Mar. 19, 2010 (Business Wire) -- Following Chile's catastrophic earthquake and tsunami on Feb. 27, 2010, Fitch Ratings is evaluating the immediate effects as well as the longer-term impact that these events may have on the operations and financial profile of the companies within the food & beverage sector.
Fitch covers three Chilean Coca-Cola bottlers (Embotelladora Andina S.A. (Andina), Coca Cola Embonor S.A. (Embonor) and Embotelladora Coca Cola Polar S.A. (Kopolar)), one brewer (Compania Cervecerias Unidas S.A., CCU) and two wineries (Vina Santa Rita S.A, y San Pedro Tarapaca S.A), as well as four food producers (Empresas Carozzi S.A. e Industrias Carozzi S.A., Invertec Foods S.A., Watt's S.A. and Empresas Iansa S.A.).
The earthquake affected each company differently, depending on its location and type of business. While some companies saw only a minor impact on their operations, others had to put contingency plans into place to mitigate the impact on operations from damage to their installations. Though all of the above-mentioned companies have insurance that covers (after a deductible) both physical damage and economic losses resulting from the temporary suspension of activities, in the short run, they will have to finance the additional expenses with either internally-generated cash or external funding. However, it should be noted that Chilean Coca-Cola bottlers (which mostly reported losses in terms of glass bottles and finished products) as well as CCU (which reported substantial damage to its beer plant in Santiago and its wine cellar in Isla de Maipo) all enjoy high liquidity and strong cash flow generating capacity, and should therefore be able to finance an increase in expenditures related to the earthquake. Fitch-rated wineries not only exhibit a solid financial profile and an adequate amortization schedule, but also belong to large economic groups, which provides additional financial comfort. Finally, Fitch-rated food companies are not expected to undergo financial stress as a result of the earthquake.
Beverage companies that reported damage to some of their facilities are making an effort to compensate by increasing the capacity utilization rate at their remaining plants. While this may have a slight impact on profitability levels (with economic losses partially being covered by insurance), the strategy should allow the affected companies to maintain their market share.
The agroindustrial sector, on the other hand, is facing significant challenges in meeting its business commitments as a result of losses in finished products and difficulties exporting these products. While most of the wine is exported from the seaports of Valparaiso and San Antonio, which have been less affected by the earthquake, there might be delays in the delivery of products due to damage to roads and other seaports located near the epicenter (such as Talcahuano). Although the grape harvest in the Central region is slowly returning back to normal, the harvest may be somewhat delayed in the affected areas.
Embotelladora Andina (rated 'AA+(cl)'; National Equity Rating: Level 2, Issuer Default Rating (IDR) on an International Scale: 'A') :
Andina's Chilean operations (which represent 40% of EBITDA) comprise three bottling plants in the Metropolitan Region, outside of the most affected area. The company resumed production and distribution of soft drinks with only minor physical damage, most of which was limited to finished products and glass bottles. Its subsidiaries Envases Central and Vital Jugos, however, were forced to suspend operations (for a respective five days and two weeks) due to moderate damage to their production lines. While the supply of sugar and PET bottles was not interrupted by the events, the company may need to import or change its local supplier of bottle caps. Due to the limited impact of the earthquake on Andina's operations as well as the company's solid financial profile (debt amounted to CHP77.4 billion and cash & equivalents to CHP135.1 billion as of December 2009), Fitch does not foresee any significant impact on Andina's credit risk profile as a result of the earthquake.
CCU ( rated 'AA+(cl)'; National Equity Rating: Level 1; IDR on an International Scale: 'A'):
The earthquake caused damage to the filter and bottling lines of CCU's beer plant in Santiago, which represents 80% of the company's beer capacity in Chile and 54% of its total beer capacity when including Argentine operations. The plant will only partially be functioning during the two- to three-month period it takes to repair the damage. As a result, CCU is currently in the process of implementing a contingency plan that envisions using its plants in Argentina (which are operating at 60% capacity) and Temuco at full capacity. In addition, CCU's subsidiary, Vina San Pedro, registered losses in terms of finished products, including some loss in its bulk and bottled wine inventory. Finally, the company's non-alcoholic beverage and candy plants registered only minor damage, while there was no damage to its Pisco operations.
Fitch believes that CCU's contingency plan will allow the company to maintain its market position, helped by the fact that the beginning of the fall season is typically characterized by lower beer consumption. In addition, the impact on cash flow generation and operating profitability is expected to be limited. Finally, it should be noted that CCU enjoys a solid financial profile as well as a substantial liquidity position, which will allow it to face the temporary increase in working capital and investment requirements associated with the earthquake. As of September 2009, cash & equivalents amounted to CHP158.5 billion, with short-term debt maturities reaching CHP65.5 billion. In November 2009, CCU paid off CHP55.1 billion in debt, significantly reducing its short-term commitments.
Empresas Iansa S.A. ( rated 'BB-(cl)'; National Equity Rating: Level 4; IDR: 'B-'):
Iansa did not report any major damage to its plants, machinery and equipment following the Feb. 27 events. Furthermore, due to the seasonality of the sugar business, Iansa's sugar facilities were not in operation at the time of the earthquake, while its juice concentrate business was able to continue production without interruptions. As a result, Fitch believes that Iansa's operating cash flow should not be affected in any significant way, particularly when taking into consideration the insurance the company has in place. Although Iansa's financial profile reflects the low profitability of its principal businesses and its high overall indebtedness, the company has adequately managed the funding of its working capital, reducing pressure on liquidity by paying off short-term debt. As of December 2009, Iansa had USD43 million in cash & equivalents, whereas short-term debt totaled USD4 million (in addition to a revolving credit line of USD51 million for working capital purposes).
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