DBRS Morningstar Assigns Issuer Rating of A (high) With a Stable Trend to Unilever Finance Netherlands B.V.

DBRS Ratings GmbH (DBRS Morningstar) assigned an Issuer Rating of A (high) with a Stable trend to Unilever Finance Netherlands B.V. (UFN).

UFN is one of the main financing companies of Unilever plc (Unilever or the Company), which owns 100% of UFN and is the ultimate parent of the entire Unilever group of companies. UFN’s credit rating is consistent with DBRS Morningstar’s credit assessment of the Unilever group. This credit rating equivalency takes into account the guarantee of UFN’s securities by Unilever and Unilever United States, Inc., and DBRS Morningstar’s assessment of UFN as a strategically important subsidiary of Unilever. UFN’s credit rating is therefore based on DBRS Morningstar’s credit assessment of Unilever using a consolidated approach.

KEY CREDIT RATING CONSIDERATIONS
The A (high) credit rating reflects Unilever’s large scale and strong brand portfolio of mainly non-discretionary 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, that makes the Group’s multi-year organic sales growth target of 3% to 5% achievable.

CREDIT RATING DRIVERS
Should 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, the credit ratings could come under pressure.

Conversely, DBRS Morningstar could take a positive credit rating action should the Company’s business risk profile meaningfully strengthen, reflected in prolonged market shares 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, defined by debt-to-EBITDA, will remain at approximately 2.5x over F2023-24 from a similar level of 2.5x as of F2022. DBRS Morningstar also anticipates that leverage will subsequently reduce towards 2.0x by F2026, led by a prudent financial policy and EBITDA margin exceeding 20% over the next three years from 19% in F2022, led by incremental research and development (R&D) and capital expenditure (capex) investments along with internal cost-savings initiatives. Despite Unilever’s leverage being relatively high for the current credit rating, the Company benefits from a very strong business profile that led to the A (high) credit rating.

In the first nine months of 2023, Unilever reported organic sales growth of +7.7% compared with the previous year, driven by prolonged price increases despite somewhat lower volumes. During the same period, Group sales were flat at +0.4% because of negative currency impacts and disposals. Similar to other consumer products peer companies, Unilever has been able to pass on increasing input costs to its customers, leading to strong price-led organic sales growth over the last years. In F2023, DBRS Morningstar expects total revenue of EUR 60 billion, growing to EUR 61 billion in F2024, which represent an approximately 15% increase compared with pre-pandemic levels.

Nevertheless, the current cost-of-living crisis evident in many of Unilever’s core geographies, such as Europe, is, in DBRS Morningstar’s view, limiting the opportunity for the Company to continue to pass on the increasing input costs. DBRS Morningstar anticipates organic sales growth at the lower end of Unilever’s F2024-26 target of 3% to 5%. In addition, recent price increases have dented Unilever’s market shares in some products 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, which DBRS Morningstar expects to exceed 20% only by F2026, compared with 19% in F2022. In F2023-24, DBRS Morningstar anticipates adjusted EBITDA to remain at around EUR 11.5 billion.

Despite the marginal deterioration of profitability in F2023-24, Unilever benefits from the non-discretionary nature of many of its products, including food and personal care, leading to relatively stable and predictable future cash flows. In addition, management remains committed to a prudent financial policy, focusing on only bolt-on acquisitions and targeting a net leverage of 2.0x (2.2x as of June 2023), which is commensurate with a gross leverage metric of around 2.5x, considered 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.

DBRS Morningstar notes that this press release was amended on 8 December 2023 to incorporate the disclosure confirming that this is the first DBRS Morningstar credit rating on this issuer.

Notes:
All figures are in euros unless otherwise noted.

DBRS Morningstar applied the following principal methodology:
-- DBRS Morningstar Global Criteria: Guarantees and Other Forms of Support (March 28, 2023), https://www.dbrsmorningstar.com/research/411694/dbrs-morningstar-global-criteria-guarantees-and-other-forms-of-support.

The following methodology has also been applied:
-- Global Methodology for Rating Companies in the Consumer Products Industry (July 21, 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 plc’s annual accounts, 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. This is the first DBRS Morningstar credit rating on this 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/425023.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Edoardo Danieli, Assistant Vice President
Rating Committee Chair: Timothy O'Brien, Managing Director
Initial Rating Date: 6 December 2023
Last Credit Rating Date: Not applicable as there is no last credit rating date.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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