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Lafargeholcim Ltd LafargeHolcim Ltd. Primary Credit Analyst: Renato Panichi, Milan (39) 02-72111-215; [email protected] Secondary Contact: David Matthews, London (44) 20-7176-3611; [email protected] Table Of Contents Rationale Outlook Standard & Poor's Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Other Modifiers Other Credit Considerations Reconciliation Ratings Score Snapshot Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 28, 2016 1 1624953 | 300052695 LafargeHolcim Ltd. Business Risk: STRONG CORPORATE CREDIT RATING Vulnerable Excellent bbb bbb bbb BBB/Stable/A-2 Financial Risk: SIGNIFICANT Highly leveraged Minimal Anchor Modifiers Group/Gov't Rationale Business Risk: Strong Financial Risk: Significant • Strong competitive positions in virtually all key • Superior access to global debt markets. markets, with a few exceptions. • Management's willingness to protect credit metrics • Extensive geographic diversification. and liquidity when needed. • Cost-efficient operations. • Ability to generate operating cash flow consistently • Cyclicality, seasonality, and high capital and energy over the business cycle. intensity of the heavy building materials' industry. • Strong liquidity. • Some operations in a competitive and fragmented industry with limited pricing flexibility. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 28, 2016 2 1624953 | 300052695 LafargeHolcim Ltd. Outlook: Stable The stable outlook on Switzerland-based building materials manufacturer LafargeHolcim Ltd. and its core subsidiaries reflects Standard & Poor's Ratings Services' view that the group's leverage metrics will progressively recover in 2016-2017, compared with pro forma 2015 metrics following the merger of France-based Lafarge S.A. into Switzerland-based Holcim Ltd. to form LafargeHolcim. The recovery mainly reflects the completion of Swiss franc (CHF) 3.5 billion of asset disposals and the delivery of operational synergies. Our base-case scenario reflects a tough operating environment in a few emerging markets in terms of both volumes and prices. We also take into account our view that management will continue to protect credit metrics through optimized capital spending and reasonable returns to shareholders. Downside scenario We could consider a negative rating action if market conditions worsen significantly beyond our base-case scenario. This could happen if the slowdown in China were more severe than we currently anticipate, which would likely affect the group's performance in other regions. Funds from operations (FFO) to debt trending toward 20% for a sustained period of time would put pressure on the ratings. A more aggressive financial policy might also trigger a downgrade in the absence of supportive trading conditions. Upside scenario We might consider a positive rating action if LafargeHolcim's FFO to debt approached 30% on a sustainable basis. This could result from better-than-expected industry trends or higher-than-expected synergies from the integration of the group's assets. We consider this scenario unlikely in 2016-2017. Furthermore, we consider that the group is likely to use any financial headroom at the current rating by either investing in operations or returning funds to shareholders. Standard & Poor's Base-Case Scenario WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 28, 2016 3 1624953 | 300052695 LafargeHolcim Ltd. Assumptions Key Metrics • A tough environment in a few emerging markets, 2015PF 2016e 2017e mitigated by supportive trading conditions in the EBITDA margin* (%) 17.0 19.5-20.5 21-22 main developed countries. FFO to debt* (%) 15.1 21-24 25-28 • An increase in revenues of 1%-3% on a pro forma Debt to EBITDA* (x) 4.1 2.7-3.0 2.2-2.5 basis, reflecting modest growth in volumes and still-challenging pricing conditions. PF--Pro forma. e--Estimate.*Fully Standard & • A progressive recovery in operating EBITDA over Poor's-adjusted. FFO--Funds from operations. 2016 and 2017, compared with the pro forma 2015 figure, mainly reflecting lower merger implementation costs, the delivery of operational synergies, and some benefit from operating leverage. • The completion of a CHF3.5 billion asset disposal, which will lead to lower reported debt. • Capital expenditures (capex) of about CHF2 billion in 2016 and slightly less in 2017. • Moderate remuneration to shareholders. Company Description LafargeHolcim is the world largest producer of heavy building materials, including cement (374 million tons per year of cement capacity at end-2015); aggregates (661 plants at end-2015); and ready-mix and other construction materials (1,577 plants at end-2015). The group has extensive geographic and asset diversification, with production sites in about 90 countries, and operates with a high level of vertical integration. The company is the result of the merger by incorporation in 2015 of France-based Lafarge S.A. into Switzerland-based Holcim Ltd., which was renamed LafargeHolcim Ltd. Following the completion of a squeeze-out in November 2015, Lafarge S.A. was delisted. Business Risk: Strong Global diversified operations, with key positions in emerging countries LafargeHolcim has an unrivalled asset portfolio in terms of size and geographic diversity; a strong competitive position in virtually all its key markets, with a few exceptions, for instance, China; cost-efficient operations; and the ability to generate operating cash flow consistently over the business cycle. Similarly, we believe that LafargeHolcim's portfolio of about 90 countries, with about half of sales coming from developing economies, helps reduce the seasonality and cyclicality that characterizes the building materials industry, and allows for better capacity utilization. However, our assessment also reflects some key risks, such as the high capital and energy intensity of the heavy building materials industry, and LafargeHolcim's operation in a competitive and fragmented industry with limited WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 28, 2016 4 1624953 | 300052695 LafargeHolcim Ltd. pricing flexibility. In addition, LafargeHolcim's operations in emerging markets expose the group to potential monetary and political risks and heightened economic volatility. Lastly, we see a risk that the integration process following the merger may be slower than the group targets. We view LafargeHolcim's high degree of vertical integration as a key asset, given the scarcity of well-located quarries, and because the demand for aggregates depends mainly on public sector spending, which may prove countercyclical to private-sector construction. The group's scale and extensive production and distribution network, and track record of effective cost management contribute to support robust operating margins. The group's Standard & Poor's-adjusted EBITDA margin at about 20% compares favorably with the current industry average, by our estimates. We believe that operating efficiencies resulting from the planned synergies may support margins of 20%-22% over the next couple of years. S&P Base-Case Operating Scenario • Revenue growth of 1%-3% in the next couple of years, reflecting a modest contribution from Europe, the Middle East, and Africa, no contribution from Latin America, and moderate growth from Asia Pacific and North America. • Ongoing tough conditions in some countries such as China, Russia, and Brazil, in terms of both volumes and prices. • A moderation in cost inflation in 2016 compared with 2015, reflecting the benefit of low oil prices, but still exceeding the average price increase. • A recovery in EBITDA margins from 2015, with a more pronounced effect visible from 2017. This mainly reflects the benefit of lower merger implementation costs and the achievement of operational synergies. To an extent, it also reflects some operating leverage. Peer comparison Table 1 LafargeHolcim Ltd. Peer Comparison Italcementi Compagnie de Wuerth GmbH & Co. LafargeHolcim Ltd. SpA Saint-Gobain CRH plc KG Adolf --Fiscal year ended-- Dec. 31, (Mil. CHF) Dec. 31, 2015* Dec. 31, 2015 Dec. 31, 2015 2015 Dec. 31, 2014 Revenues 23,584.0 4,707.7 43,059.5 25,684.8 12,089.2 EBITDA 3,992.5 617.4 4,500.7 2,990.1 1,232.3 Funds from operations (FFO) 2,324.0 390.7 3,282.8 2,131.7 985.4 EBIT (106.0) 184.9 1,656.9 1,657.6 728.7 Net income from continuing (1,573) (130.4) 406.4 786.8 435.0 operations Working capital changes (232) 148.7 91.3 635.7 (204.1) Cash flow from operations 2,598.0 514.3 3,206.7 2,825.0 879.3 Capital expenditures 2,509.0 385.5 1,602.9 958.5 401.6 Free operating cash flow 89.0 128.8 1,603.8 1,866.5 477.7 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 28, 2016 5 1624953 | 300052695 LafargeHolcim Ltd. Table 1 LafargeHolcim Ltd. Peer Comparison (cont.) Dividends paid 296.0 117.8 795.5 416.2 79.4 Discretionary cash flow (207.0) 11.0 808.3 1,450.3 398.3 Cash and short-term 4,393.0 583.7 5,846.6 2,736.4 821.3 investments Debt 20,395.9 3,192.1 11,639.0 10,020.8 2,132.5 Equity 35,721.0 4,129.4 21,000.4 14,718.7 4,307.3 Adjusted ratios EBITDA margin (%) 16.9 13.1 10.5 11.6 10.2 Return on capital (%) (0.2) 2.3 4.7 7.2 11.3 EBITDA interest coverage (x) 4.7 3.8 5.8 6.0 7.7 FFO cash interest coverage (x) 2.8 3.8 8.5 8.0 15.5 Debt/EBITDA (x) 5.1 5.2 2.6 3.4 1.7 FFO/debt (%) 11.4 12.2 28.2 21.3 46.2 Cash flow from 12.7 16.1 27.6 28.2 41.2 operations/debt (%) Free operating cash flow/debt 0.4 4.0 13.8 18.6 22.4 (%) Discretionary cash flow/debt (1.0) 0.3 6.9 14.5 18.7 (%) *LafargeHolcim figures as of end 2015 are reported and not pro forma. As such, they do not reflect full-year consolidation of Lafarge S.A.
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