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Pool Equipment Manufacturer Fluidra Rated ‘BB’ On Merger With Zodiac Pool Solutions; Outlook Stable

หน้าแรก > ข่าวธุรกิจ > Pool Equipment Manufacturer Fluidra Rated ‘BB’ On Merger With Zodiac Pool Solutions; Outlook Stable
ผู้โพส : Admin / วันที่โพส : 2018-08-10 13:15:26
คำค้นหา : S&P Global Ratings Standard & Poor's Keyword: S&P


Pool Equipment Manufacturer Fluidra Rated ‘BB’ On Merger With Zodiac Pool Solutions; Outlook Stable




          MILAN (S&P Global Ratings) Aug. 9, 2018--S&P Global Ratings today assigned its 'BB' long-term issuer credit rating to Fluidra S.A., a Spain-based multinational group serving the residential and commercial pool and wellness sector. The outlook is stable.
          At the same time, we assigned our 'BB' issue ratings to the euro-equivalent EUR850 million floating-rate first-lien term loan maturing in 2025. The recovery rating on this facility is '3', indicating our expectations of 50%-70% recovery (rounded estimate: 55%) in the event of payment default. The term loan was issued by the subsidiaries Fluidra Finco, S.L.U. (euro tranche), Zodiac Pool Solutions LLC (U.S. dollar tranche), and Zodiac Pool Solutions PTY LTD (Australian dollar tranche) and guaranteed by Fluidra and some of its subsidiaries. We are not assigning our ratings to the revolving credit facility (RCF) and to the asset-based loan (ABL).
          We withdrew the 'B' issuer credit rating on Zodiac Pool Solutions S.a.r.l., given that we have now assigned a final 'BB' rating to Fluidra S.A., the group topco and a guarantor under the group's senior credit facilities. 
          On July 2, 2018, the merger between Fluidra and Zodiac was completed following approval from the antitrust regulators. Approvals were obtained without remedies in all jurisdictions, excluding Europe and South Africa. In particular, in the EU, the group must divest the Israeli business, Aquatron. We do not see the mentioned divestment affecting the group's overall creditworthiness, as this business accounts for less than 2% of the combined group's sales and EBITDA. As such, we forecast the new Fluidra group will generate sales of EUR1.3 billion and adjusted EBITDA of about EUR220 million in 2018. Overall, we see limited integration risks between the two companies, given their similar size, focus of operations, and lack of geographic overlap. However, we believe there will be some costs associated with aligning the manufacturing and logistics for the whole group. 
          The merger has been cash neutral for the group, given that it has been funded through the issuance of new Fluidra shares to Zodiac's existing shareholders. We believe the refinancing of its debt structure supports the group's debt maturity profile.
          The new shareholder structure includes affiliates of private equity firm Rhone Capital (42%), representing the former majority owner of Zodiac; Fluidra's historical four founding families (29%); and free float on the Spanish stock exchange (29%). A formal agreement between the major shareholders supports the business strategy and the financial policy, as well as the composition of the board of directors and the management structure. These factors are positive for the group's deleveraging profile.
          In our view, the new combined group's business strengths include its position among the three top players globally (alongside Hayward Industries and Pentair) in the consolidating residential pool equipment industry. The new group will have a strong presence in the largest pool markets, such as the U.S. (30% of pro forma sales) and Europe (48%). Moreover, it has a relatively good scale of operations for the industry, with EUR1.3 billion of sales, as well as wide product distribution in 150 countries and a well-spread manufacturing footprint. Its portfolio of well-recognized brands (for example, AstralPool and the Jandy Pro Series) covers most product categories (filters, pumps, heating/cooling, and cleaning systems), supporting solid profitability, which we forecast will result in a 16%-17% adjusted EBITDA for 2018-2019. We believe maintaining high product quality and innovation should remain key with professional customers (pool builders, maintenance services, remodelers, and dealers) in the U.S. and Europe.
          Another business positive is that about 64% of pro forma sales in 2017 were derived from the aftermarket pool segment (replacement of older pool equipment). This segment is generally viewed as more resilient and less cyclical than sales driven by the new pool construction segment (36% of sales), which we view as more discretionary in nature and more correlated to the volatile residential new-build cycles.
          Business challenges, in our view, include that the combined group is operating only in one, relatively niche, and discretionary category compared with consumer durables categories like home appliances. The products have a long replacement cycle of eight to 10 years and are big-ticket items. The group faces strong competition in its main markets, against other established players such as Hayward and Pentair, which have better market positions in such core product categories as chlorinators and pumps. 
          We also view the business as exposed to a high degree of seasonality. The bulk of sales is generated in the second quarter of the year in anticipation of the summer season in Europe and in North America. This leads the company to see large seasonal working capital movements of EUR160 million-EUR180 million, which will be mostly funded by the RCF and the ABL. Still, there are some mitigants to this seasonality, such as sales generated in the Southern Hemisphere (about 15% of pro forma sales) and the "early-buy program," allowing distributors and dealers to pre-buy inventories for the following season at favorable prices and conditions.
          Supporting the financial profile is our forecast that the group will likely generate significant free operating cash flow (FOCF) of about EUR100 million. Despite the large working capital movements, the business model continues to display low capital expenditure (capex) intensity. This is notably due to Zodiac's business model, which relies on a significant part of using outsourced manufacturing partners. We also note the group has some excess capacity to accommodate volume growth.
          We forecast that the group's debt leverage, measured by our adjusted debt-to-EBITDA ratio, will gradually decrease over the next two years, supported by solid free cash flows and factoring in our understanding that the group will prioritize debt deleveraging in that period. We believe that discretionary spending on debt-financed acquisitions is likely to be constrained by the limited number of suitable acquisition targets in the industry, with no indication that Fluidra could move to an adjacent category. We also understand that shareholder remuneration will be modulated in conjunction with a stable debt leverage. 
          Our base-case scenario of gradual debt deleveraging in 2018-2019 in the range of 3.5x-4.0x is also supported by our view that the existing shareholder agreement between Fluidra's historical shareholders and affiliates of private equity firm Rhone Capital should not lead to a sizable level of shareholder remuneration that could constrain credit metrics. We think that the composition of the board of directors and the fact that affiliates of Rhone Capital have less than a majority stake, as well as our expectation that Rhone Capital will exit its investment in the medium term, support our view that the group will maintain a consistent financial policy. 

          In our base case for 2018-2019, we assume:
          - Sales of about EUR1.3 billion, driven by about 7%-9% growth in 2018, mainly thanks to the alignment of the early-buy program moving sales to October 2017-February 2018 from August-September 2017. About 3.0% organic sales increase in 2018-2019, mainly driven by volumes in the aftermarket segment;
          - S&P Global Ratings-adjusted EBITDA margin of 16%-17%, reflecting the current profitability in the two merged businesses, restructuring costs associated with the integration, and some benefits on cost savings, notably in procurement;
          - FOCF of about EUR100 million, with capex of EUR40 million-EUR50 million annually, with limited expansion capex; and
          - S&P Global Ratings-adjusted debt of EUR800 million-EUR850 million, which primarily includes borrowing, operating leases and pension, netted by surplus cash.
          Based on these assumptions, we arrive at the following S&P Global Ratings-adjusted credit measures for 2018-2019: 
          - Debt to EBITDA of 3.5x-4.0x;
          - EBITDA interest coverage at about 5.0x; and
          - FOCF to debt at 10%-15%.
          The stable outlook on Fluidra reflects our view that the new Fluidra group should benefit from strong regional market positions in Europe and the U.S. in its industry. We believe that the group's portfolio of strong brands and the long-term relationships with professional customers will support an S&P Global Ratings-adjusted EBITDA margin of 16%-17% and FOCF of about EUR100 million annually in 2018-2019. 
          For the rating category, we believe Fluidra should maintain S&P Global Ratings-adjusted debt to EBITDA of 3.0x-4.0x over the next 12-18 months, supported by a consistent financial policy on discretionary spending. 
          We could lower the rating if we see S&P Global Ratings-adjusted debt to EBITDA increasing to above 4.0x on a recurring basis. This could result from a sharp drop in sales in the combined group's new-build business, while its aftermarket business could suffer from pool owners delaying renovation works. We could also see lower profitability coming from an inability to pass on higher raw material costs in the context of stronger price pressure between competitors. 
          A negative rating action could also occur if we were to observe the group deviating to a more aggressive financial policy, which would negatively affect debt leverage. This could arise from a large debt-funded acquisition in an adjacent category or much larger dividend payments than expected in 2018-2019.
          We could raise the rating if Fluidra is able to deleverage, reaching an S&P Global Ratings-adjusted leverage ratio of 2.0x-3.0x, thanks to continued strong FOCF and a consistently prudent financial policy toward discretionary spending.
          From an operational standpoint, this is contingent on a successful merger of Fluidra and Zodiac, sustained by strong organic sales growth leading to global leadership in the industry and market share gains in all key product segments and geographic markets, as well as further business diversity.
 
 
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