(Repeat for additional subscribers)
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
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.
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.
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.
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
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
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