The following is from Fitch Ratings on August 25:
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) for Ingredion Inc. (Ingredion) at 'BBB'.
The rating applies to approximately $2.2 billion in outstanding debt. In addition, Fitch has assigned a 'BBB' rating to Ingredion's 18-month unsecured term loan facility maturing in January 2017 established on July 10.
The Rating Outlook is Stable.
See a full list of ratings affirmed at the end of this release.
KEY RATING DRIVERS
Commodity Pricing Helping Earnings:
With expectation of stable to slightly increasing commodity pricing tied to abundant supplies of key raw materials, primarily corn, Fitch sees Ingredion improving operating income over the course of 2015 and 2016. In this pricing environment, margin should benefit as input prices remain at historically low levels. Currently, the USDA forecasts corn prices to remain under $4/bushel through the 2015/2016 crop year. In addition, Fitch sees Ingredion's long-term goal of expanding margins by 200 basis points as obtainable given the company's proven ability to effectively control costs, acquire higher-margin assets, and minimize operational challenges, particularly in South America.
South American Headwind Easing:
A long-term drag on profitability may be minimizing as Ingredion takes pricing and extracts cost in the South American region to offset volume declines from slowing demand and higher production costs tied to inflationary economies. Operating income from South America was down 3 percent to $45 million (8.8 percent operating margin) in the first half of 2015, with an expectation to be steady for the full year versus 2014. Contribution from the region presently represents around 12 percent of total operating income, significantly reduced from 25 percent of overall operating income in 2012. Fitch is more cautious of the improvement to the segment and forecasts some margin compression in 2015 with modest recovery more likely in 2016.
Specialty Offering Driving Volumes:
Volume increases experienced in the first two quarters of 2015 stems from Ingredion's specialty businesses coupled with underlying growth of the existing portfolio layered with incremental contribution from the Penford Corp. (Penford) acquisition that closed in March. The company is committed to expanding sales of the higher-margin specialty offering to $2 billion over the long term through a mixture of growth that may double that of the core portfolio along with business development activities. Fitch sees M&A as an important component to reach the specialty ingredients sales goal as well as the company's long-term margin expansion target.
Steady Leverage During M&A:
Ingredion's strategic blueprint includes business development to strengthen the ingredients portfolio with higher-value specialty products, with a preference for assets in the range of $300 million to $500 million. The recent acquisitions of Penford and Kerr Concentrates Inc. (Kerr) conform to the operating strategy with Ingredion gaining expertise in potato starch, non-starch texturizers and green solutions through the purchase of Penford, and bolstering the specialty products portfolio with natural fruit and vegetable concentrates, purees and essences from Kerr. Both assets address growing consumer preference for clean label ingredients. While leverage has increased to 2.6x for the LTM as of June 30, from 2.3x in 2014, Fitch sees further M&A at a measured pace such that leverage remains consistent with the current rating category.
Balanced Capital Deployment:
Ingredion has a long-term commitment to rewarding shareholders with an emphasis on maintaining the dividend, supplemented by opportunistic share repurchasing. The dividend payout has averaged 32 percent over the past two years, and Fitch expects the dividend payout to remain around that level through the intermediate term. Fitch expects shareholder-friendly actions to be balanced with growth investment in the context of maintaining an investment-grade credit profile.
Fitch's key assumptions within our rating case for Ingredion include:
--Consolidated revenue of $5.6 billion in 2015 due to flat- to slightly-negative revenue growth as a result of foreign exchange headwinds pressuring three of Ingredion's operating regions. Positive low-single-digit revenue growth is expected in 2016 and beyond.
Operating income margin around 12 percent in 2015 resulting from increased contribution from specialty ingredients bolstered by recent acquisitions. Fitch expects operating income around 12 percent in outer years on a consolidated basis. Segment-level operating margin expectations are as follows:
--North America margin around 12 percent as recent acquisitions support margins in the region;
--South America margins in the 8 percent-9 percent range as the region continues to remain pressured due to geopolitical concerns;
--Asia Pacific margin to remain constant at 13 percent as specialty ingredients continue to play an increasingly important role in the segment;
--EMEA will continue to deliver solid operating margins around 16 percent, as cost improvements and a strong specialty ingredients portfolio continue to drive strong margins.
--Consolidated EBITDA and EBITDA margin approximate $850 million and 15.2 percent, respectively, in 2015, up from the company's historical range of 12 percent-14 percent due to the recent acquisitions of Penford and Kerr, which increased the company's specialty ingredients business. EBITDA margin may remain in the mid- 15 percent range, with higher margin specialty ingredients bolstering the portfolio.
--Total debt-to-EBITDA of 2.4x in 2015, trending closer to 2.2x in 2016 and beyond as EBITDA grows and the company refinances existing maturities.
--Free cash flow (FCF) remains around $200 million annually over the forecast horizon including capital spending of $300 million annually, and a rising dividend. The forecast also assumes modest share repurchases to offset dilution over the forecast horizon, as well as small, bolt-on acquisitions.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Successful implementation of Ingredion's operating strategy such that consistently strong operating performance yields sustained EBITDA margins above 15 percent would be required for positive movement to the current rating. Solid operational results are likely to stem from continued earnings strength in North America, the company's largest region, and stabilization/improvement in the South America segment.
--In addition, a balanced approach to capital deployment between measured growth investments, internal and external, and shareholder- friendly actions so that Ingredion maintains gross leverage (total debt/EBITDA) of approximately 2x could result in a positive rating action. Stable annual FCF generation greater than $200 million would also support a positive rating action.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A large debt-financed acquisition, significant debt-financed share repurchases, or sustained weaker than anticipated operating performance, likely from unexpected softness in the North American segment, leading to leverage approaching 3x range would result in a one-notch downgrade. Multiple years of negative FCF or very modest positive FCF would also support the negative rating action.
On June 30, Ingredion had ample liquidity that included $677 million in cash and short-term investments, and availability of $554 million under its $1 billion credit facility expiring Oct. 22, 2017. Ingredion maintains sufficient cushion under financial covenants in its revolving and new 18-month term loan credit facilities that include a maximum net leverage ratio of 3.25x and a minimum interest coverage ratio of 3.5x.
Consistent cash flow generation has been evident over the past five years given expansion of funds flow from operations (FFO) that excludes often-volatile working capital. FFO was $695 million for the LTM as of June 30, falling in the range of $600 million to $700 million since 2011. FCF has been more variable over that time, but has exceeded $200 million since 2012. Fitch sees sustained FCF around $200 million in most years absent significant volatility in working capital and assuming steady capital spending at $300 million annually.
Beyond the term loan facility expiring in January 2017, significant long-term debt maturities over the next three years are $350 million in 3.2 percent unsecured notes due in November 2015, $200 million of 6 percent senior notes due April 2017, and $300 million of 1.8 percent unsecured notes maturing in September 2017, all of which Fitch anticipates will be refinanced upon maturity.
FULL LIST OF RATING ACTIONS
Fitch affirms Ingredion's ratings with a Stable Outlook as follows:
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Additional information is available on fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https:// fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Dodd-Frank Rating Information Disclosure Formhttps:// fitchratings.com/creditdesk/press_releases/content/ ridf_frame.cfm?pr_id=989892
Solicitation Statushttps://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=989892
Endorsement Policyhttps://fitchratings.com/jsp/creditdesk/ PolicyRegulation.faces?context=2&detail=31
((Comments on this story may be sent to email@example.com))
(c) 2015 ProQuest Information and Learning Company; All Rights Reserved., source Newspapers