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July 18 (The following statement was released by the rating agency)
Fitch Ratings has affirmed food and beverage company Findus PledgeCo S.a.r.l.'s (Findus)
Long-term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook, and Findus BondCo S.A.'s
senior secured notes at 'B+' with a Recovery Rating of 'RR2'.
The affirmation is based on the stabilisation of Findus's financial performance
and recent market share gains in a difficult frozen food market environment and
high key input prices, mainly salmon. Although Fitch expects Findus's funds from
operations (FFO) adjusted leverage to reduce towards 5.5x in 2016, some
uncertainty remains around one of its key markets, Norway, which has recently
seen some pressure on frozen sales. This is partly mitigated by resilience in
their UK chilled volumes. We expect mildly positive free cash flow (FCF) in
future years, therefore ensuring sufficient financial flexibility for the
KEY RATING DRIVERS
Geographic and Product Diversity
Findus remains the leader in its key markets of Norway, Sweden, Finland and
France, with high market shares in branded frozen food and a diverse product
proposition of frozen fish and ready-to-eat meals. However, Fitch expects
increasing private-label penetration and competition from chilled food to
continue putting pressure on Findus group's profit margins. Cost savings, while
limited, are expected to remain the key driver of profit growth.
Volatility in Commodity Prices
Sudden commodity price inflation, such as the recent all-time high price of
salmon, in conjunction with greater volatility in food commodity markets will
continue to challenge Findus, especially in the event of a slowdown in consumer
spending. Meanwhile, the group is benefiting from continued investments in
product innovation and successful negotiations of contracts with food retailers
to pass on price increases in raw materials.
Scope for EBITDA Stability
Fitch expects product innovation and contract negotiations to mitigate raw
material price increases. We therefore project that EBITDA margins should remain
fairly stable at FY14's (year to September 2014) 8%. FY13 and 1HFY14
performances were in line with management's expectations despite challenges in
frozen fish sales in Norway. EBITDA margins returned to the FY11 level after
having previously been on a contracting path.
Resilient Food Consumption
Consumption of fast-moving consumer goods is fairly resilient through the
economic cycle, although growth in mature and developed markets is limited.
Findus's product innovation capabilities and targeted marketing spending are key
to ensuring its product offering remains relevant to consumers amid changing
economic conditions, consumer preferences, health concerns and food price
Findus has historically generated low levels of FCF, which is considered a
weakness. Although we expect a mildly negative FCF margin in 2014 due to one-off
costs for refinancing, exchange rate translational differences and working
capital unwinding, we expect cash generation to improve, albeit remaining
relatively weak at around 1% during FY14-FY16.
Findus's FFO adjusted gross leverage at end of the financial year to September
2013 (FYE13) post refinancing remained high at 6.4x. Fitch expects leverage to
improve towards 5.5x with FFO fixed charge cover moving towards 1.8x by 2016. If
maintained, this leverage profile would be considered relatively strong for the
'B-' rating relative to close peers.
Positive: Future developments that could, individually or collectively, lead to
positive rating actions include:
- Improvement in operating profitability and organic business growth evidenced
by EBITDA margin improvement up to 9% (FYE13: 7.9%) and FCF margin of 3% or
higher (FYE13: 0.2%).
- Further de-leveraging with FFO adjusted leverage to or below 5.5x on a
sustained basis (FYE13: 6.4x).
- FFO fixed charge cover at 2x or above on a sustained basis (FYE13: 2.3x).
Negative: Future developments that could, individually or collectively, lead to
positive negative rating actions include:
- A contraction in organic revenue, for example resulting from increased
competitive pressures, combined with a steady reduction in operating
profitability leading to an EBITDA margin below 7%.
- Consecutive periods of negative FCF leading to erosion of the liquidity
- A sustained deterioration in FFO adjusted leverage to or above 7x.
- FFO fixed charge cover sustainably at 1.5x or below.
LIQUIDITY AND DEBT STRUCTURE
Fitch anticipates that Findus's liquidity will remain adequate, supported by a
super senior RCF of GBP60m and, in the longer term, mildly positive FCF
generation from FY15.
No Maturities Before 2018
Findus's current debt includes approximately GBP405m of senior secured notes
maturing in July 2018, revolving credit facility (RCF) of GBP60m maturing in
December 2017. While there is no debt amortisation pressure in the foreseeable
future, we believe that the deleveraging path will be slow and dependent on
growth in EBITDA. Fitch expects FFO adjusted leverage to remain above 5.5x until
at least 2016.