Hello everybody. I'm Warren Akerman, head of EU Staples at Barclays. I'm delighted to be with Fernando today. Fernando, I think it's about a year since we sat down together. It feels like an eternity with the volatility in geopolitics, although I'm sure the ceasefire last night will be welcome. It's also been equally busy for you guys with the Magnum spin completed and the McCormick food proposal. So what I want to try and do today is to split our conversation into three parts. The first part is to better understand the proposed transaction. Secondly, a little bit about some of the technical details because it's quite a complex deal. And thirdly, to get a little bit behind your vision longer term as a pure-play HPC company. So with that, I'm going to go straight into it. So the first question, Fernando, is I've been covering Unilever a long time. In fact, I was even there when Unilever bought Best Foods back in 2000. I remember the deal, the $2 billion deal which brought in Hellmann's and Knorr. Two and a half decades later, we're going full circle with the exit of foods. You've just done the Magnum disposal. There's massive volatility in geopolitics. So can I start really with the elephant in the room and just ask why now?
Well, first of all, thank you for having me. Many things have happened in the last year. We're focusing on what we can control and I'm really satisfied with the fact that I believe we have really improved the fundamentals of the business when it comes to product innovation, consumer engagement, execution, and that has resulted in our performance both in our food business and in our HPC business. So I feel we're announcing this transaction from a position of strength, and this is very important for us. This is not a transaction defined by the need of producing a turnaround. This is a transaction that is absolutely aligned with the strategic path in which Unilever is. And I'm glad also that the question is changing from 'why not' into 'why now,' because the question I used to receive the most was 'why not.' This is a transaction that was originated by an inbound proposal that came from one of the companies that we respect most in foods, a company that has significant complementarity with our foods portfolio. And we have struck a deal in which we believe it's an attractive valuation. It basically allows us to separate foods in multiples that are similar to Unilever multiples and to the multiples of the highest-value food businesses that are listed. And it's fundamentally what I call a growth-led separation of foods. I'm obsessed with volume growth as a metric, and this is fundamentally about improving the volume growth potential of both the HPC pure play that Unilever will be and the combined McCormick-Unilever foods business. In the case of HPC, we are ending with a Unilever that is much simpler, with a category setup that is really common in categories that share a fast innovation cycle, with a clear set of capabilities, and these are categories in which we have already been performing. This is not the need of turning around the business. If you look at our HPC business in the last three years, our compound annual growth rate was 5.4%. Our volume growth was 2.5%, and this is clearly above the market. And when it comes to foods, we are combining here two businesses resulting in a 20 billion revenue for the new McCormick in a very focused way, with clear leadership positions from herbs and spices to stock cubes, from mayonnaise to mustard to hot sauces, growth in retail and food service, growth in developed markets and emerging markets. So we really believe that we are building here two very focused businesses with significant growth potential, clearly superior to the one that the sector has.
But the reception from the market hasn't been the best. I think your shares are down 9%. Some investors are questioning the value creation. Some people have said to me, 'Wouldn't a clean break be better?' And there are other investors out there that are a bit worried about owning shares in a company, McCormick, that maybe they don't know very well. It's going to be quite highly levered. So what can you say to those investors to reassure them that this is the right deal at the right time?
Yeah, you know, I never blame markets. Markets are imperfect in the short term, but in the long term they reward companies with good fundamentals and consistent delivery. So what I have to do here and what Unilever has to do here is to ensure that we deliver consistently across time. Regarding the deal, McCormick is a very special food company. And I know European investors don't know that company very well, and I feel we have both the McCormick team and the Unilever team has a role here in explaining what McCormick is. It's a clear leader in a very focused vertical like flavor, that is one of the few verticals in foods that sees GLP as a structural tailwind and not a headwind, in a vertical that is not exposed to growing private-label presence. So it's a company that has a history of acquiring brands, integrating them properly, and growing them. And probably the best example of that is the acquisition of the Red Hot brand, Frank's RedHot, in the past, in which they have done an excellent job. Regarding leverage, the new McCormick will be a 20 billion business with a gross margin in the mid-40s, with a starting operating margin of 21%. And the possibility of deleveraging from four to three times in two to three years is absolutely achievable, without compromising the heavy investment behind the brands that both Unilever and McCormick have done in the last few years. That is a clear differentiation with the food industry, and without compromising what has been historically a very attractive dividend payout.
Okay. I mean, maybe touching a bit more on McCormick, the valuation of food companies is quite challenged. I mean, you've kind of touched on it a little bit, but why is McCormick different to other US food companies, and why is Unilever the right partner for the business? I'm just trying to understand the upside for Unilever shareholders when they eventually become McCormick shareholders.
The food industry is full of companies with poor growth exposure, uninvested brands, and structural headwinds. And I feel McCormick is very different, and the combination between McCormick and Unilever Foods will be very different because flavor is one of the few verticals in which there is structural growth. More consumption of protein has a significant correlation with flavor growth. Because protein consumption goes up, you have to flavor it. Flavor and condiments is one of the categories that is growing across all the different generations, particularly with Generation Z. So the first point that is distinctive about McCormick is they play in a category vertical that is seriously attractive and superior to most of the food industry. It's a very focused company. It will be very large, 20 billion revenue, one of the top five food companies in the consumer goods sector, and it will have a gross margin profile that is what I used to call 'edible personal care' when I was talking about Unilever. It's a common feature with McCormick. This is a company in which, if you look at the combined Unilever and McCormick, last year grew 2.4%. And it's very clear that there are synergies here. There are definitely cost synergies that are real. We have estimated that at 600 million. There are revenue synergies that are sizable, and I will mention some of that. And there is a growth margin structure that allows significant investment behind the brands to accelerate that growth. What are the potential revenue synergies that we see? Think in the McCormick brand expansion using the international infrastructure of the Unilever food business. Think in the expansion of Hellmann's in front of house in the US using the McCormick food service structure. Think in the product range of McCormick supporting the Knorr foods expansion into food service in international markets. Think in brands like Cholula or the kind of geographical expansion they have, being brands that are in the perfect spot of the premium space in foods. So we see significant potential revenue growth there. And for me, the algorithm that McCormick has established of 3 to 5% topline growth with 23 to 25% operating margin is absolutely reachable in three to five years' time. And if Unilever shareholders decide to keep owning that, this will create a lot of value for them. But I feel it's important also to highlight that we are giving Unilever shareholders, we are not giving them more exposure to foods, we are giving them a better exposure to foods. We are making our Unilever foods brands be part of a new company in which they will be an absolute priority. We will make them part of a company in which there is significant revenue and cost synergy opportunities. We are giving them optionality because they can continue owning foods, they can reduce exposure to foods if they want, and they can eliminate their exposure to foods if they want. And this is very different to the current situation in which, when foods is part of Unilever, you don't have that choice. And finally, we are giving them an HPC business that is outperforming the market and at the same time has a 20 to 25% valuation discount versus peers. So I see upside on that. We see three potential elements of value creation for our shareholders in this transaction.
But in terms of the margins, are you giving the business that's well invested? Because clearly if I look at the foods margins over the last couple of years, they've really moved up quite sharply to 22 and a half percent. Is there still potential growth from that level?
Well, the Unilever Foods brand and marketing investment is 10% of revenue. I believe there is not a single company in the sector with that kind of level of investment. And if you look at the McCormick retail business, the brand marketing investment of the McCormick brand business, I believe is at 8%. So you are talking here of a combined 9 to 9.5% brand marketing investment. Probably the largest food company in the world is struggling to get into 9%. The average is about 5%. And if you compare the new McCormick with the American food sector, the level of investment in brands is two times. These are brands with momentum. These are two businesses with momentum. These are two businesses that have been investing significantly behind their brands. These are businesses that are having competitive gains. So this is not a match built from a position of weakness. This is a match built from a position of strength.
And you said there's no dis-synergies, Fernando, separating out food and HPC. And I think the stranded overheads are only 400 to 500 million euros, which actually was quite a bit lower than I was expecting. Can you explain why that is? Because I think there are some people out there that think you would lose more scale, because foods is effectively a quarter of your business.
Yeah. Well, let me start stating the obvious here. The revenue and cost synergies between McCormick and Unilever Foods are higher than the revenue and cost synergies between Unilever and Unilever HPC. This has complete industry logic. To your question of scale, we will have a business in the US, the remaining Unilever business will be 8 billion in the US, will be 6 billion in Europe, will be 6 billion in Latin America, will be 7 billion in India, and will be 12 billion in Asia, including India plus Africa. This is a size of many global companies in HBC. So this is a business that doesn't have an issue of scale. Do I expect to sell less Dove in the US because we have separated Hellmann's, to sell less Sunsilk in Philippines because we separated Knorr, or to sell less OMO in Brazil because we have separated Hellmann's? Definitely not. So basically we don't see any kind of revenue dis-synergies here. When it comes to stranded costs, it's true we have identified around 400 to 500 million of stranded costs. I understand that you have expected some more, but I feel you have to understand also that when we did the separation of ice cream, the separation of foods was in our strategic thinking, and we did some of the heavy lifting there. And foods now is a business at close to 80% of the revenue of foods is run as a standalone organization. Our food service business is a completely separate organization. In the top 24 markets in which we operate, foods has a different sales force. The manufacturing, regulatory, R&D structure of foods is completely separate. So I feel this is a business that is easier to separate than it used to be in the past. And I feel this is something that, of course, we have some work to do, particularly in the smaller Unilever markets. But even in these markets, many of these geographies operate through a distributor model. So we believe that we have a path to make this separation happen. What is important about the stranded costs is that the separation of ice cream for us has been a significant experience. We know where the pain points are, we know how to really attack them early, we know the kind of governance and guardrails that we have to put in place. And one of the reasons while we separated ice cream, we improved every single line of the P&L of Unilever because we increased the top line, we increased volume growth, we increased margin, and we reduced the structural cost of the business because we were able to mitigate the stranded costs before they hit the P&L. And this is the blueprint that we will repeat in this case.
But in terms of timing, Fernando, one week feels like a long time at the moment, and this deal is going to take 12 months to 15 months to get done. And I think investors are sometimes a bit concerned about it's going to be complex, it's going to be uncertain. And is there going to be restructuring fatigue because you're still going to own the food business until that time? And what learnings can you bring from the ice cream demerger experience you mentioned that maybe can actually help you accelerate this and get this done more quickly?
Well, Unilever has been criticized for many years, and I feel it has been a very fair criticism that we were too complex and too slow. And it seems now the issue is that we are becoming simpler and sharper too fast. But it is what it is. We have to go through regulatory process and through antitrust process with the competition authorities, and this is the main issue when it comes to separation. Despite the fact that here we don't see significant antitrust issues, because the beauty of the combination of Unilever Foods and McCormick is that there is a lot of complementarity, there is a lot of adjacencies, but there is very limited overlap, and that basically reduces antitrust issues in the vast majority of geographies, particularly in Western Europe where the processes tend to be slower. So we have taken here a cautious approach. We have communicated to the markets that it will take between 12 and 15 months. Of course, both McCormick and Unilever are interested in making this as fast as possible. Because I have met many investors in the last 10 days or so, when we explain this transaction and when we discuss this transaction with them, nobody challenged the strategic merit, nobody challenged that this has been a very attractive valuation, separating foods at a value that is in line with Unilever and with the highest-value food companies. But they are concerned about the short-term risk. They are concerned about the impact of separation in disrupting Unilever momentum, and they are concerned about the effort that McCormick will have to do to integrate a business that is two times their size. So we are very conscious of that, the McCormick leadership is conscious of that, plans are in place. When we give exposure to Unilever holders between Unilever's 10% stake and Unilever shareholders owning 55% of McCormick, it is our responsibility to ensure that we support McCormick in that integration, and we will do it, and we will do it well.
What kind of time frames, what kind of milestones should we look for between now and mid-2027 in terms of what's going to happen when?
Well, of course, we have to operationally separate our food business. And as I mentioned before, a significant part of the heavy lifting has been done. We have to carve out financials for our food business, and we have to go through the regulatory process and through the antitrust process. As I mentioned before, we don't see significant antitrust issues, so we believe that this process can be faster, but it's better to have a conservative planning assumption here. We have project management teams still in place. Of course, we have a team now that has the experience of carving out ice cream. Some of them have worked in the disposal of tea and spreads before. This is a team that has a blueprint, has governance processes in place, and we will repeat what we have done in ice cream, in which, as I mentioned before, I feel we demonstrated through the ice cream separation that we can perform and transform simultaneously. And this is what we'll do again.
So I move to part two now to talk a little bit more about the deal mechanics and some of the kind of moving pieces, because it is quite complex. One of the questions coming in is about the 14 billion euros of cash component of the transaction, actually was a bit higher than what I was expecting. Can you explain to investors the use of that cash in terms of costs and tax, and then what's left over for share buybacks? Because I think some investors are struggling a little bit to understand the two times net debt EBITDA and how that kind of works.
Yeah. Well, it's true we will receive, this is a cash and a stock deal, and we will receive $15.7 billion, that is around 14 billion euros as you mentioned. And there are three fundamental uses of that cash. First of all, we will reduce the debt level to two times, that is what we believe is our target in the minimum. We will cover the tax and separation costs. And of course, after reducing the debt and after covering tax and separation costs, there is a surplus of cash that we will use to enhance the returns to our shareholders. We have announced a 6 billion share buyback for the 2026-2029 period. Of course, we receive the cash in day one, and particularly the tax bill doesn't hit in day one. So probably you will see that our leverage level in year one probably will be slightly below two times, and that gives us some flexibility. At this stage, I don't want to commit in how we will use this cash because the environment is very volatile these days. So these are the three fundamental usages of cash. But let me also mention something that I believe is very, very important here that goes beyond the uses of cash, and I believe it has been underappreciated by the market. The Unilever share of the capitalized synergies in McCormick cover the tax and separation costs. And this is very, very important because a pure spin would have not given you that, because there were no synergies, and also a pure spin would have a tax bill that would have been significantly higher. So we have structured this in what we believe is an efficient tax structure. It's a reverse Morris trust. Of course, this makes the transaction in the US to be tax-free. It's not the same in other geographies, but it really reduces significantly our exposure to tax, particularly considering that the Hellmann's IP sits in the US.
I mean, I'm assuming tax of around about 4 billion is my estimate, looking at what you paid for Best Foods and what you've got for the deal. And as you say, the RMT shields the US tax. But on the non-US tax, 4 billion obviously is not insignificant, although the cash element, 14 billion, is higher, so that kind of offsets. But can you kind of confirm that this is definitely the most tax-efficient way? If you did do a spin or if you sold the business, how much higher would the tax be?
If we would have done a spin or if we had made a disposal, the tax bill would be close to two times that.
Okay, so it really is... it's very sizable. And hey, I will not confirm your tax calculation. But I feel what is important for everyone that is listening to this is that we will have flexibility. We are very confident about our ability to deliver the share buyback that we have announced.
And can you explain a little bit about the transitional services arrangements, the TSAs? Because you've obviously got them running with Magnum and now you're going to have them running with McCormick as well. How do they work, what's the time frame, and how much of the stranded overheads, the 400 to 500 million, do you think they could offset? Could they offset all of them, or would you need other savings?
Well, transitional service agreements have two fundamental values here. One is on the McCormick side, because as I mentioned before, our responsibility is to ensure that we help the McCormick company to be set up for success in an integration of a business that is close to two times their size. So we will provide McCormick with TSAs across multiple areas, from IT to distribution, and we probably will do that for a couple of years until they can integrate the whole infrastructure into the larger McCormick company. In our case, what the TSA provides is transitional headroom. They don't remove the stranded costs. The stranded costs have to be removed through a restructuring spending that we calculated will be around 500 million in a three-year period, above what is the normal course of restructuring that we want to position at around 6%, which is the norm of the industry. And it gives us time. And I feel we have been very successful in the ice cream separation in mitigating stranded costs before they hit the P&L. And transition service agreements play a good role in that. So these are the two fundamental values of the TSA.
And the other piece I want to talk about is cash flow, because obviously the foods business was cash generative. You're going to lose that cash flow. Can you talk a little bit about what you see as the kind of ongoing cash conversion or the free cash flow of the HPC remainco, and maybe what kind of free cash flow we can expect to see going forward?
Well, let me start by saying that you should analyze the cash flow here through a combined perspective, because our shareholders will own Unilever and will own also a significant chunk of McCormick. The cash flow of foods will now be in a different place in which they will be exposed to. But your question is fundamental about the cash flow profile of the remaining Unilever HPC company. The Unilever HPC pure play will have a higher growth profile, and it will have a margin and a starting margin of around 19%, in which I believe there is more headroom for margin expansion than we used to have in the past. And if you add to that a 9% negative working capital, if the growth comes in line with what we have been delivering in the last few years and what is our expectation, we expect the cash conversion at around 100%, as we have done in the past. So it will be a great cash generation business with a lot of headroom both in topline and margin expansion, and with one of the best working capital structures that you see in the industry.
Okay. And maybe one technical point: there isn't going to be a shareholder vote on this transaction. Any reason why?
Well, Unilever is incorporated in the UK, is listed as a primary listing in the UK, and we manage the company under the UK listing rules. In 2024, there has been some change in these rules. Since then, there has been close to, I feel a bit more than, 50 transactions of a similar nature to the ones that Unilever is doing now, and none of them has had either a mandatory shareholder voting or a voluntary shareholder voting. The responsibility of this transaction lies with the board of Unilever, and the board of Unilever has taken a decision that has been unanimous because it has been absolutely aligned with the strategic path that the company had. And it is a decision that we believe as a board will create substantial value for the shareholders. So that's what we will do. We will not be an outlier, as I mentioned, on this kind of 50-plus transactions that have been announced as well. The bar in terms of explaining the deal to shareholders is high, and I have been spending a lot of time in the last 10 days and I will continue spending a lot of time to continue ensuring that our shareholders understand the strategic merit of the transaction and the valuation that we are getting here.
Fernando, you have implemented a hiring freeze, I think, for three months. How should we think about that? Is it a response to the war and high costs?
Well, of course the environment has changed a lot since the 27th of February until now. Basically, I feel it's an act of responsibility to ensure that you manage every single line of a P&L and that pricing is the last resort you go for. In this kind of context with so much volatility, if there are cost increases you have to manage prices sequentially and you have to ensure that you attack every single cost line. So that's one of the reasons. And of course, we were working on this transaction, and I feel one of the key factors of success in the separation is that we use attrition and hiring freeze, natural attrition and hiring freeze, as a key element to manage our stranded costs before they hit the P&L. So these are the two reasons behind the hiring freeze.
I want to move on to the third part, Fernando, to talk a bit about the vision of Unilever as a pure-play HPC company. But before I do that, maybe some context. Can you maybe explain how you see the FMCG industry changing, and why the premium for a quality portfolio is increasing, and why you think the gap between the winners and losers is increasing? I don't think everybody is crystal clear about how this portfolio move fits into that strategic context that we're seeing. I mean, I've done this sector for almost 30 years. I've never seen it moving faster. So I'd just be interested to understand your perspective on how the industry is moving and how we should see this transaction in that context.
Well, you're absolutely right. The pace of change is incredible these days. I feel there is a fundamental shift in what kind of scale matters. In the past, the scale of manufacturing and distribution were very, very important. And I believe today scale of R&D and brand scale is what really matters the most. So I'm interested in building a portfolio that has more tailwinds than headwinds, that is really exposed to the fastest-growing channels, is exposed to premium sectors where most of the profit pool is being concentrated, is exposed to e-commerce and fast-growing channels like premium segments. And I believe the time of average portfolios delivering solid returns is gone. The way of reaching and engaging with consumers today is very, very different. The visibility that consumers have about offerings is endless, and we need to really ensure that we continue elevating our brands, we continue shifting them into premium, into the channels where there is more growth, and fundamentally into categories of high involvement. I really believe that the pure HPC play will increase our exposure to categories of high involvement. Of course, it will increase also our exposure to emerging markets in which there is more room for growth. So this is where I feel is a way of looking at this transaction in terms of improving the growth profile. There's a new rule book out there. There's a new rule book in FMCG. You've got to take more risk to get ahead of consumers, ahead of categories. Trying to nudge the super tanker doesn't work anymore. I feel market-making is very, very important, and being courageous enough to shift your portfolio into areas where there is more growth is very, very important. In the past, the difference between winners and losers was very limited. But now you have segments that are growing 15% and you have segments that are declining 15%. Increasing every year your exposure to higher market volume growth is the most important decision that the leadership of an FMCG company has to make these days.
And you talked a bit about it before, but can you maybe just pinpoint the financial profile of the new HPC remainco in terms of organic growth and margins, maybe a little bit around the brand mix and the categories and geographies, because it is going to be quite a different makeup from what you've had before.
Well, let me start first by the structure of the business from a category, geography, channel, and segment profile. We will be a 67% beauty and personal care business, beauty and wellbeing, personal care business. We will be 38% in our two anchor markets, US and India. We will be 62% in emerging markets, and we will increase our exposure to premium segments and we will increase our exposure to e-commerce. So I believe that all this is absolutely consistent with what I have been saying even since I became CEO of the company. So then in terms of the profile, it will...
Be a 39 billion euros company. Yeah, as I mentioned before, with very sizable business in every single region from 6 billion to 12 billion. It will have a 48% gross margin, and remember that in Unilever, we consider logistics as part of that. When you compare with other companies, this is equivalent to 53% growth margin, and it will have an starting operating margin of 19%. That is, if you look at pure HPC players, they are more in the 21 to 23%.
So we probably start this new stage of the journey of Unilever with more margin progression headroom than we used to have in the past. But can you explain a little bit more about the synergies between the HPC categories, because I don't think that's always fully appreciated. Maybe touching on R&D, go to market, and just how much more growth can you unlock?
Yeah, the first point to say about the HPC industry is that there is a very specific feature, there is a fast innovation cycle set of categories, and that fundamentally defines how you market, how you innovate, how you reach with consumer, how you engage with them. It has one share of capabilities at travel, because there is an underpinning science and technology that common. So, when you look at surfactants as a fundamental ingredient in formulations going from laundry detergents into dishwash into a body shower or into a shampoo, when you look at the importance of fragrances and anti-malod ingredients from deodorants into laundry, when you look at the importance of biotechnology etc., that is underpinning common science and technology. The manufacturing is similar and is done in sites that are integrated, and the route to market is absolutely complementary. So we see that as one share of capabilities, and very importantly, the way in which the market is changing and the way consumer we engage our brands engage with consumers is changing dramatically. I believe these are all categories in which format validation, in which premiumization, are significant drivers of value and are categories in which there are significant level of investment that require significant amount of creation of content, and a very very fast innovation cycle. So we see this as a potential significant simplification in the way we operate.
