Credit Opinion: Albéa Beauty Holdings S.A

Transcription

1 Credit Opinion: Albéa Beauty Holdings S.A Global Credit Research - 18 Feb 2015 France Ratings Category Outlook Corporate Family Rating -Dom Curr Senior Secured Moody's Rating Stable B2 B2/LGD3 Contacts Analyst Phone Tobias Wagner/London Donatella Maso/London Peter Firth/London Key Indicators Albéa Beauty Holdings S.A 9/30/2014(L) 12/31/2013 FCF / Debt -5.7% -17.0% Debt / EBITDA 5.0x 5.6x EBIT / Interest Expense 1.4x 1.2x EBIT Margin % 6.1% 5.2% Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Global player in the cyclical beauty & personal care packaging market - Restructuring and optimisation projects well on plan, but free cash flow remains under pressure for 2014/15 - Degree of customer concentration, but somewhat mitigated by long-standing relationships - Recent tap issuance supports liquidity profile Recent Developments In January 2015, we affirmed the ratings following the company's EUR45 million tap issuance, reflecting the progress Albéa made in 2014 regarding its various ongoing restructuring and integration efforts and the resulting improvement in EBITDA levels, which has decreased leverage on a Moody's adjusted basis towards 5x expected for year-end 2014, and 5.3x pro-forma for the tap issuance. It also reflects the progress made in reducing the company's negative free cash flow, although we expect the company to continue to remain free cash flow negative, on an annual basis, for at least In this regard, the EUR 45 million additional bond proceeds, which will be used for general corporate purposes, together with the 3-year committed European receivables facility, which was secured in June 2014, also better support the company's liquidity needs. Albéa is on track to deliver and conclude its restructuring programme by the end of 2016, in our view.

2 Corporate Profile Albéa Beauty Holdings S.A. ("Albéa", "the company"), is the holding company for the combination (December 2012) of Albéa Group and Rexam PC, the cosmetics business of Rexam Plc. Albéa Group was originally named RTA Beauty Packaging, owned by Rio Tinto Alcan Inc., and acquired by Sun Capital Partners in July Sun Capital Partners also acquired Betts Group, a producer of laminate tubes with six plants in UK, Poland, Mexico, India and Indonesia, and combined it with Albéa Group in January As a result of the buy and build strategy, Albéa has become a strong global player in the cosmetic and personal care packaging market. For 2014, revenues and adjusted EBITDA (as measured by the company) reached US$1.6 billion and US$168 million, respectively. The business operates two principal divisions: Tubes (40% of nine months to September 2014 revenues), comprising laminate and plastic tubes; Cosmetic Rigid Plastic and Beauty Solutions (60%), including lipsticks, mascara, dispensing systems for fragrances and oral care products, and beauty solution products. Rating Rationale The company's B2 corporate family rating (CFR) reflects the significant leverage, exposure to the cyclical and competitive beauty & personal care market and a degree of concentration towards large international consumer goods companies in its customer profile. It also incorporates the ongoing restructuring and optimisation projects, which we understand progress as planned, but contribute to negative free cash flow for 2014 and at least However, the rating also takes into account Albéa's longstanding relationships with those blue-chip customers, which mitigates to an extent the risk and pricing pressure larger customers can exert. In addition, it factors in Albéa's geographically well-diversified and broad product portfolio, good market positions for several product lines and some barriers to market entry, particularly regarding the more complex pumps business. Finally, we expect that the company remains on track to benefit from the significant operational synergies between Albéa and the acquired business, thereby supporting margins. In 2014, Albéa reported headline revenue growth of 0.4% (2.5% organic and constant currency) and companyadjusted EBITDA growth of 8.2%, on the back of continued significant progress regarding its restructuring efforts. However, growth has somewhat slowed in the fourth quarter with a -10.4% decline in revenues and -0.2% for company-adjusted EBITDA. We believe that performance uncertainty going forward has somewhat increased given the moderating growth prospects in some of its more mature key markets such as Europe, which also affect spending decisions for a number of the company's larger, key customers. In addition, currency headwinds from the depreciation of the euro, Brazilian real and Polish zloty against the US dollar are weighing on revenue and EBITDA. DETAILED RATING CONSIDERATIONS Global player in the cyclical beauty & personal care packaging market The combination with Rexam PC in 2012 created a diversified, global player in the beauty & personal care packaging market. Albéa traditionally benefited from a strong focus on laminate and plastic tubes, primarily used for oral care, skin and hair care products as well as rigid mascara, lipstick and lip-gloss products. While the acquisition of Rexam PC complemented these capabilities, for example regarding lipsticks or mascara, it importantly added Rexam PC's pump/dispensing system business which improves the product mix towards more complex and higher margin products. For the nine months to September 2014, the combined Tube segment including tube dispensing systems accounted for 40% of total combined revenues and CRP including pumps/dispensing systems for fragrances or cosmetics and Beauty Solutions for 60%. The company also has a strong manufacturing platform with 38 plants in 14 countries and broad geographic footprint with 50% of 2014 (fullyear) revenues generated in Europe, 35% in Americas and 15% in Asia. However, growth was unevenly distributed, on a reported basis, with Europe growing 3.6% (full year 2014), Asia 1.1% and the Americas declining by 4% although the company continued to grow in South America. We note that the company is somewhat more exposed to currency fluctuations outside Europe as raw materials for these regions are typically sourced in USD while sales are in local currencies. Beauty and personal care products are generally considered discretionary providing for some industry exposure to economic cycles. The beauty and personal care packaging industry is also competitive with many manufacturers competing to produce similar and alternate types of packaging. In addition, the main markets in Europe and North America are essentially mature. Some of the company's key competitors include Berry Plastics

3 Group, HCP Packaging, Tupack, Qualipac, Ileos, Essel Propack, the Aptar Group and MeadWestvaco Corporation. Restructuring projects on plan, but continue to drain cash Albéa expects to achieve synergies of US$47 million by 2016 with associated implementation cost of around US$100 million. These synergies are derived from a number of initiatives that span from cutting overhead SG&A costs, manufacturing footprint optimisation such as merging and relocating production to procurement optimisation, and hence are quite extensive. In 2014, Albéa completed a number of its most significant and risky restructuring initiatives including the consolidation of plants in France and Italy, and the relocation of its Chinese facility. As of December 2014, Albéa has also achieved the majority of its expected SG&A-related synergies from overhead reduction and optimisation. Thus the company remains on track with $36 million out of $47 million total expected annualized cost savings achieved, as of December 2014, and we expect further progress in As a result, company-adjusted EBITDA grew 8.2% to $168 million in the last twelve months to December 2014 from $155 million in December 2013, resulting in meaningful margin improvements and deleveraging. However, we expect implementation cost and growth investments to contribute to visibly negative free cash flow for 2014 and at least Degree of concentration in customer profile, but long-standing relationships Albéa's 10 largest customers, pro-forma for the combined group and on a revenue basis in 2013, accounted for 51% of revenues, with the largest customer accounting for 16%. Customers are primarily large consumer goods businesses (global accounts) including L'Oréal, LVMH, Estée Lauder, Procter and Gamble, Avon, GlaxoSmithKline and Natura. We would expect these customers to have considerable negotiating leverage with suppliers including Albéa, which at times, could exert pressure on margins. While this indicates material concentration in the company's customer base, Albéa has also developed strong long-term relationships with its top clients, which on average are more than 20 years old. In many cases, Albéa's production facilities are located near customers' facilities, thereby giving customers a lower cost supply option, and a supplier that can service multiple regions. Over time, the enhanced product portfolio of Albéa could also provide for some cross-selling opportunities to these customers. Cost pass through mechanisms important given raw material price volatility Raw materials and purchases (including for resale) accounted for approximately 48% of Albéa's cost of sales in the year The cost to produce tubes tends to be more dependent on raw material costs, in particular plastic resins, compared with pumps and dispensing systems, where a larger portion of cost of sales is represented by production costs given the somewhat higher complexity of the product. Overall, the raw materials primarily include plastic resins, closures, plastic film, lacquers, inks, varnishes and various metal parts. The prices for these materials tend to be volatile and some of Albéa's sales are indexed to raw material prices with an average 6-month lag. Meaningful leverage and negative free cash flow generation expected for 2014 and likely 2015 The company carries a significant amount of borrowings resulting in Moody's adjusted Debt/Ebitda ratio of around 5.0x expected for year-end 2014, and 5.3x adjusted for the tap issuance in January Given Albéa's current capital structure that primarily consists of bonds and its expected negative free cash flow, it will remain key to execute on synergies, cost savings and growth opportunities to deleverage the business. Liquidity Profile We view Albéa's liquidity profile as adequate following the tap issuance. As of September 2014, the company had $71 million in cash (+ EUR 45 million pro-forma for the tap) and additional availability of US$18 million under the US$60 million North American ABL facility due in In addition, Albéa secured (for 3 years) a committed European receivables facility (factoring) of EUR 100 million in June of which $32 million are available as of September Albéa continues to absorb cash mostly in the first half of the year, partly because of seasonal patterns but also due to its restructuring efforts, and we would expect Albéa to take any additional steps as and when necessary to maintain sufficient liquidity at all times. Structural Considerations Albéa's probability of default rating (PDR) of B2 is aligned with the CFR, reflecting an assumed recovery rate of 50%. The B2 rating, also aligned with the CFR, on the EUR245 million (thereof EUR45 million of new tap issuance

4 in early 2015) and US$385 million of senior secured notes due 2019 issued at Albea Beauty Holdings S.A reflects the fact that these comprise the majority of external debt in the company's capital structure. The senior secured notes are secured on a first-priority basis by certain assets and on a second-priority basis by the ABL priority collateral. Security for the notes do not cover receivables sold under the European receivables facility, used by some subsidiaries in France, Germany, Italy, Poland and the UK. The notes are guaranteed by certain operating subsidiaries, which represent 52% of the combined group's consolidated assets, according to the tap Offering Memorandum. Recoveries on the ABL priority collateral will be applied to the North American ABL facility in priority to the notes. The US$60 million North American ABL facility due 2019 at the company's North American subsidiaries benefits from a structurally senior position in the capital structure, and is secured on a first-priority basis by the ABL collateral (which comprises the accounts receivable, inventory and related assets of the group's subsidiaries organised in North America) and on a second-priority basis by the assets securing the notes. Rating Outlook The stable outlook continues to reflect the progress made regarding the company's restructuring efforts. It also reflects our expectation that the company will remain on track to deliver planned synergies, which will continue to support margins and deleveraging. Lastly, it incorporates our expectation that Albéa's liquidity profile will remain adequate at all times. What Could Change the Rating - Up Upward rating pressure on the rating could occur if the integration continues to visibly progress in line with the company's stated targets. For upgrade pressure, we would also expect margin improvements and EBITDA growth resulting in a continued deleveraging trajectory measured by Debt/EBITDA (as adjusted by Moody's) below 5x and a return to positive free cash flow. What Could Change the Rating - Down Downward pressure could occur if we become concerned over Albéa's liquidity profile for example from delays in its return to free cash flow generation. The rating could also experience negative pressure if improvements in operating performance from growth opportunities and synergies fail to materialize or Debt/EBITDA (as adjusted by Moody's) moves towards 6x. Other Considerations Albéa is rated using the Global Packaging Manufacturers Methodology, published June The difference between the actual rating assigned and the grid-indicated rating includes factors not sufficiently considered in the grid, including the ongoing negative free cash flow, ongoing restructuring efforts and somewhat greater performance uncertainty for Rating Factors Albéa Beauty Holdings S.A Global Packaging Manufacturers [1][2] Expected12/31/2014 [3]Moody's Forward PF ViewAs of 12/31/2015 Factor 1: Financial Leverage And Interest Coverage (30%) [1][2] Measure Score Measure Score a) FCF / Debt -3.3% Ca -5%-3% Ca b) Debt / EBITDA 5.3x B x B c) EBIT / Interest Expense 1.3x B x B Factor 2: Operating Profile (20%) [1][2] a) EBIT Margin % 6.0% B 5.5-7% B b) EBIT / FYE Gross PPE 19.0% Baa 18-20% Baa Factor 3: Competitive Position (50%) [1][2]

5 a) Size (Revenues in USD Billion) $1.56 Ba $ Ba b) Value Continuum Ba Ba Ba Ba c) Switching Costs Ba Ba Ba Ba d) Substrate Diversity Ba Ba Ba Ba Rating: a) Indicated Rating from Grid Ba3 Ba3 b) Actual Rating Assigned B2 B2 [1] Standard adjustments in accordance with "Rating Methodology: Moody's Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations, Part 1, Part 2 and Part 3". In addition, Moody's adjusts for one time items. [2] As of 12/31/2014 expected, pro-forma for the tap issue; Source: Moody's Financial Metrics [3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND CREDIT RATINGS AND RESEARCH PUBLICATIONS PUBLISHED BY MOODY S ( MOODY S PUBLICATIONS ) MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS FOR RETAIL INVESTORS TO CONSIDER MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS IN MAKING ANY INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN

6 WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s Publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. For Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail clients. It would be dangerous for retail clients to make any investment decision based on MOODY S credit rating. If in doubt you should contact your financial or other professional adviser. For Japan only: MOODY'S Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of MOODY'S Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ

7 consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.