Unilever PLC: Freezing Out the Ice Cream Division Could Have Positive Credit Implications

On 19 March 2024, Unilever PLC (Unilever or the Company, rated A (high) with a Stable trend by Morningstar DBRS) announced that its ice cream division will be separated into a stand-alone business. Unilever’s ice cream business, which includes popular brands such as Wall’s, Magnum, and Ben & Jerry’s, represents around 13% of the Company’s sales and less than 10% of the Unilever Group’s (the Group) EBIT. The Company advised that a de-merger of the ice cream business is the most likely route of separation; however, it has noted that it will consider other options for separation to maximize returns for shareholders. In addition to the separation, Unilever announced that it is undertaking a new productivity programme wherein the Company is targeting to achieve around EUR 800 million of cost savings over the next three years.

We believe this separation could have positive implications for the Company’s business profile as ice cream is a nondiscretionary good subject to seasonality and can be adversely affected by consumers’ preferences for healthier products. There could also be improvements in operating efficiency as we expect the group’s profitability margins to increase following the transaction. At this stage, the financial implications remain somewhat unclear, as the structure of the transaction has yet to be finalised. However, there is a potential upside here as well: the spin-off could involve a transfer of debt to the new entity, and the Company’s newly announced productivity programme will help offset some of the lost earnings of the ice cream division.

Key Highlights:

-- As a category, ice cream poses various challenges, including the logistics required for frozen goods and seasonality. Unilever’s ice cream division has been underperforming compared with the Company’s other product categories for some years now.
-- The ice cream business represents the least profitable business for the Company, with an F2023 adjusted operating margin of 10.8% compared with the Group total adjusted operating margin of 16.7%. The divestment will have the immediate effect of improving by 90 basis points to 17.6% the Group’s adjusted operating margin.
-- Unilever’s envisaged cost savings of EUR 800 million will be achieved, in part, through a headcount rationalisation of around 7,500 roles globally (around 6% of its total 128,000 employees) as well as an investment in technology.
-- While the mechanics of the spin-off transaction remain unclear, we expect that such a transaction will have an element of debt reduction for the refocused company, allowing it to at least maintain its debt-to-EBITDA within the current range.

“Overall, we expect that the cost savings programme will largely offset the lost earnings of the ice cream division, with further growth in earnings expected as the Company continues to execute its strategy,” said Chloe Blais, Assistant Vice President at Morningstar DBRS. “Along with the positive business profile implications of spinning off a seasonal, lower-margin product, there are potential positive credit implications if Unilever is able to achieve its cost savings targets. However, should the Company’s cost savings ambitions not be achieved, this could place pressure on Unilever’s financial metrics and have negative implications for the rating.”