Moody's affirms Mondelez's long-term senior unsecured ratings at Baa1, affirms its Prime-2 short-term debt rating, following company's announcement of planned spinoff of its global coffee business; outlook stable
May 7, 2014
– Moody's Investors Service, ("Moody's") today affirmed the long-term senior unsecured ratings of Mondelez International, Inc. ("Mondelez") at Baa1 and affirmed its Prime-2 short-term debt rating. This follows the company's announcement of a planned spinoff of its global coffee business, and separately, a $3.5 billion cost-saving restructuring program. The rating outlook is stable.
Mondelez and Netherlands-based D.E Master Blenders 1753 BV intend to combine their respective coffee businesses into a new company to be called Jacobs Douwe Egberts. This entity will become the world's largest pure-play coffee company with over €5billion ($7 billion) in sales and EBITDA margin in the high teens. Mondelez will receive approximately $5 billion in cash proceeds in the transaction — most of which it expects to use to repurchase shares — and a 49% equity interest in the new joint venture. Mondelez expects the transaction to occur sometime in 2015, subject to regulatory approvals and works councils review. Based on the significant number of countries involved (over 25), in a few of which there will be meaningful overlap, and given the need to complete the often lengthy works councils consultation process, Moody's assumes that the transaction will take longer than a year to close and could be amended.
Mondelez's coffee business, while highly profitable, has been a source of sales and earnings volatility in recent years due to swings in green coffee prices and in part to challenges with pricing strategy that has not allowed it to keep pace with volatile input costs.
Mondelez also announced a new global $3.5 billion restructuring program (Accelerated Supply Chain Reinvention) that it expects will deliver at least $1.5 billion of incremental cost savings by 2018, allowing for further expansion of its operating profit margins. In anticipation of accelerated savings from the new program, the company raised its 2016 adjusted operating profit margin target to at least 15%-16% from 14%-16% previously. This compares to 12% operating profit margin reported for fiscal 2013.
The rating affirmations reflect Moody's expectation that the pace of operating margin improvement — which will be accelerated through the new restructuring progam — will largely offset the negative implications of the spinoff of its high margin coffee business and the planned use of the majority of proceeds for share repurchases. In addition, Moody's believes that a significant portion of incremental restructuring activities will be directed at overhead and other expense areas that will provide immediate and permanent cost reductions, which lends credence to company's revised margin improvement goals.
"We expect that by the time the coffee JV closes in 2015, Mondelez will have made sufficient progress with margin expansion that will sustain financial leverage in an acceptable range for the Baa1 rating," commented Brian Weddington, a Moody's Senior Credit Officer. "However, if Mondelez falls behind the pace of its margin improvement plan -- roughly 100 basis points improvement annually -- the company may need to find ways to conserve cash and pay down debt in order to preserve the rating," added Weddington.
Mondelez International, Inc.
Issuer Rating at Baa1;
Senior unsecured debt at Baa1;
Commercial paper rating at Prime-2.
The rating outlook is stable.
Mondelez Inc.'s Baa1 and Prime-2 ratings are supported by its large scale and leading global market position in attractive categories, and its strong brands, which include snack brands such as Oreo and LU biscuits, Cadbury and Milka chocolates, Trident and Stride gum, as well as non-snack brands such as Jacobs coffee, and Tang powdered beverages. The rating is also supported by the significant clout Mondelez has with customers, reflecting the scale and strength of its product portfolio, and by future earnings growth opportunities driven by efficiency gains, and organic expansion into faster-growing market.
These credit positives are balanced against a number of key risks, including cash flow headwinds and potential distractions caused by ongoing major restructuring activities; and an aggressive financial policy, including the planned distribution of all free cash flow to shareholders.
Mondelez's ratings could be upgraded if the company is successful at improving operating performance such that retained cash flow / net debt is sustained above 18% and EBITA margin above 14%. A rating downgrade is possible if a more aggressive financial policy or a large leveraged transaction causes debt/EBITDA to be sustained materially above 3.5 times or operating profit margin falls below 12%.
The principal methodology used in this rating was the Global Packaged Goods published in June 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Deerfield, Illinois, Mondelez is the third-largest food company in the world (behind Nestlé and PepsiCo) with approximately $35 billion in annual sales. Its brand portfolio includes snack brands (e.g. Oreo and LU biscuits, Cadbury and Milka chocolates, and Trident gum) and non-snack brands (e.g. Jacobs coffee, and Tang powdered beverages). Approximately 75% of revenues is derived from snack products with nearly 40% of total sales coming from emerging markets.