Dominion Bond Rating Service (DBRS) has revealed that the corporate debt rating of US-based HJ Heinz Co is assigned as A (low) with a Stable trend and the commercial paper rating of HJ Heinz of Canada, based on full guarantee of its US parent, is confirmed at R-1 (low) with stable trend.
These ratings, says DBRS, reflect the five factors. Firstly, the financial profile should improve as Heinz has committed to reduce its debt by US$750m in two years through better working capital management and substantial reduction in capital expenditure. In addition, acquisition and share repurchase activity will be suspended.
Secondly, historically, Heinz has delivered stable operating cash flows in excess of US$1bn. Although the cash flow declined in 2001, primarily due to depressed prices of tuna and de-stocking of pet food in the US and infant feeding in Europe, coverage and liquidity ratios remain satisfactory for the rating. Thirdly, Heinz holds a strong well-diversified portfolio of brand name products in six core categories, each contributing over US$1bn in sales. Around 70% of sales is derived from products holding #1 or # 2 market share position giving consistent results over time.
EBITDA margin has meanwhile been consistently above the 20% level, which is the higher end of its peers. Profitability should improve due to rationalization of SKUs and integration of new acquisitions. Lastly, increased focus (spending) on marketing core products should help to improve sales and growth rates in the market.
Despite these strengths, however, DBRS does confirm that various challenges do exist for Heinz. While the balance sheet is still considered reasonable, large working capital requirements (US$1.8bn), acquisitions (US$1.9bn), high dividend payments (55-60% payout), and share repurchases (US$646m) have significantly raised debt levels since the beginning of fiscal 2000, weakening the financial profile of Heinz.
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By GlobalDataDespite US$910m of divestiture proceeds, Heinz required an additional debt funding of US$2.6bn (including US$325m cumulative preferred) raising net debt to capital to a high 80%.
Heinz is facing declining sales of US foodservice mostly due to economic slowdown, while pet food and infant feeding categories suffer due to retail de-stocking. EBITDA declined by 10% to US$956m in Q2 2002. Although most of the costs on restructuring have been incurred, savings are expected to be less than forecast, which could hurt future operating performance.
Heinz operates in mature markets and categories, which necessitates costly new product launches, advertising and acquisitions in order to grow. Growing negotiating power of consolidating retailers is pressurizing margins. Additionally, retailers are allocating more shelf space to their own private label products thereby reducing shelf space for branded products.
