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Fitch Affirms Unilever at 'A+'; Outlook Stable
October 13, 2016 / 2:12 PM / a year ago

Fitch Affirms Unilever at 'A+'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, October 13 (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 Outlooks on the Long-Term IDRs are Stable. Fitch has also affirmed the senior unsecured ratings of debt issued by Unilever Capital Corporation (UCC) and Alberto Culver at 'A+' and of the commercial paper programmes of Unilever NV, Unilever PLC and UCC at 'F1'. Both UCC and Alberto Culver benefit from cross-guarantees with Unilever NV, Unilever PLC and Unilever United States, Inc. Unilever's ratings continue to factor in the stability of its operating and financial profiles. The company's operating profile benefits from the strength of its brands and market shares in its core product categories across personal and home care and foods & refreshments, and the group's extensive geographic diversification. This has resulted in a consistent track record of low to mid-single digit organic revenue growth and steady profit margin expansion, which we expect to continue in 2016 and 2017, despite occasional market headwinds. The company remains acquisitive but we expect M&A spending not to materially exceed annual free cash flow (FCF) generation. Fitch views positively management's track record of adhering to conservative financial policies. We do not expect M&A or shareholder distributions to compromise Unilever's solid credit metrics, which are consistent with the rating. KEY RATING DRIVERS Industry-Leading Organic Growth We expect Unilever to maintain its good pipeline of innovation launches, which supports an industry leading level of organic growth. Since 2015, Unilever's organic growth has been strong (4.2% in 9M16), driven by a balance of volume and price growth. Except for the smaller spreads business, which suffered again in 2015 from a contraction of sales, the company's product innovation efforts are paying off across all categories, supporting volume and pricing growth as well as gross profit margin expansion. Unilever's large exposure to emerging markets (58% of sales) supports revenue growth. This was confirmed in 2015 despite an overall weaker consumer environment compared with 2010-2013. In 2015, Unilever managed to maintain good volume growth momentum (+2.7%) and to increase prices (+4.3%) in developing markets. This was aided by the inflationary environment as well as new product launches, balancing the stagnation of revenues in developed markets amid continuing deflationary pressures. Profit Margin Expansion We believe Unilever is well placed to deliver profit margin expansion of between 20 to 40bp on average over 2016-2018 given its track record over the last years against a difficult trading environment. In 2015, Unilever continued its gross profit margin and operating profit margin expansion. The core operating profit margin grew to 14.8%, a 30bp year-on-year increase. This was achieved through a combination of better product mix and innovation along with the benefits from its cost rationalisation programmes. These included efficiencies in advertising and promotions through a more extensive use of digital media, reductions in overheads and, in the lower-margin home-care unit, of stock-keeping units. M&A Activity The ratings do not factor in large M&A but we assume average bolt-on annual acquisition spending of EUR1.5bn for 2017-2019. Unilever has become more acquisitive since 2009 in the pursuit of adding higher growth, innovative products. We believe that this type of spending will continue in a measured manner. Most of Unilever's 2015 and 2016 acquisitions related to niche personal care businesses with strong organic growth capability. For example, the company entered the prestige skincare category. Additionally, Unilever further complemented its US and European ice cream operations with the acquisition of Talenti and Grom in 2015. We believe that scope for asset divestments has reduced now that Unilever's portfolio is more streamlined. Until 2014, acquisitions were accompanied by divestments of low-growth operations in an effort to simplify the portfolio of businesses and strengthen those with higher organic growth capability. The only business that Unilever could still be looking to divest is the underperforming spreads unit (part of its Food business). Commitment to High Rating Unilever's policy is to maintain credit ratios commensurate with an 'A+' rating and overall acquisition spending and shareholder distributions over 2013-2015 did not exceed aggregate FCF. However, adverse currency movements have caused funds from operations (FFO) adjusted net leverage to grow gradually to 2.2x in 2015 from 1.7x in 2012. For 2016-2017, Fitch expects positive average FCF of around EUR1.5bn and FFO adjusted net leverage to mildly improve towards 2.0x in 2017. This leverage profile remains fully aligned with the rating, given the sector. Cash Flow Covers Shareholder Distributions Fitch does not expect any major returns of capital to shareholders, barring large divestment proceeds. We believe Unilever will maintain a dividend pay-out in the 60%-70% range (FY15: 65%). As Unilever's priority is to invest in its business, bolt-on acquisitions remain more likely than shareholder-friendly initiatives. Over the past three years, the company has not engaged in any share buyback activity (except for the one-off EUR0.9bn purchase of Leverhulme's privileged shares in 2014). KEY ASSUMPTIONS - Low to mid-single-digit organic revenue growth. - EBIT margin gradually growing by 20 to 40bp per year from 2015's 14.8%. - Annual FCF around EUR1.5bn subject to continuing mild improvement in working capital management. - Capex at around 4% of revenue and annual bolt-on acquisitions of EUR1.7bn in 2016 and EUR1.5bn from 2017. - Stable dividend distribution policy with a pay-out ratio of 65%. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: -A change in financial policy, for example as a result of sizeable share repurchase programme or special dividend, leading to FFO-adjusted net leverage staying permanently above 2.5x (2015: 2.2x). -Significant slowdown in growth in the emerging markets to which Unilever is mainly exposed not fully offset by dynamic growth elsewhere. -FFO fixed charge cover of less than 6x (2015: 7.1x). -FCF consistently below EUR1bn annually (2015: EUR1.5bn). Positive: Future developments that may, individually or collectively, lead to positive rating action include: - Maintenance of a diversified business portfolio along with continued progress with operational restructuring or business mix, leading to steady long-term organic revenue growth and EBIT margin of at least 14% (2015: 14.8%). - FFO adjusted net leverage reducing below 1.5x on a sustained basis. - FFO fixed charge coverage of more than 8x. - Evidence of steady FCF trending towards EUR2bn. LIQUIDITY Strong Liquidity Liquidity is supported by FCF generation and proven access to the capital markets. The group also issues commercial paper at the Unilever NV, Unilever PLC and UCC levels and has access to USD6.5bn revolving 364-days (with 364 days term out) bilateral credit facilities. Most debt is at UCC, Unilever NV and Unilever PLC. Unilever NV and Unilever PLC guarantee each other's debt and also that of UCC. Contact: Principal Analyst Tatiana Bobrovskaya Associate Director +7 495 956 7769 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia S.p.A. via Morigi 6 20123 Milan Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Summary of Financial Statement Adjustments - Leases: Fitch has adjusted the debt by adding 8x of annual operating lease expenses of EUR427m in 2015 related to long-term assets. - Adjustment for restricted/not available cash: Fitch adjusted available cash at end-2015 by deducting EUR284m to reflect cash held in subsidiaries facing cross-border foreign exchange controls and/or other legal restrictions to repatriation. 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. 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