Morningstar DBRS Confirms Issuer Ratings of A (high) With Stable Trends for Unilever PLC and Unilever Finance Netherlands B.V.

DBRS Ratings Limited (Morningstar DBRS) confirmed its A (high) Issuer Ratings on both Unilever PLC and Unilever Finance Netherlands B.V. (UFN). The trends on the credit ratings remain Stable.

Unilever PLC is the UK-incorporated parent company of the Unilever Group (Unilever or the Company). UFN is incorporated in the Netherlands as a wholly owned subsidiary of Unilever PLC and is one of Unilever's main financing companies. UFN's debt is fully and unconditionally guaranteed by Unilever PLC.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Unilever's strong business risk assessment and are supported by its large scale and robust brand portfolio of mainly nondiscretionary products across a diverse set of categories, which include personal care, beauty and wellbeing, home care, and foods. The credit ratings are also underpinned by the Company's globally diversified geographic footprint and exposure to higher-growth emerging markets (representing around 60% of group sales). Unilever's global supply chain and manufacturing footprint also provide capacity in its operations to be flexible with respect to ongoing uncertainty related to U.S. tariffs and global trade shocks.

As discussed in Morningstar DBRS' commentary: "Unilever PLC: Freezing Out the Ice Cream Division Could Have Positive Credit Implications" published on 20 March 2024 (https://dbrs.morningstar.com/research/429837), Morningstar DBRS views the proposed spin-off of Unilever's ice cream segment positively from a business profile perspective despite a reduction in scale and scope. This is because the division generates a lower operating margin than the overall Company and because ice cream is a seasonal, nondiscretionary product. Further, the Company's cost-savings programme is expected to largely offset the lost ice cream earnings, on a normalised basis. This spin-off is expected to be completed at the end of 2025, and the benefits of the cost-savings programme are anticipated to be realised from 2025 and thereafter. Therefore, the Morningstar DBRS forecast to 2025 considers the current structure of the Company, with the inclusion of the ice cream division.

Notwithstanding, Morningstar DBRS expects that following the spin-off, Unilever will continue to manage its leverage around its target net debt to EBITDA ratio of 2.0 times (x) (equal to about 2.4x Morningstar DBRS gross debt-to-EBITDA), which supports the Stable trends on the credit ratings. The spin-off, as well as Unilever's cost-savings programme and ongoing strategic initiatives, pose execution risks and potential timing mismatches between expenditures and envisaged benefits, and therefore Morningstar DBRS will continue to take a conservative view on Unilever's margin progression until sustainable improvement is evident.

CREDIT RATING DRIVERS
Morningstar DBRS could take a negative credit rating action if Unilever's credit metrics deteriorate for a sustained period (i.e., debt to EBITDA above 3.0x) because of weaker-than-expected operating performance and/or more aggressive financial management. Conversely, Morningstar DBRS 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 operating margins and credit metrics on a normalised and sustainable basis (i.e., debt to EBITDA comfortably below 2.0x).

EARNINGS OUTLOOK
Unilever has been successful in expanding its top-line revenue via volume growth, with four consecutive quarters of positive volume growth as of September 2024 (Q3 2024), following a period of stagnancy in volumes because of its price increases to pass on inflationary costs. As of Q3 2024, the Company affirmed its 2024 full-year guidance of organic sales growth within its multiyear range of 3% to 5% with an adjusted EBIT margin of 18%. However, year-to-date, foreign exchange (FX) impacts and ongoing portfolio optimisation disposal activities have suppressed reported sales growth to 1.3% in the nine months to September 2024. Morningstar DBRS expects reported sales growth for full-year 2024 to be in line with the year-to-date results, and a similar rate of growth in 2025 as FX headwinds and portfolio disposals continue to pressurise reported sales. While Unilever has achieved expansion of its gross profit margin, returning to pre-COVID level as of 30 June 2024 (H1 2024), Morningstar DBRS expects that increased brand marketing investment and research and development costs, along with FX impacts, will limit the overall pace of margin progression in the forecast period. As such, Morningstar DBRS forecasts annual EBITDA in the range of EUR 12.0 billion to EUR 12.5 billon for 2024 and 2025.

FINANCIAL OUTLOOK
Morningstar DBRS expects Unilever's cash flow from operations (CFO) to track EBITDA, with some negative impacts from ongoing restructuring costs (estimated as around 1.2% of revenue), resulting in an average EBITDA-to-CFO conversion of 65% to 70%. Morningstar DBRS anticipates that the Company will continue to generate healthy free cash flow, with CFO more than sufficient to cover capital expenditures equal to 3% of annual revenue and ongoing progression of Unilever's dividends in line with the Company's guidance. Surplus cash flow is expected to be allocated to bolt-on acquisitions and to share buybacks, such that Unilever continues to operate around its net leverage target. Morningstar DBRS anticipates that Unilever's key financial metrics will remain in line with current levels, including cash flow-to-debt in the high 20s (%) and debt-to-EBITDA at or below 2.5x.

CREDIT RATING RATIONALE
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. In the last 12 months to 30 June 2024, Unilever's EBIT increased to EUR 10.8 billion, which represents a milestone for the Company as its operating profit has historically been constrained below EUR 10 billion. This margin expansion has been achieved via volume growth because of the Company's operating leverage and its ongoing restructuring and productivity initiatives. As of H1 2024, the Company's key credit metrics remained stable from year-end 2023 and in line with Morningstar DBRS' expectations, including cash flow-to-debt of 29%, debt-to-EBITDA of 2.4x, and EBITDA-to-interest of 10.9x. While Unilever's leverage remains high for the credit rating level, the Company's business risk profile and predictability of cash flows support the credit ratings and Stable trends. The Company maintains satisfactory liquidity reserves including cash and cash equivalents of EUR 5.0 billion and undrawn committed credit facilities of around EUR 7.5 billion equivalent as of H1 2024.

In its November 2024 investor event, Unilever provided an overview of its Growth Action Plan to 2030, which will follow the separation of the ice cream division slated for the end of 2025. This plan includes a reorganisation from a geographical management structure to a business group-led structure within its top 24 markets (which account for 85% of its turnover and 90% of its operating profit), while its remaining 100-plus markets will be managed under a uniform, lower-cost approach. This reorganisation, in conjunction with a higher proportion of capital expenditures to be allocated to supply chain efficiencies and ongoing premiumisation of its product portfolios in developed markets, should result in structural expansion of Unilever's gross margins in the long term. However, as this strategy will be executed in the medium- to long-term horizon to 2030 and remains subject to execution risks, the Morningstar DBRS forecast provides little benefit for these envisaged targets at this point in time.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
A) Weighting of BRA Factors
In the analysis of Unilever, the relative weighting of the BRA factors was approximately equal.

B) Weighting of FRA Factors
In the analysis of Unilever, the relative weighting of the FRA factors was approximately equal.

C) Weighting of the BRA and the FRA
In the analysis of Unilever, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Consumer Products Industry (14 August 2024) - https://dbrs.morningstar.com/research/437890

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186 which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Global Corporate Criteria (15 April 2024) - https://dbrs.morningstar.com/research/431186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) - https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for these credit ratings include Unilever's 2023 Annual Report, H1 2024 results, Q3 2024 Trading Update, November 2024 Investor Day Presentation, and other public enclosures and information available on Unilever's website. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, these are unsolicited credit ratings. These credit ratings were 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

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS 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 Morningstar DBRS 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/444169.

These credit ratings are 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: 6 December 2023
Last Rating Date: 29 December 2023

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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