Oct 29 - Fitch Ratings has affirmed Royal Philips Electronics' Long-term
Issuer Default Rating (IDR) and senior unsecured rating at 'A'. The Short-term
IDR has been upgraded to 'F1' from 'F2'. The Outlook is Stable.
The rating action reflects Fitch's expectation that Philips' credit profile will
remain commensurate with key credit metrics within the agency's guidance for the
current ratings. The agency forecasts funds from operations (FFO) adjusted net
leverage to decrease to 0.8x by end-2012 from 1.1x at end-Q312 and the return to
healthy free cash flow (FCF) generation thereafter, as economic conditions
improve and the group's cost-cutting programme advances.
Philips' earnings generation in 2012 has been healthy, despite margin
compression in its Lighting division and increased competition in healthcare
markets. Group Q312 EBITA margin remains solid at almost 8% (adjusted for gains
and losses on sale of assets), supported by improving margins in Healthcare and
Consumer Lifestyle. The agency expects limited margin improvements
(pre-restructuring costs) for the remainder of the year, although Q4 tends to be
a strong quarter for the group. Uncertainty around the pending US presidential
election and healthcare reform has led to hesitant investments in the group's US
The group is making solid progress on its group-wide cost-savings programme,
which it increased to EUR1.1bn from EUR800m in September 2012. Of the 6,700
full-time staff that it plans to cut by 2014, two fifths have already been
implemented. This will support the achievement of management's target of a
10%-12% EBITA margin by 2013 from 7.3% EBITA margin in Q312 (9.2% when adjusting
for incidental charges).
Philips' ratings are constrained by FCF margins (post investments and dividends)
that remain below 'A' rated peers. Philips continues to pay large shareholder
returns, including a healthy dividend and a EUR2bn share buyback programme.
However, the group takes a gradual approach in executing its share-buy-back
programme, which now runs until mid-2013. The group has also offered a scrip
option for dividends, which historically has been the mode of payment for more
than half of the group's dividends.
The ratings are supported by the company's leading position in its core consumer
lifestyle, lighting and healthcare markets, its broad diversification by
geography and product, its global brand name and commitment to innovation. The
group is well positioned to benefit from long-term demand growth for healthcare
and energy efficiency, especially in emerging markets (34% of group revenues in
the 12 months to Q312).
Fitch regards as positive the group's portfolio realignment towards more stable
and higher-margin healthcare markets, as evidenced by the TV joint venture with
TPV which reduced the group's exposure to the highly competitive and volatile
consumer electronics market. The group generated 41% of its revenues in the last
12 months to Q312 in its Healthcare division and 25% in its Consumer Lifestyle
division, of which only 28% (or 7% of group revenues) comes from consumer
electronics during the same period.
Philips' liquidity benefits from large cash balances. The group has historically
maintained more than 80% of its unadjusted debt as cash on its balance sheet.
Liquidity at end-Q312 totalled EUR5.0bn, comprising EUR3.2bn of cash and a
EUR1.8bn long-term credit facility that has been undrawn since its inception in
the mid-nineties. This compares to an aggregate EUR901m of short-term debt
maturing over the next 12 months. The group also benefits from a USD2.5bn
commercial paper programme, which has been unutilised since 2003.
WHAT COULD TRIGGER A RATING ACTION?
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--FFO adjusted gross leverage > 2.0x
--FFO (pre-rent, pre-interest) margin materially below 10%
--FCF margin significantly below 5%.
Positive: An upgrade is unlikely in the short term, but could occur if the
following guidelines, individually or collectively, are met:
--FFO adjusted gross leverage < 1.0x
--Further improvements in earnings and FCF stability.
All metrics are to be judged on a sustained basis.
Additional information is available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a service
Applicable criteria, 'Corporate Ratings Methodology', dated 12 August 2011 are
available at www.fitchratings.com.
Applicable Criteria and Related Research:
Corporate Rating Methodology