December 15, 2016 / 5:41 PM / 8 months ago

Fitch Affirms Henkel at 'A'; Outlook Stable

(The following statement was released by the rating agency) MILAN/LONDON, December 15 (Fitch) Fitch has affirmed Germany-based consumer goods and industrial adhesives company Henkel AG & Co. KGaA's (Henkel) Long-Term Issuer Default Rating (IDR) at 'A' and its Short-Term IDR at 'F1'. Fitch has also assigned a senior unsecured rating of 'A' to the company's EUR2bn bonds issued in September 2016. The Outlook on the Long-Term IDR is Stable. The affirmation reflects Henkel's consistently low leverage, a diversified business portfolio, its robust profitability and strong cash-flow generation. These traits protect its credit profile from a potential increase in raw material prices in 2017 as commodity prices rebound from low levels. The ratings also factor in the increase in leverage following acquisition activity conducted in 2016 and allows for some headroom for additional possible bolt-on acquisition spending over 2017-2020, in particular reflecting Henkel's newly announced corporate strategy - Henkel 2020+. KEY RATING DRIVERS Rating Headroom, M&A Fitch Ratings expects the large acquisition headroom that thanks to funds from operations (FFO)-adjusted net leverage well below 1.0x, Henkel AG & Co. KGaA has had for its 'A' rating level since 2014, to diminish by end-2016 and not to materially recover over 2017-2020. This follows acquisition spending of approximately EUR3.7bn in 2016 on laundry and home-care company Sun Products and some haircare brands from Procter & Gamble and possible further bolt-on M&A. However, we estimate that net leverage will still be no higher than 1.2x-1.3x (2015: 0.1x) for 2016 and should, over 2017-2020 remain well below the 2.0x maximum threshold for the current rating. Steady Revenue Performance The ratings reflect Henkel's steady sales growth and profit performance over the years and we expect this to continue over the rating horizon. Henkel achieved average organic sales growth of 3% in 2015 (partly thanks to a strong contribution from organic sales growth in emerging markets of 5.9%), almost equally fuelled by volume (1.3%) and price increases (1.7%) amid increasingly competitive markets. The company maintained this momentum in 9M16, primarily through increases in volumes, despite promotional pressure. Organic sales growth was 3.0%. Profit Margin Uplift Henkel has also maintained robust profit margin performance in all its divisions through cost-saving measures, efficiency gains and portfolio optimisation. Adjusted EBIT margin has improved by 590bp since the 2008, reaching 16.2% in 2015 and we expect it to increase by at least 100bp in 2016. Such a profit profile is adequate for the 'A' rating relative to major industry peers. However, the increase in oil prices since Q416 could start affecting Henkel's cost structure from the second half of 2017 and erode the benefits of further production efficiency and pricing power translating into weakening profit margin momentum. Henkel's New Strategy We believe that the company's new strategy for 2017 to 2020 (Henkel 2020+) announced in November 2016 will support Henkel's ability to generate organic sales growth and should enable it to maintain credit metrics commensurate with its 'A' rating. The strategy includes a goal of 2%-4% organic sales growth over the period 2017-2020, continued improvements in profit margins and expanded free cash-flow generation despite a step-up in capex. A continuation of bolt-on M&A spending is also integral to the strategy and could push leverage higher. Management has reiterated its goal of defending Henkel's 'A' rating, but we have assumed M&A spending of EUR2bn pa in our rating-case projections. Strong Adhesives Business Henkel generated 50% of profits through its global business-to-business and consumer adhesives operations, which have a well-diversified customer base by industry and in which Henkel is a global leader. These operations are exposed to the cyclicality of global industrial manufacturing and construction, but Henkel increased profitability over 2012-2016, .confirming the soundness of its strategy in terms of products, geographies and customer relations supplementing its strong product diversification as an anchor to the current rating. Emerging-Market Balance The rating reflects the solid geographic diversification with a good balance between developed and emerging markets. In 2015 sales in emerging markets accounted for 43% of total group sales. Management has not achieved so far its target of reaching a 50% level of sales from emerging markets and we estimate these should account for 40% of sales once Henkel fully integrates US-based Sun Products, mostly as a result of currency headwinds over 2014-2016 but also due to the fact that 2016's M&A activity focused on the US. However, we still believe that emerging markets will remain a driver of growth for the company over the rating horizon. DERIVATION SUMMARY Henkel is well positioned in the 'A' category with its strong business profile, low financial leverage and good cash-flow generation relative to its major peers within the consumer and personal care segment such as Unilever (A+) as well as relative to other leading global FMCG companies such as Nestle SA ('AA'), PepsiCo ('A'), Philip Morris International Inc. ('A'). This is however balanced by the potential volatility from its adhesive technologies business, its acquisitive growth ambitions and the larger size of 'A' category fast-moving consumer goods (FMCG) peers. Finally, the rating reflects stronger credit metrics than specialty chemicals companies Royal DSM and Akzo Nobel rated 'A-' and 'BBB+' respectively. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Low single-digit organic growth and stable to improving EBITDA margin - Around 4% negative impact from foreign-currency movements in 2016 - Over EUR1bn free cash flow (FCF) generation driven by strong operating profit, EUR600m of capex in 2016 followed by EUR800m of capex for 2017-2019 - 25% - 30% dividend payout ratio - EUR3.7bn of acquisition spending in 2016, and EUR2bn annually thereafter RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Expanded scale and in different product areas while maintaining innovation capability and profitability in line with major industry peers. - Solid FCF generation and a conservative financial policy leading to FFO adjusted net leverage below 1.0x on a sustained basis Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Significant deterioration in profitability and cash-flow generation due to adverse operating performance or a more aggressive financial policy leading to FFO fixed charge cover below 6.5x (2015: 7.9x) and FFO adjusted net leverage above 2.0x, all on a sustained basis. LIQUIDITY Adequate Liquidity As of end-December 2015, Henkel had EUR2.3bn of directly available liquidity, consisting of EUR0.8bn unrestricted cash and cash equivalents on balance sheet (based on Fitch's definition), EUR1.5bn committed syndicated credit facilities serving as back-up for its commercial paper programmes, and some committed bilateral line with a revolving term of up to one year in other subsidiaries. Together with our expectation of positive FCF in FY16 (EUR1.2bn), liquidity is adequate relative to limited debt maturities in 2017 and 2018. Contact: Principal Analyst Ching Mei Chia Director +44 20 3530 1068 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia S.p.A. Via Morigi 6, 20123 Milano Committee Chairperson Pablo Mazzini Senior Director +44 20 3530 1021 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Summary of Financial Statement Adjustments Fitch deducted EUR294m from 2015 readily available cash for debt service, as an estimate of the portion of cash held outside Europe for the purposes of reinvestment overseas. -Leases: Fitch has adjusted the debt by adding 8x of annual operating lease expense related to long-term assets of EUR16.5m in 2015. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016562 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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