Fitch Ratings on Aug. 2 affirmed the BBB issuer default rating of Campbell Soup Co., citing the packaged food company's strong brands and significant market share in several product categories among other factors.
The rating agency highlighted the group's solid profit margin and consistent free cash flow generation post dividends, as well as Fitch's expectations that gross leverage will fall to the mid-3.0x in fiscal 2021 ending July 2021, and low 3x in fiscal 2022, compared to 4.8x at the end of the fiscal third quarter ended April.
Fitch said the expected leverage decline is due to debt reduction funded by completed and pending sales of non-core asset sales and improving free cash flow driven by cost savings. Campbell has recently signed a deal to sell its Australian cookie brand Arnott's Biscuits Ltd. and other international assets to private equity company KKR & Co. for $2.2 billion.
Meanwhile, Fitch kept its outlook on Campbell at negative, reflecting execution risks associated with the integration of Snyder's-Lance Inc., which the company acquired in 2018 for an estimated $6.1 billion. The negative outlook also reflects continued weakness in Campbell's meals and beverages segment, led by U.S. soup. This division represented about 61% of the group's total segment operating earnings as of the end of April. The unit saw operating earnings fall 2% in the nine months to April due to a 3% decline in net sales of soup.
The agency said organic growth trends remain challenging for companies that produce packaged foods because of brand maturity and changing consumer preferences as more customers now shift to fresh and organic food. However, Fitch noted that Campbell ranks first in market share for soup, pretzels, crackers and Kettle Chips. It also ranked second in market share for Mexican sauce and pasta sauce.
Fitch said it could upgrade the ratings to BBB+ if Campbell achieves low-single-digit top-line organic growth, stable to improving operating margins and sustained leverage under 3.0x. An upgrade is also likely if Campbell's base business stabilizes, if Fitch sees strong traction on synergies from the acquisition of Snyder, or if Campbell deleverages to approximately 3.5x on a gross leverage basis by fiscal 2021.
Conversely, a downgrade could happen if Campbell uses a portion of the net proceeds from its divestitures for shareholder-friendly activities, or if organic revenue declines in the high-margin U.S. soup business accelerate.