August 31, 2017 / 5:15 PM / 10 months ago

Fitch Rates Coca-Cola European Partners 'BBB+'; Stable Outlook

(The following statement was released by the rating agency) LONDON, August 31 (Fitch) Fitch Ratings has assigned UK-based bottler Coca-Cola European Partners plc (CCEP) a Long-Term Issuer Default Rating (IDR) of 'BBB+' with a Stable Outlook and the company's EUR2.8 billion equivalent notes a senior unsecured rating of 'BBB+'. Fitch has also affirmed and withdrawn the 'BBB+' IDR of CCEP's subsidiary Coca-Cola European Partners US LLC (CCEP US LLC). Fitch has also affirmed the senior unsecured rating on CCEP US LLC at 'BBB+'. The IDR of CCEP reflects its stable cash flow, high leverage which we project should reduce during 2017, and scope for synergies from the recent merger between three important European Coca Cola bottlers. The IDR also incorporates a one-notch uplift to reflect strategic support from The Coca Cola Company (TCCC, A+/Negative). We have aligned the senior unsecured ratings of debt instruments issued by the parent company CCEP and CCEP US LLC to reflect the equal status between them as underlined by a cross guarantee. The latter entity has taken over the bonds issued by Coca Cola Enterprises Inc. KEY RATING DRIVERS Major Regional Bottler: Fitch views the merger as a significant step toward improving the long-term sustainability of cash generation for the Coca Cola system's underlying business operations in western Europe. The merger of Coca-Cola Enterprises Inc, Coca Cola Iberian Partners and Coca Cola Erfrischungsgetraenke GmbH has created a bottler with substantial operational scale, providing synergies, better leverage best practice and scope for a more coordinated operational strategy across 13 neighbouring countries. This should increase efficiencies, thus improving CCEP's ability to invest behind the brands. Strong Market Position: The ratings reflect CCEP's stable cash flows, strong market position, and exclusive right to manufacture, sell and distribute Coca Cola brand beverages in western Europe. Coca Cola products have leading market shares that allow for premium pricing of Coca Cola brands within CCEP's non-alcoholic ready-to-drink portfolio in each of the company's territories. For 2016, CCEP generated approximately pro forma EUR10.9 billion of net sales and EUR1.4 billion operating profit, with almost 80% of revenue and 85% of volume coming from its largest four countries, Iberia, Germany, the UK and France. Headwinds Drive Accelerated Reformulations: Several European countries are in various stages of implementing excise tax increases including the UK, which will impose a two-tiered excise tax for drinks with high sugar content in April 2018. Consequently, beverage companies including CCEP are accelerating their carbonated soft drink (CSD) portfolio transformation through reformulations (The Coca Cola Company has more than 500 ongoing global initiatives), innovation with reduced/no calories (i.e. Coca Cola Zero Sugar, Sprite), expanding healthier brands across regions (i.e. Smartwater), and introducing smaller/differentiated packaging size. CCEP has a high exposure to Coca Cola trademarked beverages and to regular calorie products, both of which we expect to lessen over time as faster growth occurs in its consumer- centric branded portfolio. Meaningful Synergies: CCEP is on track to achieving its synergy targets and has reaffirmed cost savings guidance in the range of EUR315 million to EUR340 million by mid-2019, which Fitch believes is largely achievable. Half of the synergies are expected to be realised by end-2017. Associated cash costs are material at approximately 2.25x savings. However, we also anticipate working capital benefits of at least EUR150 million in 2017 with further savings thereafter. These should offset a material portion of these restructuring costs, thus providing a boost to free cash flow (FCF) and debt reduction in 2017. Deleveraging on Track: Fitch expects CCEP will reduce funds from operations (FFO) adjusted net leverage to the low end of 4x by end-2017 (7.0x in 2016) due to our projection of EUR350 million of FCF generation and growth in cash flows. Longer-term, Fitch expects deleveraging will only be moderate as CCEP focuses on returning cash to shareholders through dividends and share repurchases; FFO adjusted net leverage is therefore likely to still remain high for the company's standalone IDR of 'BBB' at around 3.8x. Ratings Incorporate Implied TCCC Support: While the legal linkages between CCEP and TCCC which owns 18% of CCEP are weak, the operational and strategic relationship between the two companies is strong. CCEP is the largest independent Coca-Cola bottler based on net sales, serving over 300 million consumers across 13 countries in western Europe with TCCC holding two board seats, which enhances the strategic alignment between the two companies. Consequently, Fitch believes CCEP's ratings benefit from the strong financial profile of TCCC given the bottler's strategic importance within the Coca-Cola system, which is reflected in one-notch uplift to CCEP's rating. DERIVATION SUMMARY CCEP's standalone rating of 'BBB' reflects its stable cash flow, high leverage which we project should decline during 2017, and scope for synergies from the recent merger between three important European Coca Cola bottlers. Both its standalone rating and the one-notch uplift are at the same level as Coca-Cola Amatil, another important bottler, which operates in stable developed markets and a few emerging markets. CCEP's rating is one notch lower than Coca Cola FEMSA SAB de C.V.'s 'A-'. It is one notch higher than Coca Cola Icecek's 'BBB' (CCI), which operates mostly in the emerging markets of Turkey, central Asia and the Middle East and also enjoys a one notch uplift from TCCC ownership; CCI carries less leverage but operates in markets that require more capex and are vulnerable to volatile demand. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Low single-digit top line growth on a currency neutral basis expected in 2017 and 2018; -EBITDA of approximately EUR1.9 billion in 2017, increasing to EUR2 billion in 2018; -EBITDA margin of approximately 18% in 2017, increasing to the mid-18% range in 2018; -Dividend payout of 40% of net income over forecast period; -Capex to revenue in the mid 5% range in 2017, declining to the low 5% range in 2018; -FCF generation of approximately EUR350 million in 2017, increasing to approximately EUR480 million in 2018; -No share repurchases in 2017. Beyond 2017, Fitch assumes shareholder remuneration to increase in line with the company's net debt/EBITDA target of below 3.0x; -FFO adjusted net leverage in the low 4x in 2017, declining to less than 4x in 2018 RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action Fitch does not expect a positive rating action, based on CCEP's expected leverage and financial policies. However, future developments that could lead to positive rating action include: -FFO adjusted net leverage consistently below 3.5x; -FFO fixed charge coverage above 6x (2016: 5.0x); -Significant additional geographic/ product diversification without impairing profitability. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA due to mature economies, excise taxes, and persistent macroeconomic challenges, as well as an accelerated shift in consumer purchasing preferences away from carbonated soft drinks; -FFO adjusted net leverage sustained above 4x; -FFO fixed charge coverage declining below 4.5x; -Change in financial policies that result in material debt-financed share repurchases or special dividends; -Diminishing strategic or operational significance of CCEP to TCCC. LIQUIDITY Adequate Liquidity: At end-2016 CCEP had healthy liquidity of approximately EUR1.8 billion, including EUR149 million of readily available cash and an undrawn EUR1.5 billion multicurrency credit facility. The credit facility backstops CCEP's commercial paper programme, which has no outstanding borrowings. Fitch expects CCEP to maintain cash of EUR400 million to EUR470 million. We expect CCEP to maintain a dividend payout at the high end of the 30%-40% net income, with FCF margins of 3%-4% during 2017 and 2018. CCEP has indicated that the company will refrain from material share repurchases until leverage is back to the higher end of its net leverage target of 2.5x to 3.0x by 2017. Long-term note maturities are manageable and include EUR850 million in 2017 and EUR350 million in 2019. Its term loan amortisation begins in 2018 at EUR200 million annually for two years, before increasing to EUR300 million in 2020. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 87902 87213 Supervisory Analyst Giulio Lombardi Senior Director +39 02 87902 87214 Fitch Italia S.p.A. via Morigi 6 20123 Milan Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments - - Due to seasonal working capital swings, with a peak in 2Q and 3Q against lower funding requirements in 4Q and 1Q, as of end-December 2016 Fitch has treated EUR237 million as restricted cash to reflect estimated average peak- to-trough working capital requirements. - FY16 operating profit excludes EUR126 million merger related costs and EUR286 million restructuring charges (reported under operating costs), which we treat as exceptional. 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