DBRS Morningstar Assigns Issuer Rating of A (high) With a Stable Trend to Unilever PLC

DBRS Ratings Limited (DBRS Morningstar) assigned an Issuer Rating of A (high) with a Stable trend to Unilever PLC (Unilever or the Company). Unilever plc is the UK-incorporated parent company of the Unilever Group (the Group), one of the world's largest consumer products companies.

KEY CREDIT RATING CONSIDERATIONS
The A (high) credit rating reflects Unilever’s large scale and strong brand portfolio of mainly nondiscretionary products across a diverse set of categories, such as personal care and nutrition. The credit rating is also underpinned by the Company’s globally diversified geographic footprint and exposure to higher-growth emerging markets (representing around 60% of sales), which make the Group’s multi-year organic sales growth target of 3% to 5% achievable.

CREDIT RATING DRIVERS
DBRS Morningstar could take a negative credit rating action if credit metrics deteriorate for a sustained period (i.e., debt to EBITDA above 3.0 times (x)) as a result of weaker-than-expected operating performance and/or more aggressive financial management. Conversely, DBRS Morningstar could take a positive credit rating action if the Company’s business risk profile meaningfully strengthens with prolonged market share growth, combined with a commensurate improvement in credit metrics on a normalised and sustainable basis (i.e., debt to EBITDA trending towards 2.0x).

CREDIT RATING RATIONALE
The Stable trend reflects DBRS Morningstar’s expectations that Unilever’s gross leverage (as defined by debt to EBITDA) will remain at approximately 2.5x during F2023–24, unchanged since F2022. DBRS Morningstar also anticipates that leverage will subsequently reduce towards 2.0x by F2026 from 2.2x as of June 2023 because of the Company’s prudent financial policy and EBITDA margin growth. DBRS Morningstar expects its EBITDA margin to exceed 20% over the next three years compared with 19% in F2022 on the back of incremental research and development (R&D), capital expenditure (capex) investments, and internal cost-savings initiatives.

Although Unilever’s leverage is relatively high for the current credit rating, the Company benefits from a strong business profile. In the first nine months of 2023, Unilever reported organic sales growth of 7.7% compared with the first nine months of 2022, driven by prolonged price increases despite somewhat lower volumes. During the same period, Group sales were relatively flat because of negative currency impacts and disposals.

Similar to its peers, Unilever has passed on increasing input costs to its customers, leading to strong price-led organic sales growth over the last several years. DBRS Morningstar expects total revenue to be EUR 60 billion in F2023 and EUR 61 billion in F2024, representing an approximately 15% increase over pre-Coronavirus Disease (COVID-19) pandemic levels. Nevertheless, in DBRS Morningstar’s view, the current cost-of-living crises in many of Unilever’s core geographies, including Europe, limits the Company’s opportunity to continue passing on increasing input costs. DBRS Morningstar anticipates organic sales growth of 3% to 5%—the lower end of Unilever’s F2024–26 target. In addition, recent price increases have dented Unilever’s market shares in some product categories; DBRS Morningstar therefore expects the Company to step up R&D spending and price investments over the short term to regain competitiveness. In DBRS Morningstar’s view, incremental R&D and capex investments will take some time to translate into EBITDA margin improvements. In F2023–24, DBRS Morningstar anticipates that adjusted EBITDA will remain at around EUR 11.5 billion.

Despite the marginal deterioration of profitability in F2023–24, Unilever benefits from the nondiscretionary nature of many of its products, including food and personal care, leading to relatively stable and predictable future cash flows. Management also remains committed to a prudent financial policy focusing only on bolt-on acquisitions and targeting net leverage of 2.0x, which is commensurate with gross leverage of around 2.5x. DBRS Morningstar considers these metrics to be adequate for the current credit rating.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (4 July 2023) https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings.

Notes:
All figures are in British pound sterling unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Consumer Products Industry (21 July 2023), https://www.dbrsmorningstar.com/research/417460/global-methodology-for-rating-companies-in-the-consumer-products-industry

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223.

The primary sources of information used for this credit rating include Unilever’s annual reports, interim and quarterly results, results presentations, and earning calls. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and credit ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/425836.

This credit rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Chloe Blais, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: December 29, 2023
Last Rating Date: February 12, 2009

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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