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July 26 (The following statement was released by the rating agency)
Fitch Ratings has assigned Remy Cointreau SA (Remy) an Issuer Default Rating (IDR) and senior unsecured rating of 'BBB-'. The Outlook is Stable.
The assigned IDR reflects the strengthening of Remy's operations since its exit from Maxxium, the healthy profit margin of its own brands and strong credit metrics for the rating. These elements, together with solid geographic sales diversification mitigate the risk of a contraction of the core Chinese cognac market. These positive factors are contrasted by the strong reliance on cognac.
The rating incorporates headroom for some debt-, equity- and cash-funded M&A spending to partly fill in the company's product portfolio with complementary aged spirits (e.g. whisky or rum). This is reflected in the assignment of a Stable Outlook.
KEY RATING DRIVERS
Highly Focused Category Leader Remy leads in the high-end "Extra" cognac category which has been experiencing rapid demand growth in Asia and enjoys high profit margins. Pricing power, and consequently profit margins in the cognac industry are supported by the oligopolistic structure of this segment of the spirits industry and the constraints to the availability of the product. However, the company's concentration around cognac (more than 80% of FY13 recurring operating profit before corporate costs) and in China leaves the company exposed to any shocks in consumer spending and the changes in purchase patterns for luxury goods in China.
Control over Value Chain
Remy enjoys a strong degree of control over the supply of its valuable raw material, thanks to a partnership with a major cooperative of growers and distillers in the Cognac region in France. More recently, Remy has accelerated the build-up of inventories of maturing stocks to further reduce dependency from third parties. Remy's exit from the Maxxium JV in March 2009 has enabled it to gain almost full control over its distribution while stopping the decline of its market shares in the key US and Chinese markets.
Liqueur and Spirits Require Investments
Although cognac sales are currently experiencing a dip in China, we expect moderate growth in the low to mid-teens compared to more than 20% over the past three years, driven by wealthy individuals and not just civil servants. Steady profitability in cognac should support Remy's commercial investments in the weaker Liqueur & Spirits unit. Results from these efforts could however take some time and maintain pressure on divisional profit margins.
Cash Flow covers Growth Ambitions
Assuming sales and profits from the cognac business remain broadly stable, Fitch projects Remy should be able to generate average annual funds from operations (FFO) of EUR190m over FY14-FY16. This provides sufficient funding for ageing stocks investments (approximately EUR50m per annum) and capital expenditure (between EUR35m and EUR40m per annum) mostly in expanding capacity. Our estimates allow some EUR50m to EUR80m per annum for bolt-on acquisitions.
Strong Credit Metrics
Since the divestment of its champagne business in 2011, resources have been distributed mainly to shareholders via extra dividends and share buybacks. However, management has also worked to reduce net debt, which has halved to EUR265.5m between March 2010 and March 2013. Consequently, FFO lease adjusted leverage dropped to 2.2x (net of cash: 1.3x) at FYE13 while FFO fixed charge cover ratio stood at 8.1x. These metrics are aligned with some of the highest rated industry players and provide cushion for any shocks affecting the cognac segment or headroom for acquisition spending.
Headroom for Measured M&A
Despite recent acquisitions, the assigned ratings assume that management will maintain a conservative M&A stance, both in terms of size and profile of the target entities, limited to small, complimentary high-end brands and stocks of ageing spirits. Such bolt-on acquisitions should bolster Remy's diversification while minimizing integration risks. Remy also enjoys a solid financial flexibility mitigating M&A risk which, in our view, is consistent with an investment grade rating.
No Structural Subordination Issues
Remy's funding management is centralised via its wholly-owned subsidiary Financiere Remy Cointreau SA/NV. Any debt issued by this entity that is guaranteed by Remy Cointreau SA and subject to customary cross-default language, will rank pari passu with Remy Cointreau SA's senior unsecured debt.
Positive: Future developments that could lead to positive rating actions include:
- Adjusted net FFO leverage below 2.0x (gross below 2.5x) on a sustainable basis
- At least 30% of operating profit outside cognac and from successful products/strong brands that compliment cognac distribution well, on a sustainable basis
- EBITDA margin from own brands (excluding distributed products) sustainable at or above 27%
- FCF above 6% as a percentage of revenues on a sustainable basis
- FFO fixed charge cover above 8.0x on a sustainable basis
Negative: Future developments that could lead to negative rating action include:
- Adjusted net FFO leverage above 2.5x (gross above 3.0x)
- FCF dropping below 2% to 3% of revenues
- EBITDA margin of own brands falling below 23%
- FFO fixed charge cover below 6.0x
LIQUIDITY AND DEBT STRUCTURE:
Fitch believes that Remy's FYE13 EUR394m undrawn committed lines (EUR207m available under its EUR255m revolving credit facility) and cash on hand (EUR187m) are sufficient to cover the group's FY14 debt maturities of EUR63m as well as the working capital needs of its operating subsidiaries. Additional flexibility is provided by EUR97m worth in treasury shares and a EUR75m receivable facility from EPI due in 2017.