June 1, 2017 / 2:19 PM / 8 months ago

Fitch Affirms CCEP US at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, June 01 (Fitch) Fitch Ratings has affirmed Coca-Cola European Partners US LLC (CCEP US) ratings including the Issuer Default Rating (IDR) at 'BBB+'. Coca-Cola Enterprises Inc. (CCE) was merged into a company called CCEP US, which is where the outstanding CCE debt resides. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable. KEY RATING DRIVERS Increased Scale Fitch views the Coca-Cola European Partners plc (CCEP) bottling combination 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 CCE, Coca-Cola Iberian Partners, and Coca-Cola Erfrishungsgetranke GmbH increases CCEP's operational scale, creates synergy opportunities, better leverages best practices, and improves operational strategy across 13 contiguous countries. This should increase efficiencies, thus improving CCEP's ability to invest behind the brands. Strong Market Position CCEP US's 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 share that allows for premium pricing of the Coca-Cola brands within CCEP's non-alcoholic ready-to-drink portfolio for each of its 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 regions, Iberia, Germany, Great Britain and France. Headwinds Driving Accelerated Reformulations Several European countries are in various stages of implementing excise tax increases including the U.K., which will impose a two-tiered excise tax for drinks with a high sugar content in April 2018. These actions follow similar trends elsewhere as global momentum grows for excise taxes and consumers increasingly seek greater choice and healthier beverage options. Consequently, beverage companies including CCEP are focused on this shift with increased urgency to accelerate 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), expand healthier brands across regions (i.e. Smartwater), and smaller/differentiated packaging size. CCEP has high exposure to Coca-Cola trademarked beverages and regular calorie products at 65% each that are both expected to lessen over time as more growth occurs in its consumer-centric branded portfolio. Synergies Meaningful CCEP has executed well on synergy targets to date 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 realized by the end of 2017. Cash costs to achieve are material at approximately 2.25x savings. However, expected working capital benefits of at least EUR150 million are anticipated in 2017 with further savings in the outer years that should offset a material portion of these restructuring costs, thus providing a boost to FCF and debt reduction in 2017. Deleveraging On-Track Fitch anticipates CCEP will reduce FFO adjusted net leverage to the low 4x range by the end of 2017 with expectations for debt reduction due to an expected EUR350 million of FCF generation (CFFO less capital spending less dividends) 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. Ratings Incorporate Implied TCCC Support While the legal linkages between CCEP and The Coca-Cola Company (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 derive benefit from the strong financial profile of TCCC given its strategic importance within the Coca-Cola system, which is reflected in a one-notch uplift to CCEP's rating from the company's standalone rating. KEY ASSUMPTIONS Additional key assumptions within Fitch's internally produced 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 pay-out of 40% of net income over forecast period; --Capital intensity 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 EUR475 million in 2018; --No share repurchases in 2017. Beyond 2017, Fitch assumes shareholder remuneration will increase materially; --FFO adjusted net leverage in the low 4x range in 2017, declining to less than 4x in 2018. RATING SENSITIVITIES Fitch does not expect a positive rating action, based on CCEP's current leverage and financial policies. Future developments that could, individually or collectively, lead to a positive rating action include: --FFO adjusted net leverage consistently below 3.5x; --FFO interest coverage above 6x; --Significant additional geographic diversification. Negative: Future developments that may, individually or collectively, lead to negative rating include: --Persistent declines in volumes concurrent with material margin compression and significantly lower FCF and EBITDA given mature economies, excise taxes, and persistent macroeconomic headwinds, as well as an accelerated shift in consumer purchasing preferences away from carbonated soft drinks; --FFO adjusted net leverage sustained above 4x; --FFO interest coverage declining below 4.5x; --Change in financial policy that result in material debt-financed share repurchases or special dividends; --Fitch perceives that CCEP has become strategically or operationally less significant to its parent, The Coca-Cola Company. LIQUIDITY CCEP had good liquidity of approximately EUR1.9 billion at the end of 2016, including EUR386 million of cash and an undrawn EUR1.5 billion multi-currency credit facility. The credit facility backstops CCEP's commercial paper program which had no borrowings outstanding. Fitch expects CCEP to maintain cash levels in the EUR200 million to EUR300 million range. Expectations are for CCEP to maintain a dividend pay-out of net income at the high end of the 30%-40% range with FCF margins in the range 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 range 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. The term-loan amortization begins in 2018 at EUR200 million annually for two years before increasing to EUR300 million in 2020. FULL LIST OF RATING ACTIONS Fitch affirms the ratings for CCEP US as follows: --Long-Term IDR at 'BBB+'; --Senior unsecured notes at 'BBB+'. The Rating Outlook is Stable. Contact: Primary Analyst William Densmore Senior Director +1-312-368-3125 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Carla Norfleet Taylor, CFA Senior Director +1-312-368-3195 Committee Chairperson Megan Neuberger Managing Director +1-212-908-0501 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - -- No material adjustments have been made that have not been disclosed in public fillings of this issuer. 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