Tue May 15, 2012 10:44am EDT
(The following statement was released by the rating agency)
Overview
-- French luxury goods group LVMH reported very strong operating
performance in 2011.
-- We expect that the group's financial metrics will improve in 2012.
-- We are revising our outlook to positive from stable and affirming our
'A/A-1' long- and short-term ratings on LVMH.
-- The positive outlook reflects the possibility that we could upgrade
LVMH if it continued to report robust sales growth, generated high free cash
flow, and achieved adjusted funds from operations to net debt in excess of 60%
on a sustainable basis.
Rating Action
On May 15, 2012, Standard & Poor's Ratings Services revised the outlook to
positive from stable on France-based luxury goods group LVMH Moet Hennessy
Louis Vuitton S.A. We also affirmed our 'A/A-1' long-term and short-term
corporate credit ratings on the group.
Rationale
The outlook revision and affirmation follow LVMH's reported strong operating
performance in 2011 and reflect our anticipation that LVMH will likely achieve
increasingly conservative financial metrics as of this year.
The ratings continue to be underpinned by our view of LVMH's strong business
risk profile, which since 2010 has benefited from the sharp rebound in the
global luxury goods market. LVMH has an unparalleled world-leading position
with a flurry of prestigious luxury brands. These include leather goods group
Louis Vuitton, which generally reports outstanding profitability and accounts
for a large share of group cash flow. LVMH is also a major player in
champagne, cognac, perfumes, as well as jewelry and watches, where we consider
that the recent acquisition of Bulgari has markedly strengthened the group's
competitive position.
We believe that luxury goods will continue to benefit from favorable growth
trends on the back of robust momentum in emerging markets. LVMH has started
2012 with an exceptional performance, announcing a vigorous 25% jump in sales
in the first quarter.
We view LVMH's financial policy as conservative. For instance, its financing
of the Bulgari acquisition included an equity payment. Our ratio of adjusted
funds from operations (FFO) to net debt for the group weakened slightly to 52%
in 2011, owing to the impact of the EUR2.2 billion cash component of the Bulgari
purchase. Despite an increase in working capital and high capital expenditures
(capex), discretionary cash flow in the year was high at about EUR900 million,
and we expect it to generally exceed EUR1 billion in future years. Consequently,
absent share buybacks and large acquisitions, adjusted FFO to net debt should
markedly increase in 2012. We estimate it could approach 70%, which is well in
excess of our 50% minimum for the current ratings.
Liquidity
The short-term rating is 'A-1'. This reflects our long-term corporate credit
rating as well as our view that LVMH's liquidity is strong under our criteria.
We expect sources to comfortably cover needs by more than 1.6x in 2012 and
2013, and acknowledge the absence of financial covenants.
We estimate the following liquidity sources in 2012:
-- About EUR5 billion in FFO;
-- An available cash balance of about EUR2 billion;
-- Undrawn confirmed credit lines of about EUR3.4 billion, including the
portion backing up the group's commercial paper (CP); and
-- A proven ability to tap the financial markets as a regular issuer.
This compares with the following estimated needs for the same period:
-- EUR3.1 billion in debt repayment, including EUR1.6 billion of CP;
-- Working capital requirements and capex in line with 2011 levels; and
-- Dividend payments of about EUR1.4 billion.
Outlook
The positive outlook reflects the possibility that we could upgrade LVMH if it
continued to report robust sales growth, generated high free cash flow, and
achieved adjusted FFO to net debt in excess of 60% on a sustainable basis. We
expect discretionary cash flow to exceed EUR1 billion in coming years.
Absent any significant debt-financed acquisition, LVMH's financial metrics
should improve noticeably in 2012, namely with adjusted FFO to net debt that
should comfortably exceed 60%.
We might consider revising the outlook to stable if LVMH were unable to
maintain its ratio of adjusted FFO to net debt above 60%. In our opinion,
acquisitions are the main factor that could substantially weaken this ratio to
below the 50% guideline that we view as in line with the current ratings. This
is because LVMH is structurally a strong cash generator. Even in 2009--a
lackluster year for the industry--free cash flow and discretionary cash flow
exceeded EUR2 billion and EUR1 billion, respectively. Even if annual gross
margin
contracted by a large 200 basis points and sales dropped 10%, we think the
group would be able to maintain FFO to net debt higher than 50%. In any case,
this degree of margin erosion is unlikely in our opinion, given the currently
strong tailwinds pushing the luxury goods industry.
Related Criteria And Research
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Retail
Industry, Sept. 18, 2008
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade
Credits, May 13, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings List
Ratings Affirmed; CreditWatch/Outlook Action
To From
LVMH Moet Hennessy Louis Vuitton S.A.
Corporate Credit Rating A/Positive/A-1 A/Stable/A-1
Ratings Affirmed
LVMH Moet Hennessy Louis Vuitton S.A.
Senior Unsecured A
Commercial Paper A-1
LVMH Finance Belgique
Commercial Paper* A-1
*Guaranteed by LVMH Moet Hennessy Louis Vuitton S.A.
(Caryn Trokie, New York Ratings Unit)
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