Coca-Cola HBC AG. Primary Credit Analyst: Maxime Puget, London (44) ;

Transcription

1 Summary: Coca-Cola HBC AG Primary Credit Analyst: Maxime Puget, London (44) ; Secondary Contact: Nicolas Baudouin, Paris (33) ; Table Of Contents Rationale Outlook Our Base-Case Scenario Business Description Business Risk Financial Risk Liquidity Group Rating Methodology Ratings Score Snapshot Related Criteria And Research APRIL 13,

2 Summary: Coca-Cola HBC AG Business Risk: SATISFACTORY CORPORATE CREDIT RATING Vulnerable Excellent bbb bbb bbb+ Financial Risk: INTERMEDIATE BBB+/Positive/A-2 Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Satisfactory Leading market position in 28 countries in EMEA. Portfolio of strong global and local beverage brands. Large and efficient distribution and manufacturing footprint. Large exposure to the volatile Russian and Nigerian markets. Demand decline in its established markets for traditional sparkling beverages, which account for 70% volumes sold. Financial Risk: Intermediate Forecast stable free operating cash flow of 300 million- 350 million annually. Forecasted low debt leverage of 1.5x-1.7x in assuming no large debt-financed acquisition. No large debt maturities due before Working capital and capex intensive business. APRIL 13,

3 Outlook: Positive The positive outlook reflects our view that there is at least a one-in-three chance that we could raise the ratings on CCH over the next 12 months due to improved credit metrics. We anticipate that, despite top-line pressures in its established markets and rising input costs, CCH should maintain stable profitability and free cash flow generation. This is notably thanks to its pricing power in sparkling beverages, its control on working capital movements and its ability to manage the currency-exchange volatility in Russia and Nigeria. Upside scenario We could raise the rating if we see CCH continuing to post solid profitability over the next 12 months, despite volume growth challenges in its established markets and volatile revenues from emerging markets. We could also consider an upgrade if the adjusted debt-to-ebitda ratio remained below 2.0x and FOCF to debt moved comfortably and consistently above 25%. This would notably depend on the company's debt leverage tolerance regarding potential large debt-financed acquisitions in the beverage sector or increased shareholder remuneration. Downside scenario We could revise the outlook to stable if we see a deterioration in CCH's operating performance, for example an acceleration in the declining demand for sparkling beverages in its established markets or an inability to raise prices in volatile markets like Nigeria or Russia. Downward rating pressure could build if adjusted debt-to-ebitda ratio rose to 2.5x-3.0x and if FOCF to debt declined to about 15%-20%. Our Base-Case Scenario APRIL 13,

4 Assumptions Our base case for assumes: Flat revenues of about 6.2 billion. We see continued volume decline in traditional sparkling beverages and juices in CCH's established markets due to long-term consumer patterns and in Russia due to declines in consumers' disposable income. This is offset by slight volume growth in Central and Eastern Europe (CEE) and Nigeria due to low consumer penetration. In terms of pricing, we see slight improvement overall given the product mix and increased prices in emerging markets bearing weak currencies (Nigeria and Russia). Adjusted EBITDA margin of about 14%. We see a combination of negative currency-exchange movements and rising input costs (notably resin and sugar) offset by positive measures in terms of product and distribution mix and operating costs savings. Free operating cash flow of about 300 million- 350 million, with capital expenditure (capex) of about 6% of revenues. S&P Global Ratings-adjusted debt of 1.3 billion- 1.5 billion, assuming cash dividend payments of 160 million in 2017 and 185 million in 2017, additional shareholder remuneration of 100 million- 200 million starting from 2018 and bolt-on ( 50 million) debt-financed acquisitions. We adjust debt for about 160 million of what we view as restricted cash that is mostly located in high risk countries. Key Metrics 2016A 2017E 2018E EBITDA Margin (%) FFO/Debt (%) Debt/EBITDA (x) FOCF/Debt (%) A--Actual. E--Estimate. Based on these assumptions, we arrive at the following credit measures for : Funds from operations (FFO) to debt of 45%-55%. Debt to EBITDA of 1.5x-1.7x. FOCF to debt of 20%-25%. Business Description Coca-Cola HBC AG (CCH) is a Switzerland-headquartered soft drinks, beverages, waters, and juices branded APRIL 13,

5 manufacturer. The company is an independent bottler of Coca-Cola beverages, produced and distributed under exclusive licence from The Coca-Cola Company (TCCC; AA-/Negative/A-1+). CCH produced 2 billion unit cases in 56 manufacturing plants in It has operations in 28 countries with its main markets being Russia, Nigeria, and Italy. In 2016, CCH generated total revenues of 6.2 billion and S&P Global Ratings-adjusted EBITDA of 903 million. Business Risk: Satisfactory CCH's business benefits from the low cyclicality of the business, the very strong brand equity of its sparkling beverage product portfolio (Coca-Cola, Fanta, Sprite, Monster) and its leading market shares (43% on average) in the product category. We believe this enables CCH to maintain strong pricing power against retailers and branded competitors. The company is well diversified geographically with a presence in 28 countries, both in mature (Italy, Switzerland) and emerging markets (Russia, Nigeria) that continue to grow and now account for 52% of volume sales. CCH operates on a large industrial scale, producing 2 billion unit cases annually in 56 plants and has a wide presence across all distribution channels. We understand that the long-term franchise agreements with TCCC in its main countries are not due for renewal until CCH's business strategy is primarily to defend its leading market shares in sparkling beverages in existing markets and grow in emerging markets like Nigeria where the population is growing and consumption of sparkling beverages is low. CCH is also diversifying its product offering in mature markets to appeal to changing consumer preferences by expanding in low-calorie soft drinks like Coke Zero, waters, and energy drinks. It is also trying to increase revenue growth in Europe by launching smaller and more premium packaging formats for consumption outside the home, which support higher sales per unit. Business challenges in our view include CCH's significant presence in the large but volatile consumer markets of Russia and Nigeria (together 29% of volume sales in 2016). These markets are subject to high currency-exchange fluctuations, while in Russia volumes have been notably affected by weak domestic consumption. CCH's product range remains concentrated in the sparkling beverages category (70% of volume, including low calorie products). Consumer demand for traditional sparkling beverages has been declining in CCH's established markets such as Italy and Switzerland due to weak demographic trends, changes in consumption habits, and stricter health regulations. To offset this trend CCH has been expanding in higher-growth product categories such as low-calorie products and has diversified in waters (18%) and juices (7%). Financial Risk: Intermediate CCH has a good track-record of generating stable S&P Global Ratings free operating cash flow of 300 million- 400 million annually. This is despite the fact that the business is relatively capital intensive and sees large working capital movements due to seasonality effects linked to the summer season in Europe. Following debt refinancings last year, CCH has lowered its average cost of debt and bears no large debt maturities APRIL 13,

6 until The main currency risk exposures are to the Russian ruble, Nigerian naira, and to a lesser extent the Ukrainian hryvna. We understand that transaction risk is mostly hedged for the next 12 months. Also, about half of the operating cash flow is generated in euros, which matches to some extent the mostly euro-denominated debt. In terms of financial policy we understand that the company's priority is to grow via organic growth in underpenetrated markets in CEE and Nigeria. That said, we believe that CCH is also looking at expanding into higher growth emerging markets, potentially via acquisitions. In terms of dividend policy we note the stable payout target of 35%-45% but believe it is likely that CCH would slightly releverage its capital structure via an increase in shareholder remuneration absent large debt-financed acquisitions over the next two years. Liquidity: Strong We assess CCH's liquidity position as strong and its short-term rating as 'A-2'. We forecast that liquidity sources should exceed liquidity uses by more than 1.5x in the next 12 months and greater than 1.0x in the next months. Debt maturities are not due before CH has no maintenance financial covenants and retains good access to capital markets and bank financing. Principal Liquidity Sources Cash and cash equivalents of 573 million at Dec. 31, Undrawn committed credit lines of 500 million maturing in Forecast cash FFO of about 710 million- 725 million in Principal Liquidity Uses million of debt due within one year as of Dec. 31, 2016, and about 8 million in the next months. Our estimate of 150 million of maximum working capital intra-year movements annually. Our forecast of total capex of about 370 million annually. Our forecast of cash dividends of about 160 million- 185 million in 2017 and Group Rating Methodology We assess CCH as moderately strategic to The Coca-Cola Co. (TCCC; AA-/Negative/A-1+), as a "dedicated purchaser." We apply an upward adjustment of one notch to CCH's 'bbb' stand-alone credit profile to reflect the potential extraordinary support TCCC could provide to CCH if needed. We take account of CCH's significant long-term contractual arrangements with TCCC and the brand equity and reputational risks associated with the Coca-Cola name. Ratings Score Snapshot Corporate Credit Rating BBB+/Positive/A-2 APRIL 13,

7 Business risk: Satisfactory Country risk: Intermediate Industry risk: Low Competitive position: Satisfactory Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Neutral (no impact) Stand-alone credit profile : bbb Group credit profile: bbb+ Entity status within group: Moderately strategic (+1 notch from SACP) Related Criteria And Research Related Criteria Key Credit Factors For The Branded Nondurables Industry - May 07, 2015 Corporate Methodology - November 19, 2013 Corporate Methodology: Ratios And Adjustments - November 19, 2013 Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers - December 16, 2014 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Group Rating Methodology - November 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers - November 13, 2012 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Methodology: Industry Risk, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Guarantee Criteria, Oct. 21, APRIL 13,

8 Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com APRIL 13,

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