Fitch Ratings has assigned a 'BBB-'/'RR1' Long-Term (LT) issue rating to
Fitch has also assigned a 'BBB-'/'RR1' rating to the company's new
The rating reflects the company's leading position in the global adhesives market with a solution- and innovation-oriented product portfolio resulting in relatively high customer switching costs and stable EBITDA margins in the low-mid teens.
Key Rating Drivers
Acquisitions Hinder Financial Structure:
Given the fragmented nature of the adhesives industry, Fitch believes the company will continue to seek bolt-on acquisitions to further build out its product portfolio, regional exposures or technical capabilities. The company is able to fund small acquisitions with FCF, as evidenced by the recent acquisitions of
Strong Performance Amid Elevated Costs: After effectively navigating the period of rising raw materials and logistics costs seen during 2021 through significant offsetting price increases, where the company generated around
The company's Construction Adhesives (CA) and Engineered Adhesives (EA) segments could see lower demand from current highs, in-line with Fitch's expectations for weaker macroeconomic growth over the near term to pressure the construction, industrials and transportation end markets. Fitch expects resiliency in the company's Hygiene, Health & Consumables segment to partially offset weaker earnings from the CA and EA segments, leading to muted but positive earnings growth over the medium term.
Leader in Fragmented Adhesives:
Fitch views long-term trends such as the need for light-weighting and energy efficiency, sustainable packaging, digitization and healthcare related supplies as favorable growth drivers for the company. The 2017 acquisition of
Stable, Mid-Teens Margin Profile:
This diversification and specialization of offerings combined with pass-through clauses with customers helps mitigate cost risk and provides the company relatively resilient, through-the-cycle margins in the mid-teens. In the near term, Fitch forecasts EBITDA margins will remain around 13%, given the company's demonstrated ability to offset rising raw material costs through price increases and assuming realized cost savings from the Operations & Supply Chain project initiated in 2020. EBITDA margins are projected to trend slightly higher thereafter as the company continues to move downstream in its product offerings.
Positive FCF Generation Forecast:
Fitch believes FCF will be mainly allocated toward gross debt reduction in the near term, as well as a continued focus on measured shareholder returns and strategic bolt-on acquisitions.
Derivation Summary
Additionally, the company consistently generates FCF margins at around 5%-6%, given its typically low capex requirements of around 2%-3% of revenues, versus around 3% of revenues for Axalta and 5%-6% of revenues for
Key Assumptions
Muted revenue growth in 2023 and thereafter driven by lower expected macroeconomic growth leading to lower volumes for the EA and CA segments, partially offset by resiliency in the HHC segment;
EBITDA Margins trending around 14% as the company offsets rising costs with further price increases, continues to move downstream, and realizes cost savings resulting from the Operations & Supply Chain project;
Capex of around
Continued execution of strategic acquisitions with the assumption that management may temporarily increase leverage.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Sustained adherence to the company's long-term financial policy coupled with continued cash generation and earnings stability, leading to EBITDA Leverage durably below 3.5x;
Continued trend toward higher EBITDA Margins that demonstrates successful execution of the shift towards higher value-add products.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of leading market positions leading to EBITDA Leverage durably above 4.5x;
Reduced ability to pass through costs to customers, leading to less stable EBITDA Margins and heightened cash flow risk;
More aggressive than anticipated M&A activity, including transformative, credit-unfriendly acquisitions, or shareholder return strategy otherwise incompatible with management's articulated capital deployment policy.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Extended Maturities, Sufficient Liquidity: Pro forma for the transactions, the company has approximately
Fitch anticipates solid FCF generation of around
Issuer Profile
Date of Relevant Committee
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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