November 24, 2017 / 3:02 PM / a year ago

Fitch Affirms Henkel at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON/PARIS/MOSCOW, November 24 (Fitch) Fitch Ratings has affirmed German-based consumer-goods and adhesives group Henkel AG & Co. KGaA's (Henkel) Long-Term Issuer Default Rating (IDR) and senior unsecured Long-Term Rating at 'A'. Henkel's Short-Term IDR is affirmed at 'F1'. The Outlook on the Long-Term IDR is Stable. The rating reflects Henkel's maintenance of a strong and diversified business portfolio which benefits from its global presence, and its conservative financial structure. Thanks to strong cash-flow generation, acquisition spending conducted in 2016-2017 has not eroded Henkel's good rating headroom. We expect the company to remain on the lookout for acquisitions in each of its businesses of home and personal care, and of adhesives over the next three years as it pursues its "Henkel 2020+" strategy. Steady free cash flow should enable it to limit the impact on leverage, keeping it at relatively low levels and consistent with the current 'A' rating. KEY RATING DRIVERS Organic Revenue Growth: The ratings are based on our expectation that Henkel will be able to maintain organic sales growth at around 3% over 2017-2020 (9M17: 3.1%), in line with management's target of 2%-4%. We assume most of the growth will come from emerging markets and to be volume-driven as promotional pressure remains high, especially in the mass beauty market. Profit Margin Growth: In 9M17 Henkel's EBITDA margin improved by 200bp yoy reaching 19.1%, despite growth in oil-related raw material prices and fierce competition in some of the western European markets in which it operates. We project further gradual growth in Henkel's profit margins thanks to continued tight control over costs, supply chain improvements and portfolio optimisation which remain part of its Henkel 2020+ strategy together with growth objectives. We also assume smooth integration of recently acquired businesses, although newly acquired businesses may have lower profitability. Robust Free Cash Flow: Fitch expects Henkel to continue generating strong free cash flow (FCF) of around EUR1.2 billion per year (2016: EUR1.3 billion), despite the planned step-up in capex which is part of its strategy and our assumption that dividends will gradually increase while maintaining a dividend payout on common and preferred shares in the 25% to 35% range. Our FCF projections assume sustained growth in operating profits and stable working-capital turnover. Low Leverage Despite M&A: As M&A remains an integral part of Henkel's strategy, Fitch expects the company to continue with bolt-on M&A and to fund this with FCF and debt for the balance. Based on our assumption of annual acquisition spending of up to EUR2 billion, we project FFO adjusted net leverage will increase gradually in the next three years but to remain below the 2.0x maximum threshold for the current rating (2016: 1.2x). Strong Market Positions: The rating is supported by Henkel's strong market position as the largest player in the global adhesives market and its leading positions in some markets and categories in home products and personal care. We expect Henkel's constant product innovation and its bolt-on acquisitions to protect its market positions over the medium term, despite the increasingly competitive nature of the markets in which it operates. Not Pure Consumer Company: Around half of sales are generated from adhesives technologies, which is a fundamentally more volatile business than consumer products. Henkel sells to a variety of industries, but many of them are characterised by a higher degree of cyclicality than consumer staples. Thanks to its record of consistent growth of organic sales and operating profits, we do not view the important contribution of the specialty chemicals business to Henkel's profits (2016: 51%) as detracting from to its credit profile. The strong and stable performance in adhesives results from Henkel's large scale in this market and good product and customer diversification. DERIVATION SUMMARY Henkel is well positioned in the middle of the 'A' category with its strong business profile, low financial leverage and good cash-flow generation relative to its major peers. This is however balanced by the potential volatility from its adhesive technologies business, its acquisitive growth ambitions and the larger size of some 'A' FMCG peers. Within the consumer and personal-care segment Unilever (A+/ Negative) is a significantly larger group. Kimberly-Clark, at the same rating level as Henkel, (A/Stable) is of comparable size, more profitable but is more leveraged. Compared with other leading global fast-moving consumer goods (FMCG) companies such as Nestle SA (AA-/Stable), PepsiCo (A/ Stable) or Philip Morris International Inc. (A/ Negative), Henkel's smaller size, potentially more volatile earnings and lower profitability is offset by slightly lower leverage. Finally, the rating reflects stronger credit metrics than specialty chemicals companies Royal DSM and Akzo Nobel rated 'A-' / Stable and 'BBB+/RWN' respectively. No parent/ subsidiary linkage, country ceiling or operating environment influence was in effect for these ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - low single-digit organic growth, driven primarily by emerging markets; - stable to improving EBITDA margin; - capex of EUR700 million in 2017 followed by EUR800 million per year over 2018-2020; - gradually increasing dividends; - EUR1.9 billion acquisition spending in 2017, and EUR2 billion annually thereafter. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Expanded scale in different product areas while maintaining innovation capability and profitability in line with major industry peers. -Healthy 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 and FFO-adjusted net leverage above 2.0x, all on a sustained basis LIQUIDITY Adequate Liquidity: As of end-September 2017, Henkel's liquidity was adequate as Fitch-adjusted unrestricted cash of EUR0.8 billion and expected positive FCF were sufficient to cover short-term debt of EUR1.5 billion. In addition, Henkel had EUR1.5 billion committed revolving credit facilities serving as back-up for its commercial paper programmes. Contact: Principal Analyst Anna Zhdanova, CFA Associate Director +7 495 956 2403 Supervisory Analyst Giulio Lombardi Senior Director +39 02 8790 87214 Fitch Italia S.p.A. via Morigi 6, 20123 Milan Committee Chairperson Sophie Coutaux Senior Director +33 1 4429 9132 Summary of Financial Statement Adjustments Cash and Cash Equivalents: Fitch deducted EUR347 million from 2016 readily available cash for debt service, as an estimate of the portion of cash held outside Europe for the purposes of reinvestment overseas. Operating Leases: Fitch has adjusted the debt by adding 8x of estimated annual operating lease expense related to long-term assets (2016: EUR19 million). Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here 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. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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