Nov 19 -
Summary analysis -- SEB S.A. -------------------------------------- 19-Nov-2012
CREDIT RATING: --/--/A-2 Country: France
Primary SIC: Household cooking
Mult. CUSIP6: 812823
Credit Rating History:
Local currency Foreign currency
13-Nov-1998 --/A-2 --/A-2
The 'A-2' short-term corporate credit rating on France-based SEB S.A., the world's largest manufacturer of small household appliances, reflects Standard & Poor's Ratings Services' assessment of the company's "satisfactory" business risk profile and "intermediate" financial risk profile.
SEB's business risk profile is supported, in our view, by the company's leading market positions worldwide in the highly competitive small household appliance industry; its good geographic diversification, with a majority of sales and earnings generated from emerging markets; its portfolio of well-known brands and its large product range; and its higher and more-resilient operating profitability (the EBITDA margin averages above 12% annually) than some of its Standard & Poor's-rated peers such as Electrolux (BBB+/Stable/A-2) and Whirlpool (BBB-/Stable/A-3).
The rating is constrained by the cyclicality of demand for durable consumer goods; SEB's gross margin can be affected by the volatility of raw materials and currency-exchange movements (especially EUR/USD). There is also intense competition between manufacturers and high promotional activity by retailers, both of which weigh on the company's fixed costs. The company has a large exposure to Western Europe, a region we believe will be characterized by weak demand prospects and production overcapacities in the next two years.
We assess SEB's financial risk profile as "intermediate". We view positively the financial policy to diversify funding sources and refinance debt maturities well in advance. SEB has a track record of generating positive free cash flows (EUR200 million for the 12 months to June 2012). The capital structure is solid with low debt leverage (net debt to EBITDA of 1.7x at June 2012) and is well capitalized. We believe debt levels should remain relatively stable as the company is likely to increase investments in emerging markets and production efficiencies.
However, SEB bears large seasonal working-capital swings that translate into inventory build-up before Christmas and Chinese New Year in particular. Its cash conversion cycle is weaker than peers (95 days at June 2012) versus Whirlpool (19 days) and Electrolux (34 days). Finally, we think that the large family ownership in the company limits SEB's ability to strengthen its capital structure through equity raising or dividend cuts.
S&P base-case operating scenario
For 2013 we assume 3% revenue growth, compared with the 6% achieved for the 12 months to June 2012. We think sales growth will remain negative in Western Europe; in low single digits in North America, and in mid single digits in Latin America and Central and Eastern Europe. For Asia, we believe sales growth will slow in China but remain in the high single digits with strong growth still from South East Asia.
We see SEB's EBITDA margin declining slightly in 2013 to slightly below 12.0% compared with 12.6% for the 12 months to June 2012. We think margins will remain affected by the high level of competition, high promotional activity by retailers, and increased selling and distribution in emerging markets. Cost of materials should, however, benefit from lower metal prices but remain subject to unfavorable foreign currency movements.
S&P base-case cash flow and capital-structure scenario
We estimate SEB will generate around EUR120 million of free operating cash flow for 2013 compared with EUR99 million in 2011. We believe that slightly lower operating profit, higher interest expenses, negative working capital movements, and slightly higher capital spending (due to the expansion in emerging markets) compared to 2011 should constrain the growth in free cash flow generation.
We project debt to EBITDA to be at the low end of 1.5x-2.0x in 2013, with debt levels gradually reducing from December 2011 levels. We have factored in stable dividend payouts and share buybacks, and no large widening of the pension deficit. We do not consider the latter to be a ratings driver over the medium term due to its relatively small size compared with SEB's debt.
The short-term rating on SEB is 'A-2'. We assess the company's liquidity position as "adequate" under our criteria and calculate that the ratio of liquidity needs to uses should remain more than 1.2x over the next 12 months.
As of Sept. 30, 2012, we estimate that liquidity sources for the next 12 months mostly consist of:
-- EUR326 million of unrestricted cash.
-- EUR330 million of forecasted funds from operations for 2013, under our base-case scenario.
-- EUR657 million of undrawn committed credit lines maturing in more than 12 months, including a EUR560 million revolving credit facility maturing in February 2016.
This compares with liquidity uses of:
-- EUR247 million of debt due within 12 months, including EUR110 million of commercial paper and EUR23 million due between 12-24 months.
-- About EUR140 million of forecast capex for 2013.
-- Around EUR80 million of forecasted dividends for 2013.
We note SEB's continued good access to capital markets with a EUR220 million private placement in September 2012, which helped improving the average debt maturity.
There are currently no financial covenants or rating triggers on the company's debt.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008