Unilever finds Kraft Heinz helps concentrate minds
Bid from US rival inspires consumer goods group to rewrite growth story
Nothing concentrates the mind like money. Or the prospect of an imminent demise. Author and barrister Sir John Mortimer was of the former view. Author and general know-it-all Samuel Johnson was of the latter. Unilever chief executive Paul Polman, however, appears to have time for both.
This would explain why he penned his ‘Connected 4 Growth’ story for money-seeking shareholders last November — but felt a need to rewrite it in April, after Kraft Heinz threatened to consume his consumer goods group.
Few are of the view that Kraft will bid again, when the takeover rules permit it to next month. That would require a change of heart, or an exit, on the part of its billionaire backer Warren Buffett. Still, Unilever’s half-year results can be read as an indication of how much the possibility has concentrated minds further. Comparing what Mr Polman first wrote in November with his text on Thursday makes for interesting literary analysis.
In ‘Connected 4 Growth’, he foretold a margin improvement of 40-80 basis points, up from 20-40. Thursday’s wording suggested another rewrite: a 180 bps rise to 17.8 per cent in the first half, getting closer to the 20 per cent target that was inserted into his April draft. Full-year margin guidance was increased to a 100 bps improvement.
Mr Polman used the wording “sales growth ahead of market” in November. On Thursday, he told of 3 per cent growth, a full percentage point ahead of market and of previous quarters. Some aspects suggested a loss of concentration, though. Analysts noted that homecare and personal care growth had fallen to the lowest and second lowest level, respectively, in seven years, and total sales volumes were flat — all the increases were from price inflation.
Mr Polman had also described better cash conversion in November, alluding to free cash flow as 90 per cent of core net profit. But, on Thursday, he was more taciturn, writing only of a £600m improvement in overall cash flow levels, despite the same amount going into the pension fund.
Understandably, most of his newfound concentration came in April, when ‘Connected 4 Growth’ was embellished with the 2020 margin target, higher leverage and a €5bn share buy-back. Even insiders admit the words came more easily “in the crucible of the Kraft bid”. But the results suggest a greater desire to use superlative, rather than comparative adjectives, where possible.
For shareholders, though, two questions arise. First, how much do flat sales volumes undermine the narrative of ‘Connected 4 Growth’? Second, does shifting executive pay targets from core to underlying earning measures — excluding restructuring — make sense . . . or open up the possibility of being told more stories?