Morningstar is initiating credit coverage of Unilever with an issuer rating of A+. Unilever is a diversified packaged food (about 55% of total sales) and household and personal product (about 45% of total sales) company. It derives 30% of sales from Western Europe, 32% from the Americas, and 37% from Asia, Africa, and Central and Eastern Europe. The firm's brands include Knorr soups and sauces, Hellmann's mayonnaise, Dove soaps, and Lipton teas, among others.
Historically, Unilever operated with an extremely decentralised and complex organisational structure that hindered its ability to realise the growth and profitability that should emanate from one of the largest consumer goods firms in the industry. As a result, operating margins have suffered during the past several years as Unilever failed to present a clear global strategy, while also inefficiently ramping up its product base and overheads. To address these issues, Unilever is undergoing an organisational restructuring as well as reducing its brand portfolio, manufacturing facilities, and employee base. We believe management's efforts to root out inefficiencies are gaining traction, despite numerous headwinds. Although management is still reluctant to target the level of improvement it anticipates from these efforts, we expect the operating margin to approach 16% by 2014 (versus an adjusted operating margin of 14.8% in 2009).
During the past five years, debt/capital and debt/earnings before interest, taxes, depreciation, and amortisation averaged 0.50 and 1.65, respectively. Free cash flow averaged about 11.8% of sales over the past five years; however, we forecast free cash flow will average only 8.3% of sales over the next five years. Unilever has significant debt maturities over the next five years, but it is expected to cover debt maturities and other cash obligations by 261% over our forecast period.
