RPT-Fitch Upgrades Michelin to 'BBB+', Outlook Stable
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March 25 () - (The following statement was released by the rating agency) Fitch Ratings has upgraded Compagnie Generale des Etablissements Michelin's (Michelin) and Compagnie Financiere Michelin's (CFM) Long-term Issuer Default Ratings (IDR) and senior unsecured ratings to 'BBB+' from 'BBB'. The Outlooks on the Long-term IDRs are Stable. Fitch has also affirmed both entities' Short-term IDRs at 'F2' and upgraded Michelin's hybrid bond rating to 'BBB-' from 'BB+'. CFM is the group's finance arm and the intermediate holding entity for Michelin's non-domestic operations. The upgrade reflects the group's strong business profile as well as its relatively stable profitability and free cash flow (FCF), including during the economic recession and auto industry crisis in 2008-2009, and our expectation that it is sustainable. In particular, we believe that solid underlying funds from operations (FFO) will more than cover ambitious capex earmarked chiefly to finance growth in emerging markets. KEY RATING DRIVERS Defensive End-Markets Michelin derives the vast majority of its sales from the relatively more stable and profitable replacement market, compared with the original equipment business. Fitch expects growth rates to remain subdued in 2013 in developed markets, but emerging markets should continue to outperform. Growing Diversification Michelin's bold plan to accelerate investment in emerging markets will enable the company to boost its growth prospects. Geographic diversification is also compounded by the group's solid market position in various segments, including passenger cars and light trucks, commercial vehicles and specialty vehicles. Raw Materials Exposure Raw materials constitute a major part of Michelin's cost structure and the historical high volatility of their prices has been a significant driver of the group's profitability. A significant portion of this cost is typically hedged and covered by raw materials clauses, but such clauses and hedges only protect for a limited period. While the impact of raw materials price changes was small in 2012, Fitch believes that prices are likely to rebound in the future. Sound Profitability Operating margins increased further to 11.3% in 2012, from 9.6% in 2011, driven chiefly by the recovery of the truck business and the extremely high profitability of the specialty segment. Earnings have gradually improved as a result of cost-savings efforts and the positive effect from sustained price and mix, which offset declining volumes in 2012. While we believe that all divisions will remain resilient in the foreseeable future and be supported by the group's competitiveness plan, we expect some erosion at the specialty division, although still at a high level. We also believe that a further decline in new vehicle sales in Europe in 2013 will only have a limited impact on earnings. Financial Flexibility Strong FCF has enabled the group to steadily reduce debt since the 2009 recession. FFO gross leverage declined to 1.8x at end-2012 from 2.1x at end-2011 while cash from operations on total adjusted debt increased to 59% from 22% year on year. Healthy Liquidity Liquidity is supported by EUR1.9bn in cash and equivalents at end-2012 and undrawn credit lines of EUR1.5bn largely covering EUR1.3bn of current financial debt. RATING SENSITIVITIES Positive: An upgrade is unlikely in the foreseeable future as Michelin has already reached a natural ceiling for the sector. However, future developments that could lead to positive rating actions include a material and sustained improvement of the FCF margin above 5% and a net cash position. Negative: Future developments that could lead to negative rating action include sustained erosion of profitability and cash generation measured notably by operating margins below 10% and thin FCF margin as well as FFO gross leverage above 1.5x.