Fitch Affirms Mondelez's Ratings at 'BBB/F2' on Share Repurchase Announcement; Outlook Stable

Fri Aug 9, 2013 9:40am EDT

(The following statement was released by the rating agency) CHICAGO, August 09 (Fitch) Fitch Ratings has affirmed the ratings of Mondelez International, Inc. (Mondelez) and its subsidiaries following the announcement that Mondelez's Board of Directors approved an increase in the company's share repurchase program to $6 billion through 2016, up from $1.2 billion under a previous authorization. The company expects to execute $1 billion to $2 billion of share repurchases annually, subject to market conditions and other factors. The Board also approved an 8% dividend increase. Fitch has affirmed the following ratings: Mondelez International, Inc. --Long-term Issuer Default Rating (IDR) at 'BBB'; --Senior unsecured debt at 'BBB'; --Credit facility at 'BBB'; --Short-term IDR at 'F2'; --Commercial paper at 'F2'. Cadbury plc. --Long-term IDR at 'BBB'. Cadbury Schweppes U.S. Finance --Long-term IDR at 'BBB'; --Senior unsecured debt at 'BBB'. Fitch expects to withdraw the ratings for Cadbury plc and Cadbury Schweppes U.S. Finance when the $1 billion notes mature Oct. 1, 2013. MDLZ does not expect to issue any new debt from these entities. The Rating Outlook is Stable. Key Rating Drivers: Fitch anticipates the share repurchases will be completed at a measured pace. Free cash flow (FCF) in 2013 and 2014 will be constrained by heightened capex and cash restructuring payments. Capex will increase to 5% of sales from approximately 4% to support emerging markets growth and restructuring efficiencies associated with the 2012-2014 program. This restructuring program has $716 million of charges remaining as of June 30, 2013. A small amount of incremental debt is anticipated in order to complete the share repurchases as planned, given the near-term cash flow constraints. However, Fitch does not anticipate that total debt will vary materially from the company's current $18.1 billion level. If earnings weakness or debt financed acquisitions occur, Fitch would expect the company to pull back on share repurchases. If not, it would signal a change in financial policy and a negative rating action is likely. Mondelez is one of the largest global packaged food companies and maintains substantial scale to compete effectively despite losing the diversification from its former $19 billion North American Grocery business which was spun off Oct. 1, 2012. Fitch's expectation is that the company's approximately 40% of sales from geographically diversified emerging markets will help Mondelez generate faster growth than prior to the spinoff. Partially offsetting the stronger growth prospects are significant exposure to mature markets in developed Europe (35%) and North America (20%), lower margins than its global peers, higher foreign exchange volatility and the discretionary nature of the snack category. Mondelez's ratings reflect its prominent size and scale within the global packaged foods industry, its leading market share positions in most of its categories, and many strong brand equities. The company's business profile, capital structure, financial strategies and expectations for growing FCF generation support its ratings. The company should generate substantial and increasing FCF over the longer term with a moderate dividend payout. The company's top FCF priorities include reinvesting in its business, tack-on acquisitions, primarily in developing markets, and returning cash to shareholders. Mondelez has reduced debt to $18.1 billion as of June 30, 2013 with recent debt reduction, which was anticipated at the time of the spinoff. Total debt to EBITDA was 3.7x and EBITDA to interest was 3.1x for the latest 12 month (LTM) period ending June 30, 2013. Excluding spin-off and restructuring charges in sg&a, total debt to EBITDA was approximately 3.3x. Although leverage is currently high for the rating category, leverage should improve moderately over the next 18-24 months with a stronger top line, margin improvement and EBITDA growth. Mondelez's top line has been weaker than its long term currency neutral target of 5-7% due to several short-term issues, such as separating the historical Kraft Foods business in Canada, capacity constraints in India and the pass-through of lower coffee prices. These issues are expected to dissipate in the second half of 2013. The company has generated strong growth in chocolate and biscuits partially offset by prolonged weakness in gum, primarily in developed markets. Mondelez's ample liquidity is expected to consist of its $2.5 billion cash balance at June 30, 2013, as well as its undrawn $4.5 billion four-year senior unsecured revolving credit facility expiring in April 2015. Mondelez is expected to continue to have ample room under its minimum total shareholders' equity covenant of at least $24.6 billion. The company has substantial debt maturities, with approximately 40% of its debt due in the next five years. Upcoming debt maturities include $1.8 billion notes due in October 2013, which it plans to fund with a combination of cash and the issuance of CP. Beyond 2013, the company has $1 billion notes due in 2014, $1.1 billion due in 2015, and $1.8 billion due in 2016. Rating Sensitivities: Future developments that may, individually or collectively, lead to a positive rating action include: --Substantial and growing FCF generation, along with leverage (total debt to operating EBITDA) consistently in the mid-2x range and maintenance of conservative financial policies, such as refraining from a high dividend payout and not using leverage for share repurchases; --Consistently achieving the high end of the company's revenue and earnings guidance. Future developments that may, individually or collectively, lead to a negative rating action or Negative Outlook include: --If earnings or cash flow falter significantly or financial policies become more aggressive, such that leverage is consistently in the low to mid 3.0x range with no plan to reduce leverage; --If the company consistently fails to achieve its long term revenue and earnings guidance. Contact: Primary Analyst Judi M. Rossetti, CPA/CFA Senior Director +1-312-368-2077 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Grace Barnett Director +1-212-908-0718 Committee Chairperson Wesley E. Moultrie II, CPA Managing Director +1-312-368-3186 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). 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