LafargeHolcim Ltd. Primary Credit Analyst: Renato Panichi, Milan (39) ;

Transcription

1 Primary Credit Analyst: Renato Panichi, Milan (39) ; Secondary Contact: David Matthews, London (44) ; Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Other Modifiers Other Credit Considerations Reconciliation Ratings Score Snapshot Related Criteria And Research APRIL 28,

2 Business Risk: STRONG Vulnerable Excellent bbb bbb bbb CORPORATE CREDIT RATING Financial Risk: SIGNIFICANT Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Strong competitive positions in virtually all key markets, with a few exceptions. Extensive geographic diversification. Cost-efficient operations. Cyclicality, seasonality, and high capital and energy intensity of the heavy building materials' industry. Some operations in a competitive and fragmented industry with limited pricing flexibility. Financial Risk: Significant Superior access to global debt markets. Management's willingness to protect credit metrics and liquidity when needed. Ability to generate operating cash flow consistently over the business cycle. Strong liquidity. APRIL 28,

3 Outlook: Stable The stable outlook on Switzerland-based building materials manufacturer LafargeHolcim Ltd. and its core subsidiaries reflects Standard & Poor's Ratings Services' view that the group's leverage metrics will progressively recover in , compared with pro forma 2015 metrics following the merger of France-based Lafarge S.A. into Switzerland-based Holcim Ltd. to form LafargeHolcim. The recovery mainly reflects the completion of Swiss franc (CHF) 3.5 billion of asset disposals and the delivery of operational synergies. Our base-case scenario reflects a tough operating environment in a few emerging markets in terms of both volumes and prices. We also take into account our view that management will continue to protect credit metrics through optimized capital spending and reasonable returns to shareholders. Downside scenario We could consider a negative rating action if market conditions worsen significantly beyond our base-case scenario. This could happen if the slowdown in China were more severe than we currently anticipate, which would likely affect the group's performance in other regions. Funds from operations (FFO) to debt trending toward 20% for a sustained period of time would put pressure on the ratings. A more aggressive financial policy might also trigger a downgrade in the absence of supportive trading conditions. Upside scenario We might consider a positive rating action if LafargeHolcim's FFO to debt approached 30% on a sustainable basis. This could result from better-than-expected industry trends or higher-than-expected synergies from the integration of the group's assets. We consider this scenario unlikely in Furthermore, we consider that the group is likely to use any financial headroom at the current rating by either investing in operations or returning funds to shareholders. Standard & Poor's Base-Case Scenario APRIL 28,

4 Assumptions A tough environment in a few emerging markets, mitigated by supportive trading conditions in the main developed countries. An increase in revenues of 1%-3% on a pro forma basis, reflecting modest growth in volumes and still-challenging pricing conditions. A progressive recovery in operating EBITDA over 2016 and 2017, compared with the pro forma 2015 figure, mainly reflecting lower merger implementation costs, the delivery of operational synergies, and some benefit from operating leverage. The completion of a CHF3.5 billion asset disposal, which will lead to lower reported debt. Capital expenditures (capex) of about CHF2 billion in 2016 and slightly less in Moderate remuneration to shareholders. Key Metrics 2015PF 2016e 2017e EBITDA margin* (%) FFO to debt* (%) Debt to EBITDA* (x) PF--Pro forma. e--estimate.*fully Standard & Poor's-adjusted. FFO--Funds from operations. Company Description LafargeHolcim is the world largest producer of heavy building materials, including cement (374 million tons per year of cement capacity at end-2015); aggregates (661 plants at end-2015); and ready-mix and other construction materials (1,577 plants at end-2015). The group has extensive geographic and asset diversification, with production sites in about 90 countries, and operates with a high level of vertical integration. The company is the result of the merger by incorporation in 2015 of France-based Lafarge S.A. into Switzerland-based Holcim Ltd., which was renamed LafargeHolcim Ltd. Following the completion of a squeeze-out in November 2015, Lafarge S.A. was delisted. Business Risk: Strong Global diversified operations, with key positions in emerging countries LafargeHolcim has an unrivalled asset portfolio in terms of size and geographic diversity; a strong competitive position in virtually all its key markets, with a few exceptions, for instance, China; cost-efficient operations; and the ability to generate operating cash flow consistently over the business cycle. Similarly, we believe that LafargeHolcim's portfolio of about 90 countries, with about half of sales coming from developing economies, helps reduce the seasonality and cyclicality that characterizes the building materials industry, and allows for better capacity utilization. However, our assessment also reflects some key risks, such as the high capital and energy intensity of the heavy building materials industry, and LafargeHolcim's operation in a competitive and fragmented industry with limited APRIL 28,

5 pricing flexibility. In addition, LafargeHolcim's operations in emerging markets expose the group to potential monetary and political risks and heightened economic volatility. Lastly, we see a risk that the integration process following the merger may be slower than the group targets. We view LafargeHolcim's high degree of vertical integration as a key asset, given the scarcity of well-located quarries, and because the demand for aggregates depends mainly on public sector spending, which may prove countercyclical to private-sector construction. The group's scale and extensive production and distribution network, and track record of effective cost management contribute to support robust operating margins. The group's Standard & Poor's-adjusted EBITDA margin at about 20% compares favorably with the current industry average, by our estimates. We believe that operating efficiencies resulting from the planned synergies may support margins of 20%-22% over the next couple of years. S&P Base-Case Operating Scenario Revenue growth of 1%-3% in the next couple of years, reflecting a modest contribution from Europe, the Middle East, and Africa, no contribution from Latin America, and moderate growth from Asia Pacific and North America. Ongoing tough conditions in some countries such as China, Russia, and Brazil, in terms of both volumes and prices. A moderation in cost inflation in 2016 compared with 2015, reflecting the benefit of low oil prices, but still exceeding the average price increase. A recovery in EBITDA margins from 2015, with a more pronounced effect visible from This mainly reflects the benefit of lower merger implementation costs and the achievement of operational synergies. To an extent, it also reflects some operating leverage. Peer comparison Table 1 LafargeHolcim Ltd. Peer Comparison LafargeHolcim Ltd. Italcementi SpA Compagnie de Saint-Gobain CRH plc Wuerth GmbH & Co. KG Adolf --Fiscal year ended-- (Mil. CHF) Dec. 31, 2015* Dec. 31, 2015 Dec. 31, 2015 Dec. 31, 2015 Dec. 31, 2014 Revenues 23, , , , ,089.2 EBITDA 3, , , ,232.3 Funds from operations (FFO) 2, , , EBIT (106.0) , , Net income from continuing operations (1,573) (130.4) Working capital changes (232) (204.1) Cash flow from operations 2, , , Capital expenditures 2, , Free operating cash flow , , APRIL 28,

6 Table 1 LafargeHolcim Ltd. Peer Comparison (cont.) Dividends paid Discretionary cash flow (207.0) , Cash and short-term investments 4, , , Debt 20, , , , ,132.5 Equity 35, , , , ,307.3 Adjusted ratios EBITDA margin (%) Return on capital (%) (0.2) EBITDA interest coverage (x) FFO cash interest coverage (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) (1.0) *LafargeHolcim figures as of end 2015 are reported and not pro forma. As such, they do not reflect full-year consolidation of Lafarge S.A. Financial Risk: Significant Willingness to protect credit metrics is a key support to the ratings The willingness of LafargeHolcim's top management to protect credit metrics through reduced capital spending, moderation in shareholder remuneration, and asset disposals is a key support to the ratings. The group has committed to dispose of CHF3.5 billion of assets in 2016, following a CHF6.3 billion net disposal in Furthermore, LafargeHolcim will keep capital spending in at relatively low levels of around CHF3.5 billion, compared to historical values for both Holcim and Lafarge. This will significantly help leverage metrics to recover in 2016 and 2017 from rather weak pro forma levels in We also believe that, as result of the merger, LafargeHolcim's exposure to the appreciation of the Swiss franc has significantly reduced, although the group's leverage metrics are partly exposed to currency depreciation in emerging countries as most of its financial debt is in hard currencies. The cement industry's capital intensity is a structural constraint on financial risk, because it translates into hefty capex and large seasonal working capital swings, with a risk of build-up in working capital depending on industry conditions. However, LafargeHolcim has a track record of resilient free operating cash flow generation over the business cycle. Furthermore, heavy materials producers typically see working capital contraction when revenues decline organically. APRIL 28,

7 S&P Base-Case Cash Flow And Capital Structure Scenario A reduction in LafargeHolcim's adjusted net debt to about CHF16 billion-chf17 billion at end-2016, from CHF20.4 billion at end This mainly reflects the proceeds from the asset disposal to be completed in A progressive recovery of the group's leverage metrics in , compared with pro forma 2015 metrics. The improvement in leverage metrics in 2016, and particularly in 2017, reflects the asset disposal proceeds, as well as improved cash flow generation following the achievement of operational synergies. Adjusted ratios of FFO to debt of 21%-24% in 2016 and 25%-28% in Resilient free operating cash flow over the next two years, reflecting planned low capital spending and almost neutral working capital cash absorption. Our adjusted debt figure is higher than the company's reported debt figure because we deduct cash that we believe is not immediately available for debt repayment. Furthermore, we add to debt about CHF1.1 billion of operating leases, CHF1.2 billion of pension liabilities, as well as CHF0.7 billion of asset retirement obligations. However, we exclude about CHF0.7 billion of purchase price allocation on Lafarge's debt. Financial summary Table 2 LafargeHolcim Ltd. Financial Summary --Fiscal year ended Dec (Mil. CHF) 2015* Revenues 23, , , , ,744.0 EBITDA 3, , , , ,220.0 Funds from operations (FFO) 2, , , , ,990.4 Net income from continuing operations (1,573) 1, , Cash flow from operations 2, , , , ,842.4 Capital expenditures 2, , , , ,978.0 Free operating cash flow Discretionary cash flow (207.0) (390.6) (160.9) Cash and short-term investments 4, , , , ,950.0 Debt 20, , , , ,577.3 Equity 35, , , , ,274.5 Adjusted ratios EBITDA margin (%) Return on capital (%) (0.2) EBITDA interest coverage (x) FFO cash int. cov. (x) Debt/EBITDA (x) FFO/debt (%) Cash flow from operations/debt (%) Free operating cash flow/debt (%) Discretionary cash flow/debt (%) (1.0) (3.4) (1.4) *LafargeHolcim figures as of end 2015 are reported and not pro forma. As such, they do not reflect full-year consolidation of Lafarge S.A. APRIL 28,

8 Liquidity: Strong Access to global debt markets contributes to reducing foreign exchange risks The short-term rating is 'A-2'. Our view of LafargeHolcim's liquidity as strong reflects a pro forma ratio of liquidity sources to uses of more than 1.5x over the 12 months from Dec. 31, 2015, underpinned by sizable cash balances and committed undrawn bank lines. Principal Liquidity Sources An available cash balance in excess of CHF4 billion at end-dec. 2015; Committed, undrawn bank lines totaling about CHF6.4 billion, with maturities beyond one year; Proceeds from asset disposals of about CHF3.5 billion; and Our forecast of unadjusted FFO of about CHF3.5 billion-chf3.8 billion. Principal Liquidity Uses Short-term debt maturities of about CHF 6.7 billion; Capex of about CHF2 billion; Seasonal working capital requirement of about CHF0.6 billion; and Dividend payments of about CHF1.1 billion. Debt maturities Table 3 LafargeHolcim Ltd. Debt Maturities Current portion of long-term debt 6,807.0 Debt due in 2nd year 3,233.0 Debt due in 3rd year 2,277.0 Debt due in 4th year 2,224.0 Debt due in 5th year 2,404.0 Debt due after year 5 3,900.0 Total debt 20,845.0 Covenant Analysis To our knowledge, outstanding corporate debt and committed bank lines are currently free of rating triggers, financial maintenance covenants, and material adverse change clauses. Other Modifiers Our strong management and governance assessment, which is neutral for the ratings on LafargeHolcim, reflects the group's cautious balancing of fixed-income and equity investors' interests, together with consistent strategic undertakings and a solid track record of achieving cost efficiencies. APRIL 28,

9 Other Credit Considerations We align the ratings on Lafarge S.A. and its subsidiary Lafarge North America with those on LafargeHolcim Ltd. This reflects our view that Lafarge S.A. and Lafarge North America are core subsidiaries of LafargeHolcim. Lafarge S.A. is a sub-holding company that owns operating subsidiaries representing nearly one-half of group assets and revenues. We also align the ratings on the group financial vehicles (see list in the "Ratings Details" section) with those on LafargeHolcim Ltd. This reflects our view that those vehicles are core subsidiaries of the LafargeHolcim group, as they are legal entities created for the purpose of raising debt on the group's behalf. We align the senior unsecured debt issue ratings with the long-term corporate credit rating on LafargeHolcim. We estimate that the group's priority liabilities are about 25% of its total liabilities. However, there are significant factors mitigating this proportion of priority liabilities, such as LafargeHolcim's wide geographic diversity and downstream loans from the parent companies to the group's operating subsidiaries. Reconciliation Table 3 Reconciliation Of LafargeHolcim Ltd. Reported Amounts With Standard & Poor's Adjusted Amounts* LafargeHolcim Ltd. reported amounts Debt Shareholders' equity EBITDA --Fiscal year ended Dec. 31, Operating income Interest expense EBITDA Cash flow from operations Capital expenditures Reported 21,791 31,364 3,682 (739) 667 3,682 2,465 2,593 Standard & Poor's adjustments Interest expense (reported) Interest income (reported) Current tax expense (reported) (667) (924) Operating leases 1, Postretirement benefit obligations/deferred compensation 1, (88) (88) 48 (156) Surplus cash (3,575) Capitalized interest (84) (84) (84) Share-based compensation expense Dividends received from equity investments Asset retirement obligations APRIL 28,

10 Table 3 Reconciliation Of LafargeHolcim Ltd. Reported Amounts With Standard & Poor's Adjusted Amounts* (cont.) Non-operating income (expense) Non-controlling Interest/Minority interest , Debt - Other (789) Total adjustments Standard & Poor's adjusted amounts (1,395) 4, (1,358) 133 (84) Debt Equity EBITDA EBIT Interest expense Funds from operations Cash flow from operations Capital expenditures Adjusted 20,396 35,721 3,993 (106) 854 2,324 2,598 2,509 *LafargeHolcim figures as of end 2015 are reported and not pro forma. As such, they do not reflect full-year consolidation of Lafarge S.A. Ratings Score Snapshot Corporate Credit Rating Business risk: Strong Country risk: Intermediate Industry risk: Intermediate Competitive position: Strong Financial risk: Significant Cash flow/leverage: Significant Anchor: bbb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: Neutral (no impact) Liquidity: Strong (no impact) Management and governance: Strong (no impact) Comparable rating analysis: Neutral (no impact) Related Criteria And Research APRIL 28,

11 Related Criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Building Materials Industry, Dec. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Corporate Methodology, Nov. 19, 2013 Methodology: Industry Risk, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Use Of CreditWatch And Outlooks, Sept. 14, Corporate Criteria: Rating Each Issue, April 15, 2008 Business And Financial Risk Matrix Financial Risk Profile Business Risk Profile Minimal Modest Intermediate Significant Aggressive Highly leveraged Excellent aaa/aa+ aa a+/a a- bbb bbb-/bb+ Strong aa/aa- a+/a a-/bbb+ bbb bb+ bb Satisfactory a/a- bbb+ bbb/bbb- bbb-/bb+ bb b+ Fair bbb/bbb- bbb- bb+ bb bb- b Weak bb+ bb+ bb bb- b+ b/b- Vulnerable bb- bb- bb-/b+ b+ b b- Ratings Detail (As Of April 28, 2016) LafargeHolcim Ltd. Corporate Credit Rating Commercial Paper A-2 Senior Secured CaVal (Mexico) National Scale Senior Unsecured CaVal (Mexico) National Scale Senior Unsecured Short-Term Debt A-2 mxaaa mxa-1+ BBB Corporate Credit Ratings History 22-Jan Dec Apr-2005 Related Entities Holcim (U.S.) Inc. Holcim Capital (Corporation) Ltd. BBB+/Negative/A-2 BBB+/Stable/A-2 BBB/Stable/-- APRIL 28,

12 Ratings Detail (As Of April 28, 2016) (cont.) Holcim European Finance Ltd. Holcim Finance (Australia) Pty Ltd Holcim Finance (Belgium) S.A. Holcim Finance (Canada) Inc. Holcim Finance (Luxembourg) S.A. Holcim GB Finance Ltd. Holcim Overseas Finance Ltd. Holcim US Finance S.à r.l. & Cie S.C.S. Lafarge North America Inc. Lafarge S.A. Commercial Paper Local Currency A-2 Senior Unsecured Short-Term Debt A-2 LafargeHolcim Albion Finance Ltd. LafargeHolcim Continental Finance Ltd. LafargeHolcim Helvetia Finance Ltd. LafargeHolcim International Finance Ltd. LafargeHolcim Sterling Finance (Netherlands) B.V. BBB *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com APRIL 28,

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