(The following statement was released by the rating agency)
Dec 05 -
Summary analysis -- Electrolux AB --------------------------------- 05-Dec-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Sweden
Primary SIC: Household
Mult. CUSIP6: 285378
Credit Rating History:
Local currency Foreign currency
09-Nov-2010 BBB+/A-2 BBB+/A-2
17-Dec-2008 BBB/A-2 BBB/A-2
The ratings on Sweden-based Electrolux AB, one of the three largest manufacturers of household appliances globally, reflect Standard & Poor’s Ratings Services’ assessment of the company’s satisfactory business risk profile and modest financial risk profile.
Electrolux’s key business strengths include the large size of the company’s operations, which enables economies of scale; its leading market positions in Europe, the U.S., and Latin America; its good sales and earnings diversity overall; its wide product range with well-known brands in its portfolio; its focus on product innovation; and what we see as a balanced operating strategy aimed at increasing exposure to higher-growth and often higher-margin emerging markets.
The ratings are constrained by the cyclicality of demand for durable consumer goods, which are relatively discretionary by nature; by Electrolux’s large exposure to weak European and fragile U.S. markets; by the high price pressure from raw materials volatility, level of competition from other manufacturers and promotional activity of retailers; and by the still-large fixed-cost base in regions were demand is weak. Additionally, Electrolux’s profitability should gradually improve in the next two years under our base-case scenario but should remain below peers like BSH Bosch und Siemens Hausgeraete GmbH (BSH; A/Stable/A-1), a more high-end appliances manufacturer or SEB S.A. (--/--/A-2) which focuses solely on small appliances.
We assess Electrolux’s financial risk profile as “modest”. This is supported by our view of its financial policy as conservative, notably in terms of debt leverage, diversity of funding, and liquidity management. The company has a good track record in managing efficiently its working capital and capital expenditures (capex). In our view credit metrics should gradually improve from bottoming out in 2011 with rising free cash flow and slightly lower debt levels, not factoring in potential acquisitions.
S&P base-case operating scenario
We see revenue growth of around 2% in 2013 and 2014, compared with 5.9% at September 2012. Our base case for major appliances assumes negative sales growth in EMEA, low-single-digit growth in North America, and high-single-digit growth in Asia-Pacific. The higher share of income from Latin America and South East Asia, and of higher-margin products like built-in kitchens, should mitigate in our view the high price-pressure from competitors and promotions on mid-range products.
Gross margins should remain stable at above 20% in 2013-2014. Higher component prices due notably to rising Chinese labor costs should mitigate the benefits of lower steel and plastics market prices overall. EBITDA margins should stabilize at current levels (6.8% at Sept. 30, 2012) in 2013. This is mainly due to gross margin trends as we expect the cost savings from restructurings in Europe and the U.S. to only have a very gradual positive impact on margins. We have not factored large movements in currency-exchange movements, which could impact margins negatively.
S&P base-case cash flow and capital-structure scenario
Internal cash flow generation has been recovering in the last two quarters of 2012 compared to last year. For 2013-2014, our central scenario is that funds from operations should increase to SEK7.3 billion from SEK 6.1 billion at Sept. 30, 2012. This is mostly based on the higher share of revenues and earnings from Latin America and Asia-Pacific as well as a stabilization of the gradual recovery observed in the U.S. in 2012.
Total debt should stabilize to about SEK12 billion in the coming months. This assumes the company will repay some of the acquisition-related debt due. However, we have not taken into account potential large debt-financed transactions or a widening of the pension deficit. We do not consider the size of the pension deficit (18% of total debt) to be a major rating driver over the medium term.
The short-term rating on Electrolux is ‘A-2’. We assess the company’s liquidity as “adequate” under our criteria and calculate that liquidity sources should exceed liquidity needs by 1.2x over the next 12 months.
As of Sept. 30, 2012, we estimate that liquidity sources will mostly consist of:
-- SEK5.6 billion of unrestricted cash.
-- SEK7 billion of funds from operations (FFO) in 2013, under our base-case scenario.
-- SEK7.7 billion undrawn under two revolving credit facility (RCF) maturing in 2016-17.
This compares with potential liquidity uses of:
-- SEK4.2 billion of debt maturities due within 12 months and SEK1.8 billion of debt maturities due within 12-24 months.
-- Around SEK6 billion of forecast adjusted capital expenditure (capex) for 2013.
-- Over SEK900 million of forecast dividends for 2013.
There are currently no covenants or rating triggers on the company’s debt.
The stable outlook reflects our view that Electrolux is likely to generate solid free cash flow in 2013 based on gradual improvement and stability in operating margins and working capital efficiencies. For 2013, we think Electrolux’s operating performance will remain linked to general consumer spending trends: weak in Western Europe, flat North America, and strong in Latin America. Hence we think Electrolux should be able to maintain an adjusted FFO to net debt of more than 45% and net debt to EBITDA at or below 2x, ratios that we deem commensurate with the current ratings.
We could lower the ratings if adjusted FFO to net debt falls to less than 45%. This could occur, for example, due to lower-than-anticipated revenues and operating margins in Latin America or the U.S. Downside risks could also occur if sourcing costs rise sharply or due to unfavorable currency-exchange rates. We would also view negatively any changes in the company’s financial policy, such as a sudden increase in the pace and size of debt-financed acquisitions, which could lead to net debt to EBITDA rising above 2x on a sustained basis.
Rating upside is currently limited, due to our forecast of limited improvement in the company’s operating performance for 2013. In our opinion, a higher share of earnings from emerging markets and a continued reduction of the fixed cost base in regions with weak demand prospects are positive but its effects on the company’s profitability are not likely to be visible in the immediate future.
Related Criteria And Research
-- 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