Moody's affirmed Kraft Heinz Co.'s ratings and revised the rating outlook to positive from stable following the company's completion of key integration activities related to the 2015 merger of H.J. Heinz Co. and Kraft Foods.
The affirmed ratings are Baa2 senior secured debt rating, Baa3 senior unsecured debt rating and Prime-3 commercial paper rating.
The integration included attaining $1.7 billion of cost savings through zero-based budgeting, which overshot the company's original budget of $1.5 billion, Moody's said. "This has produced a dramatic increase in operating profit margins" from about 12% pro forma 2014 to over 27% currently, the rating agency said, adding that this metric is 10 percentage points higher than Kraft Heinz's peers.
Moody's highlighted that North America's third-largest food and beverage company has also retired $2 billion in debt since the merger, lowering debt/EBITDA from 5.2x to slightly above 4.0x.
The rating agency said that if the company's increases sales, EBITDA and EBITDA margin in 2018, its debt/EBITDA should "fall sustainably" below 4.0x by the end of 2018, potentially leading to a rating upgrade.
Moody's expects that free cash flow available for debt reduction will improve significantly this year, though a portion of the incremental free cash flow is likely to be reinvested in internal and external growth initiatives, including possible major acquisitions.
Moody's added that the ratings could be upgraded if Kraft Heinz continues to show improved operating performance and adopts a more conservative financial policy. If Kraft Heinz's operating performance worsens, it pursues large debt-financed acquisitions or allows debt/EBITDA to rise above 5.0x, a ratings downgrade may follow.
