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Rating Action:

Moody's affirms Remy Cointreau's Baa3 ratings; stable outlook

23 Sep 2019

Milan, September 23, 2019 -- Moody's Investors Service ("Moody's") has today affirmed Remy Cointreau S.A.'s ("Remy") Baa3 long-term issuer rating and the Baa3 backed senior unsecured rating on the €65 million notes issued by Financiere Remy Cointreau SA/NV due August 2023. Remy is a producer and distributor of premium-branded alcoholic beverages. The outlook is stable.

"The rating affirmation reflects Remy's track record of reporting good profit growth driven by the stronger contribution from the cognac segment on the back of positive volumes and price mix," says Ernesto Bisagno a Moody's Vice President - Senior Credit Officer and lead analyst for Remy.

"With a Moody's adjusted leverage of 2.2x, Remy is strongly positioned in the Baa3 rating category, but the rating remains constrained by the company's product and geographic concentration and its exposure to economic and demand swings in its key markets, which at times have led to profit volatility," added Mr Bisagno.

RATINGS RATIONALE

Remy's Baa3 rating reflects its (1) large profit contribution from its top quality Remy Martin brand; (2) strong market position in cognac in the most important alcoholic beverages markets; (3) steady profit growth and stable cash flow generation; and (4) balanced financial policy. However, the rating is constrained by (1) the company's small scale and product concentration relative to other rated players in the beverages industry; (2) exposure to volatility in emerging markets and economic conditions in the US; and (3) weakened free cash flow due to fairly large working capital swings, increased investments and shareholder distributions.

In fiscal 2019 (ended March 2019), Remy continued to experience strong growth in the cognac segment with organic sales and operating profit up 11.9% and 14.2%, respectively, driven by strong volumes, positive price evolution and stronger product mix, while market conditions were particularly favorable in Asia.

Despite the stronger earnings, Moody's adjusted operating cash flow significantly decreased to €53 million in 2019 (€184 million in 2018) due to negative working capital outflows owing to increased investments in "Eaux de Vie" and higher collection periods in the US. Because of the €104 million share buyback, partially offset by a cash inflow of €87 million from the early reimbursement of the vendor loan from EPI Group, reported net debt increased to €313 million (€343 million including €30 million of IFRS 16 recognised liabilities) from €283 million at March 2018.

Moody's adjusted gross debt at March 2019 was €617 million, including €49 million adjustments related to the factoring programme, €31 million for the pension deficit and €21 million for the mark-up on the OCEANE convertible bond. Moody's adjusted gross debt to EBITDA improved to 2.2x in 2019 (2.3x in 2018) leaving the company strongly positioned in its rating category.

Moody's expects Remy to report mid-single digit organic profit growth over 2020-21, driven by stronger volumes and price mix, while sales will be impacted by the termination of the distribution contracts in Czech Republic, Slovakia and the US. Free cash flow will weaken in 2020 to around -€120 million due to increased dividends, higher investments in production facilities, as well as ongoing high working capital needs. In 2021, the agency expects free cash to improve as dividends will moderate in line with the historical average. Despite the negative free cash flow, Moody's adjusted debt to EBITDA will remain broadly stable or marginally decrease towards 2.1x in 2020, as the existing cash would be enough to cover the funding requirements.

Remy's liquidity is adequate with existing liquidity and cash flow generation more than covering shareholder distributions and capex for 2020. However, relatively large working capital outflows can result in additional funding requirements, typically covered by drawings under short term uncommitted facilities. At March 2019, the company had €179 million of cash on balance sheet and a €100 million fully undrawn revolving credit facility maturing in July 2024. The bank facility contains a net leverage covenant, set at 4.0x over the life of the agreement, and the ratio stood at 1.19x as of March 2019. Refinancing needs are modest with €40 million related to a shareholder current account advance agreement signed in March 2015 with Orpar SA, maturing in April 2021.

Moody's has factored in the following environmental, social and governance (ESG) considerations. As a spirits company, Remy is exposed to social risks, including shifts in consumer tastes that can accompany changing demographics, but also evolving regulatory and societal attitudes towards alcohol-containing products, which can affect demand for its products. The company mitigates those risks through education, clear labeling, consistency of product and responsible drinking messages. In terms of governance, Remy is controlled by the majority shareholder, the Andromède family holding company, while free float represents approximately 42% of shares. Remy has a balanced financial policy with a track record of saving cash trough script dividends. However, the level of net debt can fluctuate given the company's appetite for extraordinary dividends and share buybacks, with no explicit commitment to a leverage target.

RATIONALE FOR STABLE OUTLOOK

Remy remains well positioned in the rating category and the stable outlook reflects Moody's expectation that its operating performance will continue to improve, and its leverage will progressively trend towards 2.0x and below, absent material debt-financed acquisitions.

WHAT COULD CHANGE THE RATING UP/DOWN

While Remy is strongly positioned in the rating category, a near-term upgrade is constrained by the weakened free cash flow due to increased investments and shareholder distributions. Despite its business concentration, upward pressure could develop over time if the company continues to improve its profitability, generates positive free cash flow and maintains a conservative financial policy, including an increase in medium term sources of liquidity. These metrics would need to be supported by debt/EBITDA (on a Moody's-adjusted basis) below 2x and retained cash flow (RCF)/net debt comfortably above 30%, on a sustained basis.

Conversely, deterioration in the company's profitability, leading to financial leverage (on a Moody's-gross-adjusted basis) above 3x for a prolonged period, could result in a rating downgrade. The rating could also come under negative pressure in the event of a more aggressive financial policy or ongoing negative free cash flow, leading to a weakening of the company's liquidity profile.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Remy Cointreau S.A.

.... Issuer Rating, Affirmed Baa3

..Issuer: Financiere Remy Cointreau SA/NV

....Backed Senior Unsecured Regular Bond/Debenture , Affirmed Baa3

Outlook Actions:

..Issuer: Remy Cointreau S.A.

....Outlook, Remains Stable

..Issuer: Financiere Remy Cointreau SA/NV

....Outlook, Remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Alcoholic Beverage Industry published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Remy Cointreau S.A. is a producer and distributor of premium-branded alcoholic beverages, with a significant focus on cognac. The company reported net sales and EBITDA of €1.1 billion and €298 million, respectively, in fiscal 2019 ("2019" ending March). The company's operations are divided into three divisions: Remy Martin, Liqueurs & Spirits, and partner brands. The company's main brands include Remy Martin Cognac, Cointreau Liqueur, Metaxa brandy and Mount Gay Rum.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Ernesto Bisagno, CFA
VP - Senior Credit Officer
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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