October 30, 2017 / 3:50 PM / a year ago

Fitch Affirms Carrefour at 'BBB+'; Stable Outlook

(The following statement was released by the rating agency) PARIS, October 30 (Fitch) Fitch Ratings has affirmed Carrefour SA's Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook on the Long-Term IDR is Stable. Fitch projects Carrefour's financial profile to strengthen by end-2017, in line with the agency's parameters for the 'BBB+' IDR level. The affirmation of the rating is also underpinned by the group's strong business profile, although this is increasingly showing signs of weaknesses, especially in its core French market. The 2012 restructuring strategy has prevented a strong deterioration in profitability in our view. However, growth prospects are dependent on Carrefour's ability to restore competitiveness in France, which is affected by delays in its transformation into a truly multichannel retailer. This transformation appears necessary in the medium term to allow a significant uplift in profitability and in turn, a sustainable financial profile and the maintenance of the IDR at the 'BBB+' level. We will carefully assess management's new strategy to be presented at end-2017. In particular, a plan entailing light touches and/or high execution risks could lead to a negative rating action, if combined with continuing weak trading in France. KEY RATING DRIVERS Weakening French Operations: Fitch expects France's performance to cap group EBIT margin at around 3% over the next three years in the absence of fundamental changes in strategy, which is weak for its 'BBB+' rating. The French EBIT margin fell from 3.6% in 2014 to 2.9% in 2016, and Fitch forecasts a further significant deterioration in 2017. Carrefour France faces major challenges including the growing inadequacy of its core hypermarket model in the face of changing consumer habits, which is affecting operators country wide, increasing price and promotional pressure, and a growing delay in its transformation into a multichannel retailer. We therefore expect the CEO's revised strategy to provide clear targets and action levers on the most challenged parts of the business. Meanwhile, the company's high level of ownership of French hypermarkets provides some operational flexibility, already reflected in the rating. This relates to the ability to make changes in physical space or make asset disposals to focus on more profitable areas. Satisfactory Performance Outside France: Fitch expects Brazil and Rest of Europe to keep strongly contributing to group profits. They mitigate France's declining results and China's low profitability, although they are not large or strong enough to create significant growth at group level. This highlights the relevance of Carrefour's geographical diversification. Latin America and Europe generated 60% of group EBIT before central costs in 2016, compared with 45% in 2013. This growth mainly reflects Carrefour's leading position in Brazil and management's ability to turn around ailing operations (e.g. Italy), or to reinforce them (e.g. Spain) in Europe. Business Profile Fundamentals at Risk: The latest poor French results highlight the fundamental weaknesses of Carrefour's business profile, alongside global, structural market changes. Geographic diversification appears adequate but the delayed omnichannel transformation weighs on competitiveness and growth prospects. The improvement in profitability, which is Carrefour's key weakness, is critical to the sustainability of its 'BBB+' rating. In this regard the change in CEO could be positive, if accompanied with a change in group culture leading to increased agility. The group has not found any permanent cure for the French structural issues over the past decade. Brazilian IPO Enhances Financial Flexibility: The Brazilian IPO completed in July 2017, together with Peninsula's exercise of its call option on shares, brought EUR1,231 million cash proceeds. This will lead to at least EUR1,250 million debt repayments in 2017 and considerably reduce Carrefour's interest charge, reinforcing its financial flexibility. Fitch forecasts Carrefour's funds from operations (FFO) fixed-charge cover to be at or above 2.5x over the next three years. The transaction also diversifies sources of funding and increases the visibility to local investors of Carrefour's most promising division in terms of growth prospects. Strengthening Financial Profile: Fitch projects Carrefour's FFO adjusted net leverage to decrease to 3.5x (the median for the food retail 'BBB' category) by end-2017 (end-2016: 3.9x). It should continue to decrease slowly thereafter, in line with Fitch's requirement to maintain Carrefour's IDR at the 'BBB+' rating level. However, this improvement is driven by financial transactions and cash protection measures (such as recurring offer of dividend payment in scrip, 2017 capex revised down) rather than significant profit uplift. The level of profits attributable to minorities in Brazil after the IPO could also flatten the financial profile improvement in 2018. Carrefour's anchor in the 'BBB+' rating category will mainly depend on management's ability to reinforce its growth prospects and profitability through the implementation of its new strategy. DERIVATION SUMMARY Carrefour has a stronger business profile than its European peers such as Ahold Delhaize NV (BBB/Stable), Tesco PLC (BB+/Stable) and Casino Guichard Perrachon SA (BB+/Stable), despite increasing weaknesses in its core French market. This is mainly due to its greater scale as the world second-largest food retailer and strong positions in most countries of operations (albeit weakening in France). It also benefits from better geographic diversification measured as presence in a higher number of countries and lower reliance on its core market. However, Carrefour has a weaker financial profile than peers rated in the 'BBB' category, such as Ahold Delhaize and the Kroger Co. (BBB/Negative). This is principally due to lower profitability, driven by the group's still high reliance on the lower-margin hypermarket format. In contrast, we expect its financial structure to improve to levels more compatible with its 'BBB+' IDR by end-2017 due to a decrease in debt. KEY ASSUMPTIONS Fitch's key assumptions within our rating case reflect the issuer's current strategy. They include: - like-for-like sales growth in the low single digits over 2017-2020; - EBIT margin trough at 2.5% in 2017, growing back to 3% in 2018 with limited increase thereafter. This should be mainly supported by a recovery in France (ramp-up of the DIA stores) and some margin progression in Brazil; - EUR2.5 billion capex (net of change in payables to asset suppliers) in 2017, growing back to EUR2.6 billion from 2018; - 71.3% of dividend paid in shares in 2017 (actual), i.e. EUR151 million paid in cash; dividends all paid in cash thereafter with limited increase in dividend per share; - EUR200 million annual spending on bolt-on acquisitions partially covered by proceeds from asset sales; - EUR1,321 million cash proceeds from the IPO in Brazil and Peninsula's exercise of its call option on Carrefour Brazil's shares; - EUR1,250 million debt repayment in 2017. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Evidence of enhanced organic sales growth and sales density resulting in group EBIT margin sustainably above 4% (2016: 3.0%) - FFO fixed charge cover consistently above 3.5x - FCF margin consistently at or above 1% - FFO-adjusted leverage at or below 3.5x, or FFO-adjusted net leverage at or below 3.0x, both on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Weak organic sales growth resulting in group EBIT margin below 3%, reflecting continuing challenges in the core French market not offset or mitigated by profit uplift elsewhere - FCF neutral or negative on a sustained basis - FFO-adjusted leverage above 4.0x, or FFO adjusted net leverage remaining above 3.5x over the next two years - FFO fixed charge cover consistently below 2.5x LIQUIDITY Adequate Liquidity: Carrefour has comfortable liquidity, with EUR2.3 billion readily available cash at end-2016. It benefits from a EUR3.9 billion revolving credit facility (fully undrawn at end-2016) as backup for a commercial paper issue of up to EUR5 billion (none outstanding at end-2016). Carrefour has a smooth debt repayment schedule with an average bond maturity profile of 4.1 years. Contact: Principal Analyst Anne Porte Director +33 1 44 29 91 36 Supervisory Analyst Sophie Coutaux Senior Director +33 1 44 29 91 32 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments Financial Services: Fitch calculates Carrefour's financial ratios excluding financial services to reflect true cash flows available to the group's retail operations. Fitch excludes from group FFO their estimated FFO contribution but includes estimated dividends received by Carrefour. Similarly, Fitch fully excludes the debt of the financial services division. Operating Leases: Fitch has adjusted debt by adding 7.7x of yearly operating leases related to property of EUR1,022 million for 2016. The blended 7.7x multiple is derived from Carrefour's geographic diversification across Europe, Latin America and Asia. Readily Available Cash: At 31 December 2016, Fitch estimated that EUR1 billion of cash was needed to fund intra-year working capital needs (average peak to trough), and therefore not considered readily available for debt repayments. Fitch does not include Carrefour's reported financial assets in its calculation of net debt. Fair Value of Debt: Fitch has not included the EUR101 million derivative instruments accounted by Carrefour as liabilities but adjusted debt upward by EUR67 million to reflect the bonds' nominal value to be repaid at maturity. Media Relations: Francoise Alos, Paris, Tel: +33 1 44 29 91 22, Email: francoise.alos@fitchratings.com; Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. 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