Fitch Ratings has affirmed Unilever PLC's ratings, including its Long-Term Issuer Default Rating at 'A' with Stable Outlook, and simultaneously withdrawn all ratings.
The affirmation of the ratings prior to withdrawal reflects the group's strong business profile, as one of the largest and most diversified consumer goods and food companies (FMCG) globally, and our confidence in the group's ability to generate organic growth with a more balanced volume-price mix. We project progressive improvements in profitability as inflation eases and the group invests in productivity, partially offset by marketing investments.
We expect the planned separation of an ice cream segment by end-2025 to be neutral to Unilever's credit profile, as it will only moderately reduce its scale and the breadth of its product portfolio, while resulting in a more streamlined group with accelerated revenue growth potential and an enhanced EBITDA margin.
The Stable Outlook reflects Unilever's record of adherence to a clearly formulated financial policy with a target leverage of around 2.0x (corresponding to a Fitch-estimated net leverage of about 2.2x). We estimate that on completion of the ice cream division separation EBITDA net leverage will remain within Fitch's 2.0x-2.5x rating sensitivities.
Fitch has withdrawn the ratings due to commercial reasons. Fitch will no longer provide ratings or analytical coverage of Unilever.
Key Rating Drivers
Ice Cream Spin-Off Rating-Neutral: We believe the reduction in scale and product diversification after the planned ice-cream division separation will be modest, allowing Unilever's business profile to remain consistent with the rating. Unilever retains its leading global positions in many consumer product categories, with a Fitch-estimated annual total EBITDA of more than EUR11 billion in 2026. The spin-off will lead to a more streamlined group focused on higher-growth products. The separation of its ice-cream division will be completed by end-2025, and is driven by limited synergies including different distribution channels for frozen products and its higher capex intensity.
Better Profitability Post-Separation: Following the division's separation, we project Fitch-adjusted EBITDA margin will rise by up to 100bp towards 20% in 2026 and benefit from lower exposure to seasonality. The division's underlying operating margin was about 600bp below the group's level in 2023. Additionally, the ice-cream division has seen below-average organic revenue growth recently (2023: underlying sales growth of 2.3% year-on-year) compared with other segments', due to consumers trading down and unfavourable weather conditions. Unilever estimates organic growth to improve to 4%-6% post-separation from 3%-5% previously.
Modest Near-Term Margin Recovery: We project Fitch-adjusted EBITDA margin to remain fairly stable in 2024 (17.7% in 2023), partly driven by an anticipated rise in restructuring costs to 1.2% of revenues in 2024 (from 0.8% in 2023) and increase in marketing and R&D spend that is offset by lower cost inflation. We assume gradual improvement in profitability to 18.5% in 2025, supported by a new cost savings programme that should offset operational separation costs from the ice-cream spin-off. Fitch-adjusted EBITDA margin improved 90bp in 2023, due largely to a slower inflation, price increases, cost savings, and reduced restructuring expenses, which Fitch views as operational costs.
Return to Sales Volume Growth: We project organic revenue growth of about 4% in 2024 on sales volume growth supported by Unilever's amplified marketing efforts and a gradual recovery in consumer sentiment. Unilever returned to sales volume growth in 4Q23 (up 1.8% year-on-year) with a further acceleration in 1Q24 to 2.2%, spurred by slower price increases, particularly in commodity-sensitive areas. However, the nutrition and ice-cream categories still experienced a moderate sales volume decline of 0.4% and 0.9%, respectively, in 1Q24.
Portfolio Rebalancing M&A: Unilever continues to shape its portfolio towards high-growth functional nutrition and well-being segments. We do not expect large transactions the size of the attempted acquisition of GlaxoSmithKline plc's consumer health business. Instead, we assume the group will continue focusing on bolt-on acquisitions of higher-growth products and emerging markets.
Leverage Well Within Sensitivities: Unilever remains committed to a targeted net debt/EBITDA of about 2.0x, which corresponds to our calculation of 2.1x-2.2x EBITDA net leverage. We project the group will maintain its leverage target, given its operational flexibility, despite assumed ongoing M&A activity and continuation of share buybacks (a new programme of EUR1.5 billion to be completed during 2024). We project leverage to remain within its sensitivities of 2.0x-2.5x, with limited impact from the ice-cream separation.
Leading Global FMCG Company: Unilever's business profile corresponds to the lower 'AA' or upper 'A' rating categories, reflecting its strong market position as one of the world's largest FMCG groups with a portfolio of well-known global and local brands. Fitch expects Unilever's continuous innovation and digitalisation will help maintain its resilient performance against intense competition and a challenging macro-economic environment and keep sales growth at least in line with the market.
Strong Diversification: Unilever's ratings benefit from superior diversification across FMCG product categories, price points and regions. It operates across all continents in five business segments: beauty & wellbeing (21% of 2023 sales), personal care (23%), home care (20%), nutrition (22%) and ice cream (13%). Post the ice-cream separation, Unilever will be more focused on beauty and consumer care products. It maintains a wider footprint in high-growth emerging markets than its peers (about 58% of 2023 sales) with a resulting exposure to currency fluctuations.
Derivation Summary
Fitch applies its Consumer Products Ratings Navigator to assess Unilever's rating and comparison with peers. However, Unilever's product categories are less cyclical, which allow a more stable revenue profile than those of other Fitch-rated consumer companies selling semi-durable home furnishing products, toys and appliances, etc. Together with a stronger and more diversified business profile, this allows Unilever to tolerate higher leverage at its rating than the medians in our Consumer Products Ratings Navigator. Therefore, we use less conservative leverage medians from the Packaged Food Ratings Navigator to determine Unilever's credit profile.
Unilever is one of the world's largest FMCG companies with a portfolio of well-known global and local brands and strong footprint across high-growth emerging markets. However, a mildly weaker business profile than Nestle SA's (A+/Stable) justifies the one-notch rating differential for Unilever.
Due to its larger scale, stronger diversification and lower leverage, Unilever is rated higher than Diageo plc (A-/Stable), the global leading international alcoholic beverage producer.
No Country Ceiling, parent-subsidiary linkage or operating environment aspects apply to Unilever's ratings.
Key Assumptions
Organic revenue growth of about 4% in 2024, with accelerated contribution from sales volume growth, followed by an average growth of 3.5% to 2027
Fitch-adjusted EBITDA margin to remain around 17.8% in 2024 (2023: 17.7%), gradually improving close to 20% (post-ice-cream separation) by 2027, driven by improved operating profit in light of easing of inflation and a savings programme
Capex at around EUR1.9 billion a year (3% of sales in 2024-2027)
Bolt-on M&A of EUR1 billion (net of disposals) in 2024 and EUR1.5 billion a year in 2025-2027
Annual share buybacks of EUR1.5 billion to 2027
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given Fitch's rating withdrawal.
Liquidity and Debt Structure
Comfortable Liquidity: At end-2023, Unilever's liquidity was comfortable as short-term debt of EUR4.6 billion was covered by Fitch-adjusted cash and cash equivalents of EUR4.8 billion, undrawn committed USD5.2 billion and EUR2.6 billion of credit facilities. Although the term of both facilities is 364 days, we assume these credit facilities will be renewed as part of a regular annual process.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
UNILEVER PLC 
