Evonik Industries AG

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8 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE Score of A for the “Size and Stability” rating factor reflects the group’s scale and breadth ... With annual revenues of €13.1 billion (€10.0 billion for its chemicals division), EI is among the largest European chemical issuers rated by Moody’s. On a more negative note, the group’s energy business clearly lacks scale and breadth compared with other European multi-utilities. Moody’s expects the size of the group to remain relatively stable in the short to medium term, given that parts of the proceeds from a potential sale of a stake in the group’s energy business would be reinvested in the chemicals franchise while the other part will be applied to debt reduction. We do not expect EI to embark on an aggressive external expansion strategy as the group’s focus will be on maximising its enterprise value through organic projects and bolt-on acquisitions ahead of a potential IPO. ... and the stability of its operating margins through the cycle As referred to above, EI’s diversified chemicals portfolio has proven very stable through the downturn, with EBITDA margins in FY 2009 exceeding those in the previous year. The group’s real estate business, albeit dilutive in terms of ROCE, offers earnings and operating cash flow stability through the cycle. As illustrated in Figure 7, below, EI has been able to sustain healthy and stable operating margins through the cycle and has outperformed its peers. FIGURE 7 EBITDA margins of EI in comparison to peers ADJUSTED EBITDA MARGINS 2007 2008 2009 Evonik Industries 14.42% 11.93% 13.87% Lanxess 9.87% 8.53% 7.81% Akzo Nobel 13.65% 13.77% 13.84% Clariant 8.79% 8.64% 4.75% Low Baa score for the “Cost Position” rating factor offers improvement potential in line with the implementation of EI’s “On Track” programme While EI already exhibits relatively high margins compared with most of its peers, Moody’s believes that the strength of the group’s chemicals operations should allow the group to increase its operating margins going forward. In addition, EI’s implementation of its broad-based cost optimisation programme, “On Track”, should help EI to retain industry-leading margins in the medium term, in Moody’s view. As a consequence of EI’s implementation of this cost optimisation programme and a higher focus on its chemicals operations, the group’s margins could be lifted into the high Baa – low A range (i.e. around 15% EBITDA margin) through the cycle. Financial Risk Factors High pension liabilities and reported financial debt ... EI’s overall weak Ba positioning for debt leverage rating factors reflects the group’s relatively high leverage on an adjusted basis. Adjustments for pension liabilities and operating leases accounted for almost 60% of EI’s adjusted net indebtedness at FYE 2009. While EI has largely focused on reducing its financial indebtedness over the past 12-18 months (its net reported indebtedness was reduced by €1.1 billion to €3.4 billion over the past 18 months to 30 June 2010), the group’s debt metrics remain weaker than those of its direct peers in high non-investment-grade and low-investment-grade territory. In Moody’s view, EI’s efforts to further reduce its leverage through asset disposals (the group is ANALYSIS: EVONIK INDUSTRIES AG
9 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE currently in the process of selling a stake in the energy business), with the proceeds to be partly applied to debt reduction, should help to position the group’s debt metrics in line with an investment-grade rating over time. Moody’s notes that while pension liabilities are included in its debt adjustments, they exert less pressure on the capital structure of EI than financial indebtedness, given the absence of maturities and the lower level of net interest cost carried on these liabilities. ... as well as a relatively aggressive dividend policy result in elevated debt metrics Moody’s notes that EI has historically returned material amounts of cash to its shareholders through the payment of sizeable dividends. Payout ratios have averaged more than 100% of the group’s net income over the past two years. Looking ahead, we expect EI to continue to pay large dividends. FIGURE 8 EI has weaker credit metrics than its peers [1] EBITDA/ NET DEBT/ RCF/ FCF/ RATING INTEREST EXP EBITDA NET DEBT NET DEBT Evonik Industries Ba1/sta 3.1x 4.8x 8.8% 10.9% Lanxess Baa2/sta 3.7x 2.9x 18.4% 19.8% Clariant Ba1/sta 3.0x 3.4x 26.2% 54.4% Akzo Nobel Baa1/sta 5.4x 2.1x 20.9% 22.2% [1] These figures are based on standard adjustments that Moody’s makes to enable global consistency for issuers reporting under IFRS. For details on these adjustments please refer to our rating methodology document “Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements of Non-Financial Corporations - Part II”, published in February 2006. Ba score for “Financial Strength” rating factor reflects EI’s solid operating performance despite difficult market conditions ... Despite challenging market conditions especially during the first half of fiscal year 2009 with continued destocking patterns across the chemicals value chain and pressure on prices whilst most chemicals companies were still absorbing high raw material costs through their P&Ls, EI posted a robust operating performance. EI’s performance was supported by the strength of its chemicals franchise and the overall diversity of its business profile with exposure to chemicals, energy and real estate. In 2009, EI reported a decline in sales of 18% year-on-year to €13.1 billion. Both the group’s chemicals and energy businesses posted a sharp fall in sales (-15% and -25%, respectively), mainly on the back of lower volumes (-10% for the chemicals business), but also as a result of lower prices for the chemicals business (-6% year-on year). The real estate business fared well, with a 1% increase in revenues year-on-year. In the same period, EBITDA at the group level was down 6%, to €2.0 billion, lifting the EBITDA margin by 1.9 percentage points, to 15.5%, thanks to an over-proportional reduction in cost of goods sold (COGS, -20%) and the group’s implementation of cost-cutting measures including short working hours, optimised maintenance expenses, reduced external services and the streamlining of administrative functions. Selling, general and administrative expenses (SG&A) fell by 14%, as EI maintained a high level of R&D (€300 million) in order not to jeopardise its future developments in an industry that is evolving rapidly. In terms of divisional EBITDA performance, the chemicals business proved to be the most resilient through the downturn. This division posted a 1% decline in EBITDA, lifting its margin by 2.3 percentage points to 16.1%, mainly as a result of cost-cutting measures in H1 2009 (3,500 employees, or almost 12% of the division’s workforce, were working short hours) and high operating leverage when volumes improved in H2 2009. Meanwhile, the energy ANALYSIS: EVONIK INDUSTRIES AG
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Evonik Industries AG

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