 €1.00 = £0.6712; Average for the year ended 31 December 2006 €1.00 = £0.6818.
(b)   Based on the Executive Directors’ current pension letters and calculated on a deferred basis using the Executive Directors’ service to 31 December 2005 and 31 December 2006 respectively on the basis that the Executive Directors remain in service until at least age 60 and that the pension payment commences at that time. It includes all pensions provided from Unilever pension plans. In the event that an Executive Director leaves service prior to age 60 and the payment of pension commences earlier than age 60, the pension payable would be on a reduced basis.
(c) Includes the effect of inflation on the accrued pension at 31 December 2005.
(d)  For the Netherlands-based Executive Directors’ arrangement calculated on the basis used by the Unilever Netherlands pension plan (‘Progress’), as prescribed by the Netherlands Ministry of Social Affairs and Employment. For the UK-based Executive Directors’ arrangement calculated on the market related basis used by Unilever United Kingdom pension plan (UUKPF), in line with the GN11 guidance note published by the Institute and Faculty of Actuaries in the United Kingdom. 
(e) The increase in transfer value during 2006 includes the effect of salary increases and additional service together with exchange rate movements (for pensions denominated in currencies other than Euro) and the Executive Directors being one year closer to retirement.
(f) Consistent with other Netherlands and UK-based employees, the rate of individual contributions in the Netherlands is 1% of pensionable salary and in the UK 5% of pensionable salary (above the relevant thresholds). In line with the treatment adopted for other UK-based employees, individual contributions paid by Executive Directors’ in the UK are now paid through a salary sacrifice arrangement. Individual contributions shown above represent the contributions paid before the change to salary sacrifice.
(g) Consistent with the treatment adopted for other Netherlands-based employees, the increase in pension accrued during the year includes the impact of the changes to the Unilever Netherlands pension plan.

The Listing Rules of the Financial Services Authority are different from the Directors’ Remuneration Report Regulations 2002 and require the following disclosures for defined benefit pension plans which are calculated on an alternative basis to those disclosed in the table above:

Increase (or decrease) in accrued pension during 2006 (excluding the effect of inflation on the accrued pension at 31 December 2005): Patrick Cescau €33 000; Kees van der Graaf €56 000; Ralph Kugler €10 000; Rudy Markham €(4 000); and
   
Transfer value at 31 December 2006 of the increase (or decrease) in accrued pension during 2006 (excluding the effect of inflation on the accrued pension at 31 December 2005 and less individual contributions): Patrick Cescau €605 000; Kees van der Graaf €754 000; Ralph Kugler €134 000; Rudy Markham €(110 000).

The Dutch Corporate Governance Code requires the following disclosure of pension service costs charged to operating profit: Patrick Cescau €842 000; Kees van der Graaf €258 000; Ralph Kugler €299 000; Rudy Markham €167 000.

The accrued pension of Antony Burgmans at 1 June 2006 (the date his pension payment commenced) was €1 136 000; increase in accrued pension during the year €22 000 (€21 000 excluding inflation); transfer value of the increase in accrued pension during the year (less individual contributions) €652 000 (€337 000 excluding inflation); individual contributions made during the year €10 000; pension cost charged to operating profit €621 000.

 

Unilever Annual Report on Form 20-F 2006 59

Back to Contents

   
Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Executive Directors’ interests – share capital
The interests in the share capitals of NV and PLC and their group companies of those who were Executive Directors at 31 December 2006 and of their immediate families were as shown in the table below:

      Shares held at   Shares held at  
      1 January 2006   31 December 2006  
      (excluding unvested   (excluding unvested  
Name Share type(a)       matching shares )(b) matching shares )






 
Patrick Cescau(c)  NV   69 351   85 059  
  PLC   40 230   52 347  






 
Kees van der Graaf NV   18 708   23 157  
  PLC   12 037   16 718  






 
Ralph Kugler NV   41 628   45 396  
  PLC   16 264   20 124  






 
Rudy Markham NV   127 044   161 265  
  PLC   64 606   113 329  






 
(a) NV shares are ordinary €0.16 shares and PLC shares are ordinary 3 1/9p shares.
(b) The numbers have been converted into the new denomination following the NV/PLC share split and share consolidation which took place on 22 May 2006.
(c) Balances include under NV 38 715 NV New York shares and under PLC 10 220 PLC ADRs.

The Executive Directors, in common with other employees of PLC and its United Kingdom subsidiaries, had beneficial interests in 19 454 453 PLC ordinary shares at 1 January 2006 (converted into the new denomination following the shares split and consolidation) and 16 678 871 PLC ordinary shares at 31 December 2006, acquired by the Unilever Employee Share Trust (Jersey) for the purpose of satisfying options and vesting of shares under various group share plans (including the PLC Executive Option Plans and the UK Employee ShareSave Plan). Further information, including details of the NV and PLC ordinary shares acquired by certain group companies in connection with other share-based compensation plans, is given in note 29 on pages 117 to 121.

The voting rights of the Directors who hold interests in the share capitals of NV and PLC are the same as for other holders of the class of shares indicated. None of the Directors’ or other executive officers’ shareholdings amounts to more than 1% of the issued shares in that class of share. Except as stated above, all shareholdings are beneficial.

The only changes in the interests of the Executive Directors and their families in NV and PLC ordinary shares between 31 December 2006 and 1 March 2007 were that:

The holding of the Unilever Employee Share Trust (Jersey) has reduced to 16 313 295 PLC ordinary shares; and
   
Kees van der Graaf, Ralph Kugler and Rudy Markham each acquired further interests in 18 PLC ordinary shares during January and February due to monthly ShareBuy purchases.

 

60 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Report of the Remuneration Committee (continued)

 

Non-Executive Directors’ remuneration
The total fees payable to each Non-Executive Director in 2006 are set out below:

     
  Total fees paid   Total fees paid  
Current Non-Executive Directors in 2006 (a) in 2005 (a)




 
Leon Brittan(b) 82 712   67 102  




 
Antony Burgmans(c) 299 614    




 
Lynda Chalker(d) 94 403   80 415  




 
Wim Dik(b)(e) 84 663   67 102  




 
Charles Golden(e)(f)(g) 89 478   n/a  




 
Byron Grote(e)(f) 60 311   n/a  




 
David Simon(h) 109 735   67 102  




 
Jean-Cyril Spinetta(f)(i) 60 311   n/a  




 
Kees Storm(f)(j) 75 137   n/a  




 
Jeroen van der Veer(i) 82 712   67 102  




 
     
Former Non-Executive Directors    




 
Bertrand Collomb(k)(l) 42 001   100 654  




 
Oscar Fanjul(e)(l) 28 000   67 102  




 
Hilmar Kopper(j)(l) 33 557   80 415  




 
(a) Covers fees and allowances received from both NV and PLC.
(b) Member of the Corporate Responsibility and Reputation Committee.
(c) Chairman NV and PLC, and Nomination Committee member. Received fee as Chairman since June 2006.
(d) Chairman of the Corporate Responsibility and Reputation Committee.
(e) Member of the Audit Committee.
(f) Appointed at 2006 AGMs.
(g) Total fees include €29 167 allowance for travel from outside Europe.
(h) Senior Independent Director, Vice Chairman and Chairman of the Remuneration and Nomination Committees as from 2006 AGMs. Until 2006 AGMs member of the Nomination and Remuneration Committees.
(i) Member of the Nomination and Remuneration Committees.
(j) Chairman of the Audit Committee.
(k) Senior Independent Director, Vice Chairman and Chairman of the Remuneration and Nomination Committees until 2006 AGMs.
(l) Stepped down at the 2006 AGMs.

 

Unilever Annual Report on Form 20-F 2006 61

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Report of the Directors (continued)  
   
Report of the Remuneration Committee (continued)

 

Non-Executive Directors’ interests – share capital
The interests in the share capitals of NV and PLC and their group companies of those who were Non-Executive Directors as at 31 December 2006 (including those of their immediate families) were as shown below:

      Shares held at   Shares held at  
Name Share type (a) 1 January 2006 (b) 31 December 2006  






 
Leon Brittan NV      
  PLC      






 
Antony Burgmans NV   133 848   137 334  
  PLC   58 511   62 054  






 
Lynda Chalker NV      
  PLC   1 136   1 136  






 
Wim Dik NV      
  PLC      






 
Charles Golden NV      
  PLC      






 
Byron Grote NV   3 000 (c) (d) 3 000 (d)
  PLC   1 800 (c) (e)  1 800 (e)






 
David Simon NV      
  PLC   1 421   1 492  






 
Jean-Cyril Spinetta NV      
  PLC      






 
Kees Storm NV      
  PLC      






 
Jeroen van der Veer NV   16 800   16 800  
  PLC      






 
(a) NV shares are ordinary €0.16 shares and PLC shares are ordinary 3 1/9p shares.
(b) The numbers have been converted into the new denomination following the share split and share consolidation which took place on 22 May 2006.
(c) Balance at date of appointment at the AGMs in May 2006.
(d) Held in the form of NV New York shares.
(e) Held in the form of PLC ADRs.

There were no changes in the interests of the Non-Executive Directors and their immediate families in NV and PLC ordinary shares between 31 December 2006 and 1 March 2007.

The Report has been approved by the Boards and has been signed on their behalf by the Joint Secretaries, J A A van der Bijl and S G Williams.

By order of the Boards

 

J A A van der Bijl
S G Williams

Joint Secretaries of Unilever N.V. and Unilever PLC

6 March 2007

 

62 Unilever Annual Report on Form 20-F 2006

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  Report of the Directors (continued)
   
Report of the Audit Committee

 

The role of the Audit Committee is to assist the Unilever Boards in fulfilling their oversight responsibilities regarding the integrity of Unilever’s financial statements, risk management and internal control, compliance with legal and regulatory requirements, the external auditors’ performance, qualifications and independence, and the performance of the internal audit function. During the year ended 31 December 2006 the principal activities of the Committee were as follows:

Financial statements
The Committee considered reports from the Chief Financial Officer on the quarterly and annual financial statements and reviewed the Annual Report and Accounts and Annual Report on Form 20-F prior to publication.

Audit of the Annual Accounts
PricewaterhouseCoopers, Unilever’s external auditors, reported in depth to the Committee on the scope and outcome of the annual audit. Their reports included accounting matters, governance and control, and accounting developments.

Risk management and internal control arrangements
The Committee reviewed Unilever's overall approach to risk management and control, and its processes, outcomes and disclosure, including specifically:

review of level of disclosure in quarterly financial results announcements;
review of accounting principles and judgements with respect to financial statements;
review of management’s risk assessments in relation to the NV preference shares issued in 1999;
Corporate Audit’s interim and year-end reports on the Status of Risk Management and Control, and management’s response;
annual report from the Chief Financial Officer on business risks and positive assurance on operating controls and corporate policies; and a quarterly review of business risks and safeguards;
the interim and year-end reports from the Code of Business Principles Compliance Committee;
monitoring the resolution of complaints received through the global Ethics hotline which included a procedure for handling complaints and concerns relating to accounting, internal control and auditing matters;
quarterly review of progress of the implementation of the requirements under Section 404 of the Sarbanes-Oxley Act of 2002 with respect to internal controls over financial reporting;
review of the application of information and communication technology;
a review of the annual pension report and pensions related accounting and proposals;
annual review of anti-fraud arrangements;
a review of tax planning policy; and
review of treasury policies and consideration of proposals relating to capital injection, debt issuance, investment hedge and dividends.

External auditors
The Audit Committee conducted a formal evaluation of the effectiveness of the external audit process and carried out a formal review of the appointment of external auditors in October 2006. The Committee has approved the extension of the current external audit contract by one year, and recommended to the Boards the reappointment of the external auditors. On the recommendation of the Audit Committee, the Directors will be proposing the reappointment of PricewaterhouseCoopers at the AGMs in May 2007.

Both Unilever and the auditors have for many years had safeguards in place to avoid the possibility that the auditors’ objectivity and independence could be compromised. The Committee reviewed the report from PricewaterhouseCoopers on the actions they take to comply with the professional and regulatory requirements and best practice designed to ensure their independence from Unilever. The UK lead partner in charge of the audit, who was appointed in 2001, rotated off at the 2006 AGM and a new lead partner was appointed in May 2006, and assumed responsibility for the audit of the 2006 accounts.

The committee also reviewed the statutory audit, other audit, tax and other services provided by PricewaterhouseCoopers, and compliance with Unilever’s policy, which prescribes in detail the types of engagements for which the external auditors can and cannot be used:

statutory audit services – as detailed above, including audit of subsidiaries;
other audit services – work which regulations or agreements with third parties require the auditors to undertake e.g. in connection with borrowings and shareholder services;
other services – statutory auditors may carry out work that they are best placed to undertake, including internal control reviews;
acquisition and disposal services – where the auditors are best placed to do this work;
tax services – all significant tax consulting work is put to tender, except where the auditors are best placed to do this; and
general consulting – external auditors may not tender for general consulting work.

All engagements over €100,000 require specific advance approval of the Audit Committee Chairman. The overall policy is regularly reviewed and updated in the light of internal developments, external developments and best practice.

The Committee held independent meetings with the external auditors during the year.

Internal audit function
The Committee engaged in discussion and review of the Corporate Audit Department’s audit plan for the year, and approved its budget and resource requirements.

The Committee carried out a formal evaluation of the performance of the internal audit function and confirmed that they were satisfied with their relationship with the Chief Auditor.

The Committee held independent meetings with the Chief Auditor during the year.

Audit Committee terms of reference
The Audit Committee’s terms of reference can be viewed on Unilever’s website at www.unilever.com or supplied on request. In February 2006, the terms of reference were updated to reflect requirements under the Dutch Corporate Governance Code that the Audit Committee has oversight of the policy of the Group on tax planning, the financing of the Group, and the applications of information and communication technology.

The Audit Committee carried out a self-assessment of its own performance.

Kees Storm Chairman of the Audit Committee
Wim Dik
Charles Golden
Byron Grote


 

Unilever Annual Report on Form 20-F 2006 63

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Report of the Directors (continued)   
   
Report of the Corporate Responsibility and Reputation Committee

 

Terms of reference
In 2006, the Committee revised its name and terms of reference and made the following adjustments:

the members of the Committee will include the Executive Director who chairs the Corporate Responsibility Council;
the Committee has oversight of and will make recommendations to the Boards on Unilever’s conduct with regard to corporate and societal obligations and its reputation as a responsible corporate citizen;
it will ensure that appropriate communications policies are in place and working effectively to build and protect Unilever’s reputation internally and externally; and
it will provide oversight and guidance on the environmental and social impact of how Unilever conducts its business.

The full text of the Committee’s terms of reference can be found on Unilever’s website at www.unilever.com.

Meetings
In its four meetings held in 2006, the Committee focused on a review of its terms of reference, implementation of Unilever’s Code of Business Principles and its supplier code, corporate responsibility strategy as defined by the newly established Corporate Responsibility Council (consisting of executive members from supply chain, SEAC, communications and regional representatives), Unilever’s role in the Investment Climate Facility for Africa and policy issues such as biofuels.

The Committee welcomed the visibility and importance given to the Code by Executive Directors as an important mechanism to ensure that Unilever operates as a good corporate citizen. The Committee reviewed the programme for further embedding of the code in Unilever’s business operations, including the training module to keep the code alive and understood.

Unilever’s lead role in the Investment Climate Facility for Africa, launched at the World Economic Forum in Cape Town in June, was discussed. This initiative is supported by several companies,

governments, the EU Commission and the World Bank. Unilever’s commitment to help drive development and growth in Africa through public/private partnerships was fully endorsed.

The Committee noted good progress made on redefining Unilever’s corporate environmental strategy.

The important role and impact that values-led product brands have on the health and prosperity of the communities Unilever serve was discussed and the CEO leadership role recognised (Social Innovation: How values-led brands are helping to drive business strategy, speech by Patrick Cescau, available on Unilever’s website at www.unilever.com).

Policy issues discussed included Unilever’s strategy on biofuels. First generation biofuels are made from rapeseed oil and other ingredients generally used for food, while second generation biofuels are made from materials including wood, straw, pulp and waste. Members supported Unilever’s position to improve energy efficiency and set targets for the use of renewable energy with the aim of combating climate change causes. Members also agreed that biofuels can play an important role as an alternative energy provided they meet the criteria of being sustainable, efficient and not having a negative impact on public health. It was agreed that second generation biofuels would meet these criteria. Unilever should develop a strategy geared towards promoting that more resource, particularly in R&D, be allocated to accelerating the introduction of second generation biofuels and other sustainable, cost-effective sources of renewable energy.

Lynda Chalker Chair of the Corporate Responsibility and Reputation Committee
Leon Brittan
Antony Burgmans
Wim Dik
Ralph Kugler Executive Director


 

64 Unilever Annual Report on Form 20-F 2006

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  Financial Statements 
   

 

Financial Statements      Contents
             
      Statement of Directors’ responsibilities 66
      Management’s report on internal control over financial reporting 68
      Auditors’ report 69
      Consolidated income statement 70
      Consolidated statement of recognised income and expense 71
      Consolidated balance sheet 72
      Consolidated cash flow statement 73
      Notes to the consolidated accounts 74
      1 Accounting information and policies 74
      2 Segment information 79
      3 Gross profit and operating costs 83
      4 Staff costs 84
      5 Net finance costs 84
      6 Taxation 85
      7 Combined earnings per share 87
      8 Dividends on ordinary capital 88
      9 Goodwill and intangible assets 88
      10 Property, plant and equipment 90
      11 Other non-current assets 92
      12 Deferred taxation 93
      13 Inventories 94
      14 Trade and other receivables 94
      15 Cash and cash equivalents and other financial assets 95
      16 Borrowings 96
      17 Financial instruments and treasury risk management 99
      18 Trade payables and other liabilities 102
      19 Provisions 102
      20 Pensions and similar obligations 103
      21 Equity 108
      22 Share capital 109
      23 Other reserves 110
      24 Retained profit 111
      25 Commitments and contingent liabilities 112
      26 Acquisitions and disposals 113
      27 Assets held for sale and discontinued operations 114
      28 Reconciliation of net profit to cash flow from operating activities 116
      29 Share-based compensation plans 117
      30 Related party transactions 122
      31 Key management personnel 122
      32 Remuneration of auditors 123
      33 Events after the balance sheet date 123
      34 Divergences from United States GAAP 124
      35 Additional information for US investors 132
      Selected financial data 141
      Principal group companies and non-current investments 147

 

Unilever Annual Report on Form 20-F 2006 65

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Financial Statements (continued)   
   
Statement of Directors’ responsibilities

 

Annual accounts
The Directors are required by Title 9, Book 2 of the Civil Code in the Netherlands and the United Kingdom Companies Act 1985 to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Unilever Group, and the NV and PLC entities as at the end of the financial year and of the profit or loss and cash flows for that year.

The Directors consider that, in preparing the accounts, the Group and the NV and PLC entities have used the most appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all International Financial Reporting Standards as adopted by the EU which they consider to be applicable have been followed.

The Directors have responsibility for ensuring that NV and PLC keep accounting records which disclose with reasonable accuracy their financial position and which enable the Directors to ensure that the accounts comply with the relevant legislation. They also have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group, and to prevent and detect fraud and other irregularities.

This statement, which should be read in conjunction with the Auditors’ report, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the auditors in relation to the accounts.

A copy of the financial statements of the Unilever Group is placed on our website at www.unilever.com/investorcentre. The maintenance and integrity of the website are the responsibility of the Directors, and the work carried out by the auditors does not involve consideration of these matters. Accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially placed on the website. Legislation in the United Kingdom and the Netherlands governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Going concern
The Directors continue to adopt the going concern basis in preparing the accounts. This is because the Directors, after making enquiries and following a review of the Group’s budget for 2007 and 2008, including cash flows and borrowing facilities, consider that the Group has adequate resources to continue in operation for the foreseeable future.

Internal and disclosure controls and procedures
Unilever has a well-established control framework, which is documented and regularly reviewed by the Boards. This incorporates risk management, internal control procedures and disclosure controls and procedures (including the operation of the Disclosures Committee – see page 38) which are designed to provide reasonable, but not absolute, assurance that assets are safeguarded, the risks facing the business are being addressed and all information required to be disclosed is reported to the Group’s senior management, including where appropriate the Group Chief Executive and Chief Financial Officer, within the required timeframe.

Our procedures cover financial, operational, social, strategic and environmental risks and regulatory matters. The Boards of NV and PLC have also established a clear organisational structure, including delegation of appropriate authorities. The Group’s control framework is supported through a Code of Business Principles, which sets standards of professionalism and integrity for its operations worldwide, and through an Operational Controls Assessment process, which requires the senior management in each business unit to assess the effectiveness of financial controls. In our major units financial controls are subject to a comprehensive assessment annually with all other controls being reviewed over a one- to three-year cycle.

The Boards have overall responsibility for establishing key procedures designed to achieve systems of internal control and disclosure control and for reviewing and evaluating their effectiveness. The day-to-day responsibility for implementation of these procedures and ongoing monitoring of risk and the effectiveness of controls rests with the Group’s senior management at individual operating company and regional level. Regions review, on an ongoing basis, the risks faced by their group and the related internal control arrangements, and provide written reports to the Group Chief Executive.


 

66 Unilever Annual Report on Form 20-F 2006

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  Financial Statements (continued) 
   
Statement of Directors’ responsibilities (continued)

 

Unilever’s corporate internal audit function plays a key role in providing an objective view and continuous reassurance of the effectiveness of the risk management and related control systems throughout Unilever to both operating management and the Boards. The Group has an independent Audit Committee, comprised entirely of Independent Non-Executive Directors. This Committee meets regularly with the Chief Auditor and the external auditors.

Unilever has a comprehensive budgeting system with an annual budget approved by the Boards, which is regularly reviewed and updated. Performance is monitored against budget and the previous year through monthly and quarterly reporting routines. The Group reports to shareholders quarterly.

Unilever’s system of risk management has been in place throughout 2006 and up to the date of this report, and complies with the recommendations of ’Internal Control – Revised Guidance for Directors on the Combined Code’, published by the Internal Control Working Party of the Institute of Chartered Accountants in England & Wales in October 2005. The Boards have carried out an annual review of the effectiveness of the systems of risk management and internal control during 2006 in accordance with this guidance, and have ensured that the necessary actions have been or are being taken to address any significant failings arising out of that review.

Based on an evaluation by the Boards, the Group Chief Executive and the Chief Financial Officer concluded that the design and operation of the Group’s disclosure controls and procedures as at 31 December 2006 were effective, and that subsequently there have been no significant changes in the Group’s internal controls, or in other factors that could significantly affect those controls.

It is Unilever’s practice to bring acquired companies within the Group’s governance procedures as soon as is practicable and in any event by the end of the first full year of operation.


 

Unilever Annual Report on Form 20-F 2006 67

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Financial Statements (continued)   
   
Management’s report on internal control over financial reporting

 

In accordance with the requirements of Section 404 of the US Sarbanes-Oxley Act of 2002, the following report is provided by management in respect of the Company’s internal control over financial reporting (as defined in rules 13a-15(f) or rule 15d-15(f) under the US Securities Exchange Act of 1934):

Unilever’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the group;
   
Unilever’s management has used the Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework to evaluate the effectiveness of our internal control over financial reporting. Management believes that the COSO framework is a suitable framework for its evaluation of our internal control over financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative measurements of internal controls, is sufficiently complete so that those relevant factors that would alter a conclusion about the effectiveness of internal controls are not omitted and is relevant to an evaluation of internal control over financial reporting.
   
Management has assessed the effectiveness of internal control over financial reporting as of 31 December 2006, and has concluded that such internal control over financial reporting is effective.
   
PricewaterhouseCoopers LLP and PricewaterhouseCoopers Accountants N.V., who have audited the consolidated financial statements of the Group for the year ended 31 December 2006, have also audited management’s assessment of the effectiveness of internal control over financial reporting as at 31 December 2006 and have issued an attestation report on management’s assessment. For the Auditors’ report please refer to page 69.

 

68 Unilever Annual Report on Form 20-F 2006

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  Financial Statements (continued) 
   
Auditors’ report United States

 

Report of the independent registered public accounting firms to the shareholders of Unilever N.V. and Unilever PLC

We have completed an integrated audit of the Unilever Group’s 31 December 2006 consolidated accounts and of its internal control over financial reporting as of 31 December 2006 and audits of its 31 December 2005 and 31 December 2004 consolidated accounts in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated accounts
In our opinion, the accompanying consolidated income statements and the related consolidated balance sheets, consolidated cash flow statements and consolidated statements of recognised income and expense present fairly, in all material respects, the financial position of the Unilever Group at 31 December 2006 and 2005 and the results of its operations and cash flows for each of the three years in the period ended 31 December 2006, in conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union. These consolidated accounts are the responsibility of the Group’s Directors. Our responsibility is to express an opinion on these consolidated accounts based on our audits. We conducted our audits of these consolidated accounts in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated accounts are free of material misstatement. An audit of consolidated accounts includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated accounts, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated accounts presentation. We believe that our audits provide a reasonable basis for our opinion.

IFRS as adopted by the European Union vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in notes 34 and 35 on pages 124 to 140.

As discussed in note 21 on page 108, Unilever changed the manner in which it accounts for financial instruments upon adoption of International Accounting Standards No. 32 Financial Instruments: Disclosure and Presentation, and No. 39 Financial Instruments: Recognition and Measurement, on 1 January 2005.

Internal control over financial reporting
Also, in our opinion, management’s assessment, included in the accompanying ‘Management’s report on internal control over financial reporting’ as set out on page 68, that the Group maintained effective internal control over financial reporting as of 31 December 2006 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of 31 December 2006, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Group’s internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated accounts for external purposes in accordance with generally accepted accounting standards and principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting standards and principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

26 March 2007, Rotterdam, The Netherlands  
PricewaterhouseCoopers Accountants N.V  
As auditors of Unilever N.V.  
  PricewaterhouseCoopers LLP
  London, United Kingdom
  As auditors of Unilever PLC
   
Prof Dr J A van Manen RA 26 March 2007

 

Unilever Annual Report on Form 20-F 2006 69

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Financial Statements (continued)  
   
Consolidated income statement Unilever Group

for the year ended 31 December

 

  € million   € million   € million  
  2006   2005   2004  






 
Continuing operations      
Turnover 2 39 642   38 401   37 168  
Operating profit 2 5 408   5 074   3 981  
After (charging)/crediting:      
       Restructuring 3 (704 ) (328 ) (913 )
       Business disposals, impairments and other 3 196   (249 ) (908 )
       Gain on US healthcare and UK pensions 3 266      
             
Net finance costs 5 (721 ) (613 ) (623 )
             
       Finance income 128   129   145  
       Finance costs (590 ) (689 ) (714 )
       Preference shares provision (300 )    
       Pensions and similar obligations 41   (53 ) (54 )
             
Share of net profit/(loss) of joint ventures 78   47   39  
Share of net profit/(loss) of associates 36   (25 ) 2  
Other income from non-current investments 11 30   33   54  





 
Profit before taxation 4 831   4 516   3 453  
Taxation 6 (1 146 ) (1 181 ) (725 )





 
Net profit from continuing operations 3 685   3 335   2 728  
Net profit from discontinued operations 27 1 330   640   213  





 
Net profit 5 015   3 975   2 941  
Attributable to:      
Minority interests 270   209   186  
Shareholders’ equity 4 745   3 766   2 755  






 
             
       
Combined earnings per share 7 2006   2005   2004  






 
From continuing operations            
Basic earnings per share 1.19   1.07   0.87  
Diluted earnings per share 1.15   1.04   0.84  
             
From discontinued operations            
Basic earnings per share 0.46   0.22   0.07  
Diluted earnings per share 0.45   0.21   0.07  
             
From total operations            
Basic earnings per share 1.65   1.29   0.94  
Diluted earnings per share 1.60   1.25   0.91  






 

References in the consolidated income statement, consolidated statement of recognised income and expense, consolidated cash flow statement and consolidated balance sheet relate to notes on pages 74 to 140, which form an integral part of the consolidated financial statements.

Accounting policies of the Unilever Group are set out in note 1 on pages 74 to 78.

Variations from United States generally accepted accounting principles and Securities and Exchange Commission Financial Statement Requirements Regulation S-X are outlined in notes 34 and 35 on pages 124 to 140.

 

70 Unilever Annual Report on Form 20-F 2006

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  Financial Statements (continued) 
   
Consolidated statement of recognised income and expense Unilever Group

for the year ended 31 December

 

  € million   € million   € million  
  2006   2005   2004  






 
Fair value gains/(losses) net of tax:      
       On cash flow hedges 6   14   n/a  
       On available-for-sale financial assets 15     n/a  
Actuarial gains/(losses) on pension schemes net of tax 853   (49 ) (480 )
Currency retranslation gains/(losses) net of tax(a)  (335 ) 513   80  





 
Net income/(expense) recognised directly in equity 539   478   (400 )
             
Net profit 5 015   3 975   2 941  





 
Total recognised income and expense 21 5 554   4 453   2 541  
       
Attributable to:      
Minority interests 242   249   167  
Shareholders’ equity 5 312   4 204   2 374  






 
(a)      Includes fair value gains/(losses) on net investment hedges of €(779) million (2005: €332 million; 2004 n/a).

 

Unilever Annual Report on Form 20-F 2006 71

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Financial Statements (continued)  
   
Consolidated balance sheet Unilever Group

as at 31 December

 

  € million   € million  
  2006   2005  




 
Goodwill 9 12 425   12 963  
Intangible assets 9 4 781   5 092  
Property, plant and equipment 10 6 276   6 492  
Pension asset for funded schemes in surplus 20 1 697   1 036  
Trade and other receivables due after more than one year 14 252   231  
Deferred tax assets 12 1 266   1 703  
Other non-current assets 11 874   841  



 
Total non-current assets 27 571   28 358  
         
Inventories 13 3 796   4 107  
Trade and other current receivables 14 4 290   4 830  
Current tax assets 125   124  
Cash and cash equivalents 15 1 039   1 529  
Other financial assets 15 237   335  
Assets held for sale 27 14   217  



 
Total current assets 9 501   11 142  
         
Borrowings due within one year 16 (4 362 ) (5 942 )
Trade payables and other current liabilities 18 (7 934 ) (8 228 )
Current tax liabilities (579 ) (554 )
Provisions 19 (1 009 ) (644 )
Liabilities associated with assets held for sale 27   (26 )



 
Total current liabilities (13 884 ) (15 394 )



 
Net current assets/(liabilities) (4 383 ) (4 252 )



 
Total assets less current liabilities 23 188   24 106  




 
Borrowings due after more than one year 16 4 239   6 457  
Trade payables and other liabilities due after more than one year 18 399   389  
Non-current tax liabilities 272   213  
Pensions and post-retirement healthcare liabilities:    
   Funded schemes in deficit 20 1 379   2 415  
   Unfunded schemes 20 3 398   4 202  
Provisions 19 826   732  
Deferred tax liabilities 12 1 003   933  



 
Total non-current liabilities 11 516   15 341  
         
Called up share capital 21 484   512  
Share premium account 21 165   162  
Other reserves 21 (2 143 ) (2 328 )
Retained profit 21 12 724   10 015