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Rating Action:

Moody's assigns Baa1 issuer rating to Givaudan SA; stable outlook

31 Aug 2018

London, 31 August 2018 -- Moody's Investors Service, ("Moody's") today assigned a Baa1 issuer rating to Givaudan SA (Givaudan). This is the first time that Moody's assigned ratings to Givaudan. The outlook on the rating is stable.

RATINGS RATIONALE

The Baa1 rating reflects Givaudan's strong business profile underpinned by its market leadership in the global flavour & fragrance (F&F) sector, significant diversification in terms of the geographies and consumer goods-oriented customers it serves, as well as strong innovation and service capabilities.

With revenues in excess of CHF5.5 billion (pro-forma Naturex acquisition), Givaudan holds a share of around 25% of the global F&F market, which is relatively concentrated with the top four players commanding more than 60% of the sector. Givaudan exhibits a truly global footprint, operating in more than 100 countries. Its geographical sales mix is well balanced between key regional markets and reflects a significant presence in both mature developed countries and high growth emerging economies.

Givaudan enjoys significant critical mass, which helps it absorb above industry average investments in R&D, which amounted to 8.8% of sales revenues in the period 2013-2017. This underpins its capacity to innovate - a critical success factor in the F&F industry. The scale and global reach of its operations as well as its extensive industrial know-how and strong customer insight make it a supplier of choice for many consumer goods, food & beverage companies. While F&F ingredients only account for a small portion of the latter's total production costs (typically 0.5-2.0% for flavours & consumer fragrances; 4-6% for fine fragrances), they are determining factors in consumers' choices and often drive customers' repurchase decisions.

Since its flotation in 2000, Givaudan has expanded its revenue base at a CAGR of 4.6% to reach CHF5.1 billion in 2017, through a mix of organic growth and acquisitions, which helped consolidate its industry leadership as well as expand its presence in new, higher growth areas such as active cosmetic and natural ingredients. Looking ahead, Givaudan should continue to benefit from the sound growth fundamentals enjoyed by the F&F industry amid favourable demographic and economic trends.

Givaudan's historical operating track-record reflects the resilience of its business model. In the period 2006-2017, its EBITDA margin averaged around 21%, while exhibiting limited volatility. The stability of its operating profitability and cash flow generation is underpinned by the strong bias of its customer base towards non-discretionary consumer goods, and the close and long-standing relationships it has established with many of its customers. While exposed to fluctuations in the price of raw materials, Givaudan has demonstrated the ability to protect its profit margins by passing on, albeit with a time lag, cost increases to customers.

Despite a relatively high dividend pay-out rate that was equivalent to around 77% of free operating cash flow after capex in 2015-2017, Givaudan generates a sizeable free cash flow after capex and dividends (FCF), averaging CHF160 million p.a. in the same period, and exhibits a robust financial profile. In the last three years, Moody's adjusted total debt to EBITDA averaged around 2.0x.

Financial leverage will increase significantly following the CHF1.7 billion acquisition of Naturex due to close in September 2018. We estimate that total debt to EBITDA will rise above 3x and retained cash flow (RCF) to net debt decline to around 15% in 2019, on a Moody's adjusted basis. However, the group's future operating profit and cash flow should benefit from incremental contributions from Naturex. In addition, the Givaudan Business Solutions (GBS) programme aimed at improving operational efficiency, should generate annual savings of CHF60 million by 2020.

While acquisitions are integral to Givaudan's strategy, we expect M&A activity to be limited in the near to medium term, and priority given to debt reduction. Despite the maintenance of a high dividend pay-out rate, we estimate that Givaudan will generate a cumulative FCF of around €400 million in 2019-2020. This should enable it to bring total debt/EBITDA below 3x and RCF to net debt into the high teens at year-end 2020, levels that we view as commensurate with a Baa1 rating considering Givaudan's strong business profile.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects our expectation that following the Naturex acquisition, Givaudan will initially use its FCF to reduce debt and bring its financial metrics in line with the Baa1 rating during the course of 2020, including total debt to EBITDA below 3x and RCF to net debt in the high teens (in percentage terms) as adjusted by Moody's.

WHAT COULD CHANGE THE RATING UP/DOWN

The Baa1 rating could however come under downward pressure, should weaker than expected operating results and/or the pursuit of debt funded acquisitions leave Givaudan with insufficient FCF to be applied towards debt reduction with the effect that Moody's adjusted total debt to EBITDA and RCF to net debt keep above 3x and in the low teens (in percentage terms) respectively.

While unlikely in the near term, some upward pressure on the rating may develop over time should Givaudan use its FCF generating capacity to achieve further permanent deleveraging, so that Moody's adjusted total debt to EBITDA and RCF to net debt sustainably trend towards 2x and above 25% respectively.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in Janurary 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Geneva, Switzerland, Givaudan SA is the global leader in the flavour and fragrance industry. In the year to June 2018, the group reported EBITDA of CHF1.1 billion on sales of CHF5.2 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Francois Lauras
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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