Jan 08 -
Summary analysis -- Holcim Ltd. ----------------------------------- 08-Jan-2013
CREDIT RATING: BBB/Stable/A-2 Country: Switzerland
Primary SIC: Cement, hydraulic
Mult. CUSIP6: 434741
Credit Rating History:
Local currency Foreign currency
22-Jan-2009 BBB/A-2 BBB/A-2
20-Mar-2002 BBB+/A-2 BBB+/A-2
The ratings on Switzerland-based building materials producer Holcim Ltd. and related entities U.S.-based Holcim (U.S.) Inc. (BBB/Stable/--) and Canada-based Holcim (Canada) Inc. (BBB/Stable/--) reflect Standard & Poor’s Ratings Services’ view of the group’s “strong” business risk profile and “significant” financial risk profile.
Our ratings are supported by Holcim’s large-scale, strong market positions worldwide; high level of vertical integration; and considerable geographic diversity. We believe these factors will underpin consistently robust cash generation in the future.
These strengths are tempered by Holcim’s leveraged balance sheet and aggressive capital spending on expansion projects. In addition, its exposure to pronounced construction end-market cyclicality and seasonality, commoditized products, and heavy capital and energy intensity further constrain its credit quality.
S&P base-case operating scenario
Holcim reported like-for-like EBITDA growth of 6.4% for the first nine months of 2012. This is because the group was able to compensate for input cost inflation and contrasting volume trends with price increases in all of its regions. Its reported EBITDA margin progressed by 20 basis points to 19.4%.
At this stage, we anticipate that Holcim will experience unabated pressure on sales throughout 2013, given significant market uncertainty in the group’s key regions, primarily Europe. We have pushed back our forecast for a recovery in the building materials industry to 2014 from 2013. Our base-case assumptions include revenue growth in the low single digits in 2013, largely through successful price hikes, rather than volume rebounds, mirroring results of the major industry players at end-September 2012. Therefore, we consider that price erosion could dampen profitability. Despite competition in some of Holcim’s key markets, we believe that pricing behavior will likely remain rational overall, and that a significant portion of price increases announced by Holcim and its peers during 2012 and early 2013 will stick.
Overall, a combination of sluggish demand and easing input cost inflation effects will, in our view, likely result in broadly stable or possibly improving operating margins, owing to past and ongoing cost reduction programs. Our forecast excludes unpredictable foreign exchange movements that could influence reported profitability.
S&P base-case cash flow and capital-structure scenario
Based on our estimated net debt of about Swiss franc (CHF)10.9 billion on Dec. 31, 2012, and free operating cash flow (FOCF) in excess ofCHF1 billion for the full year, we foresee a moderate improvement in Holcim’s credit metrics from the Standard & Poor’s adjusted ratio of funds from operations (FFO) to debt of 24% that we calculated on Sept. 30, 2012. In our base case, we assume that the group will maintain prudent capital expenditure (capex) in 2013, and that expansion outlays beyond the CHF1 billion we estimate to be related to maintenance, will exceed CHF1 billion (based on company guidance for 2012), depending on Holcim’s financial flexibility. As a consequence, we currently anticipate FOCF of close to CHF0.6 billion. Factoring in management’s strong focus on cash conservation and its commitment to its stated financial policy, our projections do not include sizable debt-financed acquisitions or aggressive shareholder returns.
We think the group’s credit metrics could slightly rebound through 2013. This would in line with the level that we consider to be commensurate with the ‘BBB’ rating, which include, for instance, an FFO-to-debt ratio at about the mid-twenty-percent mark on an adjusted basis for partly owned subsidiaries.