--Long-term Issuer Default Rating (IDR) at 'BB-';
--Secured bank credit facility at 'BB+';
--Senior unsecured notes at 'BB-'.
--Long-term IDR at 'BB-';
--Senior unsecured notes at 'BB-'.
The Rating Outlook is revised to Negative from Stable.
KEY RATING DRIVERS:
Negative Outlook Reflects High Near Term Leverage and Negative FCF: The Negative Outlook reflects Dean's recently elevated leverage and expectations that it will continue to rise in the near term, based on the company's need for further covenant relief discussed below. In addition, Fitch estimates that free cash flow (FCF; cash flow from operations less capital expenditures and dividends) could be negative for the year due to severe earnings pressure. The timing and magnitude of earnings and FCF improvement will be key to determining if Dean can return to sustainable leverage appropriate for the current ratings. Currently, Fitch's view is that Dean can return to moderate leverage and positive FCF after 2014, as long as milk input costs moderate. Total debt to EBITDA was 3.9x for the latest 12 months ended
Further Amending Leverage Covenants: In
Limited Diversification, Earnings Volatility, Low Margins: Dean has limited diversification following the spinoff of its higher margin and faster growing WhiteWave (WWAV) and divestiture of Morningstar in 2012 and 2013. The company's remaining operations largely consist of processing and marketing fresh fluid milk, which represented 73% of Dean's product mix during 2013. Dean also produces ice cream, cultured dairy products, juices, and teas. Dean's current ratings incorporate Fitch's view that the company's normalized EBITDA margin is in the low to mid-single-digit range, and earnings and cash flow exhibit volatility. Ratings also consider the fundamental challenges faced by the fluid milk industry, which has significant excess capacity, volume declines, and high levels of competition. The dairy industry also remains highly sensitive to volatile raw milk prices. Fitch factors Dean's historical success at reducing costs into the ratings, and views the continued rationalization of processing operations as necessary given excess capacity and declining demand.
EBITDA Declines, Near Term FCF Dissipates: Fitch has brought down its EBITDA expectations for Dean but still anticipates Dean can generate more than
Good Liquidity: Dean's liquidity is supported by
Future developments that may, individually or collectively, lead to a negative rating action include:
--Total debt-to-operating EBITDA sustained above the 3.5x range, which equates to total adjusted debt to operating EBITDAR above the 4.5x range, due to a material increase in debt and/or EBITDA decline for a prolonged period, potentially related to sustained high Class I milk prices and the inability to effectively pass through high raw milk prices in a timely manner;
--Expectations for multiple years of minimal or negative FCF generation due to weak operating earnings and sustained acceleration of volume declines due to a contraction in milk consumption and/or loss a major customer could also support negative rating actions.
Future developments that may, individually or collectively, lead to a positive rating action include:
--A positive rating action is not anticipated in the near-to intermediate term, and any positive rating action is likely to be limited to within the 'BB' category;
--Total debt-to-operating EBITDA consistently in the low 2.0x range, which equates to total adjusted debt to operating EBITDAR consistently in the low 3.0x range, due to materially higher EBITDA and/or stable-to-declining debt levels could lead to a positive rating action;
--Sustainable annual FCF of approximately
--Further diversification could also be positive for the ratings.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Wesley E. Moultrie, II CPA, +1-312-368-3186
Source: Fitch Ratings
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