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Fitch Rates Mondelez's $1.5B 364-Day Facility 'BBB'
March 1, 2017 / 11:06 PM / 7 months ago

Fitch Rates Mondelez's $1.5B 364-Day Facility 'BBB'

(The following statement was released by the rating agency) CHICAGO, March 01 (Fitch) Fitch Ratings has assigned a 'BBB' rating to the new $1.5 billion 364-day facility being issued by Mondelez International, Inc. (Mondelez). The Rating Outlook is Stable. Fitch also affirmed its Long-Term Issuer Default Rating Rating and Short-Term IDR at 'BBB'/F2'. A full list of rating actions follows at the end of this release. Mondelez has secured a new $1.5 billion 364-day credit facility due February 2018. This facility is in addition to Mondelez's existing $4.5 billion credit facility due October 2021. The total $6 billion will backstop commercial paper (CP) borrowings. Mondelez ended 2016 with $2.4 billion in CP borrowings. The new 364-day facility is similar in terms to the outstanding $4.5 billion, multi-year credit facility. KEY RATING DRIVERS Increased Confidence in 2018 EBIT Margin Target of 17%-18%: The ratings reflect Fitch's expectation that Mondelez can achieve its target to improve EBIT margins from 15.6% in 2016 to 17%-18% in 2018 on 1%-2% annual organic revenue growth. The improvement will primarily be driven by the large restructuring program the company put in place in 2014 to realize $1.5 billion in annualized savings by 2018 in the areas of supply chain, overhead costs, and other organizational efficiencies. Free cash flow (FCF; after dividends, cash restructuring charges, and pension contribution) is expected to improve from approximately $520 million in 2016 to over $1.4 billion in 2018, as the company cycles heavy restructuring-related cash payments and capex over the next 2-3 years. Debt/EBITDA is expected to improve from 3.5x in 2016 to 3.3x in 2018 and trend toward 3.2x by 2019, primarily as a result of EBITDA growth. Risks to the ratings include prolonged weakness in organic sales growth, with Mondelez growing below industry-category sales and higher than expected investments needed to drive sales which would preclude the company from achieving the targeted EBIT margins. Debt-financed share buybacks and M&A activity that keeps leverage elevated in the mid-to-high 3x range are also rating concerns. Fitch expects M&A activity to continue in the packaged food sector as companies optimize product portfolio, geographic exposure, and seek cost reduction opportunities. While Mondelez's rating does not factor in a major M&A event, the company could be acquisitive or even the target of a larger multi-national food company over the rating horizon. Favorable Portfolio Mix Fitch views Mondelez as having a favorable product mix relative to its packaged-food peers given that 85% of its sales are geared towards snacks, which Fitch expects should grow in the 2%-3% range going forward (versus 6% historically) against flat to 1% for overall packaged foods. The snacking category is well-aligned with consumer trends of eating more frequent, smaller meals, and convenience. In addition, 40% of its sales come from emerging markets which have near-term headwinds but strong growth prospects longer term. This supports long-term organic growth of 1%-2%, which Fitch expects will be driven equally by volume growth and pricing over the medium term. Mondelez is one of the world's largest snack companies, with 2016 revenues of approximately $26 billion and an attractive portfolio of sweet snack brands. The company operates in approximately 165 countries and has #1 global market shares in biscuits and candy, as well as #2 global shares in chocolate and gum. Oreo, Cadbury, Nabisco, Dairy Milk, LU, Milka, and Trident each generate more than $1 billion in annual sales. Power Brands, which make up approximately 70% of sales, are the company's fastest growing and highest-margin global and regional brands. These brands have grown at about twice the pace of overall sales during the past few years and have margins 100bps-200bps higher than the company's other brands. Power Brands also receives about 80% of advertising and consumer (A&C) expenditures. Restructuring Program to Yield Industry Level Margins Management has been focused on improving efficiency, since Mondelez was created through a series of acquisitions made by legacy Kraft that were never properly optimized or integrated. In 2014, the company announced a $3.5 billion restructuring program to be executed from 2014 through 2018 with $2.5 billion in cash costs. The purpose is to reduce supply chain and overhead costs by $1.5 billion by the end of 2018. This would be supported by an incremental $1.6 billion in capex to upgrade manufacturing facilities. The company expects 70% of its Power Brand sales will move to upgraded facilities by 2018, versus 25% in 2015. EBIT margin has improved steadily to 15.6% in 2016 versus 12.5% in 2013. Fitch views Mondelez's margin target of 17%-18% in 2018 as achievable, and would bring Mondelez more in line with industry averages. KEY ASSUMPTIONS Fitch's assumptions in its base case projections are as follows: --Organic growth of about 1% in 2017 and 1.5% thereafter split equally between volume/mix and pricing. Currency impact is assumed to be a negative 0.5% in the first half of 2017 and neutral thereafter. --EBIT margin is expected to improve to 16.3% in 2017 from 15.6% in 2016, and then expand to 17%-18% in 2018. --EBITDA margin is expected to be 19.4% in 2017, versus 18.8% in 2016, and then expand to 20%-21% in 2018. --Capex peaked in 2015 at $1.5 billion and declined to $1.2 billion in 2016. Capex is expected to trend slightly lower and come in under $1.1 billion by 2018 as restructuring-related capex continues to decline. --FCF (after dividends, cash restructuring charges, and pension contribution) improving from $520 million in 2016 to over $1.4 billion in 2018. --Total debt-to-EBITDA is expected to decline from 3.5x in 2016 to 3.3x in 2018 and further to 3.2x in 2019, driven primarily by EBITDA growth. This improvement assumes incremental debt (in the form of CP borrowings) will partially fund share buybacks. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --EBITDA tracks below expectation due to a shortfall in expected operating margin improvement or deceleration in organic top-line growth, aggressive financial policies or engaging in a large debt-financed acquisition, such that leverage is consistently above 3.5x. Future developments that may, individually or collectively, lead to a positive rating action include: --Organic growth in line with or better than category growth; --EBITDA margins in line with or better than industry average; --Leverage consistently below 3x. LIQUIDITY Mondelez's liquidity at Dec. 31, 2016 included more than $1.7 billion in cash and equivalents and an undrawn $4.5 billion senior unsecured revolving credit facility expiring in October 2021. Mondelez had $2.4 billion in CP outstanding at Dec. 31, 2016, which was backstopped by the $4.5 billion credit facility. Upcoming long-term debt maturities include approximately $0.7 billion due in 2017, which Fitch believes the company is likely to refinance with increased CP borrowings. FCF (after dividends, cash restructuring charges, and pension contribution) is expected to improve from $520 million in 2016 to over $1.4 billion in 2018 as the company cycles heavy restructuring-related cash payments and capex moderates over the next 2-3 years. Debt/EBITDA is expected to trend toward 3.2x by 2019 from 3.5x in 2016 on EBITDA growth. FULL LIST OF RATING ACTIONS Fitch has assigned the following rating: Mondelez International, Inc. --$1.5 billion 364-day credit facility at 'BBB'. Fitch has affirmed the following ratings: Mondelez International, Inc. --Long-Term Issuer Default Rating (IDR) at 'BBB'; --Short-Term IDR at 'F2'; --$4.5 billion credit facility due Oct. 21 at 'BBB'; --Senior unsecured debt at 'BBB'; --Commercial paper at 'F2'. Mondelez International Holdings Netherlands B.V. --Senior unsecured debt at 'BBB'. The Rating Outlook is Stable. Contact: Primary Analyst Ellen Itskovitz, CFA Senior Director +1-312-368-3118 Fitch Ratings, Inc. 70 West Madison St Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Fitch Ratings, Inc. Committee Chairperson David Silverman Senior Director +1-212-908-0840 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude restructuring charges. For example, Fitch added back $140 million in non-cash stock-based compensation and $498 million in restructuring charges to its EBITDA calculation in 2016. 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