Stable outlook for European beverages, some challenges – Moody’s

The outlook for the European beverage industry remains stable, underpinned by factors including relatively predictable cash flows and strong brand portfolios, Moody’s Investors Service said in a new Industry Outlook. However, several developing trends could exert downward pressure on ratings in the next 12 months.

“Our outlook for the European beverage industry continues to be stable, as rated issuers still present solid credit characteristics, including relatively predictable cash flows, a strong portfolio of brands and efficient distribution networks that create barriers to entry,” said Marie Fischer-Sabatie, a Moody’s Assistant Vice President-Analyst and co-author of the report.

“Companies able to use economies of scale to offset increasing costs of packaging and transportation, as well as those able to develop new products to satisfy shifting consumer tastes, will enjoy a competitive advantage and are likely to maintain credit quality.”

Growth in mature markets such as Western Europe has slowed, with companies turning to emerging markets for faster volume growth. While consumers in most markets may be drinking fewer alcoholic beverages, they have shown a thirst for premium drinks. Meanwhile, demand for healthier beverages has increased, and soft drinks producers have positioned themselves to take advantage of the move away from carbonated soft drinks to bottled waters, juices and tea, the Moody’s report notes.

Challenges companies operating in the industry face include continuing high raw material costs; these are constraining margins, especially for issuers not able to pass price increases on to their customers. Furthermore, increasingly shareholder-friendly financial policies and acquisitions could lead to higher leverage, according to Moody’s.

“In spite of numerous transactions that have brought together many companies, the industry in Europe, particularly the brewing industry, remains fragmented, compared with other regions where we see more monopolistic or duopolistic markets,” said Ms Fischer-Sabatie.

“Consolidation has continued in 2006 and 2007, albeit at a slower pace than in 2004-2005, and we expect the process of consolidation to continue.”

Moody’s currently rates nine beverage companies in Europe. Senior unsecured or corporate family ratings range from A3 to B2 and the total amount of rated debt outstanding is approximately USD23 billion. Moody’s sample includes two of the world’s largest brewers, SABMiller and Carlsberg Breweries, as well as five spirits and wine companies, Diageo, Pernod Ricard, Remy Cointreau, CEDC and Belvedere. Moody’s also rates two soft drinks producers, CCHBC and Cadbury Schweppes.

There are currently eight stable outlooks and a rating under review with direction uncertain. Positive rating actions have outnumbered negative rating actions over the past year. Moody’s changed the outlook on Pernod Ricard to stable in November 2006. Cadbury’s Baa2 long-term rating was placed under review with direction uncertain in March 2007 as a result of its announced plans to separate its Confectionary and Americas Beverages businesses. Moody’s upgraded CEDC in May 2007 and revised Remy Cointreau’s outlook back to stable in July 2007.