Unilever PLC To Spin-Off Ice Cream Business

Deal Overview

On March 19,2024, Unilever PLC (NYSE ADR: UL; $49.35; Market Capitalization: $123.5 billion) board announced that it is planning to separate Ice-cream business through spin-off, a move that will accelerate its Growth Action Plan (GAP). Post separation, Unilever (stub) will focus on its four business units namely: Beauty & Wellbeing, Personal Care, Home Care and Nutrition. On the other hand, the NewCo will operate as a standalone entity creating a world-leading Ice-cream business.

By separating the ice cream business, the management wants to simplify the portfolio of Unilever and deliver the cost savings of €800.0 million over the next three years. The separation process started immediately after the announcement of the deal. It is anticipated to be completed by the end of 2025, subject to customary conditions, including final approval by the UL’s board of directors, receipt of a tax opinion, and other regulatory approvals. The company has not disclosed the tax status of the transaction to shareholders.

Unilever has signaled its intent to explore various avenues for separation, with a demerger emerging as the probable route leading to the establishment of a newly listed public entity. The management has a plan to headquarter Ice-cream business (spin-off entity) in Amsterdam however more details are expected to announce at later date. Unilever has established a fresh leadership team spearheaded by Peter ter Kulve, renowned for his extensive expertise in the field. This team is currently scrutinizing the entire economic spectrum of the business, aiming to enhance operational control and productivity.

Growth action Plan (GAP) In October 2023, Unilever introduced the GAP to improve how well it performs and competes with others in the industry. The plan is rooted in a fundamental principle: the imperative to prioritize fewer tasks, execute them better, and amplify their impact. Under this plan, Unilever is focused on three principles which are 1. Deliver higher quality growth; 2. Stepping up productivity and simplicity; and 3. Adopting a strong performance focus. The operational effects of this GAP are anticipated to progressively manifest throughout 2024.

Deal Rationale

Unilever operates into five business segments currently which are: Beauty & Wellbeing (21.0% of group turnover), Personal Care (23.0% of group turnover), Home Care (21.0% group turnover), Nutrition (22.0% of group turnover) and Ice-Cream (13.0% of group turnover). In the FY23, each of the four business units, with the exception of the Ice- Cream division, demonstrated a noteworthy upswing in sales, indicating positive growth momentum. However, Ice-Cream sales fell short of expectations, a trend attributed to consumer preference for alternative offerings boasting superior value propositions over Unilever’s proprietary brands, compounded by unfavorable summer conditions.

In Ice-cream business, Unilever holds a dominant position in the €80 billion global Ice Cream market, boasting a commanding 20% market share, which surpasses that of its closest competitor by twofold. The company’s portfolio includes renowned brands like Ben & Jerry’s, Cornetto, and Magnum, collectively referred to as Power Brands. These Power Brands contributed approximately 85% of Unilever’s Ice Cream revenue in 2023. Notably, Unilever operates on a truly international scale, with its top five markets comprising the United States (constituting 24% of Ice Cream sales), Turkey and Germany (both accounting for 6% of sales), followed closely by the United Kingdom and China (both representing 5% of sales).

The ice-cream segment within Unilever operates under a distinct business model compared to the company’s predominantly beauty and consumer care divisions, leading to limited synergies across its portfolio. This differentiation is notably underscored by the unique necessity for cold storage facilities, which diverges from the operational requirements of other Unilever businesses. Consequently, the company encounters challenges in achieving cost synergies and faces heightened distribution costs as a result.

Moreover, it’s important to note that the ice-cream business operates on a seasonal basis, typically contributing to approximately five months out of the year to the overall profitability of the company. From Environmental impact perspective, the Ice-cream business has high carbon footprints due to carbon emission associated with freezers and cold chain distribution. Additionally, with high inflation, the ice-cream unit operating margins are also impacted by unprecedented milk-price escalations.

Following the separation from its ice-cream business, Unilever will have the opportunity to allocate increased capital and research and development resources toward its top 30 brands. These brands collectively account for approximately 75.0% of Unilever’s total revenue and are characterized by high margins and robust growth prospects. Additionally, immediately after the spin-off announcement, management has launch productivity savings programme which are anticipated to save cost by €800 million and will result in 7500 job losses. While the implementation of the program will be conducted in phases, this strategic initiative enables the company to concentrate its financial and managerial resources on its most resilient, internationally scalable brands. Projections indicate that these brands will experience accelerated growth and generate more sustainable revenue streams. Moreover, this strategic maneuver is expected to enhance profitability and drive mid single- digit sales growth, coupled with improved profit margins, by 2026. The transaction is anticipated to get complete by end of 2025, giving ample time for Unilever to improve the margins of Ice-cream business and improve its ice-cream business valuation before its IPO.

Founded in 1860 and headquartered in London, Unilever PLC is one of the largest fast moving consumer goods manufacturer worldwide, crafting various products from soaps and detergents to shampoo and food items. Operating in more than 190 nations, Unilever maintains a vast global footprint with notable brands, including Dove, Hellmann’s, Lipton, and Ben & Jerry’s. The company’s business operations are structured into five segments: Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

Beauty & Wellbeing

The Beauty & Wellbeing division operates within haircare, skincare, highend beauty items, and solutions for health and wellness. Within the segment, the company has many recognizable brands like Dove for hair and skin care, Sunsilk for hair care, Vaseline for skincare, Liquid I.V. for hydration, and Dermalogica for skin care. The company focusses on investing in brands in crucial markets, as evidenced by Sunsilk’s robust performance across multiple markets. Multi-year innovations geared towards premiumization serve as a significant growth driver for brands, particularly in Hair Care, aiming to enhance competitiveness in markets like the U.S. and India. The company achieved breakthrough innovations to bolster ongoing premiumization efforts within the Hair Care and Skin Care portfolios. It encompasses many beauty and personal care products, including skincare, hair care, oral care, deodorants, and cosmetics. Notable brands in this segment include Dove, Axe, Lynx, Sunsilk, TRESemmé, Pond’s, and Vaseline.

Personal Care

The Personal Care division primarily focuses on deodorants, soaps, shower gels, and oral care items. The company has many recognizable brands within the division, including Dove, Rexona for deodorants, Lifebuoy for soaps, Axe for deodorants and shower gels, and Pepsodent for oral care. This segment maintains a dominant global status with solid market positions in global deodorant skin cleansing products and a significant presence in oral care. This category encompasses many beauty and personal care products to enhance consumers well-being, including skincare, haircare, oral care, deodorants, and cosmetics. In Oct 2023, the company announced the sale of Dollar Shave Club to Nexus Capital Management LP. Moreover, Yellow Wood Partners LLC offered to acquire Elida Beauty, with an expected finalization date of mid-2024. The company optimized its portfolio by discontinuing various brands and reducing active SKUs by ~29% in 2023.

Home Care

The Home Care segment primarily revolves around cleaning products such as cleaning agents, laundry detergents, and fabric conditioners. Among the well-known brands in this category are Cif for surface cleaners, Sunlight for dishwashing liquids, and Omo for laundry detergents. The segment encompasses a variety of products essential for household cleaning and maintenance, including laundry detergents, fabric softeners, dishwashing products, household cleaners, and air fresheners. Unilever’s lineup of home care brands includes Omo, Surf, Comfort, Cif, and Domestos. The company undertook measures to streamline its home care offerings by eliminating ~19% of active SKUs, with a notable focus on Latin America and Europe. Integrating procurement into its business operations has positioned it more advantageously to pursue competitive procurement strategies.

Nutrition

The Nutrition division primarily focuses on food products such as savory spreads, cooking aids like bouillons and sauces, and mayonnaise. Among the recognizable brands within this category are Knorr for bouillons and sauces, Hellmann’s for mayonnaise and its plant-based alternative, Hellmann’s Vegan. The nutrition segment encompasses a range of products that provide consumers with nutritional benefits, including spreads, cooking oils, soups, sauces, and beverages. Unilever’s portfolio of nutrition brands includes Flora, Knorr, and Hellmann’s, among others. Within this segment, Unilever emphasizes offering healthier choices to consumers, often by incorporating natural ingredients and reducing additives and preservatives. The company further solidified its leading position in Functional Nutrition in India, experiencing a return to growth fueled by the performance of both the Horlicks and Boost brands. Additionally, it has broadened its range with vegan and plant-based choices, including the successful Hellmann’s Vegan Mayo, in nearly 40 markets. Furthermore, the company has persisted in simplifying its product offerings, achieving a 14% reduction in active SKUs in 2023, mainly focusing on nutrition products.

Ice Cream

The Ice Cream segment offers diverse frozen delights with a variety of frozen desserts such as ice cream, sorbet, and frozen yogurt, with Unilever offering a range of brands, including Magnum, Ben & Jerry’s, Walls, and Cornetto, among others. Innovation is critical in this segment, as Unilever continuously introduces new flavors, formats, and packaging designs to align with evolving consumer tastes and preferences. Despite being a minor revenue contributor, it holds a robust global presence. Ben & Jerry’s unveiled the Caramel Café Sundae range, while Magnum introduced the Vegan Raspberry Swirl in Europe. Furthermore, the company expanded its product offerings with the new Cornetto & Magnum Minis collection and diversified its Mochi range with additional flavors across Asian markets. As a leading provider of cones in several key markets, particularly in Asia, such as India and China, the company extended its footprint in this category. Additionally, there’s a strategic repositioning of heritage brands such as Wall’s Viennetta, which was showcased by the launch of Mini Viennetta in stick and cup formats in China.

4Q23

Total sales fell 3.0% YoY to €14.2 billion due to currency fluctuations. Underlying sales grew 4.7% YoY, attributed to a 2.8% price increase and 1.8% volume rise. Beauty & Wellbeing sales contracted 2.3% YoY to €3.2 billion (underlying sales: +7.9%), Personal Care division revenue fell 3.4% YoY to €3.4 billion (underlying sales: +6.4%), Home Care sales fell 5.9% YoY to €3.0 billion (underlying sales: +1.7%), Nutrition revenue contracted 1.5% YoY to €3.4 billion (underlying sales: +4.7%), and Ice Cream sales contracted marginally by 0.2% YoY to €1.2 billion (underlying sales: -0.4%). Geographically, sales were negatively impacted due to the Asia Pacific Africa region, which fell 7.9% YoY to €6.1 billion (underlying sales: +1.9%), partially offset by The Americas region increased 0.3% YoY to €5.4 billion (underlying sales: +9.6%) and Europe region grew 2.8% YoY to €2.7 billion (underlying sales: +2.5%).

FY23

Total sales fell marginally by 0.8% YoY to €59.6 billion (-0.7% vs. consensus), primarily due to currency fluctuations and net disposals. Underlying sales grew 7.0% YoY, attributed to a 6.8% price increase and a marginal rise of 0.2% in volumes. Beauty & Wellbeing sales increased 1.8% YoY to €12.5 billion (underlying sales: +8.3%), Personal Care division revenue grew 1.4% YoY to €13.8 billion (underlying sales: +8.9%), Home Care sales fell 1.8% YoY to €12.2 billion (underlying sales: +5.9%), Nutrition revenue contracted 5.0% YoY to €13.2 billion (underlying sales: +7.7%), and Ice Cream sales grew marginally by 0.5% YoY to €7.9 billion (underlying sales: +2.3%). Geographically, sales were negatively impacted due to the Asia Pacific Africa region, which fell 4.6% YoY to €26.2 billion (underlying sales: +6.5%), partially offset by The Americas region increased 3.0% YoY to €21.5 billion (underlying sales: +9.3%) and Europe region grew 1.5% YoY to €11.8 billion (underlying sales: +4.1%). Gross margins grew 200bps to 42.2%, Adjusted operating profit increased by 2.6% YoY to €9.9 billion (+0.1% vs. consensus), and corresponding margins expanded 54bps to 16.7% (FY22: 16.1%). Adjusted net profit grew marginally by 0.3% YoY to €6.6 billion (-0.1% vs. consensus), and corresponding margins expanded marginally by ~12bps to 11.1%. Adjusted diluted earnings per share came in at €2.60 (FY22: €2.57), missing the consensus estimates by 0.9%.

Company Description

Unilever PLC. (Parent)

Founded in 1860 and headquartered in London, Unilever PLC. is one of the largest FMCG manufacturers worldwide, crafting various products from soaps and detergents to shampoo and food items. Operating in more than 190 countries, the company maintains a vast global footprint with notable brands, including Sunsilk, TRESemmé, Dove, Clear, POND’s, Vaseline, Knorr, Hellmann’s, Lipton, and Ben & Jerry’s. The company’s business operations are structured into five segments: Beauty & Wellbeing, Personal Care, Home Care, Nutrition, and Ice Cream.

Ice-Cream Business (Spin-off)

The NewCo. aims to provide a diverse range of frozen desserts worldwide. Its offerings encompass a variety of deserts including ice cream, sorbet, and frozen yogurt, showcasing popular brands like Magnum, Ben & Jerry’s, Walls, Yasso, and Cornetto. Continuously innovating, the company introduces new flavors, formats, and packaging to adapt to changing consumer tastes and preferences, ensuring it remains at the forefront of the frozen dessert market.