Corporates

Building Materials / EMEA

2012 Outlook: EMEA Building Materials

Better Credit Profiles, but Macroeconomic Risks Remain
Outlook Report

Rating Outlook Rating Outlook

STABLE Difficulties Remain: Fitch Ratings believes that all the negative issues that the building
material sector has been facing in 2011 – such as poor growth and margin deterioration - will
remain in 2012. Mature markets will continue to see poor volume recovery (or a further decline
in certain regions, such as Southern Europe). Emerging markets could continue to see a better
trend in volumes, but overcapacity in some markets, such as India or North Africa, could limit
the possibility of price increases in the cement segment.

Pressure on Margins: Cost inflation will remain an issue, especially in some emerging
countries, and will continue to put pressure on margins. The ability of issuers to cut costs will
be a key driver to preserve profitability. However, Fitch does not anticipate any major recovery
in margins in 2012.

Stable Outlook: Fitch anticipates EMEA building material companies to enter 2012 with better
credit profiles than a year ago, despite improvements in credit metrics being hampered by
difficult market conditions. Companies now have sufficient room to cope with another
challenging year, with limited risks for rating downgrades.

Cash Preservation: Cash preservation measures will remain a key credit factor. Fitch expects
issuers to maintain strict working capital control and to keep capex and dividends below
historical levels. While an improvement in credit profiles achieved in 2011 allows for some
increase in capex and dividends, these could be cut again should economic conditions worsen.

Strong Liquidity: Liquidity across the issuers in the sector is strong. Companies started
accumulating cash positions from 2009. With liquidity ratios ranging between 2.4x and 2.8x,
Fitch believes issuers have sufficient financial flexibility to handle capital market volatility.

Limited Refinancing Risk: The debt maturities of the major issuers within the sector are well-
balanced and evenly split across years, with no significant peaks in any year, thus limiting the
refinancing risk. In addition, major issuers‟ debt is mainly towards capital markets rather than
banks. The risk of a credit contraction from banks is therefore limited.

What Could Change the Outlook

Macroeconomic Trend: A worsening in macroeconomic conditions represents the major risk
factor for a negative change in the sector‟s rating outlook. A double dip scenario for the global
economy is not currently part of Fitch assumptions.

Related Research However, a new recession in North America with a spill over effect in Western Europe would
Other Outlooks materially impact the operating performance in the sector, particularly for those companies with
www.fitchratings.com/outlooks
limited exposure to Asia and other emerging countries. Issuers more exposed to emerging
countries could sustain a moderate recession in mature countries with only limited risk for their
Analysts
ratings. By contrast, a severe downturn in the economies of emerging countries would have a
Lorenzo Re
+39 02879087213 major impact on the credit profile of cement companies.
lorenzo.re@fitchratings.com

Jean-Pierre Husband Fitch believes that a positive change in the Outlook is unlikely in light of the current
+44 20 3530 1155 macroeconomic scenario.
jean-pierre.husband@fitchratings.com

Anil Jhangiani
+44 20 3530 1571
anil.jhangiani@fitchratings.com

www.fitchratings.com 12 December 2011

 Corporates

Figure 1 Key Issues

GDP Forecast
Uneven recovery
2010 2011f 2012f
The building material market recovery remains uneven across geographies. Fitch does not
US 3.0 1.5 1.8
Euro area 1.7 1.6 0.8 anticipate any major recovery in the US, where both volumes and prices are expected to
Brazil 7.5 3.3 2.7 remain anaemic. In Western Europe, the trend is more favourable in North and Central
Russia 4.0 4.1 2.1
India 10.1 7.4 7.6 countries, while the Southern countries (ie, Italy, Spain and Greece) will be penalised by public
China 10.3 8.6 7.0 spending restrictions and poor macroeconomic conditions. Eastern Europe, Asia and Latin
Source: Fitch GEO (October 2011) America could continue to drive global growth. However, prices in the cement segment could
continue to be under pressure due to overcapacity in some regions (ie, India). In this context,
Fitch expects issuers‟ sales to increase at low- to mid-single digit rates at best, depending on
each individual issuer‟s regional exposure.

Figure 2

Sales Breakdown
Europe North America Middle East and Africa Latin America Asia
100%

80%

60%

40%

20%

0%
Saint-Gobain CRH Holcim Lafarge HeidelbergCement

Source: Company reports, Fitch

Pressure on margins
In 9M11, pressure on margins has been so far intense. Fitch expects this to contnue in 2012,
 Overcapacity and cost inflation will
particulalry in emerging countries. Energy cost inflation, which has been particulalry high in
continue to put pressure on margins.
2011, should ease next year, thanks to the stabilisation of oil prices. This should reduce cost
inflation in developed markets, favouring some recovery in margins. On the other hand, cost
inflation should remain high in emerging markets, particularly in Eastern Europe (ie, Fitch
expects Russian inflation to be above 7.0% in 2012) and Asia. In India, an important market for
all cement producers, Fitch forecasts inflation to remain close to 8%.

Figure 3

EBITDA and margin

Aggregated EMEA building materials

(EURm) EBITDA (LHS) EBITDA margin (RHS) (%)

25,000 20

20,000 18

15,000 16

10,000 14

5,000 12

0 10
2007 2008 2009 2010 2011f 2012f
Source: Company reports, Fitch

In addition, overcapacity in Western European countries remains, and this is likely to keep
margins down. Issuers have been reacting to the decline in volume demand by mothballing
plants, but the permanent closure of production capacity has been slow. The process is also
delayed by the sale of CO2 emission rights, as some producers prefer to maintain their
capacity in order not to lose their allocation of CO2 permissions. Therefore, Fitch believes that
a recovery in margins is unlikely in 2012, despite all major companies having already
Related Criteria
announced further cost cutting programmes.
Corporate Rating Methodology (August 2011)

2012 Outlook: EMEA Building Materials 2

December 2011
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Cash Preservation
 Fitch expects issuers to continue with
cash preservation measures.
From 2009 onwards, all companies in the building materials sector started to adopt cash
preservation measures including working capital control, capex reduction and cuts in cash
dividends. Fitch expects tight discipline to be maintained on working capital, while the generally
improved credit profiles allow for some higher spending in capex and dividends.

Figure 4

Working Capital on Sales

(%) Saint-Gobain CRH Holcim Lafarge HeidelbergCement

25

21

17

13

5
2007 2008 2009 2010 2011f 2012f

Source: Company reports, Fitch

Companies have been increasing capex in 2011, mainly due to the recovery of maintenance
capex for cement producers that was reduced during 2009 and 2010. Fitch expects capex to
increase further in 2012 to an aggregated EUR7.0bn (+10%yoy), but to remain far from the
peaks registered in 2008 when aggregated capex in the sector exceeded EUR10bn. Issuers
have shown that they have ample flexibility on their capex spending. This flexibility could
represent a buffer for additional cash savings in case of a significant deterioration in trading
conditions.

The same applies to dividends: cash dividends were more than halved in 2009 and partially
recovered in 2010 and 2011. Fitch expects the sector‟s aggregated dividends to increase by
almost 10% in 2012, on the back of generally better credit metrics and increased financial
flexibility for most of the issuers. Fitch anticipates the aggregated dividend payout to reach
EUR2.5bn, still 20% below the peak reached in 2008, but EUR1bn above the aggregated
dividends paid in 2009. Thus, in the case of a further unexpected deterioration of trading
conditions, issuers could find an additional liquidity buffer from a new cut in dividends. The
agency believes that the need to maintain credit profiles will prevail, as in 2009, over
shareholder remuneration policies.

Figure 5 Figure 6

Capex Dividends
(Aggregated EMEA Building Materials) (Aggregated EMEA Building Materials)
(EURm) (EURm)
12,000 3,500

2,800
9,000
2,100
6,000
1,400
3,000
700

0 0
2007 2008 2009 2010 2011f 2012f 2007 2008 2009 2010 2011f 2012f
Source: Company reports, Fitch Source: Company reports, Fitch

2012 Outlook: EMEA Building Materials 3

December 2011
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Recession in the US
While a double dip scenario is not part of Fitch‟s assumptions, a further deterioration in the US
macroeconomic environment would have negative impact on the credit profile of the issuer in
the sector. In particular, a recession in the US economy and the consequent slowdown in
Western Europe would have a major impact on CRH and Compagnie de Saint-Gobain, which
have a stronger presence in North America and Western Europe.

However, the impact would be much lower for those issuers with a high exposure to Far East
markets (ie, Holcim and Lafarge). For example, according to Fitch estimates, a recession in the
US would have only a limited impact on the growth in India, but it would lead to a decline in oil
Figure 7 prices and hence to lower energy costs for cement producers. Therefore, issuers could
continue to see a sustained growth in demand in some emerging countries (although at a
Europe EBITDA on Total
2010 slightly lower rate), but with significantly lower cost inflation that would be beneficial for margins.
Holcim Higher margins in emerging countries could therefore offset, at least partially, the decline in
Lafarge mature ones.
CRH
Sovereign Debt Crisis
HeidelbergCement
A worsening in the macroeconomic scenario of western European countries caused by the
Saint-Gobain
sovereign debt crisis would likely have less of an impact than a double dip scenario on issuers
0% 20% 40% 60% in the sector. Even those issuers that realise a significant part of their EBITDA in Europe have
Source: Company reports, Fitch in reality low exposure to Portugal, Ireland, Italy, Greece and Spain. For example, Saint-Gobain
obtains about 55% of its EBITDA in Western Europe, but 23% of which is in France.
HeidelbergCement realises more than 40% of EBITDA in Europe, but is not present in Italy,
Greece and Portugal and has only a minor presence in Spain. In addition, most of the
companies have been already restructuring their operations in these countries, mothballing
plants and reducing fixed costs.

Slower Growth in Emerging Markets

By contrast, a slowdown is Asian economies that would lead to a decline (or slower growth) in
Figure 8
demand would have a major impact for Holcim, Lafarge and to a lesser extent
Liquidity
HeidelbergCement, leading to low volume growth, difficulty in increasing final prices and cost
Company Liquidity ratio
(x) inflation.
Saint-Gobain 2.6
CRH 2.8 Stable Outlook
Holcim 2.4
While the market outlook for the building material segment remains difficult, Fitch believes that
HeidelbergCement 2.6
Lafarge 2.6 all the major issuers in the sector have some headroom in their current ratings, and should
Source: Company reports, Fitch maintain them even in the event of a moderate worsening of trading conditions.

Strong Liquidity
Companies in the building materials sectors maintain strong cash positions, reflecting the cash
preservation measures initiated in 2009 and continued in both 2010 and 2011. Liquidity is
therefore strong for all the companies, with the Fitch calculated liquidity score (cash + undrawn
committed facilities plus 2012 FCF / 2012 debt maturities) ranging from 2.4x to 2.8x for major
issuers. In addition, the debt maturity profile is on average well balanced, limiting the
refinancing risk. Refinancing needs have been modest in 2011, with only EUR1.7bn of bonds
repaid during the year. New bond issues totalled almost EUR3.0bn in 2011, as some issuers
already refinanced part of their 2012 maturities. In 2012 a total of EUR4.2bn bonds are
maturing, corresponding to about 10% of total bonds outstanding, an amount that could be
easily managed and refinanced, in Fitch‟s view. In addition, out of this total, EUR1bn refers to a
bond issued by HeidelbergCement and maturing in January 2012 that has been already
refinanced for EUR620m with the company‟s bond issues in October and November
(EUR500m + CHF150m). An additional EUR1.2Bn refers to a Sain.Gobain bond that has been
already fully refinanced with a EUR1.75bn dual-tranche issue in September.

2012 Outlook: EMEA Building Materials 4

December 2011
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Figure 9

Debt Composition
(%) Market debt Bank debt

100

80

60

40

20

0
Saint-Gobain CRH Holcim HeidelbergCement Lafarge
Source: Company reports

All the major issuers have financial structure with a higher exposure to bond debt markets
(including bonds, US private placement and CP programmes) rather than bank debt. In addition,
most of the bank exposure is concentrated in local subsidiaries, mainly in emerging countries.
Therefore Fitch believes the possible credit contraction from the eurozone banks could have a
limited impact on the sector‟s issuers.

2011 Review
In November 2011, Lafarge‟s Long-Term IDR was downgraded from „BBB-„/Negative Outlook
to „BB+‟/Stable Outlook. The main reason for the downgrade was the disappointing operating
performance and the decline in operating cash flow that partially offset the good progress in
terms of debt reduction. HeidelbergCement‟s IDR was upgraded from „BB‟/positive Outlook to
„BB+‟/Stable Outlook in May 2011 and successively affirmed in November. The upgrade
reflects the company‟s good achievements in improving its credit metrics thanks to the constant
debt reduction. Although this process has slowed in 2011, Fitch expects credit metrics to
continue to improve, remaining comfortably at a level in line with the current ratings.

In the investment grade category, the ratings of Saint-Gobain, CRH and Holcim were all
affirmed at „BBB+‟/Stable Outlook, „BBB‟/Stable Outlook and „BBB‟/Stable Outlook respectively.
While trading conditions are more challenging, these issuers in the investment grade have
enough financial strength to maintain their current ratings.

In the lower end of speculative grade ratings, Ideal Standard‟s IDR was affirmed at „B-„/Stable
Outlook: the market for the bath ceramics and products remain subdued, especially in some of
the group‟s core markets (Italy and UK), but the restructuring process is going ahead in line
with plans. Pfleiderer was affirmed at „C‟, pending the restructuring process of the group. In
Africa, Societè des Ciments d‟Enfidha was downgraded from „BBB+(tun)‟/Stable Outlook to
„BBB(tun)‟ with Rating Watch Negative in July, due to the negative impact of the turmoil in
Tunisia on the weak business profile of the company (ie, single product, single market, single
plant). The Rating Watch was resolved in October, with IDR affirmed at „BBB‟/Stable Outlook.

2012 Outlook: EMEA Building Materials 5

December 2011
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2012 Outlook: EMEA Building Materials 6

December 2011