Unilever is 'connected for growth'

So far, the company has bought back €5bn-worth of its shares, announced the sale of its spreads business to private equity firm KKR for €6.8bn, and increased the dividend by 12 per cent. Management has also set out an ambitious efficiency programme and promised that two-thirds of the €6bn-worth of targeted savings will be reinvested in growth. And it has introduced a 2020 target of a 20 per cent underlying operating profit margin. Mr Polman referred to the strategy as going at “full speed while we tune the engine at the same time”.

The turnaround plan has been dubbed Connected 4 Growth. It’s the “most significant set of changes we’ve made in a decade”, according to Mr Polman, and “it’s starting to show results”. With €2bn saved so far, the programme is developing “faster than expected”. The sale of spreads looks like a good move, given the rest of the business achieved underlying sales growth of 3.5 per cent in 2017 compared with 3.1 per cent if spreads are included. Meanwhile, underlying operating margins rose from 16.4 per cent to 17.5 per cent, putting them nearly one-third of the way towards the 20 per cent target with three years remaining. A recent recovery in volumes is also encouraging. The shares fell after a third-quarter update last year indicated that volume growth was lagging, but this has since rebounded to 3.2 per cent in the final quarter. Mr Polman made growing volumes ahead of markets a priority for the coming year.

The consumer goods giant has also been tactical in its dealmaking. The 11 acquisitions it made in 2017 at a total cost of €4.9bn included brands targeting healthy living trends, as well as a large Korean skincare brand. The expected proceeds from the sale of the spreads business will go towards further acquisitions should they be able to find suitable buys, and if not shareholders can expect a payout. Importantly, acquisitions do not appear to be harming the quality of the business, with return on invested capital of 19.2 per cent maintained last year.

Between recent acquisitions and spending on share buybacks, net debt crept up to 1.9 times cash profits – nearing the top of Unilever’s two times targeted leverage level, but still within a range management is comfortable with.

Unilever is also making changes to its capital structure. During the second half of last year it bought back all its Dutch preference shares, suggesting that it could soon drop the listing in the Netherlands. Analysts reckon this simplified share structure could make it easier for the company to make acquisitions, split off a part of the business and improve transparency for shareholders. At the full-year results Mr Polman said investors can expect an announcement “in the coming weeks” over whether the headquarters will be in the UK or the Netherlands.