english - About Heraeus

Summary:
Heraeus Holding GmbH
Primary Credit Analyst:
Eve Seiltgens, Frankfurt (49) 69-33-999-124; Eve_Seiltgens@standardandpoors.com
Secondary Contact:
Anna Stegert, Frankfurt (49) 69-33-999-128; anna_stegert@standardandpoors.com
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Related Criteria And Research
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Summary:
Heraeus Holding GmbH
Corporate Credit Rating
BUSINESS RISK SATISFACTORY
FINANCIAL RISK INTERMEDIATE
Rationale
Profile Assessments
BBB+/Stable/A-2
Vulnerable Excellent
Highly leveraged Minimal
Business Risk: Satisfactory Financial Risk: Intermediate
• Leading niche market positions in most of the core
businesses.
• Significant proportion of earnings from end markets
with stable demand.
• Good diversity by region, product, and customer
base, reducing volatility in earnings generation.
• Sizable cyclicality in industrial end markets.
• Relatively small size, excluding trading activities,
exposing the group to strong competition in many
niche markets.
• Conservative financial policy and balance sheet
structure
• Strong liquidity.
• Relatively volatile free cash flow generation.
• Restricted access to equity owing to status as a
family-owned company.
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Outlook: Stable
The stable outlook reflects Standard & Poor's Ratings Services' belief that Germany-based precious metals and
technology group Heraeus Holding GmbH will preserve its intermediate financial profile, despite the weak
economic environment. We believe the company will be able to balance investments, dividends, and acquisitions
in line with its financial profile. At the current rating level, we see headroom to accommodate small to midsize
acquisitions, assuming no significant deterioration of industry conditions in Heraeus' end markets. We believe that
Heraeus will be able to maintain credit metrics in line with our benchmarks for the current ratings, including funds
from operations (FFO) to adjusted debt of about 35% and debt to EBITDA of about 2.5x.
Downside scenario
Ratings downside could result should Heraeus' debt to EBITDA rise above 2.5x on a protracted basis. Downside
risks would likely be driven by a significant cyclical downturn in the industry, coupled with excessive debt levels
from a substantial increase in investments or acquisition activities, or deteriorating liquidity.
Upside scenario
Ratings upside could arise if we were to see sustainable strong credit metrics, including FFO to debt of 45%-50%
and debt to EBITDA of less than 1.5x.
Standard & Poor's Base-Case Scenario
Assumptions Key Metrics
• Low double-digit percentage revenue decline in
2012, flat in 2013 in a difficult macro environment.
• EBITDA margins weaker in 2012 and 2013 than in
2011, but in line with the historical average between
11% and 14%.
• Capital expenditures in line with historical levels at
about 3%-4% of product revenues over the next two
years.
Business Risk: Satisfactory
2011A 2012E 2013E
EBITDA margin (%) 12.0 11.0-11.5 11.5-12.0
FFO/debt (%) 56.4 45-50 40-45
Debt/EBITDA (x) 1.2 1.3-1.7 1.3-1.7
A--Actual. E--Estimate
Summary: Heraeus Holding GmbH
Our assessment of Heraeus business risk as "satisfactory" reflects the group's leading niche market positions in most of
its core businesses. Heraeus' operations include precious metals, sensors, dental products, quartz glass, specialty light
sources, and biomaterials and medical products. The ratings also reflect the group's good diversity by region, product,
and customer base. We understand the company derives a significant proportion of its earnings from end markets with
relatively stable demand patterns, which mitigates exposure to cyclical demand from other end markets.
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In our base-case scenario, we forecast that Heraeus will record low-double-digit percentage product revenue declines
in 2012, following a strong financial year in 2011, when the company reported product revenue growth of about 20%.
For 2013, we assume flat product sales growth. We consider that some of the group's end markets behave relatively
robustly, whereas its Quarzglas business group has proved more cyclical in previous downturns and is most vulnerable
to a continued weak economy.
Our assumptions reflect our economists' base-case economic assumption of GDP falling by 0.5% in the eurozone in
2013 (see "Entrenched In Recession, Europe Seeks A Balance Between Deleveraging And Growth", published on
March 26, 2013, on RatingsDirect on the Global Credit Portal).
We assume the group's EBITDA margin will decline slightly to 11%-11.5% for 2012 and 2013. This is in line with the
historical average of 2007-2011 when Heraeus reported EBITDA margins of 11%-14%, excluding revenues from
trading operations.
Financial Risk: Intermediate
We view Heraeus' financial risk profile as "intermediate" due to its relatively robust balance sheet and strong financial
flexibility. These strengths are partly offset by the group's track record of relatively volatile free cash flow generation
and its limited financial flexibility in terms of access to the equity market as a family owned company.
In our base case, we assume that Heraeus should be able to generate annual FFO of €300 million-€350 million in 2012
and 2013, which is somewhat below the levels of 2011 (when adjusted FFO was €408 million). We assume this decline
primarily because of lower earnings over the next two years also caused by moderate restructuring expenses. We
assume capital expenditures will remain in line with historical levels at about 3%-4% of product revenues over the next
two years.
As a result of these assumptions, we expect annual free operating cash flow (FOCF) to amount to about €150
million-€200 million over the next two years, assuming only moderate working capital investments due to low volume
growth. As a result, lower earnings will be largely balanced by lower adjusted debt levels. Therefore, Heraeus' credit
protection measures will likely not significantly deteriorate from the level reported for the 12 months ended June 30,
2012, when FFO to debt and debt to EBITDA stood at 48% and 1.4x, respectively.
Liquidity: Strong
We view Heraeus' liquidity position as "strong" under our criteria. We estimate that the group's ratio of sources of
liquidity to uses will comfortably exceed 1.5x for the coming 12-18 months.
Summary: Heraeus Holding GmbH
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Principal Liquidity Sources Principal Liquidity Uses
• €237 million of cash (of which we estimate about
€10 million is tied up in operations) and equivalents,
and €470 million of other interest-bearing assets as
of June 30, 2012.
• Access to an undrawn €300 million committed
credit facility, maturing in October 2015. To our
knowledge, this instrument is not subject to
financial maintenance covenants.
• Positive FOCF in 2012 and 2013 on the assumption
of low investments in working capital.
• Access to committed short-term lines of about €110
million, of which about €102 million were unused at
end-June 2012. Parts of these lines are allocated to
Chinese subsidiaries as a backup possibility of
funding their domestic operations in case no
sufficient funds are available in the local currency
cash pool. The short-term lines have varying
maturities and we expect the group to renew them
when they fall due.
Related Criteria And Research
Summary: Heraeus Holding GmbH
• Maturities of two €100 million promissory notes due
in 2013 and 2015.
• Potential acquisitions of about €120 million
annually.
• We assume that Heraeus will need about €100
million in cash for its ongoing operations.
• Methodology: Management And Governance Credit Factors For Corporate Entities and Insurers, Nov. 13, 2012
• Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
• 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
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Business And Financial Risk Matrix
Business Risk
Financial Risk
Minimal Modest Intermediate Significant Aggressive
Excellent AAA/AA+ AA A A- BBB --
Highly
Leveraged
Strong AA A A- BBB BB BB-
Satisfactory A- BBB+ BBB BB+ BB- B+
Fair -- BBB- BB+ BB BB- B
Weak -- -- BB BB- B+ B-
Vulnerable -- -- -- B+ B B- or below
Note: These rating outcomes are shown for guidance purposes only. The ratings indicated in each cell of the matrix are the midpoints of the likely
rating possibilities. There can be small positives and negatives that would lead to an outcome of one notch higher or lower than the typical matrix
outcome. Moreover, there will be exceptions that go beyond a one-notch divergence. For example, the matrix does not address the lowest rungs of
the credit spectrum (i.e., the 'CCC' category and lower). Other rating outcomes that are more than one notch off the matrix may occur for
companies that have liquidity that we judge as "less than adequate" or "weak" under our criteria, or companies with "satisfactory" or better business
risk profiles that have extreme debt burdens due to leveraged buyouts or other reasons. For government-related entities (GREs), the indicated
rating would apply to the standalone credit profile, before giving any credit for potential government support.
Additional Contact:
Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com
Summary: Heraeus Holding GmbH
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