(The following statement was released by the rating agency)
Dec 11 -
Summary analysis -- Henkel AG & Co. KGaA -------------------------- 11-Dec-2012
CREDIT RATING: A/Stable/A-1 Country: Germany
Primary SIC: Chemical
Mult. CUSIP6: 42550U
Credit Rating History:
Local currency Foreign currency
18-May-2011 A/A-1 A/A-1
14-May-2009 A-/A-2 A-/A-2
The ratings on Germany-based branded consumer goods and adhesives manufacturer Henkel AG & Co. KGaA (Henkel) reflect Standard & Poor’s Ratings Services’ view of the group’s strong business risk profile and its modest financial risk profile.
Henkel’s key business strengths include its solid market positions in continental Europe in home care and personal care products and its worldwide leading positions in adhesives, sealants, and surface-treatment sectors. Henkel owns strong brands but discloses lower profitability in the consumer goods segments than its leading peers. However, despite tough market conditions in Western Europe, the group has steadily improved its operating margin over the past few years. The adhesives business partially exposes Henkel to cyclicality, as the negative volume trends in 2012 attest, but it has strong growth prospects, potential for higher profitability, and favorable market conditions in emerging markets.
Our view of Henkel’s financial risk profile takes into account the group’s moderately leveraged capital structure, robust free cash flow (FCF) generation, and prudent liquidity management. We view the group’s financial policies as moderate, reflecting its commitment to maintaining adjusted funds from operations (FFO) to net debt above 50%. Henkel’s very high cash conversion ratio and relatively low capital expenditures (capex) and dividends boost its financial risk profile.
S&P base-case operating scenario
We anticipate that Henkel’s sales will rise by at least 5% for full-year 2012, which looks conservative compared with the 6.6% increase reported in the first nine months of 2012. We believe that the group’s ability to increase its prices in the laundry and home care markets was a key success factor in 2012 and will continue to be one of the main aspects affecting Henkel’s operating development in 2013. In cosmetics, we think Henkel’s innovation skills will be necessary to sustain pricing. Nevertheless, we believe that Henkel will deliver an overall resilient performance in 2013, owing to growth in emerging markets and the strength of the group’s brands. Still, we believe that sales growth could somewhat slow relative to past growth, because austerity measures in Western Europe may affect buying power and the recession in Southern Europe may continue to affect adhesives.
We project that Henkel will report increased EBITDA slightly in excess of EUR2.5 billion in 2012, following EBITDA of EUR2.26 billion in 2011 and EUR2.5 billion in the 12 months ended Sept.30, 2012. EBITDA margin could widen somewhat in 2013 because we think that Henkel’s cost-saving initiatives and growth in emerging markets could offset the challenges in mature markets.
S&P base-case cash flow and capital-structure scenario
We forecast that Henkel will achieve a Standard & Poor‘s-adjusted ratio of FFO to debt in excess of 75% for full-year 2012, roughly in line with the already strong 70% ratio achieved last year. This doesn’t fully reflect Henkel’s creditworthiness, however, because this ratio excludes about EUR1.2 billion of short-term investments, which we don’t treat as cash and equivalents under our criteria. These investments are relatively liquid, however. For 2013, we anticipate additional improvement in the group’s financial profile because we think the group will generate very robust discretionary cash flows of close to EUR1 billion. In our opinion, Henkel will further reduce its debt or increase its short-term financial assets in 2013, unless it makes a substantial acquisition.
The short-term credit rating is ‘A-1’. We view Henkel’s liquidity as “strong” as defined in our criteria and calculate that liquidity sources should exceed liquidity needs by about 2x in the next 12 months.
On Sept. 30, 2012, we estimate that liquidity sources were in excess of EUR5 billion. These included:
-- Surplus cash of about EUR1.8 billion;
-- EUR1.5 billion availability under back-up lines with a long-term maturity. These lines do not include any financial covenants or material adverse changes; and
-- FFO in excess of EUR1.9 billion.
We estimate Henkel’s liquidity needs to be about EUR2.7 billion in the next 12 months, comprising:
-- Short-term debt of about EUR1.5 billion at end-September 2012,
-- Capex in the EUR400 million-EUR500 million range,
-- Dividend payments of about EUR400 million, and
-- Bolt-on acquisitions (unidentified so far) of about EUR300 million.
The stable outlook reflects our expectation that Henkel’s operating performance will remain robust in 2012 and in 2013. Our ratings on Henkel are based on a scenario of a fairly stable environment for consumer goods and adhesives in the next few years, with growth prospects in emerging markets offsetting subdued activity in Western Europe. The stable outlook also reflects our assessment that Henkel will likely continue to generate high FCF and maintain adjusted FFO to net debt sustainably in excess of 50%, which we view as the minimum level commensurate with an ‘A’ rating. We also factor into our view the group’s public commitment to maintaining an ‘A’ rating.
Our base-case rating scenario includes mid-single-digit sales growth, and slightly improving EBITDA margins in 2013. Under our assumptions, Henkel should benefit from debt headroom of more than EUR4 billion in 2013, which we view as commensurate with the ratings. Consequently, Henkel’s ratings leave ample flexibility for acquisitions.
We consider the possibility of a downgrade as limited, but it could arise from large or repeated debt-financed acquisitions or share buybacks (beyond the above-mentioned debt headroom).
We consider that ratings upside is remote at this stage. A positive rating action could stem from, among other things, Henkel’s strong commitments to significantly more conservative financial measures and further strengthening of its business risk, which is exposed to some cyclicality and price competition. We take the view that Henkel could use the current substantial leeway it has on credit metrics to finance acquisitions.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008