Research Update:
French Auto Supplier Valeo Affirmed
At 'BBB/A-2' On Strong Revenues
Amid Expected Higher Investments;
Outlook Positive
Primary Credit Analyst:
Tatjana Lescova, Paris (33) 1-4420-7327; [email protected]
Secondary Contact:
Margaux Pery, Paris +33 1 44 20 73 35; [email protected]
Table Of Contents
Overview
Rating Action
Rationale
Outlook
Ratings Score Snapshot
Related Criteria
Ratings List
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 1
1792815 | 301687691
Research Update:
French Auto Supplier Valeo Affirmed At 'BBB/A-2'
On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
Overview
• We expect Valeo to have demonstrated continued strong revenue growth of
about 12% in 2016, benefitting from organic growth and integration of
recent acquisitions, and that the company will sustain funds from
operations (FFO) to debt comfortably above 45% and see positive, albeit
weaker, free operating cash flows.
• We anticipate that the company will materially increase its capital
expenditures and investments in research and development to support
future growth embedded in its order book, and we think that the company's
financial policy may include further external growth initiatives.
• We are affirming our 'BBB/A-2' ratings on Valeo.
• The positive outlook reflects our expectation that Valeo's continued
solid growth will offset higher investments, and that the company will
have maintained FFO to debt comfortably above 45% at the end of 2016 and
over the coming two years.
Rating Action
On Jan. 31, 2017, S&P Global Ratings affirmed its 'BBB' long-term and 'A-2'
short-term corporate credit ratings on France-based auto supplier Valeo S.A.
The outlook remains positive.
We also affirmed the 'BBB' issue rating on the company's senior unsecured
notes.
Rationale
The affirmation reflects our view that higher investments in capital
expenditures (capex) and research and development (R&D), as well as recent and
future acquisitions, will not hamper Valeo's ability to sustain its funds from
operations (FFO)-to-debt ratio comfortably above 45% in 2017-2018, albeit at
lower levels against 2015-2016.
We project that Valeo's strong revenue progression will prompt the company to
take on higher investments to accommodate future growth. We anticipate that
the company will report a sales increase of about 12% for 2016, in line with
13% reported for the first nine months of the year, including 14% growth in
original equipment manufacturer sales and 5% in aftermarket sales. Revenue
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 2
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
growth averaged close to 9% over the past five years, rising to €14.5 billion
in 2015 from €10.9 billion in 2011. Over the same period, reported capex
(including capitalized development costs) increased from €0.7 billion to €1.1
billion, rising almost two times faster on average than revenue.
We expect that capex will continue to climb, mirroring increasing order
intake. In the first half of 2016, order intake surged by 20% to €12.8
billion. Furthermore, given the company's focus on innovative products
(defined as a product released in the last three years), we think that R&D
spending, including both expensed and capitalized costs, will also increase.
In the first half of 2016, R&D reported by the company in its profit and loss
amounted to 6.0% of its revenue, up from 5.5% a year ago. We expect it to
remain around this level.
We note that Valeo capitalizes much higher R&D amounts than many European
peers, which inflates its reported margins compared with other companies. As
such, Valeo capitalized €364 million of development costs in 2015 (up from
€143 million in 2010). However, because we deduct capitalized R&D costs in our
adjusted EBITDA calculation, our estimate of Valeo's adjusted EBITDA margin is
comparable with that of its peers.
Higher investments will limit free operating cash flow (FOCF) generation to
about €200 million-€300 million per year in 2017-2018, versus about €400
million in our previous forecast. At the same time, we positively note that
the company's dividend payouts are quite stable, and we don't foresee an
increase.
We expect that the EBITDA margin will strengthen gradually over the coming
years, on the back of revenue growth, higher investments in more profitable
innovative products, and our expectation of an increase in content by car with
the rise of automated driving. Nevertheless, we think that the adjusted margin
expansion will be somewhat contained by higher expensed and capitalized R&D.
Over 2010-2014, Valeo's S&P Global Ratings-adjusted margin fluctuated between
8% and 10%, then reached 10.7% in 2015 and, as per our assumptions, about
11.0% in 2016, in line with the rolling 12 months at end-June. We think that
this level of profitability is average for the auto supplier industry. At the
same time, the margins remain significantly lower than for many EU peers, such
as Schaeffler, Continental, or Michelin.
We adjust reported gross debt of €1.8 billion at the end of 2015 by adding
about €150 million for operating leases, €760 million for post-retirement
obligations, €306 million for receivables sold, and €39 million for put
options. At the same time, we deduct €1.3 billion of surplus cash, which
excludes €400 million of cash that we regard as not immediately available for
debt repayment. At the end of June 2016, reported gross debt increased
markedly to €2.6 billion, following the payment of €610 million for German
companies peiker, a supplier of onboard telematics and mobile connectivity
solutions, and Spheros, a manufacturer of air conditioning systems for buses.
We expect gross debt to near €2.8 billion at the end of 2016. Furthermore, we
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 3
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
think that Valeo's gross debt could increase by about €1.0 billion in 2017,
assuming a rise in capex from €1.2 billion-€1.3 billion anticipated for 2016
and €1.2 billion spending on acquisitions (including Germany-based FTE
automotive, a producer of clutch and gear actuators, and Japan-based Ichikoh,
a manufacturer of car lighting and rear mirrors, among other bolt-ons). We
anticipate that acquisitions will be debt funded. Positively, we note that the
group materially reduced its cost of funding as a result of recent refinancing
operations.
In our base case, we assume:
• Real global GDP growth of 3.2% in 2016, 3.5% in 2017 and 3.6% in 2018. We
expect Western Europe's real GDP to grow at 1.5% and 1.4% respectively in
2017 and 2018, NAFTA at 2.3% and 2.2%. We also expect Latin America to
return to positive real GDP growth of 2% in 2017 and 2.7% in 2018, while
China is expected to grow at 6.4% and 6.1% respectively.
• An increase in global automotive sales by about 2% in 2017, slowing from
an estimated 3% growth in 2016. For China, the world's biggest car
market, we expect that car sales volumes will slow down in 2017 despite
the extension of tax incentive for another year.
• Revenue growth of close to 12% in 2016, supported by solid double-digit
increase in Asia, Europe, and slightly less in the U.S., as well as flat
or marginally declining sales in Latin America, significantly
outperforming materially declining car production in that region. Also,
reported revenue growth in 2016 will benefit from the 10-month
consolidation of peiker and the 9-month consolidation of Spheros that we
estimate to more than €400 million of additional revenue.
• Continued revenue growth in 2017 and 2018 at about 5%-6% organically,
supported by continually growing order intake. External growth
initiatives, such as FTE and Ichikoh that we expect to be consolidated in
2017, will likely lift revenue by about 10% overall.
• The acquisitions budget to double in 2017 to about €1.2 billion,
including €0.8 billion for FTE and €0.4 billion in other transactions,
such as Ichikoh. We expect external growth to be funded through new debt
issuance, already partly pre-refinanced in January 2017 via the issuance
of €500 million notes. We assume €100 million for acquisitions per year
going forward.
• Adjusted EBITDA margin of around 11% in 2016, mirroring improvement
achieved on a rolling 12-month basis to June 2016, rising from 10.7% in
2015. We expect the company's adjusted margin to expand by around 20
basis points per year.
• Capex sizably higher than our previous assumptions, with about €1.2
billion-€1.3 billion expected for 2016 (€611 million reported for the
first six months of 2016).
• We assume stable dividends and no share buybacks.
• Given the strong growth trend, we think that the working capital
requirement may turn negative.
Based on these assumptions, we arrive at the following credit measures:
• Adjusted EBITDA of about €1.7 billion-€1.8 billion in 2016. In 2017, we
anticipate it will exceed €2 billion, assuming 11- and 6-month
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 4
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
contribution from Ichikoh and FTE, respectively. We note that the exact
closing time of the FTE acquisition remains uncertain at this stage. We
estimate Ichikoh's and FTE's full year EBITDA contribution to about €170
million.
• Adjusted FFO to debt remaining strong above 60% in 2016 and somewhat
weakening in 2017-2018, but still remaining in the 45%-50% range.
• Adjusted debt to EBITDA remaining in the 1.5x-2.0x range in 2017-2018.
• Positive, albeit lower, FOCF generation of about €200 million-€300
million per year in 2017-2018.
Our view of Valeo's business risk profile continues to reflect the group's
good product and geographic diversification, with rising share of presence in
Asia (about 26% of sales). Valeo holds solid market positions in its key
product lines as No. 1 or No. 2 players in Europe. We also positively note
Valeo's strong organic growth demonstrated in recent years, which we expect to
continue based on the visibility provided by its large order book.
We regard Valeo's high spending on R&D as supportive of its credit profile,
because we believe these investments will support gradual improvement in its
margins over time. In particular, because Valeo focuses on emissions reduction
and intuitive driving, which we think are areas for future growth in auto
industry. At the same time, high and nondiscretionary R&D limits the
flexibility of cost management in cyclical troughs, in our view. Also, we
think that the company still generates a material part of its sales from
lower-added products, which further limits profitability expansion.
Valeo remains subject to the anti-trust initiated in 2011 by the European
authorities. No provision has been taken in the accounts in that respect, and
no indication on likely resolution timing and potential liability was
indicated to the market.
Liquidity
The short-term rating is 'A-2'. We view Valeo's liquidity as strong, based on
a ratio of sources to uses of liquidity above 1.5x for the 12 months from July
1, 2016, and remaining above 1.0x in the ensuing 12 months.
Our view of Valeo's liquidity is supported by the company's good standing in
the credit markets and prudently managed liquidity. In early January 2017,
Valeo issued €500 million six-year notes at a low 0.625% coupon. We expect it
to be used for refinancing and partial pre-payment of acquisitions announced
for 2017. We expect Valeo to raise more debt in the capital markets in 2017 to
fund the acquisitions.
Valeo is subject to maintenance covenants in some of its bank lines and loans,
which limit net debt to EBITDA to 3.25x. We expect there will be ample
headroom under this covenant, even if EBITDA were to decline by 30%.
Principal liquidity sources as of June 30, 2016, include:
• About €1.85 billion in available cash, of which about €400 we view as not
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 5
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
immediately available for debt repayment.
• €1.2 billion of available committed credit lines maturing beyond 12
months.
• Our forecast of about €1.8 billion-€1.9 billion of FFO (before
adjustments).
We estimate the following principal liquidity uses over the same period:
• €0.6 billion of short-term debt, of which €0.4 billion were already
refinanced before the end of 2016.
• Capex exceeding €1.3 billion.
• €1.1 billion of announced acquisitions.
• Dividends of about €270 million in the first half of 2017.
Outlook
The positive outlook reflects a one-in-three likelihood that we could raise
the rating on Valeo by one notch over the next 12 months.
Upside scenario
We could upgrade Valeo by one notch if the company continues to demonstrate
solid organic growth and sustains its FFO to debt comfortably above 45% in
2017-2018. We would expect higher capex and R&D to be offset by stronger
EBITDA generation and prudent acquisitions policy. Also, a higher rating would
require evidence of gradually strengthening margins and consistently positive
sizable FOCF generation.
Downside scenario
We could revise the outlook to stable if the company's FFO to debt remains
below 45%. This could happen if Valeo experienced operational slowdown, did
more sizable debt-funded M&A and did not adjust its capex accordingly in
timely manner. Also, evidence of a more opportunistic financial policy would
be a negative. An FFO to debt ratio in the 35%-45% range would be commensurate
with the current rating.
Ratings Score Snapshot
Corporate Credit Rating: BBB/Positive/A-2
Business risk: Satisfactory
• Country risk: Low
• Industry risk: Moderately high
• Competitive position: Satisfactory
Financial risk: Intermediate
• Cash flow/Leverage: Intermediate
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 6
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
Anchor: bbb
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Strong (no impact)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)
Related Criteria
• Criteria - Corporates - General: Methodology And Assumptions: Liquidity
Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Criteria - Corporates - General: Corporate Methodology: Ratios And
Adjustments, Nov. 19, 2013
• Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions,
Nov. 19, 2013
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• Criteria - Corporates - Industrials: Key Credit Factors For The Auto
Suppliers Industry, Nov. 19, 2013
• General Criteria: Methodology For Linking Short-Term And Long-Term
Ratings For Corporate, Insurance, And Sovereign Issuers, May 07, 2013
• General Criteria: Methodology: Management And Governance Credit Factors
For Corporate Entities And Insurers, Nov. 13, 2012
• General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each
Issue, April 15, 2008
Ratings List
Ratings Affirmed
Valeo S.A.
Corporate Credit Rating
Senior Unsecured
BBB/Positive/A-2
BBB
Additional Contact:
Industrial Ratings Europe; [email protected]
Certain terms used in this report, particularly certain adjectives used to
express our view on rating relevant factors, have specific meanings ascribed
to them in our criteria, and should therefore be read in conjunction with such
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 7
1792815 | 301687691
Research Update: French Auto Supplier Valeo Affirmed At 'BBB/A-2' On Strong Revenues Amid Expected Higher
Investments; Outlook Positive
criteria. Please see Ratings Criteria at www.standardandpoors.com for further
information. Complete ratings information is available to subscribers of
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All
ratings affected by this rating action can be found on the S&P Global Ratings'
public website at www.standardandpoors.com. Use the Ratings search box located
in the left column. Alternatively, call one of the following S&P Global
Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office
(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225;
Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 8
1792815 | 301687691
Copyright © 2017 by Standard & Poor’s Financial Services LLC. All rights reserved.
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part
thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval
system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be
used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or
agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not
responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for
the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL
EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR
A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING
WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no
event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential
damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by
negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and
not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase,
hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to
update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment
and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does
not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be
reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain
regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P
Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any
damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective
activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established
policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P
reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites,
www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription) and www.spcapitaliq.com
(subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information
about our ratings fees is available at www.standardandpoors.com/usratingsfees.
STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor's Financial Services LLC.
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT
JANUARY 31, 2017 9
1792815 | 301687691