The review was instigated as a result of the recently failed £115bn ($143bn) takeover bid by US firm Kraft Heinz. This accelerated Unilever’s plans to improve shareholder returns and its decision to target a 20% underlying operating margin, before restructuring by 2020.
However, announcing the results of the review, Unilever ceo Paul Polman reiterated the company’s commitment to its ‘proven’ long-term model of compounding growth and sustainable value creation.
Speaking on BBC Radio 4’s Today programme [April 6], Polman announced that the restructuring of the group would result in unspecified number of middle and senior management job losses. He also revealed plans to review the dual-headed legal structure with the objective of simplifying the Anglo-Dutch conglomerate.
The results of this work would be completed by the end of 2017, he said.
Exit Spreads business
The decision by Unilever to exit its underperforming Spreads business and improve shareholder returns had been much anticipated by City analysts. Polman said Unilever intended to raise its dividend by 12% for the coming year.
Polman announced plans to establish a net debt to earnings before interest tax, depreciation and amortisation ratio of 2x. He also announced the launch of a share buy-back of €5bn (£4.27bn) this year. He said Unilever would be raising its dividend by 12%, reflecting increased confidence in the outlook for profit growth and cash generation.
“The review that the Board has undertaken has been detailed and comprehensive. It has confirmed that our model of long-term shareholder value creation has been successful and remains as valid as ever. The actions we are now going to take are fully supported by the Board,” said Unilever chairman Marijn Dekkers, as the statement was made.
Polman added: “Our recent review concluded once more that our strategy for long-term value creation through growth and compounding returns on investment is the right one for Unilever and for our shareholders. It also highlighted the opportunity to go faster and further.
‘Integrated Foods & Refreshment unit’
“The progress already made with Connected 4 Growth [a Unilever initiative announced last year] allows us to now accelerate the programme. This will be further enabled by the next step, which is the establishment of an integrated Foods & Refreshment unit, a leaner and more focused business that will continue to benefit from our global scale and footprint.
“This acceleration allows us to unlock sustainable value faster and target an overall underlying operating margin, which excludes restructuring, of 20% by 2020 [up from 16.4% in 2016]. Progress and performance will be reported on with greater granularity in our financial communication.
“The review has also highlighted the opportunity for accelerated development of our portfolio. After a long history in Unilever, we have decided that the future of the Spreads business now lies outside the Group. We will look to increase our strategic flexibility for further portfolio optimisation through a review of the dual-headed legal structure, with a view to simplifying it.”
Polman also announced plans to increase borrowing to meet its new objectives. “We will support our business with a higher level of leverage, while retaining the benefits of a strong credit rating,” he said. “This will enable us to enhance value for shareholders through increased capital returns, while maintaining operational and strategic flexibility.”
He added that for 2017, Unilever remained on track to deliver underlying sales growth ahead of its markets, in the 3–5% range, and expected an underlying operating margin improvement of at least 80 basis points.
“We feel confident that the changes we are announcing today will accelerate the transformation of Unilever and the delivery of sustainable shareholder value over the long term,” said Polman.
Polman continued: “We are increasing our target for cumulative savings, to be delivered over the next three years in overheads, and through increased efficiency of our brand and marketing investment, from over €1bn to €2bn.
“In addition, we are rolling out the holistic ‘5-S’ gross margin programme from Home Care into all categories, raising expected supply chain savings from a cumulative €3bn to €4bn over the next three years. In total, this increases the expected cumulative savings over this period from €4bn to €6bn.
“The total restructuring costs for the accelerated programmes, including both the new initiatives and ongoing activities, are expected to be around €3.5bn for the 2017–2019 period.”