CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and the debt ratings of Brown-Forman Corporation (Brown-Forman) as follows:
--Long-term Issuer Default rating (IDR) at 'A+';
--Senior Unsecured Notes at 'A+';
--Bank Credit facility at 'A+';
--Short-term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Key Rating Drivers
Brown-Forman's ratings are supported by the sizeable operating earnings and consistent cash flow generation that is derived from the strong and competitive brand portfolio of one of the largest worldwide spirits companies. These elements combined with relatively conservative financial strategies with regard to acquisitions, leverage and share repurchases along with continued investment in its existing brand portfolio that result in a solid credit profile.
Major contributors to Brown-Forman's operating earnings are its Jack Daniel's franchise, which is the fourth-largest premium spirits brand and the largest selling American whiskey brand in the world including its highly successful line extensions, Tennessee Honey, and ready-to-drink beverages. Brown-Forman's other major brands are Finlandia Vodka, Southern Comfort Liqueur, Canadian Mist and El Jimador Tequila.
Brown-Forman's spirits portfolio primarily competes in the super premium to premium category and skews toward whiskeys, liqueurs and bourbons. Fitch views this as a competitive strength, because the aging process and inventory investments required are a barrier to entry providing an impediment particularly for value competition. Brown spirits have taken share from beer and clear spirits with the favorable demand trends driven by flavored and higher-end whiskey and bourbon products. As such, Brown-Forman has experienced strong category momentum for Jack Daniel's Tennessee Honey which grew depletion volume 36% during fiscal 2014 to approximately 1 million cases. Industry demand trends should remain strong for the foreseeable future that when coupled with Brown-Forman's portfolio should allow the company to grow at above average rates for the next several years.
Brown-Forman has good geographic diversification with net sales contribution in fiscal 2014 of 41% from the United States (the world's most profitable spirits market), 32% from Europe and 27% from the rest of the world. In addition to the convenience factor, Brown-Forman's ready-to-drink and ready-to-pour products effectively diversify its product mix. Brown-Forman has also pursued opportunities to increase its company-owned distribution across several of its international regions including France recently that will benefit margins over the longer term.
Debt Structure and Liquidity
All of Brown-Forman's debt is senior and unsecured, and the company maintains a very manageable maturity profile with approximately $250 million coming due in 2016. The company has an undrawn $800 million five-year credit facility that matures in November 2018, which can be expanded by $400 million. The credit facility is primarily used to support the company's $1 billion commercial paper program, in which there were no issuances at April 30, 2014. The credit facility includes an interest coverage financial maintenance covenant of 3.0x.
Brown-Forman has relatively good financial flexibility as a result of its cash balances, stable free cash flow (FCF) generation and reduced leverage. As of April 30, 2013, Brown-Forman had $437 million of cash, with $256 million being held by foreign subsidiaries whose earnings Brown-Forman expects to reinvest indefinitely outside the U.S. FCF for the past 12 months was $288 million. Fitch expects FCF in fiscal 2015 to decline moderately due to higher levels of capital spending, working capital and dividends. FCF should continue to increase during the following years through organic growth and as capital spending ramps down to maintenance levels of approximately $80 million by fiscal 2017.
In September 2013, Brown-Forman authorized a new stock repurchase program of up to $250 million. As of April 30, 2014, Brown-Forman had repurchased shares totaling $47 million. The annual dividend is approximately $260 million as Brown-Forman increased the regular cash dividend by 14% per share in November 2013. Longer-term, Brown-Forman may consider share repurchase programs within the context of current rating expectations in the absence of acquisition opportunities that are attractive, affordable and available. Past distributions and special dividends have been driven by asset sales or by proposed changes in the tax code.
Industry Risk Factors
Industry risk factors and Brown-Forman's high concentration of earnings from its Jack Daniel's franchise, which represents on an annual basis approximately 51% of the depletions of the company's major brands and plays the largest role in limiting the company's ratings to the 'A' category, make an upgrade unlikely. Industry risk factors include industry structure, competitive environment, regulations related to alcohol sales, consumption patterns, and consolidation.
Fitch believes Brown-Forman could participate in industry consolidation with bolt-on acquisitions that are not expected to increase leverage materially in the near term. The company's acquisition strategy is to acquire brands opportunistically with growth potential and that complement its current portfolio. Acquisitions that could complement the portfolio would include Scotch, Irish whiskey, Vodka or a local brand.
Credit Metrics
Leverage (total debt to EBITDA), which increased to 1.5 times (x) following the $850 million special dividend in December 2012, has declined to 0.99x as of April 30, 2014 which is more in line with historical levels of less than 1.0x due to cash flow growth and debt reduction. FFO to interest coverage was 29x. Current ratings incorporate Fitch's expectation that total debt-to-operating EBITDA will not exceed 1.5x (or 2.0x on a lease adjusted basis) for an extended period of time. Leverage exceeding those amounts will likely lead to a negative rating action. Merger and acquisition risk from an unsolicited takeover is unlikely because the Brown family controls approximately 67.3 % of voting shares.
Recent Operating and Financial Performance and Outlook
Sales, net of excise taxes, increased 5% to $3 billion for the 12 months ended April 30, 2014. Sales growth on an underlying basis was 6%. Growth in the U.S. and Europe, which represents 73% of net sales, was 4% and 11% respectively on an underlying basis. The Jack Daniel's franchise experienced 6% net depletion volume growth and was the primary contributor to overall sales growth, aided by Finlandia at 3%, and the company's super and ultra-premium brands at 4%. Woodford Reserve, a super premium bourbon brand grew volumes 24%.
Operating income, excluding other expenses-net, increased 7% to $969 million and continued to benefit from volume gains, better pricing and mix. Consequently, EBITDA margins increased by approximately 50 basis points to 34.1%.
Brown-Forman anticipates mid to high single-digit growth in sales in fiscal 2015 with select price increases, primarily international. Brown-Forman expects depletion volumes to grow mid-single digits. Brown-Forman also expects modest operating leverage through the SG&A line that should result in underlying operating income growth of 9-11%, which Fitch believes is reasonable.
Rating Sensitivities
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade is unlikely given Brown-Forman's dependence on the Jack Daniel's franchise.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Larger than expected debt-financed acquisitions that result in total debt-to-operating EBITDA exceeding 1.5x or total adjusted debt-to-operating EBITDAR exceeding 2.0x could lead to a ratings downgrade;
--A change in financial policy and/or implementation of a large special dividend;
--A significant and sustained loss of market share for the Jack Daniel's brand could also contribute to negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=843214
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.