Moody's changes outlook on Imperial Tobacco Group's Baa3 long-term ratings to positive from stable
November 9, 2012
– Moody's Investors Service has today changed to positive from stable the outlook on the Baa3 long-term ratings of Imperial Tobacco Group PLC ("Imperial" or "the company") and its guaranteed subsidiaries.
A full list of outlooks affected by today's announcement is provided towards the end of this press release.
"Our new positive outlook on Imperial reflects its gradual strengthening of business and financial profiles following the company's acquisition of Altadis, S.A. in 2008," says Paolo Leschiutta, a Moody's Vice President - Senior Credit Officer and lead analyst for Imperial. "Despite Imperial's financial leverage reduction having slowed down over the past two years, since reintroducing its share buyback programme, we still expect further, albeit modest, improvements in the company's credit metrics over the next 12 to 18 months," adds Mr. Leschiutta. "Any improvement in Imperial's creditworthiness, coupled with the demonstrated resilience of its operating performance, is likely to exert positive pressure on the company's existing rating."
Some of Imperial's key credit metrics remain at the low end of the investment-grade rating range. In particular, the company's cash flow coverage metrics are weakened by its large dividend payments. However, the impact of these payments is partially mitigated by a mix of solid investment-grade characteristics, such as the company's size, geographic spread, leading market positions in selected countries and strong cash generation from operations. Furthermore, the company has demonstrated its willingness and ability to reduce its financial leverage significantly following the Altadis acquisition. Imperial's business profile has improved considerably with the consolidation of Altadis activities, increasing the positive pressure on its rating.
Nonetheless, Moody's notes that Imperial's operating performance remains exposed to a number of uncertainties such as the increasing regulatory pressure in the UK market, where the group generates around 20% of its tobacco (cigarette, fine cut tobacco, cigars and cigarette papers) profits. The company also relies heavily on western European markets, where cigarette volumes are contracting at low single-digit rates. Despite these uncertainties, Moody's would expect Imperial to be able to maintain and moderately expand its top line and profitability, offsetting the ongoing decline in cigarette consumption in mature markets through price increases and gradually expanding into emerging markets. Imperial's strong presence in the "value" and "roll your own" segments should also help the company in this respect. The company's success in weathering current uncertainties in market conditions will add to the positive pressure on its rating.
Overall, Moody's would expect the company to maintain a stable financial policy. The rating agency does not anticipate that Imperial will make any meaningful acquisitions in the short term and the current rating cannot accommodate any large debt-funded acquisitions. In May 2011, the company resumed its GBP500 million annual share buyback programme and Moody's would not expect this to be increased over the short-term. On the contrary, Moody's would expect the company to reduce its share buybacks in the event of a deterioration in market conditions or profitability that leads to significantly weaker-than-expected cash flow generation.
Imperial recently announced its preliminary results for its financial year ended (FYE) September 2012. Despite a 3% contraction in stick-equivalent volume during the year, the company reported that its tobacco net revenues had increased by 1% and its tobacco adjusted operating profit by 2%. The company also reported a non-cash goodwill impairment for GBP1.2 billion due to further deterioration in its Spanish activity. On a preliminary basis and excluding the impairment charge, Imperial's financial leverage, measured as debt/EBITDA (adjusted for pension and operating leases), improved to 3.0x from 3.3x a year earlier, while retained cash flow (RCF)/net debt declined to 12.4% (14.6%). We note that 2012 ratios are based on preliminary data and key ratios might change as a result of our adjustments once full annual report disclosure will be available. While financial leverage indicates a degree of upward pressure on the rating, the company's RCF/net debt ratio remains weak for the rating category.
The positive outlook reflects Moody's expectation that Imperial will continue to be able to compensate for declining volumes in mature markets by increasing prices, allowing the company to achieve ongoing improvements in profitability and credit metrics, while remaining committed to a prudent financial policy.
WHAT COULD CHANGE THE RATING UP/DOWN
Positive pressure on Imperial's rating could arise if the company were to reduce its debt/EBITDA ratio to below 3.0x and improve its RCF/net debt ratio towards mid teens on a sustainable basis. In addition, before Moody's were to consider an upgrade, Imperial would need to demonstrate resilient operating performances.
Negative pressure on Imperial's ratings could arise from a weaker-than-expected operating performance or a sizeable debt-financed acquisition. Such developments could be reflected by the group's debt/EBITDA ratio remaining above 3.5x and its RCF/net debt remaining around 10% for a prolonged period of time.
The following outlooks were changed:
..Issuer: Imperial Tobacco Finance PLC
....Outlook, Changed To Positive From Stable
..Issuer: Imperial Tobacco Group PLC
....Outlook, Changed To Positive From Stable
The principal methodology used in this rating was the Global Tobacco Rating Methodology published in November 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Bristol, England, Imperial Tobacco Group PLC is the world's fourth-largest listed tobacco company in terms of revenues and a leading manufacturer of cigarettes and fine-cut tobacco. Imperial is also the world's number one player in cigarette papers and premium cigars in terms of revenues and has an interest in logistics. In the year ended September 2012, Imperial reported a company adjusted operating profit in excess of GBP3.1 billion.
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