CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Embotelladora Andina S.A. (Andina) as well as its senior unsecured notes and National scale ratings. A full list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
Andina's ratings reflect its solid operating profile backed by strong brand recognition of Coca-Cola, well-diversified operational geographies across Latin America, as well as the relatively stable dynamics of the beverage industry. These factors have enabled Andina to maintain its strong performance and cash flow generation despite the weak macroeconomic environment in the region, which has allowed the company to reduce leverage quickly. Negatively, the ratings are tempered by its increased exposure to Brazil where the macroeconomic factors remain weak, and the volatility of prices of its main raw materials such as sugar and oil.
Strong Business Position & Geographical Diversification
Andina has solidified its operations in Argentina, Brazil, Chile and Paraguay through acquisitions of Embotelladoras Coca-Cola Polar (Kopolar) and Companhia de Bebidas Ipiranga (Ipiranga). The company is the third largest Coca-Cola bottler in Latin America in terms of volume and the seventh largest Coca-Cola bottler worldwide. Andina's business is also well diversified across Latin America. Brazil is the largest contributor, with sales and EBITDA proportions at 40% in 2014, compared with Chile (27% of sales, 32% of EBITDA), Argentina (26% of sales, 17% of EBITDA), and Paraguay (7% of sales, 11% of EBITDA).
The company's consolidated volumes increased by 9% in 2014 compared to a year ago, reaching 831 million unit cases (UC), mainly the result of increased sales volumes for non-carbonated soda drink (CSD) products. During the first quarter of 2015, volumes were 220 million UC, relatively flat compared to the same period last year. Andina's EBITDA improved to CHP290 billion in 2014, a 14% increase over 2013 due to a full year's consolidation of Ipiranga. Excluding Ipiranga, sales volumes declined by 3% while EBITDA and sales increased by 4% and 5%, respectively, during the same period. Cost pressures from higher distribution expenses in Brazil and Chile, increased labor costs, depreciation of regional currencies relative to the U.S. dollar, and the higher cost of concentrate were partially offset by lower sugar costs in Paraguay and the depreciation of the Argentine Peso against the Chilean Peso.
Improving Net Leverage
Fitch expects Andina's net leverage to further improve to below 1.5x within the next 12-18 months. Along with a 14% EBITDA improvement in local currency terms in 2014, the company also reduced its capex and dividend payouts in 2014 to improve its leverage ratios which had peaked at above 2.4x following three acquisitions during 2012-2013. Andina has also hedged its FX exposure on the international bond through a cross-currency swap, which reduced its total debt by about CHP51 billion based on Fitch's methodology. As a result, its gross and net leverage ratios improved to 2.3x and 1.7x, respectively, as of March 31, 2015, from 2.6x and 2.0x as of year-end 2014, in line with Fitch's expectations.
Increased Exposure to Brazil
Andina's exposure to Brazil has increased partly due to its recent acquisition of Ipiranga. The Brazilian operation accounted for 37% of its consolidated sales volumes, 40% of revenues and EBITDA in 2014. The company is the third largest bottler of Coca-Cola products in Brazil in terms of volume. Given its increased exposure to Brazil, a potential negative rating action on the Brazil's country ceiling could place additional pressure on the company's ratings.
Fitch's key assumptions within the rating case for Andina include the following:
--Conservative revenue growth between 8%-10% from 2015-2018;
--EBITDA margin remains close to 16%;
--Capex of around USD270 million in 2015 and 2016 in accordance with company guidance;
--Capex drops to 4.5% of revenues in 2017 and 2018 to cover maintenance;
--Dividends of USD90 million in 2015 and 2016, increasing to up to 60% of net income beginning in 2017.
A negative rating action could occur if Fitch believes that net leverage will remain above 1.5x during the next 18 to 24 months. A downgrade in the ratings of Brazil or Chile that results in a downgrade of their respective country ceilings could lead to a negative rating action. While Andina's rating does not explicitly factor in support from the Coca-Cola Company, a decrease of Coke's participation in the ownership structure would be viewed negatively.
A positive rating action is not likely in the near to medium term. A return to historical net leverage levels for a continued period of time and a conservative financial strategy would be viewed favorably.
Andina had CHP696 billion of total debt and CHP174 billion of cash and marketable securities as of March 31, 2015; the company has about CHP2 billion of cash and equivalents in Argentina which Fitch considers as restricted cash. Short-term debt totaled CHP83 billion. Andina generated approximately CHP58 billion in free cash flow (net of CHP109 billion in capex and CHP48 billion of dividends) during the LTM ended March 31, 2015.
Fitch has affirmed the following ratings:
Embotelladora Andina S.A.
--Foreign currency and local currency long-term Issuer Default Ratings (IDRs) at 'A-';
--Senior unsecured notes at 'A-';
--National scale long-term rating at 'AA(cl)';
--National equity rating at 'Primera Clase Nivel 2';
--National senior unsecured debt at 'AA(cl)'.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
National Scale Ratings Criteria (pub. 30 Oct 2013)
Rating Non-Financial Corporates Above the Country Ceiling (pub. 02 Feb 2015)
Dodd-Frank Rating Information Disclosure Form