Fitch Affirms Ingredion's IDR at 'BBB'; Outlook Revised to Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Ingredion Inc.'s (INGR) ratings as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Bank credit facility at 'BBB';
--Senior unsecured debt at 'BBB'.
The Rating Outlook is revised to Stable from Positive.
KEY RATING DRIVERS
Moderate Leverage, Stable Earnings in North America
The Stable Outlook reflects that Ingredion (INGR) is likely to maintain moderate leverage, balanced with Fitch's view that earnings recovery in South America (SA), the company's second largest region, continues to be slower than anticipated, and returns to shareholders have ramped up during the past year. These factors result in less room in the ratings for acquisitions, which the company intends to pursue. Fitch has not seen enough earnings strength or consistency over the past year to support a ratings upgrade, but the ratings are stable at the 'BBB' level. The company's earnings should strengthen in 2014, driven by higher volumes and moderating prices as a result of large global crops.
The Stable Outlook also incorporates Fitch's expectations that North America, INGR's largest region, generates flat to slightly improved operating income in 2014, after encountering a slow first quarter mainly on winter weather-related higher operating costs. Operating performance improved in the second quarter of 2014 as North American volumes rose 3% versus the prior year period, driven by the U.S. and Canada, which more than offset a modest decline in Mexico. The Mexican business was negatively impacted by a new tax on sweetened beverages, partially offset by strength in specialty starches.
Current Challenges in South America
INGR's operating results have also been affected negatively by macroeconomic conditions in SA, particularly Argentina, where raw material, energy and labor costs remain high and where Ingredion has not been able to fully price for rapidly rising costs and significant currency headwinds. In Brazil, weak sales to the brewing industry have recovered with the World Cup, but slower GDP growth has tempered food and industrial volumes. Reliance on earnings from SA has eased given that Ingredion generated 28% of its segment operating income in SA in 2012, compared to 19% in 2013. The difficult environment in SA is expected to continue for the near term but should improve over the next few years. Ingredion is still awaiting further currency devaluation in Argentina which could alleviate its cost pressure and encourage more farmers to sell their corn.
Specialty Starches Bring Higher Margins and Growth
INGR acquired the National Starch business of Akzo Nobel N.V. (National Starch) in October 2010 in a primarily debt-financed $1.4 billion transaction. National Starch's expertise in specialty and modified starches, particularly for processed foods, is protected by patents and complements INGR's core corn refining. Also, National Starch has broadened INGR's geographic breadth in Asia and Europe and strengthened the U.S. business. The ratings consider INGR's earnings strength, larger scale, and increased diversification of starch-based ingredients since the acquisition. Specialty starches now make up about 20% of Ingredion's sales, though it varies by region, and have much faster growth and higher margins than Ingredion's base business.
FCF Periodically Volatile
Although the company's business model has shifted more toward ingredients, INGR's cash flow is still subject to periodic working capital volatility associated with agricultural cycles, particularly for corn. Free cash flow (FCF) has improved, resulting in $350 million FCF in 2012 and $209 million in 2013, up from an average of approximately $115 million during the prior five years. Based on the company's guidance, including $300 million in capex and approximately $125 million of dividends, FCF in 2014 could be approximately in the $300 million range. However, Fitch believes that average annual FCF, factoring in some periodic volatility and excluding one-time items, will be closer to $150 million annually.
Share Repurchases and Dividends Up, Pursuing Acquisitions
Bolt-on acquisitions, particularly to expand the company's specialty ingredients portfolio, remain part of INGR's strategy. Although Fitch had previously anticipated that these acquisitions would be funded primarily with FCF, recent share repurchases have absorbed FCF and Fitch now believes that near-term acquisitions are likely to require debt funding. Ingredion entered into a $300 million accelerated share repurchase (ASR) on July 30, 2014. The maximum number of shares to be repurchased is 4 million. The ASR was funded with revolver borrowings and cash on hand. Combined with more than $200 million share repurchases completed in 2013, this will total more than $500 million of share buybacks within 12 months. Ingredion also raised its dividend by a total of approximately 60% in 2013 to get to a payout ratio in the 30% range. Fitch believes that the heightened share repurchases and dividend increases, combined with the company's desire to still engage in acquisitions, is a more aggressive financial policy than Ingredion had taken previously. While the company's preference is bolt-on acquisitions in the $300 million to $500 million range, acquisitions could be larger.
Adequate Liquidity, Manageable Maturities
The company's liquidity includes $592 million cash at June 30, 2014, with approximately $450 million located outside the U.S., and full availability under its $1 billion credit facility expiring Oct. 22, 2017. INGR maintains sufficient cushion under its financial covenants. The company's only significant note maturity in the next three years is $350 million, 3.2% notes due Nov. 1, 2015, which Fitch believes will be refinanced. Despite weakening operating performance, total debt has remained flat at $1.8 billion. However, debt could be up slightly in the near term due to the ASR funding.
Future developments that may individually or collectively lead to a positive rating action include:
Consistently strong operating performance as evidenced by sustainable improvement in SA, earnings strength in the company's largest region of NA, and maintenance of financial policies balancing shareholder and debtholder interests so that Ingredion is likely to maintain gross leverage (total debt/EBITDA) below approximately 2.0x could result in a positive rating action in the intermediate term.
Maintenance of EBITDA margins in the low teens and annual average FCF generation sustainable at more than $150 million annually would also support a positive rating action.
Future developments that may potentially lead to a negative rating action include:
A large debt-financed acquisition, significant debt-financed share repurchases, or sustained weaker than anticipated operating performance, potentially resulting from lack of improved operating conditions in Argentina, combined with earnings weakness in other regions leading to leverage that is likely to be sustained near the 3.0x range.
Multiple consecutive years of negative FCF or very modest positive FCF would also support the negative rating action.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage