Unilever unveils 'faster and further' growth plans, 5bn euro buyback

Alongside new plans to "go faster and further" with its restructuring programme, Unilever upped its annual dividend guidance and launched a €5bn share buyback, as well as confirming it will sell off its spreads business.

Following a review of the group's strategy after fighting off a bid from US rival Kraft Heinz, the Anglo-Dutch consumer goods group's new plans include establishing an integrated Foods & Refreshment unit, targeting an increased €6bn of cost savings and a possibly controversial review of its dual-headed UK-and-Netherlands legal structure.

Chief executive Paul Polman said review reinforced the view that the group's basic business model was "the right one for Unilever and for our shareholders" but that the 'Connected 4 Growth' programme launched last year strategy could be accelerated.

Setting up the integrated Foods & Refreshment unit as a leaner and more focused business is expected to lead to an expansion of the underlying operating margin, not including restructuring, from 16.4% in 2016 to 20% and contribute to a doubling of the group cash conversion ratio to 100% by 2020.

Polman, who has been dismissive of share buybacks in the past, also upped targets for cutting overheads, with cumulative cost savings over the next three years through increased efficiency of brand and marketing investment and from a more efficient supply chain were upped from over €4bn to a combined €6bn, though total restructuring costs are expected to be around €3.5bn between 2017 and 2019.

The Dutchman also plans to take on a higher level of leverage as part of the aim of increasing capital returns, keeping the option open for earnings-boosting acquisitions.

The Baking, Cooking and Spreads unit set up in 2015 has performed well enough but as the underlying category faces continued challenges in developed markets, the decision has been taken to launch a process to either sell or demerge the Spreads part, which makes annual sales of €1.5-2bn and includes brands such as Flora, Stork and I Can't Believe It's Not Butter.

"As we evaluated the alternatives for our Spreads business, it was apparent that our dual-headed (NV and PLC) legal structure adds complexity when undertaking such changes. Accordingly, we will review our legal structure with the objective of achieving greater simplification and strategic flexibility. As part of this review, which we expect to complete by end of 2017, we will investigate and take actions, if appropriate, that assist in implementing that corporate structure change," the company said.

For the current year, not only was guidance for 3-5% sales growth and an underlying operating margin improvement of at least 80 basis points repeated, but to show faith in the future of the business the dividend will be hiked 12% for the coming year.

Unilever will up its leverage to help fund the restructuring, doubling its net debt to around two times EBITDA.

Chairman Marijn Dekkers, who was appointed last year, said the review was "detailed and comprehensive" and was "fully supported" by the board.

With the company having last visited the issue in 2005, Dekkers will lead the examination of whether the dual legal structure, which involves listings in London and Amsterdam, could be simplified to be less confusing for US investors and remove complexity for future purchases.

Analyst Neil Wilson at ETX Capital said the Kraft approach has really shaken things up, with the dividend increase, share buyback and ramping up of debt all designed to ensure shareholders are not tempted by another bid.

"It smacks a little of short-termism but we have to see whether the offloading of Spreads and higher gearing pays off as it looks to grow its business in emerging markets, where it generates 57% of sales and where future growth needs to come from."

Ramping up the leverage ought to deter speculative bids such as that of Kraft, he added, as Unilever was felt to be vulnerable to a takeover exactly because it has been so free of debt.

Offloading Spreads, which Polman said has been declining for 20 years, may free cash Wilson was not alone in pointing out that whether this made genuine sense if margins are key.

Broker Whitman Howard pointed out that Spreads enjoys a margin of 25% and accounted for €1.5bn to €2bn of sales in the 2016 financial year so by selling spreads it estimated margin will fall by 500bps.

It added that extent to which combining the Foods and Refreshment units into one organisation will have on margin accretion "is unclear" and said plans to increase borrowing by the order of €12bn plus the Spreads disposal "should allow Unilever to make what we would assume as positive acquisitions".

Noting that in March Polman called for an overhaul of Britain’s takeover code to safeguard companies from unwanted bids, Reuters Breakingviews suggested Unilever may be playing the UK government against the Netherlands as the Dutch regime subjects takeovers to a more stringent stakeholder interest test than the UK does, but Theresa May will not want to lose such a big employer amid other Brexit-related departures.