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Fitch Affirms Unilever at 'A+'; Outlook Stable
October 15, 2015 / 2:20 PM / 2 years ago

Fitch Affirms Unilever at 'A+'; Outlook Stable

(The following statement was released by the rating agency) LONDON/MILAN, October 15 (Fitch) Fitch Ratings has affirmed Unilever NV's and Unilever PLC's (together Unilever) Long-term Issuer Default Ratings (IDR) and senior unsecured ratings at 'A+' and their Short-term IDRs at 'F1'. The Outlook on the Long-term IDRs is Stable. Fitch has also affirmed at 'A+' the senior unsecured ratings of debt issued by Unilever Capital Corporation (UCC) and Alberto Culver as well as the 'F1' rating of the commercial paper programmes of Unilever NV, Unilever PLC and UCC. Both UCC and Alberto Culver benefit from cross-guarantees with Unilever NV, Unilever PLC and Unilever United States, Inc. The ratings continue to factor in the stability of Unilever's operating and financial profiles. This is supported by a reasonable potential for organic growth and by Fitch's expectations that the company will generate sufficient free cash flow (FCF) to fund bolt-on M&As and shareholder distributions. Fitch does not expect M&A or shareholder distributions to compromise Unilever's solid credit metrics. KEY RATING DRIVERS Adequate but Decelerating Organic Growth Unilever's target of doubling revenue to EUR80bn relies mostly on organic growth. Fitch believes this is achievable over the long-term, by maintaining annual organic revenue growth in the mid-single digits. However, organic growth has decelerated over the last two years, in particular from the emerging markets, to which Unilever has a higher exposure than its peers at 57% of sales in 2014. Firmer-than-expected organic revenue growth of 3.8% in 9M15 was boosted by a soft base effect in China, a strong ice cream season and advanced sales in Latin America that included announced price increases. Fitch still expects Unilever to deliver its long-term goals through continued product innovations and from the higher-growth home and personal care segment. Profit Margin Expansion Despite Unilever's gross margin declining 20bps to 41.4% in 2014, its core operating margin was up 40bps at 14.5%. This continued in 1H15 as core operating margin improved 50bps to 14.5%. This increase in 2014 was achieved through overhead reduction while that in 1H15 was driven by pricing and product mix as well as cost savings including further efficiencies in advertising and promotions and reductions in overheads. Fitch believes that Unilever is well placed to deliver further margin expansion given its track record over the last seven years in a difficult trading environment. M&A Activity Unilever has become more acquisitive since 2009 but has also been divesting low-growth operations as it focuses on (mainly organic) revenue growth. The ratings do not factor in large M&A and assume average annual acquisition spending of EUR1.5bn for 2015-2016, net of small disposals of some lower-growth assets. Commitment to High Rating Unilever's policy is to maintain credit ratios commensurate with an 'A+' rating. Funds from operations (FFO) adjusted net leverage has remained consistently between 1.8x and 2.2x since 2011. For 2015-2016, Fitch expects positive free cash flow (FCF) of around EUR1bn and leverage to remain stable at 2.0x, at the lower-end of the downgrade threshold of 2.0x to 2.5x. This profile remains consistent with the current rating given the stable packaged food sector. The negative impact from FX headwinds in emerging markets in 2014 has started to reverse since 1H15 and was further confirmed in 9M15 results where favourable currency impact added.7.6% to turnover. We expect this to flatter 2015 leverage via higher translated FFO. Cash Flow Covers Shareholder Distributions The company has not, over the past three years, engaged in any share buyback activity (except for the one-off EUR0.9bn purchase of Leverhulme's privileged shares). Barring large divestment proceeds, Fitch does not expect any major returns of capital to shareholders. We believe Unilever will maintain dividend payout in the 60% to 70% range (2014: 62%). As Unilever's priority is to invest in its business, bolt-on acquisitions and disposals of slower-growth assets remain more likely than shareholder-friendly initiatives. KEY ASSUMPTIONS - Low single-digit organic revenue growth complemented by strong positive FX impact in 2015; - Stable EBIT margin above 14.5%; - Annual FCF around EUR1bn, subject to changes in working capital and additional restructuring charges; - Capex at around 4% of revenue and annual bolt-on acquisitions (net of disposals) of EUR1.5bn from 2015 onwards; - 8% dividend growth per annum. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: -A change in financial policy, such as sizeable share repurchase programme or special dividend, resulting in an increase in EBITDA- based adjusted net leverage to more than 2.0x (2014:1.7x) and FFO-adjusted net leverage to between 2.0x and 2.5x (2014: 2.1x) on a sustained basis -Significant slowdown in growth in the emerging markets -FFO fixed charge cover of less than 6x (2014: 7.3x) -FCF consistently below EUR1bn annually (2014: EUR768m) Positive: Future developments that may, individually or collectively, lead to positive rating action include: -Continued progress with operational restructuring or business mix, leading to an EBIT margin of at least 14% - EBITDA-based adjusted net leverage sustainably between 1.0x and 1.3x or FFO-based adjusted net leverage within 1.3x-1.5x - FFO fixed charge coverage of more than 8x - FCF in the high-end of EUR1bn-EUR2bn range -Commitment by management to maintain credit ratios and financial policies consistent with a 'AA-' rating. LIQUIDITY Liquidity is supported by FCF generation and sound access to the capital markets. The group also issues commercial paper at the Unilever NV (NV), Unilever PLC (PLC) and Unilever Capital Corporation (UCC - a US issuing entity) levels and has access to USD6,550m revolving 364-day bilateral credit facilities with a 364-day term out. Most debt is at UCC, NV and PLC. NV and PLC guarantee each other's debt and also guarantee that of UCC. Contact: Supervisory Analyst Ching Mei Chia Director +44 20 3530 1068 Fitch Ratings Limited 30 North Colonnade London E14 5GN Principal Analyst Ilana Elbim Analyst +44 20 350 1644 Committee Chairperson Giulio Lombardi Senior Director +39 02 8790 87214 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=992333 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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