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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 rating.
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 inflation.
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 cushion.
- 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.