DBRS Confirms Unilever Group at R-1 (low)p and A (high)p

Dominion Bond Rating Service (“DBRS”) has today confirmed the long-term and Commercial Paper ratings of the Unilever Group (“Unilever” or the “Company”) at A (high)p and R-1 (low)p, respectively. The trends are Stable.

DBRS notes that in Europe (which generates around 43% of Unilever’s net sales), Unilever is still witnessing difficult market conditions, due to weak consumer demand as well as the growing significance of hard discounters. In addition, the Company continues to face more vigorous competition from branded and private label consumer product companies worldwide, exerting pressure on pricing, volume growth, and market share retention. Rising commodity and energy costs have also produced headwinds restricting the Company’s earnings and margins.

However, over the past year the Company has responded by placing a stronger emphasis on brand support by way of greater product innovation (something the Company has fallen short on in previous years) and a higher investment in advertising and promotion. As well, in order to improve competitiveness and management responsiveness, the Company has been de-layering the organization’s management and seeking procurement savings on an ongoing basis. While it is perhaps too early to tell, the result appears to be accelerating growth in net sales (+4.6% for H1 2005 versus +0.4% for FY2004), driven primarily by higher sales volumes and earnings/margins that have remained relatively stable.

While the re-launch of the Slim-Fast brand during FY2004 was not completely successful, and resulted in a write-down of around €1 billion to date (which DBRS has treated as non-recurring), DBRS does not expect future meaningful write-downs from the Company’s various brand categories. Accordingly, the balance sheet is expected to remain reasonably strong, even though meaningful debt reduction is not anticipated going forward, as management has now achieved their targeted net debt level of around €10 billion.

DBRS believes the Company’s ratings continue to be supported by the fact that the Company remains one of the leading packaged consumer goods companies in the world, generating strong operating cash flow from its diverse portfolio of consumer products (including some of the world’s best-known brands).

However, should difficult business conditions ultimately affect Unilever’s earnings profile in a more pronounced manner over an extended period of time, this could impact DBRS’s view of the Company’s rating trend.

Note:
p - This rating is based on public information.