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Fitch Affirms Labeyrie Fine Foods at 'B'; Outlook Stable
February 28, 2017 / 4:37 PM / 9 months ago

Fitch Affirms Labeyrie Fine Foods at 'B'; Outlook Stable

(The following statement was released by the rating agency) MILAN/PARIS/LONDON, February 28 (Fitch) Fitch Ratings has affirmed French packaged food group Labeyrie Fine Foods SAS's (LFF) Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. Fitch has also affirmed LFF's EUR355m senior secured notes due 2021 at 'B+'/'RR3'. The affirmation of the IDR and the Outlook reflects Fitch's expectation that LFF will be able to cope well the current combination of raw materials issues and adverse exchange-rate movements, without any significant deterioration in its credit profile. Resilience should be underpinned by the group's high market shares in France which allows for strong bargaining power and effective cost pass-through, and its current diversification strategy through both organic and external growth. Assuming no acquisition-related debt increase over the next three years, this operating resilience should enable the group to regain headroom under a currently weak financial profile, which has been stretched by the largely debt-funded acquisitions made in the financial year ended June 2016 (FY16). KEY RATING DRIVERS Avian Flu Impact: Fitch continues to expect the effect of avian flu to be manageable at the current rating level, despite its recurrence. Following the first outbreak in 2016, the group was able to compensate for lower available volumes and higher production costs with higher prices, helped by the price inelasticity of consumer demand, and its premium positioning. It was thus able to limit its impact on EBITDA to EUR3.4m in FY16 and to EUR0.6m in FY17. Fitch assumes a stronger effect from the 2017 outbreak in both FY17 and FY18, but this should be minimised at group level due to the decreasing importance of foie gras in total sales and EBITDA following the FY16 acquisitions. Brexit Challenge: In FY16 LFF generated around 30% of its sales and 28% of its EBITDA in the UK. In its rating case Fitch includes some effect from reduced consumer confidence, but mostly a transactional (on raw material prices) and translational negative effect from the depreciation of the pound against the euro, although mitigated by the group's ability to pass on a large part of cost increases on to its retail customers. In FY17 Fitch assumes a slight decrease in UK sales and EBITDA margin to a low of 6.5% (FY16: 7.5%), with a progressive recovery thereafter in raw material prices and a stabilisation in exchange rates. Diversification Strategy: LFF's acquisition strategy and its record of innovation help reduce its business risk profile through diversification by product range, raw materials and geography, and lower sales seasonality. The companies acquired in FY16, including Pere Olive, King Cuisine and Aqualande, clearly help mitigate the supply and raw materials difficulties of the French premium and UK businesses. They are also less seasonal and higher margin. Pere Olive and King Cuisine reinforce growth prospects and enhance geographic diversification, due to their location and as they provide export opportunities, notably to Germany and Scandinavia. Resilient Profitability: Fitch expects the EBITDA margin to fall by 30bp to 7.7% in FY17 due to the combination of the second avian flu outbreak, the depreciation of sterling and record-high salmon prices. However, Fitch expects a recovery to above 8% in FY19. This should be driven by the group's ability to compensate, although with delays, lower production volumes and higher raw material prices by selling price increases and the positive impact of the integration of the FY16 acquisitions, which provide better organic growth prospects and have less volatile margin profiles. We also expect greater resilience in profitability to arise from medium-term cost synergies resulting from management's focus on better integrating the group's various businesses. Mildly Positive Free Cash Flow: Fitch expects LFF's free cash flow (FCF) generation to remain positive, despite some volatility in operating profit margin over the next three years. Fitch forecasts FCF to reach its low in FY17 at 0.4% of sales, and that it will then recover towards 2.2% in FY20, which would be adequate relative to the assigned IDR, driven by growing EBITDA and limited increase in working-capital and capex needs as a percentage of sales. Stretched Leverage Headroom: LFF's FY16 debt-funded acquisitions help reduce its business risk profile but resulted in FFO adjusted net leverage increasing to 5.5x in FY16, a high level for its 'B' IDR, though still consistent with the assigned rating. Assuming no acquisitions in 2H17, it should only marginally decrease to 5.4x in FY17. LFF retains only limited financial flexibility for further bolt-on acquisitions, considering expected low, yet positive FCF in the medium term. Fitch expects that any further large acquisitions would be at least partially equity-funded. Based on these assumptions, Fitch forecasts FFO adjusted net leverage falling towards 4.7x by FY19, improving LFF's headroom under its current rating. Above Average Recoveries for Senior Notes: The 'B+'/'RR3' senior secured notes' rating reflects above average expected recoveries in the range of 51%-70%, at 60%. According to the intercreditor agreement, the senior secured notes are effectively subordinated to the RCF and to non-guarantors' debt, including Aqualande and Sales Sucres, and rank pari passu with their guarantors' debt. Fitch also estimates the factoring line as being of strategic interest despite being non-recourse, and therefore we include it as a super-senior claim within the debt waterfall. However, the total amount of prior-ranking debt is not significant enough to materially affect the recovery prospects for bondholders. For the purpose of our recovery calculations, in a hypothetical default situation we estimate a post-restructuring going-concern EBITDA of EUR62m. The high discount to LTM December 2016 reported adjusted EBITDA of EUR85.4m reflects the group's high business risk profile. The going-concern distressed EV/EBITDA multiple of 6x reflects LFF's strong brands, solid pricing power and the high market shares of its core businesses. DERIVATION SUMMARY LFF has narrower margins than most food manufacturing peers due to the high share of raw materials in its cost structure. Moreover, it benefits from low raw-material and geographic diversification, although this is improving. The volatility in performance is mitigated by the company's high market shares (allowing strong bargaining power with client retailers), high brand reputation and the price inelasticity of demand, especially in its premium segments. In addition, compared to other food manufacturers sharing the same operating margin profile and size, Labeyrie benefits from a stronger financial structure and financial flexibility. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for LFF include: - annual Sales growth in the mid-single digits; - in FY17 and FY18 the full contribution of the FY16 acquisitions should be significantly offset by the second avian flu outbreak and the depreciation of the pound; - thereafter, Fitch assumes stable organic growth around 3% per annum; - EBITDA margin down to 7.9% in FY17 and FY18, with the impact of avian flu and the Brexit vote being mitigated by the full-year integration of higher-margin Pere Olive, King Cuisine and Aqualande; - working-capital needs development in line with sales and raw materials (both prices and volumes); - stable capex at 2.8% of sales; - no dividend payments; - no acquisitions in FY17, internally generated cash-funded acquisition spending of EUR15m per annum from FY18. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - Stronger business profile reflected in meaningfully lower product seasonality and higher geographic, products and customer base diversification - EBITDA margin increasing towards 10% together with higher cash-flow generation - Adjusted FFO net leverage consistently below 4.5x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - EBITDA margin below 7.5% on a sustained basis - Neutral to negative FCF margin for two consecutive years - FFO adjusted net leverage consistently above 5.5x, either due to aggressive financial policy or sustained operating underperformance LIQUIDITY Adequate Liquidity: At end-FY16 LFF's readily available cash on balance sheet was low at EUR2m (Fitch-adjusted) but liquidity was supported by its both undrawn EUR45m RCF maturing in 2020 and its EUR80m factoring facility maturing in 2017, which we expect will be renewed. Fitch expects liquidity to remain adequate after FY16, supported by mildly positive FCF generation, the RCF and the forecast renewal of its factoring facility. Furthermore, the group faces only minor scheduled debt repayments before 2020. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 8790 87213 Supervisory Analyst Anne Porte Director +33 1 44 29 91 36 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Summary of Financial Statement Adjustments Readily Available Cash: as of 30 June 2016 Fitch estimated EUR22m of the group's reported cash and cash equivalents deemed as not readily available for debt service. This is the amount Fitch considers as needed to fund LFF's intra-year working-capital needs and as such, it captures sales seasonality. For its calculation Fitch has considered working-capital needs excluding the positive impact of the receivables sold under the factoring line. Subordinated Debt: Fitch assigned 100% equity credit to the EUR15.9m subordinated debt outstanding at end-FY16. FFO: Fitch has excluded fees related to acquisitions and refinancing costs (together amounting to EUR4.6m) from its FY16 FFO calculation. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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