(The following statement was released by the rating agency)
Oct 10 - This announcement corrects the version published earlier todaywhich incorrectly stated Arcelik's National Long-term rating. A correctedversion follows.
Fitch Ratings has affirmed Arcelik A.S.'s
(Arcelik) Long-term foreignand local currency Issuer Default Ratings (IDR) at 'BB+' and National Long-termrating at 'AA(tur)' The Outlook is Stable.
The rating affirmation reflects Fitch's expectations that profitability and freecash flow (FCF) will rebound in 2013, following an erosion of the EBITDA marginto 10% in H112 from 10.6% in 2011 and 11.7% in 2010, and further negative FCF.Fitch's current base case projects a rebound in EBITDA margin to just less than11% and positive FCF in 2013. A lower or slower improvement in profitability andcash generation in 2013 could put renewed pressure on the ratings.
The ratings are supported by Arcelik's leading position in its domestic market,its proven capability to grow export volumes and a broadly stable financialprofile. Market share gains in Europe, mainly due to European customers tradingdown in the current difficult economic conditions, has supported Arcelik'srevenue growth in H112. The majority of Arcelik's production is based inlow-cost locations such as Turkey, Romania, Russia and South Africa, whichallows the company to benefit from lower costs compared to its EU basedcompetitors (mainly from labour) and its Asian competitors in terms oftransportation costs due to its proximity to the EU.
Arcelik's revenue grew 39% in H112, supported by all segments, as well as thecontribution from the full consolidation of Defy acquired in Q411. Excluding theeffects of the Defy acquisition and currency effect, sales jumped 27%organically. This strong growth prompted a significant working capital outflowand the company is lagging behind its working capital target of 35% at end-2012(38.7% at end-June 2012). As a result, FCF was negative in H112, although Fitchexpects FCF to improve and be positive in H212 and beyond.
Despite higher than expected revenue growth, H112 EBITDA margin were lower thanhistorical levels at 9.9%. Fitch believes this deterioration is mainly becauseof persistently high raw material costs, and margin losses coming frominternational markets and the increased share of the electronics business wheremargins are typically lower compared to the white goods sector. Fitch believesthat profitability will rise slightly in the medium term as the volatilitysurrounding raw material prices lessens. However, increasing sales frominternational markets is likely to continue putting pressure on earningsmargins.
Debt increased slightly to TRY3.6bn at end-H112 from 2011 YE levels of TRY3.1bn,mainly due to continuous working capital needs. This pushed the net debt/EBITDAratio up to 2.5x but Fitch expects some de-leveraging in 2013 as the companyimproves its working capital management and its FCF generation ability.
Arcelik's reported leverage is negatively impacted by its higher than averageworking capital needs, as a significant portion of durable goods are sold oncredit in Turkey, and this is partly financed by Arcelik. Given that Arcelik hashistorically seen few losses on its trade receivables, Fitch adjusts Arcelik'sdebt by netting off the debt portion of trade receivables above 60 days ofrevenues (approximately TRY1.7bn at end-H112) to enable a more accurate peercomparison. On this basis, Arcelik's adjusted gross debt/EBITDA ratio was 2.0xat end-H112 (from 1.6x at end-2011) and the adjusted FFO gross leverage was2.2x.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead topositive rating action include:
- Significant improvement in business profile along with reduced structural FXrisks could be positive for Arcelik's ratings.
Negative: Future developments that may, individually or collectively, lead tonegative rating action include:
- A receivable-adjusted FFO gross leverage ratio above 2.0x, EBITDA marginsbelow 10.5%, or consistently negative FCF would put negative pressure onArcelik's ratings.
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The ratings above were solicited by, or on behalf of, the issuer, and therefore,Fitch has been compensated for the provision of the ratings.
Applicable criteria 'Corporate Rating Methodology', dated 12 August 2011, areavailable at
.Applicable Criteria and Related Research:Corporate Rating Methodology(New York Ratings Team)