S&P Global Ratings revised its outlook on food and beverage group Danone to stable from negative due to projected strong free cash flows and the company's plan to sell 14% of its stake in Yakult Honsha Co. Ltd.
Danone, which reported a 42.6% year-over-year profit jump for 2017, was forecast to generate free cash flow of €2.0 billion to €2.2 billion annually for 2018 and 2019, according to S&P.
"The stable outlook reflects our view that Danone should continue to generate solid free cash flows, thanks notably to growth in its large and highly profitable specialized nutrition businesses and stable earnings from bottled water," the rating agency said.
The proposed Yakult stake sale is also credit-positive for Danone, S&P added, as it intends to use most of the €1.3 billion net cash proceeds to repay debt.
S&P affirmed Danone's long-term and short-term issuer credit ratings at BBB+ and A-2, respectively.
"We could raise the ratings if Danone is able to deleverage faster than we expect over the next two years thanks to higher earnings than we forecast and free cash flow growth," S&P said.
"This could occur notably from a sustained rebound in sales volumes and much higher profitability in fresh dairy in Europe, North America, and Brazil," S&P added, noting that Danone is facing volume declines in large product categories in those geographies.
S&P said Danone should be able to maintain a stable operating performance over the next two years, with revenue growth of 2% to 4%.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.