Fitch Ratings has assigned JDE Peet's N.V. (JDEP) new EUR2 billion notes a senior unsecured rating of 'BBB-'.

The notes are guaranteed by JDEP's two core subsidiaries JDE International BV (JDEI) and Peet's Coffee Inc. and are rated at the same level as the company's Issuer Default Rating (IDR). A system of cross guarantees by JDEP, JDEI and Peet's Coffee Inc. for their debt ensures pari passu ranking of these obligations. We understand from management that the notes proceeds will be used to repay part of the EUR3.7 billion term loans currently outstanding at JDEI, which will result in about 60% of debt being at the parent company level. We view this issue as part of a process to achieve a capital structure that is more aligned with the company's investment-grade profile and to enhance financial flexibility.

The 'BBB-' IDR with a Stable Outlook reflects JDEP's strong market position in the global coffee industry, the ability to protect the company's performance from the price movements of raw coffee. It also reflects scope for continued profit growth due to a well-thought-out strategy relying on a wide breadth of successful technology, brands and products. The rating is further supported by our expectation that JDEP's still high leverage at end-2020 should reduce to levels that are consistent with a low investment- grade rating in 2021.

KEY RATING DRIVERS

Resilient 2020 Performance: With the closure of coffee stores and the shift to working from home, the pandemic has resulted in a substantial contraction of sales for JDEP's away-from-home products (30% decline in organic revenues) in 2020. A shift in consumption to premium products at home (9% organic growth), particularly in western Europe and the US has compensated for lost sales, leading to a mild 0.2% contraction of organic revenues. A reduction of marketing expenses further helped protect profits, enabling JDEP to report broadly stable EBITDA for the year, in line with our prior expectations.

Temporarily High Leverage: Funds from operations (FFO) net leverage at end-2020 remained high for an investment-grade rating, at almost 5.0x. However, we see scope for continued deleveraging, due to moderate FFO growth and debt reduction resulting from strong cash flow generation and project leverage to drop to 4.0x by end-2021. This level equals to a company-defined net debt/EBITDA of below 3.0x.

Scope for Deleveraging Beyond 2021: The rating is premised on FFO net leverage peaking at 5x and supported by the company's expectation of a reduction below 3.0x in 2021, as well as a financial policy that targets maintaining net debt/EBITDA of 2.5x-3.0x. We do not rule out further debt reduction for 2022, and we project that FFO net leverage could drop to around 3.5x. This would enable JDEP to gain some financial headroom within its rating.

Coffee Focus; Market Leadership: The rating is influenced by limited category diversification as the company is concentrated in the coffee market. This exposes the availability or price of its core input to meteorological events or its revenues to the risk that consumer preferences migrate away from coffee consumption. We view the materialisation of these risks as remote and sufficiently mitigated by JDEP's leading market presence, with number one or number two positions in most of the company's markets.

Protection from Input-Cost Volatility: JDEP has a record of adjusting its prices proportionately to movements in the prices of raw coffee, a main input of its production process. This is aligned with other market participants' practices, leading to a fairly swift pass-through of raw-material price changes to end-consumers, albeit with a lag, which translates into fairly stable gross profits for JDEP.

Product Portfolio Supports Growth: The main driver of JDEP's revenue performance is the company's ability to increase sales volumes by entering new markets and shifting the product mix towards more premium products. We estimate that these two effects should contribute to around 4% annually of revenue growth over 2021-2023. JDEP has a wide range of technologies and products enabling consumers to enjoy coffee on multiple occasions at home and has demonstrated a strong innovation record. The company is investing significantly in single-serve capsules, which we estimate carry a higher profit per kilo and high single-digit volume growth.

Profit Growth: In addition to premiumisation and volume-driven growth, we expect profits will also be driven by cost efficiencies. We expect JDEP will continue investing in cost-efficiency measures and treat these investments as recurring costs. While entry into new markets and marketing spend for the launch of new products will constrain EBITDA margin growth, we expect profits to grow in absolute terms in tandem with volume growth.

Superior Cash Flow Strength: An overall EBITDA margin of around 20% as well as limited absorption of resources from working capital and capex have allowed for very strong free cash flow (FCF) generation. Despite a gradual increase of dividends over time under the company's latest financial policy, we project annual FCF generation will remain at around EUR500 million-EUR550 million, representing approximately 7% of revenue, at the top end of packaged food peers'. Solid cash flow generation should provide good flexibility for JDEP to continue acquiring small coffee businesses that enhance its organic growth, while maintaining leverage within the 'BBB-' rating.

DERIVATION SUMMARY

Within Fitch's rated food and beverages universe, JDEP's rating is aligned with that of packaged food companies, Kellogg Company and Conagra Brands, Inc. (BBB-/Stable), which are larger in sales but have been suffering from weak revenue growth due to a high exposure to mature markets and weakening pricing power. Conagra and Kellogg have slightly stronger product category diversification than JDEP, whose product portfolio, however, has superior pricing diversification compared with these peers. They are slightly larger than JDEP in EBITDA and their leverage is currently more conservative. However, we expect JDEP's leverage to converge towards the levels of these rated peers.

Compared with Nomad Foods Limited (BB/Stable), JDEP's EBITDA and FCF are bigger in size while we expect leverage to be more conservative than that of Nomad - which has exhausted its rating headroom after its acquisition of Fortenova Frozen Food Business to be completed by 3Q21. We expect Nomad's net leverage to increase towards 5.1x in 2021 versus JDEP's maximum net leverage of 4.2x.

Compared with Mondelez International, Inc. (BBB/Stable), JDEP has similar EBITDA margin, but Mondelez has larger scale (EBITDA is 3x larger), wider product and geographic diversification, as well as currently lower leverage, but JDEP's is likely to converge towards Mondelez's in the medium term.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within Our Rating Case for the Issuer

Sales growing mid-single digits over the next four years

EBITDA margin gradually improving towards 22% by 2024

Cash tax rate at 25% of earnings before taxes over the next four years

Working capital moving in tandem with sales; trade payables trending towards 130 days of sales for the next four years

EUR100 million acquisition spending in 2021, followed by EUR250 million-EUR350 million per year (assuming enterprise value)/EBITDA multiple at 8x; 12% EBITDA margin) to 2024

EUR150 million share buyback per year from 2023

Dividend pay-out at 70% in 2021-2024

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Subject to profitability (measured in EBITDA, FFO and FCF margins) remaining stable at 2020 levels, and JDEP retaining its industry leadership and organic growth capabilities, the following factors would support an upgrade:

Stronger geographic diversification with lower reliance on the top four European markets of Germany, Netherlands, France, UK and a record of limited correlation of consumption dynamics within Europe.

FFO net leverage at 3.5x or below.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Increased shareholder returns or M&A activity constraining deleveraging.

Lower-than-expected profitability due, for instance, to inability to pass on cost increase, leading to an FFO margin sustainably below 13%.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Solid Liquidity: JDEP has adequate financial flexibility for its rating. As of end-2020, it had around EUR400 million readily available cash. Liquidity is further supported by a largely undrawn EUR1,500 million revolving credit facility (RCF) available to JDEP, JDEI and Peet's Coffee. We restrict year-end cash by around EUR90 million due mainly to average annual working-capital absorption being higher during the year compared with year-end.

We understand from management the notes proceeds will be used to repay part of EUR3.7 billion term loans currently outstanding at JDEI, which will result in about 60% of group debt being at the parent company level, and about 40% at the main operating subsidiary, compared with the majority of debt at the operating company at end-2020. We view this issue as part of a process to achieve a capital structure that is more aligned with the company's investment -grade profile, and beneficial to its financial flexibility.

JDEP's next material debt maturity is JDEI's term loan A, which is due in November 2023 and following the recent bond issue, should remain outstanding for EUR2 billion. This will represent approximately one third of Fitch-defined total debt, which remains moderately material but has significantly reduced due to the diversification of funding since March 2021 and an overall extension of average debt maturities.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

ISSUER PROFILE

JDE Peet's is the largest pure coffee company, competing with Nestle. JDE merged with Peet's in December 2019, and the combined group performed a partial IPO (13% free float), with proceeds of EUR794 million used to repay shareholder debt. JAB Holding (62%) and Mondelez (23%) remain the two main shareholders.

SUMMARY OF FINANCIAL ADJUSTMENTS

An EUR271 million portion, out of EUR558 million of supply-chain financing credit facilities, used at end-2020 is treated by Fitch as debt. The amount taken as an adjustment represents Fitch's estimate of the portion of the programme (which the company fully books as trade payables) that extends its payment terms from the average of 130 days in its trade payables.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.RATING ACTIONSENTITY/DEBT	RATING		JDE Peet's N.V.

senior unsecured

LT	BBB- 	New Rating

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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