CRIF Ratings upgrades Campari’s unsolicited long term issuer rating to “BBB”. Outlook is “Stable”

CRIF Ratings (or ‘Agency’) has upgraded Davide Campari-Milano S.p.A.’s long term issuer rating to “BBB” from “BBB-”; the outlook is “Stable”. The rating is assigned by CRIF Ratings on an unsolicited basis, without the participation of the rated entity and relying only on publicly available information. Davide Campari-Milano S.p.A. (‘Campari’ or ‘Group’) is the sixth global spirits producer with a turnover of EUR 1.7bn in FY18 (unaudited preliminary results).

The upgrade of the rating mainly reflects the sustained improvement of the Group’s credit metrics in FY18, in line with CRIF Ratings’ previous expectations. Furthermore, the rating reflects the Group’s healthy operating performance and solid business profile, both underpinned by strong geographical diversification and wide portfolio of well-known spirit brands.

The Stable outlook incorporates CRIF Ratings’ expectations of Campari’s ability to maintain the net leverage below 2x and 2.5x on EBITDA and FFO basis respectively over the next 24 months. The low leverage levels will be supported by continuous positive free cash flow generation and, to a lesser extent, by the potential proceeds from others disposals of non-core businesses. CRIF Ratings anticipates a low single-digit top line organic growth and a slight EBITDA margin improvement over the coming 12-24 months, reflecting the portfolio streamlining and its shifting towards premium brands. In its rating case, CRIF Ratings incorporates a moderate M&A activity consistent with the past. Any further material, debt funded acquisitions over the next few quarters could reduce the Group’s financial flexibility and put negative pressure on the rating.

In FY18, the Group maintained satisfactory profitability, with EBITDA margin edging up to 25.3% from 25.0% in the previous year, remaining above the average for the spirits industry but still below the global giants like Brown-Forman or Pernod Ricard. The result reflects the continuous support from highly profitable Global and Regional Priorities in core developed markets, the full-year consolidation of the Bull Dog brand and the accretive effect of non-core business disposals, in particular Lemonsoda. These compensated for the higher advertising and promotion (‘A&P’) expenses and for the adverse effect of an increase in agave and sugar prices. The Group reported a net profit of EUR 296m in FY18, down by 17% compared to the previous year. This is mainly attributable to higher total taxes, as the benefits from the U.S. tax reform and the 2015-2017 cumulative effect of “Patent box” tax relief in Italy faded.

Satisfactory profitability continued supporting the Group’s Free Cash Flow (FCF) generation that reached EUR 178m in FY18 (EUR 174m in FY17), net of EUR 58m of dividends paid (EUR 52m in FY17) and EUR 83m of CAPEX (EUR 86m in FY17). The positive FCF — in combination with proceeds from the disposal of non-core assets — prompted the consolidated net debt to decrease to c. EUR 0.85bn at YE18 from c. EUR 1bn at YE17. This improvement allowed Campari’s net leverage to decrease to 2.0x and 2.2x in FY18 on EBITDA and FFO basis respectively, from 2.3x and 2.5x in FY17. In addition, the decreasing in gross debt lowered the interest expenses, which had a positive effect on the FFO coverage ratio (27.8x in FY18 vs. 7.9x in FY17). Following such improvements, the Group’s credit metrics overall hit the positive triggers set by CRIF Ratings in the previous rating action. The Agency foresees these developments as sustainable, given the historically-significant FCF generation.

Seizing the favorable market conditions, Campari had carried out some liability management actions in FY17 aimed at reshaping its debt structure, reducing interest costs and lengthening debt maturities. This has relieved some pressure on the Group’s financial profile, which in previous years was constrained by M&A activity. At YE18, cash on balance totaled EUR 614m (up from EUR 515m at YE17), which is deemed sufficient to substantially cover debt repayments in the next 24 months. The next meaningful debt maturity is represented by the outstanding EUR 580.9m Eurobond issued in 2015 that has a bullet maturity on 30 September 2020.

For further information please refer to the Rating Update.

 

Rating Sensitivities

Positive Triggers – Future events that may, individually or collectively, positively affect Campari’s rating include the following:

  • EBITDA net leverage below 1x on a sustained basis;
  • FFO net leverage below 1.5x on a sustained basis;
  • EBITDA margin above 28% on a sustained basis.

 

Negative Triggers – Future events that may, individually or collectively, negatively affect the Group’s rating include the following:

  • Cash and available RCFs not sufficient to cover the financial debt maturities over the next 24 months;
  • EBITDA and FFO net leverage above 2x and 2.5x, respectively on a sustained basis;
  • FFO interest coverage below 8x on a sustained basis;
  • EBITDA margin below 25% on a sustained basis;
  • Aggressive external growth strategy through large debt-funded acquisitions.

Company Profile

Campari Group was founded in 1860 and is engaged in the beverages industry. The Group, headquartered in Sesto San Giovanni, Italy, is the sixth largest player in the global spirits industry and recorded a total turnover of EUR 1,712m in FY18 (FY17: EUR 1,753m). It employs approximately 4,000 employees and sells its products in more than 190 countries, with leading positions in Europe and the Americas. Campari has its own distribution network in 20 countries and 18 plants around the world.

The 51% of Campari S.p.A. is owned by the Garavoglia family (through the Luxembourg-based holding Lagfin S.C.A.), which also owns the 64.35% voting rights by virtue of the loyalty share program. The shares of the holding company, Davide Campari-Milano S.p.A., have been listed on the Milan Stock Exchange since 2001 and as of 19 March 2019, its market capitalization was EUR 9.8bn (+40% over the last twelve months). The company has steadily outperformed the FTSE MIB equity index since 2006.

Regulatory and legal disclosures

Information to be provided pursuant to Regulation (EC) No. 1060/2009 on Credit Rating Agencies and subsequent amendments

Credit Rating Type

The rating was not solicited by the Rated Entity or by a Related Third Party, and so CRIF Ratings did not receive any payment. The Rated Entity or Related Third Party did not participate in the rating process and CRIF Ratings did not have access to the internal documents of the Rated Entity or related Third Party.

Responsibility

CRIF Ratings S.r.l. with registered office at Via M. Fantin 1/3, 40131 Bologna (Italy)

 

Lead Rating Analyst: Christian De Rose, Associate.

Responsible for rating approval: Simone Mirani, Rating Committee Chairperson

 Rating history

Date of first issue 15/12/2015

Date of last update 21/03/2019

List of rating actions (https://www.crifratings.com/en/rating-list/davide-campari-spa)

Methodology, rating category and historic default rates

Methodological information used for the rating, including the meaning of the each rating category and default definition, is available in the Corporate Rating Methodology document updated on the 12 June 2018 (https://www.crifratings.com/en/methodology/). Information concerning historic default rates and their interpretation can be consulted on the CEREP website (https://cerep.esma.europa.eu/).

CRIF Ratings states that the outlook indicates the most probable direction of the rating over a time period of 12-24 months.

Disclosure of the rating to the Rated Entity prior to publication

Before publication, the Rated Entity was provided with the opportunity to examine the rating and rating drivers, including the main assumptions on which the rating and the outlook are based. The Rated Entity was given at least 24 hours – one full working day - to report any factual errors or appeal against the rating decision, providing additional new information in support of the assessment. Following the disclosure, the rating and the outlook were not amended.]

Conflicts of Interest

The rating action issued by CRIF Ratings was performed independently. On the basis of its procedures, CRIF Ratings has not identified any conflicts of interest. The analysts, members of the rating committee involved in the process, CRIF Ratings shareholders and those who are able to exercise a significant influence on the economic activities of the agency do not have any conflicts of interest in relation to the Entity Requester/ Related Third Party and/or Rated Entity. If in the future a potential conflict of interest is identified in relation to the persons reported above, CRIF Ratings will provide the appropriate information and if necessary will withdraw the rating.

Information sources used

Consolidated financial statements of the Rated Entity, unaudited preliminary consolidated results of the Rated Entity as of 31 December 2018, other public information available on the Rated Entity’s website, other public sources.

 

CRIF Ratings considers satisfactory the quality of the available information on the Rated Entity. However, CRIF Ratings is not responsible for the accuracy of this information and does not carry out any auditing activities on the information examined.

Other services provided by CRIF Ratings to the Rated Entity

The Rated Entity did not receive other services from CRIF Ratings.

Disclaimer

The rating is an independent opinion provided by CRIF Ratings S.r.l. (‘CRIF Ratings’) on the creditworthiness of the Rated Entity and does not necessarily predict future results. Rating reports, rating actions and other relevant information are provided on an ‘as is’ basis, without any guarantee of any type. CRIF Ratings adopts all necessary measures to issue ratings based on information that it considers to be complete and reliable. However, CRIF Ratings is not responsible for the accuracy of the information used to assign the rating or perform the rating actions, and does not carry out any auditing activities on this information. The rating actions are carried out on the basis of methodological guidelines defined by CRIF Ratings. CRIF Ratings reserves the right to update or withdraw the ratings at any time, in accordance with internal methodologies and processes. The rating does constitute a recommendation to buy, sell or keep securities or other financial instruments issued by the Rated Entity. The ratings issued by CRIF Ratings are not a substitute for exercising independent judgment and for the personal assessments that must be performed by any third party. Under no circumstances shall CRIF Ratings, its employees, officers, directors and persons involved in its rating activities be liable to any party for any direct or indirect, consequential or incidental damage and/or costs arising from or in connection with the use of ratings or credit opinions issued by CRIF Ratings.