The positive response in bond prices thus far has been less pronounced than was seen following Q2 and Q3 22 earnings, as we had predicted as of Q3 22. The €685m 5.75% 2026 SUNs and $525m 7.875% 2026 SUNs are both up ~4.5 points since earnings landed, as of writing. This alters the pattern seen in the two previous quarters.

The 2023 earnings outlook doesn’t look much changed from November, with management guiding to mid-single digit sales growth, continued EBITDA growth and further de-leveraging. Input cost inflation is expected to persist in the near-term, but the annualisation of 2022 pricing initiatives still has a big part to play in H1 23 in particular.

Repaid TLBs in Feb-23

Perhaps the most notable development from earnings was the fact the company opted to pay down €60m-equivalent of its sterling TLB and €190m-equivalent of its PLN-denominated TLB in February 2023.

Unrestricted cash at Q4 22 was €187m and Q1 is not typically a seasonally strong quarter, so it is therefore reasonable to assume the company partly drew down its €700m RCF (€40m drawn at Q4 22) to help fund the TLB repurchases. The company noted in its Q4 22 financial report that: “We will continue to utilise the RCF to support overall liquidity consistent with the general seasonality of the business.”

Management did not state how the redemptions were funded, but the notes to the financial statements state that the solicitation process to reduce the loans was done “using financial headroom”. There was certainly plenty of headroom under the 40% springing covenant on the RCF with senior secured net leverage at 5.6x vs a cap of 8.5x.

Asked about the repayments on the call, CFO, Florence Naviner said the repayment had a “very good economic benefit” and that the choice of tranches was down to cost and favourable currency. She went on to say that management expects to generate similar levels of cash in 2023, and hopes that there is capacity every year to repay some debt.

Separately, Naviner confirmed that floating rate interest hedging had gradually increased to 67% as of now from 45% at Q3 22. There will be a small rise in interest costs as a result of the lower level of hedging vs 2022, but it will be “relatively controlled”.

Inflation concerns no longer dictating performance

The company has proven it can handle inflationary pressures and has a good degree of pricing power. Concerns regarding input cost inflation were more prevalent in the lead up to Q2 and Q3 22 earnings with less clarity on whether pricing could keep up.

Confirmation that pricing could indeed keep up, particularly in Q3 22, was likely the main driver of the bond price appreciation following both sets of results. We suggested the trend was less likely to repeat at Q4 earnings with less concern now around profitability.

That said, bond prices in the high-70s/low-80s now, from the mid-60s before Q2 22 earnings in August, is clearly indicative that Upfield’s credit profile has sustainability improved. From here, bond performance is likely to be more driven by the inherent refinancing risk, we suggest, with the company’s ability to continue to de-leverage firmly in focus.

The short thesis is fraying.

On the outlook for pricing, CEO, David Haines, revealed on the call that all but one large European contract was agreed for 2023, with two large European customer agreements reached in the past 48 hours. Some are six-month agreements, but by-and-large 2023 contracts are agreed, he said.

This should offer a good degree of visibility in terms of the outlook for 2023 and management appeared confident on the commercial dynamics. This is in the context of softening edible oil prices, but management is not expecting any net commodity input cost decreases in 2023 with many costs, such as energy and refinery costs, still inflating.

Leverage boosted by asset sale

Q4 22 revenue of €991m was broadly expected, with management guiding to high-teens FY 22 revenue growth at Q3 22. FY 22 came in at €3,375m, a 20.8% YoY increase or 18.5% at constant currency.

Pricing contributed 36.5% to Q4 22 revenue with volume and mix offsetting by 14%. That meant that for FY 22 in total, revenue was boosted 29% by pricing and hit with a 10.5% volume and mix impact, of which 6.5% was underlying.

Q4 22 EBITDA also came in line with our expectations at €248m (25% margin). FY 22 EBITDA of €749m at a 22.2% margin was a 12.5% YoY nominal improvement, but the margin suffered a 160bps decline on account of inflation outpacing pricing in H1 22.

Year-end leverage of 7.2x was a strong print, as typically seasonally strong cash flows were boosted by €60m proceeds in Q4 from the sale of PP&E. €271m of Q4 22 FCF (9fin definition) provided the windfall needed to pay down the RCF to only €40m drawn from €279m as of Q3 22.

As mentioned above, the company had ample room under a 40% springing covenant on the RCF with senior secured net leverage of 5.6x well below the cap of 8.5x.

More de-leveraging in 2023, please

Guidance for next year was limited: net sales is expected to experience mid-single digit growth, EBITDA is expected to grow (unquantified) and leverage to reduce. Pushed during the Q&A, management declined to give a specific target for leverage in FY 23.

We are currently working with a base case of ~5% revenue growth and normalised EBITDA in the €800m - €820m range. FY 23 leverage of 6.3x is a decent target, after FCF of €200m - €250m.

The annualisation of pricing still has a big part to play in H1 23 and we expect the YoY comparison to look strong as pricing lagged inflation by some margin in H1 22.