Credit Opinion: Holcim Ltd

Transcription

1 Credit Opinion: Holcim Ltd Global Credit Research - 19 Dec 2014 Jona, Switzerland Ratings Category Moody's Rating Issuer Rating -Dom Curr Senior Unsecured -Dom Curr Other Short Term Holcim US Finance S.a r.l. & Cie S.C.S. Bkd Senior Unsecured Bkd Commercial Paper P-2 Bkd Other Short Term -Dom Curr Holcim Capital Corporation Ltd. Bkd Senior Unsecured Bkd Commercial Paper Bkd Other Short Term P-2 Holcim Finance (Australia) Pty Ltd Bkd Senior Unsecured -Dom Curr Bkd Other Short Term -Dom Curr Holcim GB Finance Ltd. Bkd Senior Unsecured Bkd Other Short Term Contacts Analyst Phone Falk Frey/Frankfurt am Main Matthias Volkmer/Frankfurt am Main Matthias Hellstern/Frankfurt am Main Key Indicators [1]Holcim Ltd 9/30/2014(L) 31/12/ /12/ /12/ /12/2010 Revenue (USD Billion) $21.1 $21.3 $22.6 $23.5 $20.8 Operating Margin 12.4% 12.4% 10.7% 11.3% 12.5% Operating Margin Volatility 12.4% 12.4% 10.7% 11.3% 12.5% EBIT / Avg. Assets 6.5% 6.6% 6.0% 4.7% 6.0% Debt / Book Capitalization 40.2% 40.6% 42.8% 44.9% 42.4% Debt / EBITDA 3.4x 3.1x 3.6x 4.4x 3.4x EBIT / Interest Expense 4.0x 3.9x 3.6x 2.8x 3.3x RCF / Net Debt 17.6% 21.7% 22.8% 18.8% 22.7% [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-

2 Financial Corporations. Source: Moody's Financial Metrics Note: For definitions of Moody's most common ratio terms please see the accompanying User's Guide. Opinion Rating Drivers - Pending merger with Lafarge - if successful, capital structure will weaken - Large global building materials group with a balanced portfolio of emerging and developed countries - Market leading position in a concentrated industry with high barriers to entry - FX losses drag on 2014 performance, Leadership Journey continues to deliver cost efficiencies - Financial policy and healthy liquidity profile are key supporting factors for the rating Corporate Profile Domiciled in Jona, Switzerland, Holcim is one of the world's leading cement and aggregates producers. Additional activities include ready-mix concrete, asphalt and a range of other services. Key competitors are Lafarge (Ba1 Review for Upgrade), Italcementi (Ba3 Positive), HeidelbergCement (Ba1 Stable), CRH ( Stable) and Cemex (unrated). The group operates in around 70 countries across all continents. At end of December 2013, the group's annual cement production capacity amounted to 206 million tons. The group generated revenues of CHF19.0 billion in the last twelve months ended September Holcim's largest shareholders are T. Schmidheiny, with a share of 20.1%, Eurocement Holding AG with a share of 10.8% and Harris Associates with a share of 4.9% On 7 April 2014, Lafarge and Holcim announced a merger of equals to form the world's largest building materials company which is expected to close in the first half of 2015 due to obtaining required approvals from the relevant regulatory authorities and the approval of the shareholders of Holcim. The combined group will be active in around 90 countries and have combined sales of around CHF33 billion (EUR27 billion) on a pro-forma 2013 basis. Rating Rationale The negative outlook on Holcim's ratings is driven by the announcement of Lafarge and Holcim to merge both groups through an all share deal with a 1:1 exchange ratio into the world's largest building materials company, being active in around 90 countries and with combined sales of around CHF33 billion (EUR27 billion) on a proforma 2013 basis. Initially, on a proforma basis, the combination with Lafarge will lead to a capital structure which will weaken and position the combined entity weakly in the category, hence the negative outlook assigned. The combined group expects to achieve synergies at EBITDA level of CHF1.2 billion (EUR1.0 billion) over a three year horizon and will need to undergo a substantial asset disposal program in order to receive approval from competition authorities. Holcim's creditors will benefit from the improved business of the combined entity, but will also be exposed to risk factors that are associated with such a large transaction: (i) timing and valuations achieved for the assets to be disposed of, (ii) achievement of synergies timely and at projected levels, (iii) successful combination of two different business cultures and (iv) approvals from shareholders and regulatory authorities. Holcim's stand-alone rating benefits from the group's strong competitive position, reflecting its scale, high degree of geographical diversification and brand name strength. In addition to its position as one of the leading global cement producers, Holcim has good positions in aggregates and ready-mix concrete in mature markets. The group experienced rather positive operating conditions in Q1-Q with the top line growing by 3.4% and EBITDA increasing by 0.7% on a like for like basis and excluding FX movements. Nevertheless, Holcim's performance remains exposed to the cyclical nature of construction activity and has weakened between 2008 and 2011 as a result of the economic downturn in Europe and North America, where the group generated approximately 45% of revenues. An improvement in operating performance and cash flow generation over the last two years mainly supported by positive pricing trends and good volume developments in the US, Latin America and Asia has supported a stabilization in credit metrics with RCF/net debt at 17.6% for the last twelve months ended September 2014 (at the seasonal working capital peak, 21.7% at year-end 2013).

3 Moody's also notes Holcim's strong market presence in India and more generally in Asia-Pacific but also in the Latin American region as an ongoing source of uncertainty due to currency volatility (the Latin American currency basket depreciated by 15% in the first nine months of 2014 versus the same period in 2013, the Asian basked depreciated by 10%). Other factors weighing negatively on the rating are the group's considerable minority interests resulting from fully consolidated, but not fully owned, and highly profitable entities predominantly in India (although with current currency volatilities, minorities also participate in the downside risk), which are not reflected in the group's credit metrics. DETAILED RATING CONSIDERATIONS PENDING MERGER WITH LAFARGE - IF SUCCESSFUL, CAPITAL STRUCTURE WILL WEAKEN The pending merger of Holcim with Lafarge, which is expected to be consummated in mid 2015, will create by far the largest cement producer in the world with a very well-balanced geographic diversification. This should help downturns in individual regions to offset with stronger performance in other regions. It also will create potential for synergies, especially in back-office functions. Production synergies will be rather limited given the usually local production of cement and aggregates, which is driven by the low value-to-weight ratio of cement. On a combined basis no single country will account for more than 10% of sales. This is a particular advantage when more than 60% of the sales of the combined group are being generated in emerging markets. The geographical reach of both companies fits together quite well in developed and emerging countries. Lafarge and Holcim also complement nicely in Egypt as Lafarge is the majority shareholder of Lafarge Cement Egypt and Holcim controlling the remaining minorities. The capital structure of Lafarge is weak, and, therefore, the all share merger of Lafarge and Holcim will lead to weaker leverage metrics of the combined entity than for Holcim on a stand-alone basis, which will position the combined group weakly in the rating category. This is partly offset by proceeds from sizeable asset disposals which will be used to reduce the group's indebtedness. SIZE AND DIVERSITY OF OPERATIONS REDUCES VULNERABILTY TO CYCLICALITY Holcim ranks among the largest players in the cement industry and benefits from its good position in markets in Asia and Latin America with favorable long-term demand fundamentals and from solid positions in aggregates and ready-mix concrete in mature markets. In Q1-Q3 2014, the group generated 28.9% of revenues in Europe, 16.1% in North America, 15.2% in Latin America, 35.3% in Asia-Pacific and 4.5% in Africa and the Middle East. The relatively low dependency on any single market supports stability of cash flows and profit margins. Management's strategy remains focused on its core cement and aggregates business and maintaining a high degree of geographic diversification. Future investment opportunities are largely determined by the maturity of the respective markets. In emerging countries, investments are targeted at increasing cement capacity: For instance, in Brazil the group adds incremental annual cement capacity of 2.3 million tons in Since 2008 the group added globally 22.3 million tons net of closures and 4.6 million incremental increase came on stream in In mature markets, the focus lies on vertical integration as aggregates are becoming increasingly scarce resources, with their asset values growing continuously due to restrictive permit and extraction regulations. FX LOSSES DRAG ON 2014 PERFORMANCE On a like for like basis, Holcim posted a stable to slightly positive performance in the first nine months of 2014 with net revenues increasing by 3.4% and operating EBITDA increasing by 0.7%. Including changes in scope and FX rates, sales declined by 4.7% and operating EBITDA by 7.1%. While Europe and North America developed favorably (operating EBITDA +6.8% and +22.4% lfl respectively) driven by volume increases and tight cost control, Asian and Latin American operations suffered from negative currency effects and restructuring costs associated with plant closures (operating EBITDA -1.3% and -5.5% lfl respectively). The group's operating performance was supported by the progress made under the ongoing cost cutting programme with an additional CHF591 million of savings and customer excellence improvements achieved year to date (cumulative CHF1,500 million targeted for the full year 2014 compared to the base line 2011). Despite the challenging market conditions encountered by Holcim credit metrics remained broadly stable year-onyear with RCF/Net debt at 17.6% as per LTM September 2014, which is - taking seasonal working capital patterns into account - broadly in line, although at the lower end, with our expectations for the current rating. EMERGING MARKET CURRENCY VOLATILITY COULD HIT HOLCIM IN THE SHORT TERM

4 Holcim generated 33% and 21% of group operating EBITDA in Asia-Pacific and Latin America respectively. The currency volatility we have observed over the last year in several Asian and Latin American countries (the Latin American currency basket depreciated by 15% in the first nine months of 2014 versus the same period in 2013, the Asian basked depreciated by 10%) is a source of concern and has led to declining EBITDA contributions from these regions on a group level. We see three main risks from the current depreciation: (i) Risks of lower growth prospects and threat of temporary overcapacities, (ii) operating margin pressure due to spike in inflation as most of these countries are heavily reliant on imports for raw material supplies, (iii) mismatch between currency of cash flows and currency of debt with limited ability to hedge, an issue mainly in India, which was partially addressed by Holcim with the still ongoing restructuring of the ownership structure of its Indian operations. FINANCIAL POLICY AND HEALTHY LIQUDITY PROFILE KEY SUPPORTIVE FACTORS We consider Holcim's financial policy and the adequacy of its liquidity profile as consistent with a rating. In line with other players in the market, Holcim has been growing through acquisitions in the past, but did not do large scale acquisitions at the time when markets were considered overheated, i.e. between 2007 and contrary to HeidelbergCement and Lafarge. At the same time Holcim's organic growth programme has been relatively aggressive leading to very high capex spend between 2007 and The acquisition of Cemex' Australian activities in 2009 for AUD2.0 billion (CHF 1.8 billion) had been financed by equity. Also the merger with Lafarge is structured as an all share deal with limited cash outflows expected for minority buy outs, if any. On a more negative note the group has maintained relatively high dividend levels in the period (CHF645 million in 2014, incl. dividends for minorities) notwithstanding that cash out for the declared dividends have been reduced considerably during that period. This was partially achieved by using stock dividends at times of weaker results in Holcim has been able to continuously improve its leverage ratios from a debt/ebitda level of 4.4x in 2011 down to 3.4x for LTM September 2014 (seasonal working capital peak, 3.1x for FY2013) by applying free cash flow to debt reduction. LEADERSHIP JOURNEY Around two years ago Holcim implemented a three-years efficiency and customer focus program "Holcim Leadership Jouney" to improve the company's Return on Invested Capital (ROIC). The aim of the program is to increase Holcim's ROIC from currently below 8% post-tax to above 8% post-tax by 2014 through a combination of cost cutting initiatives (CHF1 billion additional profit), asset base optimization (selective divestments and investment efficiency), customer excellence (CHF500 million additional operating profit) and net working capital improvement. The total increase in operating profit achieved until end of September 2014 was CHF1,692 million and the final target for 2014 is set at >CHF1.5 billion. All one off cash costs were already expensed in Liquidity The liquidity position of Holcim is solid. The group had around CHF2.0 billion of cash on balance sheet at 30th September 2014 and CHF3.7 billion availabilities under its long term committed revolving credit facilities (which do not include any repeating MAC clauses or any financial covenants). Alongside still healthy operating cash flow generation expected over the next twelve months this should be more than sufficient to cover main liquidity uses consisting of working cash (Moody's typically assumes 3% of revenues), capital expenditure, working capital requirements, scheduled debt repayments and dividends. Holcim has a well spread maturity profile with an average maturity of 5 years as per end of September Rating The negative outlook on Holcim's ratings reflects the uncertainties on the timely execution and successful realization of the merger in particular (1) the successful sale of the identified assets, (2) uncertainties regarding the price realisation on the required disposals, (3) execution risks on the achievement of the targeted synergies with respect to the calculated amount and the timing, and (4) concerns that the relatively optimistic assumptions for future performance might not materialise. What Could Change the Rating - Up

5 An upgrade of Holcim's rating is unlikely over the next months. However, the ratings could be upgraded in case of (1) realization of synergies beyond the anticipated CHF1.2 billion by 2016; (2) higher than expected cash inflow from the planned asset disposals within the anticipated time frame until H as part of the merger process, and (3) an operating performance and profitability improvements driven by volume growth and cost synergies of the newly formed group evidenced in RCF / net debt to reach at least 25% by 2015 and beyond and a reduction of the Debt/EBITDA ratio to below 3.0x by 2015 and beyond. What Could Change the Rating - Down Moody's would consider downgrading Holcim if (1) the timeline of the integration and achievement of synergies or realization of asset disposal valuation would fall materially behind expectations; or (2) legal and/or regulatory requirement would lead to a significant change in the current merger plan; (3) such events as well as weaker-thanexpected performance which would result in the inability of the company to achieve RCF / net debt of around 20% by 2015 the latest which has to be sustained over the following years. Other Considerations High share of minority interest Holcim holds a high share of minority interests. This reflects the group's strategy to expand into new markets with local partners, and therefore provides for easier market access and helps sharing the risks which a company is exposed to in certain emerging markets. In 2013, approximately 40% of the group's consolidated income was attributable to minorities. The book value of minority interest on balance sheet amounted to approximately CHF2.5 billion last year. The most significant minority interests are in its Indian subsidiaries, where Holcim holds shareholdings of around 50% in Ambuja Cements Ltd. and ACC Limited. Therefore Holcim's Indian subsidiaries are fully consolidated in Holcim's results. Holcim recently announced, subject to pending approvals, a simplification of its Indian group structure, which involves the increase of its shareholdings in Ambuja Cements to 61.4% and the acquisition of Holcim's 50.01% stake in ACC Limited by Ambuja Cements. The current rating does not incorporate debt-financed steps to increase these shareholdings. Structural subordination Like other building materials companies, Holcim has a material amount of its financing at subsidiary level. This reflects the group's operations in a variety of regions with local partners and the limited direct convertibility of certain currencies. However, Holcim intends to limit total debt at subsidiary level to a maximum of 30% of consolidated group debt (stood at 21% as per Q3/2014). In Moody's view, this is acceptable in light of the very international business scope of the group and because it helps to mitigate currency and transfer risks. The local financing helps to mitigate the current volatility in the foreign exchange movements. Rating Methodology In its assessment of Holcim, Moody's applied the Global Building Materials Industry methodology, which indicates a Baa1 rating derived from the methodology grid based on a point in time assessment as per LTM September The assigned rating, which is one notch below the grid-indicated rating, is mainly explained by Holcim's relatively high leverage, and the expectation that this may deteriorate based on proforma figures for the combined LafargeHolcim entity. List of rated subsidiaries - Holcim Capital Corporation Ltd.: LT Rating:, ST Rating: P-2, : - Holcim Finance (Australia) Pty Ltd: LT Rating:, ST Rating:, : - Holcim European Finance Ltd.: LT Rating: (P), ST Rating:, : - Holcim Finance (Canada) Inc.: LT Rating:, ST Rating:, : - Holcim Finance (Luxembourg) S.A.: LT Rating:, ST Rating:, : - Holcim GB Finance Ltd.: LT Rating:, ST Rating:, : - Holcim Overseas Finance Ltd.: LT Rating:, ST Rating:, : - Holcim US Finance S.a r.l. & Cie S.C.S.: LT Rating:, ST Rating: P-2, :

6 - Holcim Finance (Belgium) S.A.: ST Rating: P-2 Rating Factors Holcim Ltd Building Materials Industry Grid Current LTM [3]Moody's Month Forward ViewAs [1][2] 9/30/2014 of 12/11/2014 Factor 1 : Scale (5%) Measure Score Measure Score a) Revenue (USD Billion) $21.1 Aa $21 - $22 Aa Factor 2 : Business Profile (15%) a) Business Profile Aa Aa Aa Aa Factor 3 : Profitability and Efficiency (30%) a) Operating Margin 12.4% Ba 12% - 13% Baa b) Operating Margin Volatility 7.1% A 6% - 8% A c) EBIT / Avg. Assets 6.5% Ba 6% - 7% Ba Factor 4 : Leverage and Coverage (40%) a) Debt / Book Capitalization 40.2% Baa 40% - 42% Baa b) Debt / EBITDA 3.4x Baa 2.8x - 3.2x Baa c) EBIT / Interest Expense 4.0x Baa 4x - 4.5x Baa d) RCF / Net Debt 17.6% Ba 20% - 22% Baa Factor 5 : Financial Policy (10%) a) Financial Policy Baa Baa Baa Baa Rating: a) Indicated Rating from Grid Baa1 Baa1 b) Actual Rating Assigned [1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non- Financial Corporations. [2] As of 9/30/2014(L); 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. ("MIS") AND ITS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT

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