Fitch Affirms Brown-Forman's IDRs at 'A+/F1'; Outlook Stable
CHICAGO -- July 31, 2014
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and the debt
ratings of Brown-Forman Corporation (Brown-Forman) as follows:
--Long-term Issuer Default rating (IDR) at 'A+';
--Senior Unsecured Notes at 'A+';
--Bank Credit facility at 'A+';
--Short-term IDR at 'F1';
--Commercial Paper at 'F1'.
The Rating Outlook is Stable.
Key Rating Drivers
Brown-Forman's ratings are supported by the sizeable operating earnings and
consistent cash flow generation that is derived from the strong and
competitive brand portfolio of one of the largest worldwide spirits companies.
These elements combined with relatively conservative financial strategies with
regard to acquisitions, leverage and share repurchases along with continued
investment in its existing brand portfolio that result in a solid credit
Major contributors to Brown-Forman's operating earnings are its Jack Daniel's
franchise, which is the fourth-largest premium spirits brand and the largest
selling American whiskey brand in the world including its highly successful
line extensions, Tennessee Honey, and ready-to-drink beverages. Brown-Forman's
other major brands are Finlandia Vodka, Southern Comfort Liqueur, Canadian
Mist and El Jimador Tequila.
Brown-Forman's spirits portfolio primarily competes in the super premium to
premium category and skews toward whiskeys, liqueurs and bourbons. Fitch views
this as a competitive strength, because the aging process and inventory
investments required are a barrier to entry providing an impediment
particularly for value competition. Brown spirits have taken share from beer
and clear spirits with the favorable demand trends driven by flavored and
higher-end whiskey and bourbon products. As such, Brown-Forman has experienced
strong category momentum for Jack Daniel's Tennessee Honey which grew
depletion volume 36% during fiscal 2014 to approximately 1 million cases.
Industry demand trends should remain strong for the foreseeable future that
when coupled with Brown-Forman's portfolio should allow the company to grow at
above average rates for the next several years.
Brown-Forman has good geographic diversification with net sales contribution
in fiscal 2014 of 41% from the United States (the world's most profitable
spirits market), 32% from Europe and 27% from the rest of the world. In
addition to the convenience factor, Brown-Forman's ready-to-drink and
ready-to-pour products effectively diversify its product mix. Brown-Forman has
also pursued opportunities to increase its company-owned distribution across
several of its international regions including France recently that will
benefit margins over the longer term.
Debt Structure and Liquidity
All of Brown-Forman's debt is senior and unsecured, and the company maintains
a very manageable maturity profile with approximately $250 million coming due
in 2016. The company has an undrawn $800 million five-year credit facility
that matures in November 2018, which can be expanded by $400 million. The
credit facility is primarily used to support the company's $1 billion
commercial paper program, in which there were no issuances at April 30, 2014.
The credit facility includes an interest coverage financial maintenance
covenant of 3.0x.
Brown-Forman has relatively good financial flexibility as a result of its cash
balances, stable free cash flow (FCF) generation and reduced leverage. As of
April 30, 2013, Brown-Forman had $437 million of cash, with $256 million being
held by foreign subsidiaries whose earnings Brown-Forman expects to reinvest
indefinitely outside the U.S. FCF for the past 12 months was $288 million.
Fitch expects FCF in fiscal 2015 to decline moderately due to higher levels of
capital spending, working capital and dividends. FCF should continue to
increase during the following years through organic growth and as capital
spending ramps down to maintenance levels of approximately $80 million by
In September 2013, Brown-Forman authorized a new stock repurchase program of
up to $250 million. As of April 30, 2014, Brown-Forman had repurchased shares
totaling $47 million. The annual dividend is approximately $260 million as
Brown-Forman increased the regular cash dividend by 14% per share in November
2013. Longer-term, Brown-Forman may consider share repurchase programs within
the context of current rating expectations in the absence of acquisition
opportunities that are attractive, affordable and available. Past
distributions and special dividends have been driven by asset sales or by
proposed changes in the tax code.
Industry Risk Factors
Industry risk factors and Brown-Forman's high concentration of earnings from
its Jack Daniel's franchise, which represents on an annual basis approximately
51% of the depletions of the company's major brands and plays the largest role
in limiting the company's ratings to the 'A' category, make an upgrade
unlikely. Industry risk factors include industry structure, competitive
environment, regulations related to alcohol sales, consumption patterns, and
Fitch believes Brown-Forman could participate in industry consolidation with
bolt-on acquisitions that are not expected to increase leverage materially in
the near term. The company's acquisition strategy is to acquire brands
opportunistically with growth potential and that complement its current
portfolio. Acquisitions that could complement the portfolio would include
Scotch, Irish whiskey, Vodka or a local brand.
Leverage (total debt to EBITDA), which increased to 1.5 times (x) following
the $850 million special dividend in December 2012, has declined to 0.99x as
of April 30, 2014 which is more in line with historical levels of less than
1.0x due to cash flow growth and debt reduction. FFO to interest coverage was
29x. Current ratings incorporate Fitch's expectation that total
debt-to-operating EBITDA will not exceed 1.5x (or 2.0x on a lease adjusted
basis) for an extended period of time. Leverage exceeding those amounts will
likely lead to a negative rating action. Merger and acquisition risk from an
unsolicited takeover is unlikely because the Brown family controls
approximately 67.3 % of voting shares.
Recent Operating and Financial Performance and Outlook
Sales, net of excise taxes, increased 5% to $3 billion for the 12 months ended
April 30, 2014. Sales growth on an underlying basis was 6%. Growth in the U.S.
and Europe, which represents 73% of net sales, was 4% and 11% respectively on
an underlying basis. The Jack Daniel's franchise experienced 6% net depletion
volume growth and was the primary contributor to overall sales growth, aided
by Finlandia at 3%, and the company's super and ultra-premium brands at 4%.
Woodford Reserve, a super premium bourbon brand grew volumes 24%.
Operating income, excluding other expenses-net, increased 7% to $969 million
and continued to benefit from volume gains, better pricing and mix.
Consequently, EBITDA margins increased by approximately 50 basis points to
Brown-Forman anticipates mid to high single-digit growth in sales in fiscal
2015 with select price increases, primarily international. Brown-Forman
expects depletion volumes to grow mid-single digits. Brown-Forman also expects
modest operating leverage through the SG&A line that should result in
underlying operating income growth of 9-11%, which Fitch believes is
Future developments that may, individually or collectively, lead to a positive
rating action include:
--An upgrade is unlikely given Brown-Forman's dependence on the Jack Daniel's
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Larger than expected debt-financed acquisitions that result in total
debt-to-operating EBITDA exceeding 1.5x or total adjusted debt-to-operating
EBITDAR exceeding 2.0x could lead to a ratings downgrade;
--A change in financial policy and/or implementation of a large special
--A significant and sustained loss of market share for the Jack Daniel's brand
could also contribute to negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Brian Bertsch, New York, +1-212-908-0549
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