Unilever PLC ($ULVR)

Hello, everybody. I'm Warren Ackerman, 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 3 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, $25 billion deal, which brought in Hellmann's and Knorr. 2.5 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. And indeed, I think many things happened in the last year. And we're focusing what we can control, and I'm really satisfied with the fact that I feel -- I believe we have really improve the fundamentals of the business when it comes to product innovation, consumer engagement, execution and that has resulted in outperformance both in our food business and in our HPC business, as you know. So I feel we are announcing this transaction from a position of strength, and this is very important for us. This is not a transaction that is 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 received more 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 a significant complementarity with our Foods portfolio. And we have strike a deal in which we believe is an attractive valuation. It basically allow us to separate Foods in multiples that are similar to Unilever multiples and to the multiples of the highest value food business that are listed. And it's fundamentally what I call a growth-led separation of Foods. I feel that while I'm obsessed with volume growth as a key 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. And I really believe that this is absolutely possible. In the case of HPC, we are ending in a Unilever that is much simpler with a clear -- with a category setup that is really common in categories that share a fast innovation cycle with a clear share 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 3 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 2 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, across retail and food service, across developed markets and emerging markets. So we really believe that we are building here 2 very focused business 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 they maybe 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?

Yes. I never blame markets. So 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, it's just -- I feel McCormick is a very special foods company. And I know European investors don't know that company very well. I feel we have both the McCormick team and the Unilever team has a role here in explaining what McCormick is. It is a clear leader in a very focused vertical like flavor that is one of the few verticals in foods that is -- that see 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 Reckitt Benckiser brands, food brands 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 starting operating margin of 21%. And the possibility of deleveraging from 4x to 3x in 2 to 3 years is absolutely a reach without compromising the heavy investment behind the brands that both Unilever Foods 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. I mean 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 U.S. food companies? And why is Unilever the right partner for the business? I'm just trying to understand like 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 think 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 a structural growth. More consumption of protein means -- has a significant correlation with flavor growth because protein consumption goes up, you have to flavor it. Flavor condiments is one of the categories that is growing across all the different generations, particularly with Gen Z generation. 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 5 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 Foods is a common feature with McCormick. So this is a company in which if you look at the combined Unilever Foods 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 in $600 million. There are revenue -- potential 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. And what are the potential revenue synergies that we see. I think in the McCormick brand expansion using the international infrastructure of Unilever Food business. Think in the expansion of Hellmann's in front of house in the U.S. using the McCormick foodservice structure, think in the product range of McCormick supporting the Knorr Foods expansion into foodservice in international markets, think in brands like Cholula or Maille, the kind of geographical expansion they have being brands that are in 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% top line growth with 23% to 25% operating margin is absolutely reachable in 3 to 5 years' time. And if Unilever shareholders decide to keep owning that, this will create a lot of value for them. But I think 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 being part of a new company in which they will be an absolute priority. We will make them part of a company with the 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% value discount versus peers. So I see upside on that. So we see 3 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 22.5%. Is it -- 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 it's in 8%. So you are talking here of a combined 9% to 10% -- 9% to 9.5% brand marketing investment. I believe probably the largest food company in the world is struggling to get into 9%.

I think the average is about 5%.

The average is 5%. And if you compare the new McCormick with the American food sector, the level of investment in brands is 2x. These are brands with momentum -- these are 2 businesses with momentum. These are 2 businesses that have been investing significantly behind their brands. These are businesses that are having competitive gains. So this is not a much built from a position of weakness. This is a much built from a position of strength.

And you said there's no dissynergies, Fernando, separating out food and HPC. And I think the stranded overheads are only EUR 400 million to EUR 500 million, 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 -- it's 1/4 of your business.

Yes. Well, let me start by stating the obvious here. The revenue and cost synergy between McCormick and Unilever Foods are higher than the revenue and cost synergy between Unilever Foods and Unilever HPC. This has complete industry logic. To your question of scale, we will have a business in the U.S. The remaining Unilever business will be $8 billion in U.S. 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, excluding India plus Africa. This is the size of many global companies in HPC. So this is a business that doesn't have any issue of scale. Do I expect to sell less Dove in U.S. 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 synergies here. When it comes to stranded costs, it's true we have identified around EUR 400 million to EUR 500 million of stranded costs. I understand that you have expected some more, but I think 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 that close to 80% of the revenue of Foods is run as a stand-alone organization. Our foodservice business is a completely separate organization. In the top 24 markets in which we operate, Foods has 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-led model. So we believe that we have a path to make this separation happen. I think what is important about the stranded cost is 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 I feel one of the reasons in which -- while we separate Ice Cream, we improve every single line of the P&L of Unilever because we increased the top line, we increased volume growth, we increased margin and we reduce the structural cost of the business because we were able to mitigate 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, like 1 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 it that maybe it can actually help you accelerate this and get this done more quickly?

Well, Warren, I feel Unilever has been criticized for many, 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. And it's just -- we have to go through a 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 I feel 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 the antitrust issues in the vast majority of geographies, particularly in Western Europe where the process tend to be slower. So we have taken here a cautious approach. We have communicated to the market that it will take between 12 and 15 months. Of course, both McCormick and Unilever is interested to making this as fast as possible because I have met many investors in the last 10 days or so. And when we explained this transaction and when we discussed 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 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 2x their size. So we are very conscious of that. The McCormick leadership is conscious of that. Plans are in place. And when we give exposure to Universal shareholders and between Unilever 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 frame or 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.

Project management teams are still in place from...

Yes, of course. We have a team now that has experience of carving out Ice Cream. Some of them has work goals in the disposal of tea and spreads before. This is a team that has a blueprint, has governance process in place, and we will repeat what we have done in Ice Cream, 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 will do again.

So I'll move to part 2 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 EUR 14 billion of the cash component of the transaction, it 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 2x net debt EBITDA and how that kind of work?

Yes. Well, it's true. We will receive -- this is a cash and stock deal, and we will receive $15.7 billion, that is around EUR 14 billion, as you mentioned. And there are 3 fundamental uses of that cash. First of all, we will reduce the debt level to 2x. That is what we believe is our target in the medium run. We will cover the tax and separation cost. And of course, after reducing the debt and after covering tax and separation cost, there is a surplus of cash that we will use to enhance the returns to the capital returns to our shareholders. We have announced a EUR 6 billion share buyback for the '26, '29 period. Of course, we received the cash in day 1 and particularly the tax bill doesn't hit in day 1. So probably you will see that our debt level in the -- our leverage level in the year 1 probably will be slightly below 2x, and that gives us some flexibility. At this stage, I don't want to commit in how we will use this cash because, of course, the environment is very volatile these days. So these are the 3 fundamental usages of tax. But let me also mention something that I believe is very, very important here that go 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 cost. And this is very, very important because a pure spin would have not given you that because there were no synergies. And also 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 removes -- this makes the transaction in the U.S. 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 U.S.

Well, I'm assuming tax of around about EUR 4 billion is my estimate, looking at what you pay for Best Foods and what you've got for the deal. And as you say, the RMT shields the U.S. tax. But on the non-U.S. tax, EUR 4 billion obviously is not insignificant, although the cash element of EUR 14 billion is higher, so that kind of offset. 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 have been?

If we would have done a spin or if we would have made a disposal, the tax bill would be close to 2x that.

Okay. So it really is...

It's very sizable. 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.

Can you explain a little bit about the transitional services arrangements with 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 EUR 400 million to EUR 500 million do you think they could offset? Could they offset all of them? Or would you need other savings?

Well, transitional service agreement has 2 fundamental value here. One is in 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 2x 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 large McCormick company. In our case, what the TSAs provide is a transitional headroom. They don't remove the stranded costs. The stranded cost has to be removed through a restructuring spending that we calculated will be around EUR 500 million in a 3-year period, above what is the normal course of restructuring that we want to position a 0.6% that is the norm of the industry, and it give us time, and I feel we have been very successful in the Ice Cream separation in mitigating stranded costs before it hit the P&L and transition service agreement play a good role on that. So these are the 2 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 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. So 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 that 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 kind of 100% as we have done in the past. So it's just -- it will be a great cash generation business with a lot of headroom both in top line and margin expansion and with one of the best working capital structure 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 U.K. is listed -- as a primary listing in the U.K. and we manage the company under the U.K. listing rules. In 2024, there has been some change in these rules. Since then, there has been close to a little bit more of 50 transactions of a similar nature to the ones that Unilever is doing now. And none of them has had a mandatory shareholder voting or voluntary shareholding 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 that 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 more transaction...

I think it's kind of important as well, right? You need to meet...

Yes, and what is important here is that the VAR 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 be 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, Unilever have implemented a hiring freeze, I think, for 3 months. How should we think about that? Is it a response to the war and high cost?

Well, it's just, of course, the environment has changed a lot since the 27th of February until now. So basically, I feel it's an act of responsibility to ensure that you manage every single line of the P&L and that pricing is the last resort you go for. I feel 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 in this transaction. And I feel one of the key factors of success in the Ice Cream 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 this is -- these are the 2 reasons behind the hiring freeze.

I want to move on to the third part, Fernando, to talk a little 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? Because I don't think everybody is crystal clear about how this portfolio move fits into that strategic context that we're seeing. I've done this sector of 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 level of -- the pace of change is incredibly these days. I think there is a fundamental shift in which -- in what kind of scale matter. And I feel 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 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 that is exposed to e-commerce -- fast-growing channels like e-commerce or premium segments. And I believe the time of average portfolio delivering solid returns are gone. So it's just the way of reaching and engaging with consumers today is very, very different. I feel you have to really -- the visibility that the consumer have about offering 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 a pure HPC play, it 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 headroom for growth. So this is where I feel it is a way of looking at this transaction in terms of improving the growth profile.

There's a new rule book out there, isn't there?

Sorry?

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. Being courageous enough to shift your portfolio into areas where there is more growth is very, very important. As I say, 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 do 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 BMI 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 for a bit the structure of the business from a category, geography, channel and segment profile. We will be a 67% Beauty & Personal Care business. Beauty & Wellbeing, Personal Care business. We will be 38% in our 2 anchor markets, U.S. and India, we'll 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 CFO of the company. So then in terms of the profile, it will be a EUR 39 billion company, as I mentioned before, with very sizable business in every single region from EUR 6 billion to EUR 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 our companies, this is equivalent to 53% gross margin. And it will have a 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 that 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?

I think the first point to say about the HPC industry is that there is a very specific feature there. It's a fast innovation cycle set of categories. And that fundamentally defines how do you market it, how do you innovate, how do you reach with consumer, how do you engage with them. It has one share of capabilities at travel because there is an underpinning science and technology that is 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 antimalodor ingredients from deodorants into laundry, when you look at the importance of biotechnology, et cetera, et cetera, there 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, very importantly, as you said before, the way in which the market is changing and the way consumer and we engage, our brands engage with consumers is changing dramatically. I believe these are all categories in which format aggradation in which premiumization are significant drivers of value and are categories in which there are significant level of investment that require a significant amount of creation of content. And as I mentioned before, a very, very fast innovation cycle. So we see this as a potential significant simplification in the way we operate in the company.

So to come back on the margin point, you said you have a lot of headroom when your starting margin is 19%. Can you maybe, if you can, outline where you see that headroom on margins, maybe by category or by geography? I guess Home Care might be one area. But is there any structural reason why the gross margins longer term can't be the same or even better than some of your HPC peers?

You know that the most important metric I look in the business is volume growth. So -- and I will not give you now a guidance of what our margin will be in 2030 or whatever. What I'm saying is that we start with an operating margin of around 19% and most of the HPC pure-play companies are between 21% and 23% in that kind of range. So we see some headroom, okay? And the fundamental driver to really improve our operating margin is improving our mix and ensure that we continue delivering volume growth. I have mentioned this before, but we have a 48% gross margin. But when you look at the next unit of volume, our marginal contribution now with this new setup is close to 60%. So for us, delivering significant superior volume growth is one fundamental driver of higher gross margin. And the second is ensuring that we have a better mix. The more we grow in Beauty, the more we grow in Personal Care, the more that we grow in premium segments, the more that we can roll out some of the very powerful brands that we have built in North America in the last few years, the more our margin will go up, and we are very confident that we can make that. You call significant headroom, I call it headroom.

Yes. But maybe just coming back on Home Care because I guess Home Care is a bit different from Beauty & Wellbeing & Personal Care. It's got a different geographic footprint, different margin structure. How do you see the future for that division?

There is a clear correlation between format upgradation in Home Care and margin expansion. So when you have a business that is fundamentally laundry bars, your margins tend to be low, you go into powder, it's higher, you go into liquids, it's higher, you go into unit dosing, it's higher. And when you look at our Home Care business is fundamentally a very strong leader in emerging markets. And in emerging markets, we continue to see a significant headroom for market upgradation and this should result in a significant margin improvement across time in our Home Care business. The important point is if I look in absolute value to the most important revenue growth opportunity that Unilever has is probably Laundry India. The market revenue per capita of Laundry in India is around $4 the market revenue per capita of laundry in Philippines, Thailand, Brazil is between $8 and $10. The washing machine penetration in India 35%. The washing machine penetration in Brazil. Philippines, Thailand is 80%, 90%. So this is probably one of our biggest opportunities at the geographic category sell level. And if we deliver that, the impact in our total margin in Home Care will be very significant.

Okay. And once the deal completes, you're going to be left with 10 category verticals spanning from Hair Care, Skin Care, Deos to fabric. It actually reminds me of P&G a little bit a decade ago where they doubled down on everyday category usage where superiority drives repeat purchase and market share. And these categories, these 10 verticals, I think, have grown market volume at 2% in the last 3 years. So it's actually quite interesting to make that parallel. How can you really leverage those 10? And what's your long-term sort of vision? When I look at, say, like deodorants, you don't have a big footprint in Asia at the moment. That would be one obvious one. But just to get a few ideas of how you kind of feel about it.

Yes, it's absolutely true. The market volume growth in these 10 verticals has been 2%. So basically, if we can outperform our ambition of being 2-plus percent is there. And I think it's important to say also that with 10 verticals, we are probably one of the more focused pure-play HPC companies. And this is important because when you are more focused, you can allocate talent to value better. I'm interested in building a portfolio in categories where science matter, because where science matter, it gives you particularly to a company like Unilever with a very significant emerging market footprint, going into categories where science matter, it gives you a significant element of defense against local competitor in the value segment. I have mentioned this to you many, many times in -- but I feel the example of Wonder Wash in Laundry is a very important one. Why I love Wonder Wash -- that by the way, is close to 300 million now. I love Wonder Wash because washing in 15 minutes is much more difficult than washing in 2 hours. When you need to wash -- when you wash in 2 hours, the machine does a lot of the heavy lifting. But when you wash in 15 minutes, the science has to do the heavy lifting. We are rolling out Wonder Wash in every single market around the globe and in every place is a success. And that's a success that is where in patented technology with a very clear superior product that is also supported by a significant improve in aesthetics, in sensorials and in models of reach and engagement with consumers that are supported by what we call, shared by others, and young spirited brands. So our SASSY model is what is behind Wonder Wash. And I feel we can deploy this in all these 10 verticals. This category share that kind of approach. And I'm very confident that we are having a model now, and we are starting to deploy this model with success in many of our brands.

Okay. And you said the desirability of scale is working. It's differentiated. You just gave the example of Wonder Wash, which is a great example. But what other proof points do you have that desirability of scale is working? And how easy is it to transfer that skill set across all of your power brands? We've seen on a couple, but not on the entirety of the portfolio.

Well, I feel it's good to look at the aggregated level. The new HPC, the new Unilever HPC pure play will have 25 brands that represent close to 80% of the revenue. So you are talking -- they are about close to EUR 30 billion. And these 25 brands have grown -- the compound annual growth rate of these 25 brands has been 7% in the last 3 years with 4% volume. So things are working in many of our brands. Of course, there are usual suspects that are the ones I usually mentioned. I feel Dove is a $7 billion brand that has been growing 7%, 8% for us in the last few years, and I believe it's one of the blueprints for us in terms of repeatability. Vaseline, it took us 153 years to get to EUR 1 billion. But in the last 3 years, we have added close to EUR 500 million in revenue, growing close to 10% in volume in the last couple of years. So there are some brands in which I believe that we have built this SASSY model better than in other ones. I'm always focused on accelerating the winners first. And I feel we have 6, 7, 8 brands that are in great momentum now. And I feel desire at scale is a clear marketing philosophy for the company and SASSY brands is a framework that has united the company in terms of what is important for us. Science is important, improving the aesthetics of our brands, of our packaging of our -- how we present our brands, our visibility is important. Sensorials are important. Ensuring that our brands are recommended by other people is very, very important because I have mentioned this 1 year ago, and I know this has been a bit provocative, but I really believe that the marketing philosophy of broadcasting messages from the brands is gone. And it's very important to ensure that your brands are contemporary and they keep young, they keep -- brands that look brands of today and not brands of the past. So this is uniting the company in terms of a marketing philosophy, and we believe that this is what we call desire at scale. It is working for us, and I feel the performance that we have had in the last 3 years show that.

But some investors think you're trying to create a mini L'Oreal. And I think about it more as the L'Oreal of health and well-being, maybe. So can you maybe kind of outline why you're distinctive? And perhaps can you explain your vision about the Prestige cosmetics and the health and well-being strategy?

Well there are several companies I admire. You mentioned in the last 5 minutes, you mentioned 2 of them. And I don't have any problem to recognize that I admire these companies. You know what, we have our own path. I believe we have a portfolio that is -- it's a broad-based portfolio with a good category exposure that give us resilience from a volume-led category like Home Care, where premiumization format upgradation is very, very important into categories of very high involvements that can be Prestige beauty or well-being. And with a profile that is very distinctive, that is our presence in emerging markets that we like a lot because I believe that this give us a superior volume growth exposure because when you look at emerging markets, there is superior population growth, there is increasing number of households, there is an increase -- a significant increase in female level of participation, and there is much more headroom for wealth expansion. So all these result in significant volume growth, mix and premiumization opportunity. So we like that, and I believe this is a distinctive feature that we have accentuated with this kind of change. And I think it's important also because people tend to look at the emerging markets with the eyes of the past. And I have to recognize that managing emerging markets is not easy. But tell me, how many countries now in emerging markets have inflation beyond 10%. You can count it with the fingers on the hand.

You give me a clue. 5?

Yes, around that. So basically, this is a very different set. Just look at what has happened in the last month or so. The currencies in emerging markets has sustained very well at the moment that in 20 years ago, this kind of situation would have destroyed them. So I believe emerging markets are more solid than they were before, and they have fundamentals of volume growth that are better, and we believe this is a distinctive feature for us.

I mean one area -- I mean, you touched on emerging markets. I mean that is going to be a distinctive feature because I think the weighting of Asia -- Asia plus Africa, I should say, goes from 44% to 48% and emerging markets overall are 62%. I mean that is very different to any other FMCG player. I mean maybe in the short term, it's a headwind. But in the long term, given what you've said, it's going to be a big tailwind. So how do you see it? What can it do for the kind of growth profile? And does it make it more difficult to manage hard currency earnings just because the weight of EM has just bigger?

Actually, I think the fundamentals of emerging market is -- emerging markets -- the fundamental of the economics of emerging market has improved. And you can never predict what will be the negative currency. But if I look at what were the fundamentals of these economies in the past, and what are the fundamentals of today, I believe that in the long run, I feel currency should be more stable in emerging markets than it has been in the past. And as I mentioned before, superior population growth, increasing number of households, significant increase of female labor participation, superior world expansion opportunities. These kind of things matter in the categories in which we compete. There are significant format upgradation, significant premiumization opportunities. We like that. And this should cement the probability of Unilever deliver more than 2% volume growth. And I think it's important also to highlight the 38% in U.S. and India. U.S. has delivered for us in the last 4 years, 4% volume growth. So I don't believe there are many companies that have delivered 4% volume growth in the U.S. And can I promise that we will deliver that forever? No. But do I believe that we have a portfolio footprint in the U.S. can be in the 3% territory? Yes, I believe. And the Indian economy is an economy that is growing 6%, 7%, 8%. And in that kind of context, thinking that India can deliver 5% volume growth is also something that is a reach. So if you take 3% in U.S., 5% in India, 40% of the revenue, you are talking at an average of, let's say, 3.8%, 4%, you're talking of 1.6% already there. And then you have another 62% of the business to deliver the rest of the growth. So I'm very confident on this kind of 2-plus percent volume growth territory that we have as an ambition. And I believe it's very important for us to deliver that consistently quarter in, quarter out.

Maybe just following up on India, you mentioned it just now. I mean, Priya, who is now running the Indian business. Can you maybe sort of outline what her priorities are, where things are, obviously, macro aside in terms of the portfolio shape. You've done the Minimalist, you've done some other deals. But how do you see it kind of progressing around sort of premiumization?

Well, I feel that the number one priority of Priya in India is to ensure that the portfolio is future fit because the incredible portfolio that has brought us into the incredible position of leadership that we have today because we have 55% share in Hair Care. We have 45% share in Laundry. We have 80% share in Dishwash. We have 80% share in lifestyle nutrition, and I can continue counting in many, many categories. So I feel we have in most of the categories, 3 to 5x the size of our second -- of our main competitor. So we have an incredible portfolio in India. And we have an incredible distribution system. We have -- we are very cost efficient in India in terms of our cost of producing goods, and we have an incredible access to talent. So I feel the fundamental challenge of Priya is ensuring that our portfolio is future fit and ensure that the execution is flawless as it has been in the past. I believe that we lost a bit our way for a couple of years. I feel we are improving now. I'm very, very bullish about India and the contribution that will do to Unilever growth algorithm overall. It's just having close to 16%, 17% of your business in India, I believe it's a long-term competitive advantage maybe.

Yes, definitely. I want to come back on the SASSY model and marketing model because when we were sat here a year ago, I remember you telling me that you wanted an influencer in every ZIP code in India and Brazil and some 100 still in my head. So perhaps a year on, can you maybe update us where we are on that, if you've got any specific examples of where it's made a big difference. And I'm thinking about it also in the context of the FIFA World Cup upcoming where Unilever are, I think, for the first time, a major sponsor.

Well, influencers is a way of simplifying what I call other people recommendation. Some of them are influential, some of them are professionals that recommend our brands. But we have now close to 300,000 people recommending our brands. If you have like -- you have a look at that 2 years ago, we have around 10,000. We have 17,000 recommending Dove in the U.S. We have, I believe, 22,000 in Liquid I.V. in the U.S. We have 17,000 in India, and I can continue counting many, many examples. So it has been a significant change in the infrastructure that we have for our model of reach and engagement with consumers. Is the efficiency of this investment has reached the peak? Definitely not. I feel we have increased the amount of investment behind this, but there is a lot that we have to do to ensure that we have the higher return of investment in that kind of money that we are putting behind that. And this is a kind of work in which I'm -- if you ask me, one of the things I'm much more interesting now is what are the variables that affect return of investment in a model like that today. And these things change every single day, and I feel there will be even more changes with the emergence of large language model as a key driver of search in the future. But overall, I'm never happy, but I'm satisfied with the progress that we have done in this space. And I believe the improvement in our performance is a combination of significant higher level of investment because you remember 4 years ago, we used to invest 13.1% of revenue in brand marketing investment. I call that being consciously uncompetitive, and that's a criminal act. Now we have 16.1%. When you remove Foods, that level is 18%. I feel we're investing competitively now, but we're also investing better in models of engagement and -- reach and engagement with consumers that are models of today and not models of the past.

And in terms of the World Cup, how are you activating?

It's huge. I really believe that event marketing will be very important in the future. And there are 2 areas in which we are investing more also beyond other people recommendation for our brands. One is in-store visibility because in a world in which media fragmentation is very high, I feel the importance of a store is higher. And if you look at Advantage survey in the U.S. last year ranked us as the #2 company, #1 in Foods, #1 in Personal Care, #3 in Beauty. So investment in store is very important. And investment in events is very important. And FIFA this year is a very important event for us. It's the first time we do something of that size. And it's very important because sports is linked with movement and movement is very related with many of our categories like Skin Cleansing or Deos that are fundamental for us. We are very excited, and we believe it will be a key driver of growth for us this year.

And in terms of going forward, Fernando, I think about capital allocation, I think you're clearly on record saying no transformational acquisitions. Can you maybe kind of just elaborate a little bit on that because there is clearly a lot of consolidation going on. I mean, every day, there's more news flow or something on something happening. And why you think kind of your bolt-on strategy is a better use of capital?

Yes. There are very few transactions that increase the growth profile of the company. What I'm excited about this transaction with McCormick is that I believe that this transaction increased the volume growth potential of the Unilever Food business and the McCormick food business. Do I see similar transactions in other spaces like in HPC? I don't see it. And this is not a transaction that is done to generate flexibility to do another transaction. Our capital allocation priorities remain the same. We will invest for organic growth and productivity. We will ensure that we have a dividend payout ratio of around 60% in our HPC pure-play business. We will do bolt-on acquisitions that we like in places like Beauty & Wellbeing, in Personal Care in U.S. and in India, in premium segments and with significant exposure to e-commerce. And if there is a surplus of capital, of course, we will return it to shareholders. So there is no change in our capital allocation priorities. And many people is talking, okay, are these guys thinking in doing something in consumer health or anything like that? No, we are not thinking anything like that. We are focusing on growing our business organically and ensuring that we continue shifting our portfolio progressively into areas of super growth with bolt-on acquisitions, focus in the U.S., focus in India, focusing Beauty & Wellbeing, focus in Personal Care.

And on the Health & Wellbeing part of the portfolio, obviously, it's high growth and it's slowing a little bit recently, but it's quite narrow. So how are you thinking about kind of broadening it?

That's the beauty of that. I want strong leadership positions in narrow verticals instead of weak positions in wider verticals. And I believe I like having more than 40% share in powdered hydration. I like having close to 80% share in hair fall with Nutrafol. I like the kind of exposure that OLI has in areas like sleep, et cetera, et cetera. So we will continue looking at assets in that space, but they have to be assets that are in super growth space that are very clearly defined in narrow verticals in which we can extract positions of leadership there. And you know that our business that have good exposure to digital has good exposure to e-commerce and that are easy to roll out globally because one of the reasons that we are doing this investment in the U.S. because U.S. is the only market that gives you 2 things. It gives you critical mass and it gives you brands that can travel internationally. And I believe that strategically is very, very important for Unilever to build a new leg of the portfolio that can travel in the premium segment globally.

There's a lot of focus on Liquid I.V. and Nutrafol for obvious reasons, they're quite big, but you've also got K18, you've also got Dr. Squatch. How are you feeling about those 2?

We are excited. I feel K18 is having a great run. I feel Dr. Squatch is not counting yet in our underlying sales growth, but it's more than $500 million business, growing double digit there. And it's very exciting because it's absolutely complementary in terms of positioning to our other brands in Skin Cleansing and deodorants. It's a male grooming brand that I believe has a lot of potential and it has a lot of potential internationally also. And you asked me before about Prestige Beauty. We see Prestige Beauty as a natural extension of our Skin Care and Hair Care strategy into mass, and give us exposure to price points in which we can deploy our best science, and we have fabulous brands there like Dermalogica, Hourglass, Murad, Tatcha, et cetera, et cetera, that there is a lot of growth headroom there.

But also the portfolio is still quite U.S. Is there still more room to internationalize?

Yes, of course. And you can blame me on that because I feel when China slowed down, we made a conscious decision of making a fortress of our U.S. position because when China slowed down, where companies were going to go. They were going to go to the U.S. and they were going to discover India. So basically, we decided not to go too fast in the global rollout of these brands, but I believe now is the time, and we have a good portfolio with very good critical mass. Liquid I.V. is close to $1 million, Nutrafol is the same in the U.S. So I feel the brands are ready. Some brands are more complex in terms of regulatory barriers than other ones. But overall, we believe that we are building a new level of portfolio that has significant international...

And how do you think about those brands from a China portfolio point of view? Because I think previously, China, you were trying to be all things to all people. Now you're trying to be more selective. I mean, OLI has done very well, I know, in China. Is there now more potential for taking some of these brands into China? Or do you still need to be selective?

I feel selective growth is our approach, our strategic approach to China. I believe that I want to be narrow there. Again, I feel we have 5 brands there in which we are investing significantly, Dove, Vaseline, OLI, OMO between them. Of course, we need to build a premium portfolio in China, but there is always time. It's too late to be early in China for us, and it's too early to be late. So I feel the 2 things are true, and it's a very important market. I feel we have improved our operations there significantly and expect a good performance this year in China, but it doesn't have the strategic importance for us as, for example, India has when you compare to the 1.4 billion population countries.

And maybe just conscious of time, Fernando, sort of just maybe wrapping up and sort of summarizing some of the points that you're making. And going back to the McCormick deal, I mean, some have argued that the deal was not compelling value for Unilever shareholders or is at least bad option. And you've kind of mentioned a lot of different points there. But how would you really sort of 1 or 2 sentences really push back on that?

This value is about unlocking volume growth. It's unlocking volume growth in our Food business because our Food brands will become absolute priority within McCormick in a company that has significant revenue and cost synergies. It's about volume growth in our HPC business because we will have a simpler business with very well-defined categories in which we will compete with a 1 share set of capabilities and in a business in which we are already outperforming the market and where there is a significant value discount, valuation discount versus peers of around 20%, 25%. We are probably now top third or top quartile in terms of performance when it comes to top line growth, and we are bottom quartile in terms of valuation. I see that as an upside. I would not like to be bottom quartile in performance and top quartile in valuation. So I believe that this will unlock a lot of value for our shareholders in the long run. I feel coming back to Foods also, we are not increasing the exposure to foods of our shareholders. We are increasing the quality of their exposure to foods. We are giving them optionality if they want to own foods, reduce exposure or not owning foods. And we are generating significant cost synergies that are proven already. And we believe that there are revenue synergies, potential revenue synergies that are sizable and in which the very healthy margin profile of that business will be able to be a significant enabler because it will allow significant investment behind the brands.

When you mentioned valuation, obviously, that's more the market's job than your job to run the company. But as you said, there is quite a big disconnect. I mean, is there kind of like a frustration that actually you are delivering that kind of top line growth, but the valuation is not reflecting it. What do you think is the bit that's misunderstood? What's the unlock? How long is it going to take?

Well, it's just -- I mentioned this before, I never blame markets. They are imperfect in the short term. But in the long term, they tend to reward companies with good fundamentals that deliver consistently. And the main issue of Unilever is that it has not delivered consistently. I mean we have had a couple of good years, but this is about quarter in, quarter out. I'm absolutely obsessed to ensure that this company gets into a consistent path of 2-plus percent volume growth that leads to consistent earnings growth in hard currency across time. If we deliver that, the valuation discount will disappear with time. And we focus on what we can control. And what we can control is to make Unilever better every single day.

Final question, Fernando. If you had to sum up Unilever in sort of 3 words, what would you say? What are the 3 kind of -- what are the 3 kind of go forwards that you're thinking about that we, as investors and analysts should think about?

Well, that's tough, but I would say, sharper, forward-looking, competitive.

Super. Thank you, Fernando.

Thank you.