Corporates...Sep 24, 2019 · (EURm) Dec 2017 Dec 2018 Dec 2019F Dec 2020F Dec 2021F ... EBITDA margin and the risk that, following a rise in 2019, leverage may fail to return to

Corporates

Food, Beverage & Tobacco / Netherlands

Royal FrieslandCampina NV

24 September 2019 1


Rating Type Rating Outlook Last Rating Action

Long-Term IDR BBB+ Negative Affirmed 17 September 2019

Short-Term IDR F2 Affirmed 17 September 2019

Click here for full list of ratings

Financial Summary

(EURm) Dec 2017 Dec 2018 Dec 2019F Dec 2020F Dec 2021F

Revenue 12,110 11,553 11,309 11,391 11,597

Operating EBITDA 930 754 852 893 928

Operating EBITDA Margin (%) 7.7 6.5 7.5 7.8 8.0

Free Cash Flow Margin (%) -2.1 0.3 -0.5 0.2 -0.4

FFO Adjusted Net Leverage (x) 2.6 2.9 2.6 2.4 2.5

Source: Fitch Ratings, Fitch Solutions

The Negative Outlook reflects execution risks related to the restoration of Royal FrieslandCampina NV ’s (RFC)

EBITDA margin and the risk that, follow ing a rise in 2019, leverage may fail to return to levels compatible w ith the

‘BBB+’ rating over the next tw o years. The company’s performance remains challenged by high competition in key

markets, supply chain issues and volatile milk prices. Fitch Ratings believes RFC has yet to demonstrate its ability to

fully address these issues.

RFC’s ratings are underpinned by its large scale in the global dairy market and balanced geographic footprint across

developed and emerging markets. The ratings also take into account our expectation that the company ’s

performance payments w ill be more aligned w ith accrued amounts over 2019-2022 and that management w ill

maintain a conservative f inancial policy, w ithout material M&A transactions until there is a sustained improvement in

profit and cash f low generation. Together w ith moderate capex, this supports our expectation of positive to only mildly

negative free cash f low (FCF) over the medium term.

Key Rating Drivers

EBITDA Recovery Is Taking Time: RFC reported an improvement in EBITDA in 1H19 after it fell in 2017 and 2018.

Nevertheless, w e are cautious in our assumptions of profit grow th over the next three years as w e believe that a

steady recovery depends on several factors outside of RFC’s control. The success of turnaround measures taken is

yet to be proven. We have therefore projected an EBITDA recovery that w ill take more time than w e previously

expected and believe that the EBITDA margin is likely to stay below our negative rating sensitivity of 9% (2018: 6.5%)

over the next three years. This is reflected in the Negative Outlook.

Milk Price Volatility Is Still Challenging: Profit grow th in 1H19 w as achieved primarily due to favourable product

mix changes in basic dairy products (cheese, butter and milk pow der) and the better alignment of the price of raw

milk w ith selling prices. How ever, the volatility of milk prices and of its fat and protein components is likely to continue

challenging the company ’s performance as RFC is still facing problems passing on milk protein price increases to

retailers for its value-added and basic dairy products. The company has taken measures to reduce margin volatility

and dependence on raw milk prices. A record of more sustained improvement in the profitability of the basic products

division w ould demonstrate the effectiveness of these actions.

Tough Competition in China: RFC’s performance remains challenged by tough competition in China, a strategically

important market that represents 7% of the company’s revenue, but w hich accounted for a substantial part of EBITDA

in 2018, based on our estimates, due to sales of high-value-added infant nutrition. We believe that there are

execution risks in RFC’s turnaround strategy as the Chinese infant nutrition market has become more complex due to

falling birth rates, tightening regulation and increased competition from international and local producers. RFC’s sales

in China have also been recently under pressure from the shortage of lactoferrin.

https://www.fitchratings.com/gws/en/esp/issr/93685290

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24 September 2019 2

Fitch believes that innovation and premiumisation of product portfolios, development of new sales channels and

w idening of distribution to low er tier cities are key to protecting and grow ing RFC’s share in China’s infant nutrition

market.

Tight Rating Headroom: RFC’s funds from operations (FFO) adjusted net leverage peaked at 2.9x in 2018, a level

not compatible w ith the company’s ‘BBB+’ rating. How ever the group has deleveraged in 2019 and w e expect this to

continue. Yet w e expect rating headroom to stay tight over the medium term, w ith FFO-adjusted net leverage

remaining at or close to our negative rating sensitivity of 2.5x . Consequently, a low er-than-expected recovery in

operating profit, coupled w ith higher performance premium payments could lead to a dow ngrade.

Lower Performance Payments Assumed: A reduction in the member take-out of cash performance premium,

w hich Fitch treats as a dividend, is important for RFC’s deleveraging in 2019. The performance premium is linked to

the company’s performance and represents a small part of the milk price that RFC pays to farmers. How ever,

performance premium take-outs may deviate f rom accrued amounts as farmers tend to accumulate the RFC premium

ow ed to them by the company and to w ithdraw it w hen they need cash resources. For instance, in 2018 RFC

declared a performance premium of EUR48 million but paid farmers a materially higher amount. In our forecasts w e

assume that further payments to farmers w ill be more aligned w ith the accrued expense.

Conservative Financial Policy Assumed: The rating incorporates our expectation that RFC w ill maintain a

conservative f inancial policy in terms of cash performance payments to members, capex and M&A. We expect RFC

to continue to adhere to its historically conservative capital structure, although its internal leverage target allow s the

company to incur more debt.

Global Dairy Producer: RFC’s rating is supported by its position as the w orld’s sixth-largest dairy producer, w ith

w ell-know n brands in the Netherlands and various developing markets. RFC benefits from a w ide range of dairy -

based products from commoditised cheese and butter to high-value-added specialised nutrition, including infant

formula. RFC also enjoys geographic diversif ication and footprint across emerging markets and especially Asia,

w here long-term grow th fundamentals are strong. We view this as credit positive, even though the profits upstreamed

from these countries can be volatile.

Cooperative Set-up Neutral to Ratings: Fitch assesses RFC’s ow nership by a cooperative as neutral for the

ratings. We recognise the benefits of a reliable and stable supply of high-quality raw materials from cooperative

members but this is balanced by RFC’s obligation to collect and purchase all the milk produced by member farmers.

Milk supplies in excess of production capacity may lead to an inability to fully process milk into value-added products.

RFC has been able to keep the balance betw een its capacity and supplies from member farmers.

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24 September 2019 3

Rating Derivation Relative to Peers

Rating Deriv ation v s. Peers

Peer Comparison The dairy market is inherently volatile as raw milk prices and selling prices for dairy products are largely outside producers' control. Market volatility leads to instability in dairy companies’ profits and working capital. RFC’s high share of value-added products in its sales helps the company to achieve

greater control over sell ing prices and stronger profit margins than industry peers but does not fully isolate the company from high sector risks. Fitch therefore expects RFC to adhere to a more conservative capital structure than similarly rated peers in the packaged food sector.

RFC is not fully comparable with other rated peers operating in the dairy market, such as Nestle SA (AA-/Negative), Fonterra Co-operative Group Limited (A/Negative) and Dairy Farmers of America, Inc. (DFA, BBB/Stable). Nestle ’s credit profile is characterised by lower volatility than RFC due to the company's substantially smaller exposure to commoditised products and we ll-diversified operations

across various packaged food categories and geographies. Furthermore, Nestle's rating reflects the group’s strong market position as the largest food company globally and high profit margins, supported by strong brands.

Similarly to RFC, Fonterra’s and DFA’s operations are also concentrated on dairy products produced under a cooperative set-up. The companies have similar business scales. However, Fonterra ’s and DFA’s ratings benefit from effective subordination of milk payments to the company's principal and interest obligations (and other costs), as specified in their by-laws. This allows them to operate under

higher leverage than RFC.

Parent/Subsidiary Linkage No parent/subsidiary linkage is applicable.

Country Ceiling No Country Ceiling constraint was in effect for these ratings.

Operating Environment No operating environment influence was in effect for these ratings.

Other Factors Not applicable.

Source: Fitch Ratings

Navigator Peer Comparison

IDR/Outlook

BBB+/Neg a n bbb+ n bbb+ n bbb n bbb- n bbb n b+ n a n bbb+ nAA-/Neg aa- n aa- n aa+ n a+ n aa n aa n a+ n aa- n a+ nA/Neg aa n a n bbb+ n bbb n a n a- n bbb- n a n a- nBBB+/Sta bbb+ n a n bbb+ n bbb n bbb n bbb+ n bbb- n a+ n bbb+ nBBB/Sta aa n a- n bb+ n bbb n bbb- n bbb- n bbb- n bbb n bbb nBBB/Neg aa n a- n a- n bbb n bbb n a- n a n bbb- n bbb+ n

Source: Fitch Ratings. Importance n Higher n Moderate n Low er


Nestle SA

Fonterra Co-operative Group Limited

WH Group Limited

Flow ers Foods, Inc.

General Mills, Inc.

Financial

Structure

Financial

Flexibility

Financial profileIssuer

Management

and Corporate

Governance

Operational

Scale

Growth

Potential Business Profile Diversification Profitability

Operating

Environment

Business profile

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24 September 2019 4

Rating Sensitivities

Developments that May, Individually or Collectively, Lead to Lead to Revision of the Outlook to Stable

– Organic sales grow th of value-added products and sustained improvement in EBITDA margin, confirming the

company’s ability to w ithstand competitive pressures and smooth profit volatility .

– Positive FCF margin.

– Visibility of FFO adjusted net leverage falling below 2.5x in 2020-2021 on a sustained basis.

Developments that May, Individually or Collectively, Lead to a Downgrade

– Evidence that the group’s earning profile is subject to increased volatility on a sustained basis .

– Inability to recover EBITDA margin to 9%.

– Negative FCF, in the low single-digits of sales, for more than tw o years, driven by w eak operating performance,

aggressive f inancial policies or w ithdraw als of performance premiums from member accounts (treated as

dividends) substantially exceeding accrued amounts.

– FFO-adjusted net leverage persistently above 2.5x.

Liquidity and Debt Structure

Adequate Liquidity: At end-2018, the company had more than EUR1.2 billion of available liquidity, of w hich EUR240

million related to Fitch-adjusted readily available cash and EUR980 million w as represented by the undraw n portion

under EUR1 billion credit facility maturing in 2023. Liquidity is considered suff icient to cover short-term debt of

EUR616 million.

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24 September 2019 5

Liquidity and Debt Maturity Scenario with No Refinancing

Av ailable Liquidity (EURm) 2019F 2020F

Beginning Cash Balance 240 -400

Rating Case FCF after Acquisitions and Divestitures -24 17

Total Av ailable Liquidity (A) 216 -383

Liquidity Uses

Debt Maturities -616 -152

Total Liquidity Uses (B) -616 -152

Liquidity Calculation

Ending Cash Balance (A+B) -400 -536

Revolver Availability 980 980

Ending Liquidity 580 444

Liquidity Score 1.9 3.9

Source: Fitch Ratings, Fitch Solutions, RFC

Scheduled Debt Maturities Original

Statement Date 31 December 2018

2018 616

2019 152

2020 83

2021 160

2022 640

Thereafter 0

Total 1,651

Source: Fitch Ratings, Fitch Solutions, RFC

ESG Considerations

Unless otherw ise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. ESG issues are

credit neutral or have only a minimal credit impact on the entity, either due to their nature or to the w ay in w hich they

are being managed by the entity.

RFC has an ESG Relevance Score of ‘4’ for Customer Welfare as safety of the company ’s products helps it to

differentiate itself from competitors in certain markets. This has a positive impact on the credit profile, and is relevant

to the rating in conjunction w ith other factors.

For more information on our ESG Relevance Scores, visit w w w .fitchratings.com/esg.

http://www.fitchratings.com/esg

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24 September 2019 6

Key Assumptions

Fitch’s Key Assumptions within Our Rating Case for the Issuer Include:

– Revenue grow th in low single-digit from 2020, supported by grow th in sales of value-added products;

– Gradual improvement in EBITDA margin tow ards 8.5% in 2022;

– Stable profit distribution policy (55% added to equity, 10% distributed to farmers shareholders as f ixed-member

bonds and 35% distributed as performance premium – accounted as dividends by Fitch) w ith total member take-

out of cash performance premium of around EUR500 million over 2019-2022;

– Capex at about 4.5% of revenue;

– Disposal of non-core assets for about EUR150 million over 2019-2020 (Fitch’s assumption); and

– M&A spending not exceeding EUR300 million in total over 2020-2021.

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24 September 2019 7

Financial Data

Historical Forecast

(EURm) Dec 2016 Dec 2017 Dec 2018 Dec 2019F Dec 2020F Dec 2021F

Summary Income Statement

Gross Revenue 11,001 12,110 11,553 11,309 11,391 11,597

Revenue Growth (%) -1.9 10.1 -4.6 -2.0 1.0 2.0

Operating EBITDA (Before Income from Associates) 1,209 930 754 852 893 928

Operating EBITDA Margin (%) 11.0 7.7 6.5 7.5 7.8 8.0

Operating EBITDAR 1,273 996 814 912 953 988

Operating EBITDAR Margin (%) 11.6 8.2 7.1 8.1 8.4 8.5

Operating EBIT 902 562 392 490 529 559

Operating EBIT Margin (%) 8.2 4.6 3.4 4.3 4.6 4.8

Gross Interest Expense -39 -45 -34 -43 -38 -37

Pretax Income (Including Associate Income/Loss) 542 407 357 374 395 410

Summary Balance Sheet

Readily Available Cash and Equivalents 321 194 240 200 164 190

Total Debt with Equity Credit 1,585 1,635 1,651 1,635 1,583 1,749

Total Adjusted Debt with Equity Credit 2,097 2,163 2,131 2,115 2,063 2,229

Net Debt 1,264 1,441 1,411 1,435 1,418 1,560

Summary Cash Flow Statement

Operating EBITDA 1,209 930 754 852 893 928

Cash Interest Paid -40 -49 -40 -43 -38 -37

Cash Tax -140 -162 -120 -129 -136 -141

Dividends Received Less Dividends Paid to Minorities

(Inflow/(Out)flow)

-57 -81 -40 -45 -45 -45

Other Items Before FFO -25 16 7 -42 -42 -42

Funds Flow from Operations 921 621 523 603 642 673

FFO Margin (%) 8.4 5.1 4.5 5.3 5.6 5.8

Change in Working Capital 31 -158 131 -68 -9 -22

Cash Flow from Operations (Fitch Defined) 952 463 654 535 633 650

Total Non-Operating/Non-Recurring Cash Flow 0 0 0

Capital Expenditure -567 -530 -485

Capital Intensity (Capex/Revenue) (%) 5.2 4.4 4.2

Common Dividends -215 -185 -140

Free Cash Flow 170 -252 29

Net Acquisitions and Divestitures -367 89 -24

Other Investing and Financing Cash Flow Items 26 -41 18 0 0 0

Net Debt Proceeds -193 43 8 -16 -53 167

Net Equity Proceeds 0 0 0 0 0 0

Total Change in Cash -364 -161 31 -40 -35 25

Calculations for Forecast Publication

Capex, Dividends, Acquisitions and Other Items Before FCF -1,149 -626 -649 -560 -616 -791

Free Cash Flow After Acquisitions and Divestitures -197 -163 5 -24 17 -141

Free Cash Flow Margin (After Net Acquisitions) (%) -1.8 -1.4 0.0 -0.2 0.2 -1.2

Cov erage Ratios

FFO Interest Coverage (x) 11.9 7.6 6.9 7.6 8.4 8.9

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24 September 2019 8

FFO Fixed Charge Coverage (x) 7.2 4.8 4.5 5.0 5.4 5.6

Operating EBITDAR/Interest Paid + Rents (x) 11.7 8.0 7.7 8.4 9.3 9.7

Operating EBITDA/Interest Paid (x) 28.8 17.3 17.9 18.9 22.2 23.9

Lev erage Ratios

Total Adjusted Debt/Operating EBITDAR (x) 1.7 2.4 2.8 2.4 2.3 2.4

Total Adjusted Net Debt/Operating EBITDAR (x) 1.5 2.2 2.4 2.2 2.1 2.2

Total Debt with Equity Credit/Operating EBITDA (x) 1.4 1.9 2.3 2.0 1.9 2.0

FFO Adjusted Leverage (x) 2.0 2.8 3.2 2.9 2.7 2.8

FFO Adjusted Net Leverage (x) 1.7 2.6 2.9 2.6 2.4 2.5


How to Interpret the Forecast Presented

The forecast presented is based on Fitch Ratings’ internally produced, conservative rating case forecast. It does not represent the forecast of the rated issuer. The forecast set out above is only one component used by Fitch Ratings to assign a rating or determine a rating outlook, and the information in the forecast

reflects material but not exhaustive elements of Fitch Ratings’ rating assumptions for the issuer’s financial performance. As such, it cannot be used to establish a rating, and it should not be relied on for that purpose. Fitch Ratings’ forecasts are constructed using a proprietary inter nal forecasting tool, which employs Fitch Ratings’ own assumptions on operating and financial performance that may not reflect the assumptions that you would make. Fitch Ratings’ own

definitions of financial terms such as EBITDA, debt or free cash flow may differ from your own such definitions. Fitch Ratings may be granted access, from time to time, to confidential information on certain elements of the issuer’s forward planning. Certain elements of such informati on may be omitted from this forecast,

even where they are included in Fitch Ratings’ own internal deliberations, where Fitch Ratings, at its sole discretion, considers the data may be potentia lly sensitive in a commercial, legal or regulatory context. The forecast (as with the entirety of this report) is produced strict ly subject to the disclaimers set out at the end of this report. Fitch Ratings may update the forecast in future reports but assumes no responsibility to do so. Origi nal financial statement data for

historical periods is processed by Fitch Solutions on behalf of Fitch Ratings. Key financial adjustments and all financial forecasts credited to Fitch Ratings are generated by rating agency staff.

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24 September 2019 9

Ratings Navigator

Corporates Ratings NavigatorPackaged Food

aaa AAA Negative

aa+ AA+ Negative

aa AA Negative

aa- AA- Negative

a+ A+ Negative

a A Negative

a- A- Negative

bbb+ BBB+ Negative

bbb BBB Negative

bbb- BBB- Negative

bb+ BB+ Negative

bb BB Negative

bb- BB- Negative

b+ B+ Negative

b B Negative

b- B- Negative

ccc+ CCC+ Negative

ccc CCC Negative

ccc- CCC- Negative

cc CC Negative

c C Negative

d or rd D or RD Negative

ESG Relevance:Royal FrieslandCampina NV

Factor

LevelsSector Risk Profile Operating Environment

Financial FlexibilityFinancial StructureProfitabilityDiversificationBusiness ProfileGrowth PotentialOperational Scale

Business Profile Financial Profile

Issuer Default RatingManagement and

Corporate Governance

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24 September 2019 10


Operating Environment Management and Corporate Governance

a+ bbb a bbb

a aa a- a

aa bbb+ a

b- bbb bbb

ccc+ bbb-

Operational Scale Growth Potential

a bbb a- bbb

a- a bbb+ bbb

bbb+ bbb bbb

bbb bbb-

bbb- bb+

Business Profile Diversification

bbb+ bbb a- bbb

bbb bbb bbb+ bbb

bbb- bbb bbb

bb+ bbb-

bb bb+

Profitability Financial Structure

bb b aa- a

bb- b a+ a

b+ b a a

b bb a- a

b- bbb+

Financial Flexibility Credit-Relevant ESG Derivation

For further details on Credit-Relevant ESG scoring, see page 3.

3.0x

2.5x

2.5x

2.0x

Moderate geographical diversification.

Good breadth of price points providing sufficient flexibility to manage portfolio favorably through

different points in the economic cycle.

1Showing top 6 issues

How to Read This Page: The left column shows the three-notch band assessment for the overall Factor, illustrated by a bar. The right

column breaks down the Factor into Sub-Factors, with a description appropriate for each Sub-Factor and its corresponding category.

Safe, healthy and nutritious products; product labeling and marketing

Emissions from operations and distribution

Water used in manufacturing process

Impact of product waste and packaging; supply chain management - agricultural materials

Effect of climate change and extreme weather on crop availability and pricing

Impact of labor negotiations and employee (dis)satisfaction

8.0x

Volatility of profit higher than industry average.

EBITDAR >$1.5 billion

Market leader in many categories, with proven ability to maintain or grow share.

Group Structure

Financial Transparency

Innovation

Organic growth tends to be average.

Innovation pipeline of new products allows stable market share and offsets declines in other parts of

the porfolio.

Strategy may include opportunistic elements but soundly implemented.

Experienced board exercising effective check and balances. Ownership can be concentrated among

several shareholders.

Group structure shows some complexity but mitigated by transparent reporting.

Good quality reporting without significant failing. Consistent with the average of listed companies in

major exchanges.

Organic Growth

key

driver

Price Points

issues

issues

4

3

not a

rating

driver

5

2issues

issues

0

1

10

1

2

potential

driver

Lease Adjusted FFO Net Leverage

Lease Adjusted Net Debt/EBITDAR

Royal FrieslandCampina NV has 1 ESG rating driver and 10 ESG potential rating driversFinancial Discipline

bbb-

issues

driverbbb+

bbb

a

Systemic governance (eg rule of law, corruption; government effectiveness) of the issuer’s

country of incorporation consistent with 'aa'.

Volatility of Profitability

Strong brand portfolio with good awareness.

Lead pricing in a few categories, follow pricing actions in others.

0.01

8%

5%

FCF Margin

EBITDA Margin

Distribution ChannelGood presence and positioning across relevant distribution channels, including physical

retail and online formats

Overall ESG

Size

Market Share

Price Leadership


Average combination of countries where economic value is created and where assets are

located.

Very strong combination of issuer specific funding characteristics and of the strength of the

relevant local financial market.Governance Structure

Management Strategy

Systemic Governance

Geographic

Moderate portfolio diversity.Products

Liquidity bbb

a Clear commitment to maintain a conservative policy with only modest deviations allowed.

FX Exposure bb

One year liquidity ratio above 1.25x. Well-spread maturity schedule of debt but funding may

be less diversified.

FX exposure on profitability and/or debt/cash flow match. Some hedging in place but only

partly effective.

a-

FFO Fixed Charge Cover bbb 5x

EBITDAR/(Gross Interest Expense +

Rent)a

Lease Adjusted FFO Gross Leverage

Lease Adjusted Gross Debt/EBITDAR

FFO Margin

Brand Strength

Financial Access

Economic Environment

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Credit-Relevant ESG Derivation

Environmental (E)

E Score

Social (S)

S Score

Governance (G)

G Score

1


3

2

Royal FrieslandCampina NV has exposure to waste & impact management risk and supply chain management risk but this has very low impact on the rating.

Royal FrieslandCampina NV has exposure to extreme weather events but this has very low impact on the rating.

Royal FrieslandCampina NV has exposure to customer accountability risk which, in combination with other factors, impacts the rating.

Royal FrieslandCampina NV has 1 ESG rating driver and 10 ESG potential rating drivers

Royal FrieslandCampina NV has exposure to labor relations & practices risk but this has very low impact on the rating.

3

3

3

E ScaleReferenceSector-Specific Issues

Profitability; Financial Structure; Financial Flexibility 4

3

5

2

Royal FrieslandCampina NV has exposure to water management risk but this has very low impact on the rating.

Overall ESG Scale

4

Labor Relations & Practices 3

Energy Management

Business Profile; Growth Potential; Operational Scale

Diversification; Business Profile; Profitability; Financial

Structure; Financial Flexibility

General Issues

Waste & Hazardous Materials Management;

Ecological Impacts

Exposure to Environmental Impacts

Customer Welfare - Fair Messaging, Privacy &

Data Security4

GHG Emissions & Air Quality

Water & Wastewater Management

Royal FrieslandCampina NV has exposure to emissions regulatory risk but this has very low impact on the rating.

S Scale

General Issues

Emissions from operations and distribution

Energy and fuel use in manufacturing and distribution

Showing top 6 issues

Profitability

Diversification; Profitability; Financial Structure;

Financial Flexibility

2

3

1

5

4

n.a.

Financial Transparency 3 2 Irrelevant to the entity rating but relevant to the sector.

4

n.a.

Operational Scale; Business Profile; Profitability;

Financial Structure; Financial Flexibility

Human Rights, Community Relations, Access

& Affordability1

Employee Wellbeing 1

Exposure to Social Impacts

Group Structure 3 3

Management and Corporate Governance


Board independence and effectiveness; ownership concentration

Complexity, transparency and related-party transactions

3

CREDIT-RELEVANT ESG SCALE

How to Read This Page

ESG scores range from 1 to 5 based on a 15-level color gradation. Red (5) is most

relevant and green (1) is least relevant.

The Environmental (E), Social (S) and Governance (G) tables break out the

individual components of the scale. The left-hand box shows the aggregate E, S, or

G score. General Issues are relevant across all markets with Sector-Specific

Issues unique to a particular industry group. Scores are assigned to each sector-

specific issue. These scores signify the credit-relevance of the sector-specific

issues to the issuing entity's overall credit rating. The Reference box highlights the

factor(s) within which the corresponding ESG issues are captured in Fitch's credit

analysis.

The Credit-Relevant ESG Derivation table shows the overall ESG score. This

score signifies the credit relevance of combined E, S and G issues to the entity's

credit rating. The three columns to the left of the overall ESG score summarize the

issuing entity's sub-component ESG scores. The box on the far left identifies the

[number of] general ESG issues that are drivers or potential drivers of the issuing

entity's credit rating (corresponding with scores of 3, 4 or 5) and provides a brief

explanation for the score.

Classification of ESG issues has been developed from Fitch's sector and sub-

sector ratings criteria and the General Issues and the Sector-Specific Issues have

been informed with SASB's Materiality Map.

2

1

General Issues G Scale

Management Strategy 3 5Strategy development and implementation

ReferenceSector-Specific Issues

1

Governance Structure 3 4

3

2

How relevant are E, S and G issues to the overall credit rating?

5



3

1

issues

issues

issues

issues

issues

key driver

driver

potential driver

not a rating driver

0

1

10

1

2

Highly relevant, a key rating driver that has a significant impact on the rating on an

individual basis. Equivalent to "higher" relative importance within Navigator.

Relevant to rating, not a key rating driver but has an impact on the rating in

combination with other factors. Equivalent to "moderate" relative importance within

Navigator.

Minimally relevant to rating, either very low impact or actively managed in a way

that results in no impact on the entity rating. Equivalent to "lower" relative

importance within Navigator.

Irrelevant to the entity rating and irrelevant to the sector.

5

Safe, healthy and nutritious products; product labeling and marketing

Shift in consumer preferences

Sector-Specific Issues

Effect of climate change and extreme weather on crop availability and

pricing

Reference

Impact of labor negotiations and employee (dis)satisfaction

n.a.

Quality and timing of financial disclosure

n.a.

Diversification; Business Profile; Profitability; Financial

Structure; Financial Flexibility

Operational Scale; Business Profile; Profitability;

Financial Structure; Financial Flexibility

Water used in manufacturing process

Impact of product waste and packaging; supply chain management -

agricultural materials

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Simplified Group Structure Diagram

Source: Fitch Ratings, Fitch Solutions, RFC, As of 31 December 2018

Corporates




Peer Financial Summary

Company IDR

Financial Statement Date

Rev enue (EURm)

Operating EBITDAR

(EURm)

Operating EBITDAR

Margin (%)

Free Cash Flow Margin

(%)

FFO Adjusted Net Lev erage

(x)

Royal FrieslandCampina NV BBB+

2018 11,553 814 7.1 0.3 2.9

2017 12,110 996 8.2 -2.1 2.6

2016 11,001 1,273 11.6 1.6 1.7

Nestle SA AA-

2018 79,470 15,894 20.0 2.8 2.2

2017 80,790 15,899 19.7 1.5 1.6

2016 82,378 16,287 19.8 3.9 1.4

Fonterra Co-operative Group Limited

A

2018 12,130 889 7.3 -1.8 4.8

2017 12,560 1,102 8.8 -1.5 4.2

2016 10,409 1,231 11.8 7.0 4.3

WH Group Limited BBB+

2018 19,158 1,937 10.1 -1.5 1.9

2017 19,799 2,186 11.0 1.5 1.5

2016 19,471 2,142 11.0 3.3 1.3

Ingredion Incorporated BBB

2018 4,950 920 18.6 2.9 2.4

2017 5,160 1,016 19.7 5.0 2.0

2016 5,158 995 19.3 6.1 2.5

Flowers Foods, Inc. BBB

2018 3,348 430 12.8 1.2 4.1

2017 3,470 496 14.3 2.1 4.3

2016 3,551 509 14.3 2.9 3.9

General Mills, Inc. BBB

2019 14,733 3,294 22.4 6.2 4.8

2018 13,234 3,013 22.8 6.5 6.2

2017 14,339 3,405 23.7 2.8 4.1


Corporates




Reconciliation of Key Financial Metrics

(EUR Millions, As reported) 31 Dec 2018

Income Statement Summary

Operating EBITDA 754

+ Recurring Dividends Paid to Non-controlling Interest (63)

+ Recurring Dividends Received from Associates 23

+ Additional Analyst Adjustment for Recurring I/S Minorities and Associates 0

= Operating EBITDA After Associates and Minorities (k) 714

+ Operating Lease Expense Treated as Capitalised (h) 60

= Operating EBITDAR after Associates and Minorities (j ) 774

Debt & Cash Summary

Total Debt with Equity Credit (l) 1,651

+ Lease-Equivalent Debt 480

+ Other Off-Balance-Sheet Debt 0

= Total Adjusted Debt with Equity Credit (a) 2,131

Readily Available Cash [Fitch-Defined] 240

+ Readily Available Marketable Securities [Fitch-Defined] 0

= Readily Av ailable Cash & Equiv alents (o) 240

Total Adjusted Net Debt (b) 1,891

Cash-Flow Summary

Preferred Div idends (Paid) (f) (47)

Interest Received 9

+ Interest (Paid) (d) (40)

= Net Finance Charge (e) (31)

Funds From Operations [FFO] ( c) 523

+ Change in Working Capital [Fitch-Defined] 131

= Cash Flow from Operations [CFO] (n) 654

Capital Expenditures (m) (485)

Multiple applied to Capitalised Leases 8.0

Gross Lev erage Total Adjusted Debt / Op. EBITDAR* [x] (a/j ) 2.8

FFO Adjusted Gross Lev erage [x] (a/(c-e+h-f)) 3.2

Total Adjusted Debt/(FFO - Net Finance Charge + Capitalised Leases - Pref. Div. Paid) Total Debt With Equity Credit / Op. EBITDA* [x] (l/k) 2.3

Net Lev erage Total Adjusted Net Debt / Op. EBITDAR* [x] (b/j ) 2.4

FFO Adjusted Net Lev erage [x] (b/(c-e+h-f)) 2.9

Total Adjusted Net Debt/(FFO - Net Finance Charge + Capitalised Leases - Pref. Div. Paid) Total Net Debt / (CFO - Capex) [x] ((l-o)/(n+m)) 8.3

Cov erage Op. EBITDAR / (Interest Paid + Lease Expense)* [x] (j /-d+h) 7.7

Op. EBITDA / Interest Paid* [x] (k/(-d)) 17.9

FFO Fixed Charge Cov er [x] ((c+e+h-f)/(-d+h-f)) 4.5

(FFO + Net Finance Charge + Capit. Leases - Pref. Div Paid) / (Gross Int. Paid + Capit. Leases - Pref. Div. Paid)

FFO Gross Interest Cov erage [x] ((c+e-f)/(-d-f)) 6.9

(FFO + Net Finance Charge - Pref. Div Paid) / (Gross Int. Paid - Pref. Div. Paid) * EBITDA/R after Dividends to Associates and Minorities Source: Fitch Ratings, Fitch Solutions, RFC

Corporates




Fitch Adjustment Reconciliation

(EUR Millions, As reported)

Reported Values

31 Dec 18

Sum of Fitch

Adjustments

Cash Adjus

tment

Preferred

Div idend, Associates

and Minorities Cash

Adjustments

Lease Adjust

ment

Other Adjust

ment

Adjusted

Value Income Statement Summary

Revenue 11,553 0 11,553 Operating EBITDAR 693 121

60 61 814

Operating EBITDAR after Associates and Minorities 693 81 (40) 60 61 774

Operating Lease Expense 0 60

60

60 Operating EBITDA 693 61 61 754

Operating EBITDA after Associates and Minorities 693 21

(40)

61 714

Operating EBIT 331 61 61 392

Debt & Cash Summary

Total Debt With Equity Credit 1,651 0 1,651 Total Adjusted Debt With Equity

Credit 1,651 480

480

2,131 Lease-Equivalent Debt 0 480 480 480

Other Off-Balance Sheet Debt 0 0

0 Readily Available Cash &

Equivalents 353 (113) (113) 240 Not Readily Available Cash &

Equivalents 3 113 113

116

Cash-Flow Summary

Preferred Dividends (Paid) 0 (47)

(47)

(47) Interest Received 9 0 9

Interest (Paid) (40) 0

(40) Funds From Operations [FFO] 562 (39) (87) 48 523

Change in Working Capital [Fitch-Defined] 34 97

97 131

Cash Flow from Operations [CFO] 596 58 (87) 145 654

Non-Operating/Non-Recurring Cash Flow 0 0

0

Capital (Expenditures) (485) 0 (485) Common Dividends (Paid) 0 (140)

(140) (140)

Free Cash Flow [FCF] 111 (82) (87) 5 29

Gross Lev erage

Total Adjusted Debt / Op. EBITDAR* [x] 2.4 2.8

FFO Adjusted Leverage [x] 2.8

3.2 Total Debt With Equity Credit /

Op. EBITDA* [x] 2.4 2.3

Net Lev erage

Total Adjusted Net Debt / Op. EBITDAR* [x] 1.9 2.4

FFO Adjusted Net Leverage [x] 2.2

2.9 Total Net Debt / (CFO - Capex)

[x] 11.7 8.3

Cov erage

Op. EBITDAR / (Interest Paid + Lease Expense)* [x] 17.3 7.7

Op. EBITDA / Interest Paid* [x] 17.3

17.9 FFO Fixed Charge Coverage [x] 14.8 4.5

FFO Interest Coverage [x] 14.8

6.9 *EBITDA/R after Dividends to Associates and Minorities Source: Fitch Ratings, Fitch Solutions, RFC

Corporates




Related Research & Criteria

Short-Term Ratings Criteria (May 2019)

Corporate Rating Criteria (February 2019)

Fitch Ratings 2019 Outlook: U.S. and EMEA Consumer, Food, Beverage & Tobacco (Mild Erosion Expected for Global Consumer

Spending) (November 2018)

Packaged Food: Ratings Navigator Companion (May 2018)

Sector Navigators (March 2018)

Corporates Notching and Recovery Ratings Criteria (March 2018)

Analysts

Giulio Lombardi

+39 02 879087 214

[email protected]

Anna Zhdanov a, CFA

+7 495 956 2403

[email protected]

https://app.fitchconnect.com/search/research/article/RPT_10073011







mailto:%[email protected]

mailto:[email protected]

Corporates




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Documents

Corporates...Sep 24, 2019 · (EURm) Dec 2017 Dec 2018 Dec 2019F Dec 2020F Dec 2021F ... EBITDA margin and the risk that, following a rise in 2019, leverage may fail to return to