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Fitch Affirms Carlsberg Breweries at 'BBB'; Outlook Stable
May 11, 2017 / 4:08 PM / in 6 months

Fitch Affirms Carlsberg Breweries at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, May 11 (Fitch) Fitch Ratings has affirmed Carlsberg Breweries A/S' Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB', and Short-Term IDR at 'F3'. The Outlook is Stable. The affirmation reflects an improvement in Carlsberg's credit metrics to levels more commensurate with a 'BBB' rating due to successful cash preservation measures taken in 2015-2016 leading to 25% gross debt reduction over the period. We expect rating headroom to continue improving over 2017-2019, allowing for some bolt-on M&A activity in a still consolidating industry. Management's focus on improving profitability and strengthening the company's balance sheet under the SAIL'22 strategy it aims to deliver by 2022 should continue to enhance the group's financial flexibility under the current rating. The rating also reflects Carlsberg's strong business profile resulting from its large scale, geographic diversification and strong portfolio of international and local brands, ensuring leading positions in most of its markets. KEY RATING DRIVERS Good Progress with Efficiency Programme: Carlsberg made good progress under its "Funding the Journey" efficiency programme in its first year of implementation, achieving around DKK0.5 billion benefits and enhancing the group's EBITDA margin in 2016. We conservatively assume future cost savings of around DKK1.0 billion-1.5 billion over 2017-2018 will be largely reinvested to strengthen the company's operations in its core western Europe region. Carlsberg's ability to enhance margins and fund its strategy with internally identified resources is positive for its credit profile. Solid Cash Generation: A favourable working-capital development and efforts to restrain capex helped Carlsberg to maintain strong free cash flow (FCF) of DKK4 billion in 2016. We expect the FCF margin to decrease to 3.5%-4.5% (2016: 6.4%) over 2017-2019 but to remain healthy for the rating. The gradual step-up in dividends and scope for growth in capex from 2018 to the level of annual depreciation and amortisation should constrain further uplifts in FCF. There is also limited room for further improvement in working capital. Deleveraging Continues: In 2016 non-core asset disposals and solid FCF contributed to good pay-down of debt. Management reported that net debt/EBITDA reduced to marginally below 2.0x. This represents the upper level of the 1.5x-2.0x range that management is targeting. We expect deleveraging to continue over 2017-2019 with funds from operations (FFO)-adjusted net leverage decreasing below 3.0x (2016: 3.3x) and increasing headroom under the company's 'BBB' IDR. Premiumisation in Western Europe, China: Fitch expects price/mix increases enabled by Carlsberg's product launch strategy to support organic revenue growth in western Europe and China over 2017-2019. At the same time, volume growth in these markets remains constrained by the maturity of the western Europe consumer market and the weakness of demand for beer in China. We expect better sales volumes performance in other Asian countries, such as Vietnam, due to favourable market fundamentals. Russia Challenges Offset by Rouble: Russia, Carlsberg's largest single market, representing 12% of its 2016 revenues and 16% of group EBIT, remains challenging due to still weak consumer confidence, the price competitiveness of local brewers and the ban on PET bottles larger than 1.5 litres effective from 2017. We therefore assume for 2017 a contraction in the company's sales volumes in Russia by around 5%. Nevertheless, operating profit in Danish krone terms should be supported by rouble appreciation, causing both translational and transactional effects as part of costs are denominated in hard currency. No Near-Term Competitive Risks: We do not expect the merger of the two global industry leaders, Anheuser Busch InBev NV/SA (ABI; BBB/Stable) and SABMiller plc, in October 2016 and the subsequent entry of Japanese Asahi Group Holdings, Ltd. into Europe to materially affect the competitive landscape for Carlsberg, at least in the short to medium term. However, Carlsberg remains largely reliant on Europe (around 75% of revenue), and we believe it remains critical for Carlsberg to focus on continuing to strengthen its cost structure and its operations in this region, so that it could face effectively any competitive challenge from ABI or Asahi. No Large-Scale M&A: Carlsberg's balance sheet is now in a safer place and could tolerate bolt-on M&A activity absorbing more than annual FCF generation. Our projections assume DKK1.5 billion bolt-on M&A spending per year. Management remains committed to deleveraging and large-scale expensive deals are not a part of our rating, but we do not rule out some interest for one of the two Vietnamese brewers that are being privatised. DERIVATION SUMMARY Carlsberg is smaller and less geographically diversified than ABI, which is the largest beer company globally with strong market positions and superior operating margins and pre-dividend FCF generation. Nevertheless, Carlsberg has the same rating due to its more conservative financial policies and capital structure. Carlsberg is rated higher than US-based Molson Coors Brewing Company (BBB-/Stable) as the latter has higher leverage and a slightly weaker business profile. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - strengthening of RUB/USD rate to 60.8 in 2017; - DKK/USD rate at 7.23 in 2017; - low- to mid-single-digit annual revenue growth, supported mostly by price-mix effect; - broadly stable EBITDA margin at 20.7%; - capex at DKK4.0 billion-4.5 billion over 2017-2020; - dividend payout gradually increasing to 50% of net profit; and - no large M&A (we factor DKK1.5 billion per year into the current rating). RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Continuation of a strong competitive profile leading to group EBITDAR margin above 25% (2016: 21.2%), a FCF margin above 5% (2016: 6.4%) or annual FCF of DKK4 billion (2016: DKK4.0 billion) - FFO-adjusted net leverage sustainably below 3.0x (2016: 3.3x) Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - A severe decline in operating performance from key markets (e.g. Russia) causing FFO-adjusted net leverage to increase above 3.8x - An erosion of FCF margin below 2.0% - A shift in financial policy towards a much stronger remuneration of shareholders, coupled with an increased M&A appetite LIQUIDITY Strong Liquidity: Liquidity was strong at end-2016 as DKK9 billion of short-term debt (including DKK7 billion bonds) was well covered by undrawn committed credit lines of DKK19 billion, Fitch-adjusted unrestricted cash of DKK2 billion and estimated positive FCF in 2017 of around DKK3 billion. Contact: Principal Analyst Anna Zhdanova, CFA Associate Director +7 495 956 2403 Supervisory Analyst Giulio Lombardi Senior Director +39 02 879087214 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 -Restricted cash: We adjusted available unrestricted cash at end-2016 by DKK1.5 billion for intra-year working capital swings. -Dividends to minorities/from associates: Under our methodology we included in the calculation of FFO dividends received net of dividends paid (a net DKK402 million outflow). Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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