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Kraft Foods Group, Inc. (OLD) -- Moody's affirms Kraft Heinz's Baa3 unsecured rating, outlook revised to stable

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Rating Action: Moody's affirms Kraft Heinz's Baa3 unsecured rating, outlook revised to stableGlobal Credit Research - 12 Feb 2021New York, February 12, 2021 -- Moody's Investors Service, ("Moody's") today affirmed the ratings of Kraft Heinz Foods Company and other subsidiaries of The Kraft Heinz Company ("collectively, Kraft Heinz"), including the Baa3 senior unsecured ratings and Prime-3 commercial paper ratings. Moody's also revised the outlook to stable from negative.The stable outlook reflects the significant progress the company has made toward reducing financial leverage and improving its operating performance over the past year such that a rating change is unlikely to occur over the next 12 to 18 months. Specifically, through earnings growth and $1.2 billion of debt repayment, the company has successfully reduced debt/EBITDA below the maximum 4.5x that Moody's has said is tolerable for Kraft Heinz at the Baa3 rating. Additionally, Moody expects that a significant portion of the approximate $5 billion in after-tax proceeds from recently announced asset sales will be used to further reduce debt and financial leverage.Moody's believes that good operating execution and partnership with customers during the pandemic has helped improve brand equity and retailer relationships that were previously weakened by business underinvestment stemming from the company's deep cost cutting strategy."We recognize that Kraft Heinz's 2020 operating performance was greatly aided by coronavirus-driven retail food demand that will abate over time. However, the related improvement in customer, consumer and employee relations, along with the company's use of incremental cash flow to reduce debt and strengthen liquidity provides lasting benefit to its credit profile," commented Brian Weddington, a Moody's VP-Senior Credit Officer. Kraft Heinz reported 2020 sales and EBITDA growth of 6.5% and 10.5%, respectively, which far exceeded Moody's pre-COVID forecast of sales and earnings declines."Moreover, we expect that Kraft Heinz's pending asset sales and sustained high rates of at-home dining over the next year will support further credit improvement," added Weddington. Kraft plans to complete both the sale of its Natural cheese business to Groupe Lactalis for $3.2 billion and its Planters business to Hormel Foods (A1 stable) for $3.4 billion in the first half of 2021. Moody's projects that debt-to-EBITDA leverage (4.3x as of December 2020 incorporating Moody's standard adjustments) will fall to a low 4x range in 2021. This assumes that the company will repay enough debt to offset a Moody's estimated 10% decline in EBITDA due to the asset sales and weaker forward earnings for the remaining portfolio as the pandemic subsides and consumers gradually return to more out-of-home dining.The following ratings/assessments are affected by today's action:Ratings Affirmed:..Issuer: H.J. Heinz Company (Old)....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3..Issuer: H.J. Heinz Finance Company....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3..Issuer: H.J. Heinz Finance UK PLC....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3..Issuer: Kraft Foods Group, Inc. (OLD)....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3..Issuer: Kraft Heinz Foods Company....Senior Unsecured Bank Credit Facility, Affirmed Baa3....Senior Unsecured Commercial Paper, Affirmed P-3....Senior Unsecured Regular Bond/Debenture , Affirmed Baa3Outlook Actions:..Issuer: H.J. Heinz Company (Old)....Outlook, Changed To Stable From Negative..Issuer: H.J. Heinz Finance Company....Outlook, Changed To Stable From Negative..Issuer: H.J. Heinz Finance UK PLC....Outlook, Changed To Stable From Negative..Issuer: Kraft Foods Group, Inc. (OLD)....Outlook, Changed To Stable From Negative..Issuer: Kraft Heinz Foods Company....Outlook, Changed To Stable From NegativeRATINGS RATIONALEThe Baa3/Prime-3 ratings of Kraft Heinz reflect its global scale, strong product diversity and leading brands in multiple large food categories. Additionally, the ratings reflect the company's high operating profit margin in excess of 20%, and good operating cash flow. These strengths are balanced against governance risks related to the execution of a new turnaround strategy, and the company's past aggressive financial strategies including the use of high financial leverage, the pursuit of transformational acquisitions, and a high dividend relative to operating cash flow. The credit profile also reflects social factors related to the recent rapid shifts in food consumption patterns due to the pandemic, and ongoing trends in consumer preferences toward less processed food products.In September 2020, Kraft Heinz launched a new strategic plan aimed at delivering consistent sales, EBITDA and cash flow growth by, among other things, strengthening its global management team, simplifying its brand portfolio around the consumer, and streamlining operations. The company's long-term targets include 1% - 2% Organic Net Sales growth, 2% - 3% Adjusted EBITDA growth, and $2 billion of savings by 2024, which the company intends to reinvest into marketing and capital expenditures.Kraft Heinz targets a net debt to EBITDA leverage below 4.0x (3.7x as of December 2020). The current dividend remains aggressive, but has become more affordable with improved earnings and cash flow. Even though the pending asset sales will reduce the earnings base, Moody's believes that the company will continue to generate meaningful positive free cash flow in an $800 to $900 million annual range over the next two years.Kraft Heinz and the packaged food sector are moderately exposed to social risks related to responsible production, health and safety standards and evolving consumer lifestyle changes. The company and sector are also moderately exposed to environmental risks such as soil/water and land use, and energy & emissions impacts, among others. These factors will continue to play an important role in evaluating the overall creditworthiness of food processors, like Kraft Heinz, particularly as the industry continues to evolve globally.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of consumer sectors from the current weak U.S. economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn rating upgrade could occur if Kraft Heinz sustains its improved operating performance, and maintains a balanced financial policy. Quantitatively, debt/EBITDA would need to be sustained below 4.0x and retained cash flow to net debt would need to reach at least 10% before Moody's would consider an upgrade. The ratings could be downgraded if operating execution were to faulter, debt/EBITDA is likely to be sustained above 4.5x or if the company adopts a more aggressive financial policy including major leveraged acquisitions.The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Kraft Heinz is the one of the largest food and beverage companies in North America. The company's brands include Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Plasmon, Quero, Weight Watchers Smart Ones, and Velveeta. The majority of sales are generated in North America with other sales generated in Europe, AMEA, and Latin America. Annual sales approximate $26 billion. The Kraft Heinz Company is controlled by its two largest investors, 3G Capital (17.5%) and Berkshire Hathaway (26.6%), and is common stock is publicly traded under the ticker 'KHC'. Revenue for 2020 was $26.4 billion and was approximately $23.5 billion pro forma for the pending sales of the Natural cheese and Planters businesses.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Brian Weddington, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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