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Imerys S.A. -- Moody's affirms Imerys' Baa3 rating; changes outlook to stable from negative

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Rating Action: Moody's affirms Imerys' Baa3 rating; changes outlook to stable from negativeGlobal Credit Research - 30 Mar 2021Frankfurt am Main, March 30, 2021 -- Moody's Investors Service ("Moody's") has today affirmed all ratings of Imerys S.A. (Imerys), including the company's senior unsecured ratings at Baa3, its senior unsecured euro medium term note program rating at (P)Baa3, as well as the issuer's commercial paper rating and other short term rating at P-3 and (P)P-3 respectively. The outlook has been changed to stable from negative."Our decision to stabilise Imerys's rating outlook reflects an improving trend in its operating results with organic revenue growth turning positive in Q4 2020 and our expectation of further economic recovery in 2021. The rating is also supported by management's commitment to an investment grade rating, underpinned by very limited cash dividend distribution in 2020 and the company's solid track record of positive free cash flow (FCF) generation" says Vitali Morgovski, a Moody's Assistant Vice President-Analyst and lead analyst for Imerys.Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443200 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.RATINGS RATIONALEImerys' operating results were heavily impacted by the drop in economic activity following the outbreak of the global pandemic and restrictions resulting from government imposed lockdowns. The company's like-for-like revenue dropped by 26% in Q2 2020, but recovered quickly in the second half of the year with Q4 posting a positive 1.7% l-f-l revenue growth compared to the same period previous year. Nevertheless, full year earnings (Moody's adjusted EBITDA) declined by 14%, additionally affected by one-off expenses such as restructuring charges (around E70 million disbursed in 2020), which brought Moody's adjusted gross leverage ratio up to 4.7x at the end of 2020, well above 3x-4x range Moody's views as appropriate for Imerys' current rating. However, Moody's anticipated economic recovery in 2021 resulting in mid-single digit revenue growth and in absence of further substantial restructuring costs should lead to earnings growth and deleveraging below 4x in the next 12-18 months.Despite topline and earnings pressure, Imerys demonstrated its ability to generate positive free cash flow (Moody's adjusted, post dividends) with E187 million in 2020 thanks to active capex and working capital reductions. A decline of cash dividends to E18 million in 2020 from E173 million in 2019 due to largely payment in shares (scrip dividends) additionally supported FCF. Moody's also positively noted that while Imerys plans a return to cash dividend distribution in 2021, with E97 million it remains well below pre-crisis level despite solid FCF and liquidity position of the group. Lower dividend payments than in the past is also one of the reasons why Moody's expects Imerys' retained cash flow/ net debt ratio to remain in the upper half of the 15-20% guidance range for the current rating.Imerys' rating is supported by (1) the group's position as the world leader in mineral-based specialities used by a great variety of end-markets; (2) its wide geographical footprint, with industrial sites in 40 countries around the world; (3) the group's conservative financial policy demonstrated by dividend distribution mostly in shares (scrip dividends) in 2020 and supportive shareholder structure with the majority stake held by financially strong investment holding GBL; and (5) the group's commitment to investment-grade rating and track record of sustainably positive FCF generation including downturns in 2009 and 2020.However, the rating is constrained by (1) the cyclicality of most of Imerys' end-markets and still fragile global economic outlook; (2) Moody's gross leverage still being above the level Moody's deems as appropriate for current rating; (3) still ongoing litigation affecting its US talc operations, which could lead to a material cash outflow (though it is already included in our 2021 estimates); (4) the group's exposure to structurally declining markets such as graphic paper (catalogs, leaflet etc); and (5) M&A related event risk reflected in increased bolt-on acquisitions recently that can further intensify in case of recovering economic activity, though the group may consider some targeted divestments as well.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's view that Imerys' operating results will continue to recover allowing its Moody's adjusted gross leverage ratio to decline below 4x in the next 12-18 months. The stable outlook is conditional upon Imerys maintaining solid liquidity profile supported by positive free cash flow generation.LIQUIDITYImerys' liquidity position remains solid and supportive of the current rating. Imerys had E646 million of cash on balance sheet at the end of December 2020 (little change compared to December 2019) and E1.1 billion availability under credit facilities. Imerys has only one covenant in some of its credit facilities with net financial debt/ consolidated equity to stay below 160% (43.7% in December 2020).Moody's expects Imerys to cover its regular cash needs such as those for working capital, capex and dividends with internal cash generation. The company has no bond maturities before March 2022 when its E300 million bonds come due, but had E230 million of commercial papers outstanding at the year-end 2020. Furthermore, Imerys expects to be required to pay around $100 million to close the litigation process for the group's talc operations in the US in course of 2021 and also to make around E40 million deferred acquisition payment for the Turkish Haznadar group.ESG CONSIDERATIONSEven following the sale of its roofing division, Imerys retains some exposure to the building materials sector through the former operations of Kerneos. The production of calcium aluminate cement, which represents around 7% of the group's revenue, is CO2 intensive although this cement is used in lower quantities than Portland cement as an additive to other materials. As such Imerys' exposure to CO2 risks is lower than for cement or other building materials peers.With its US talc litigation, Imerys is also exposed to reputation risks from social considerations although it is only a supplier of the talc products and not the pharmaceutical producer who sold the products.Imerys is a publicly listed company with a long history of strong corporate governance. The company's largest shareholder is the Belgian investment holding company Groupe Bruxelles Lambert (GBL) with around E20 billion in net asset value. Imerys has recently reinforced its commitment to solid investment grade rating and expects gradual deleveraging over time.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD MOVE THE RATINGS - UPPositive rating pressure could arise if:** Moody's adjusted retained cash flow/ net debt to exceed 20% and** Moody's adjusted gross debt/EBITDA to decline below 3x, both on a sustained basis.WHAT COULD MOVE THE RATINGS -- DOWNConversely, negative rating pressure could arise if:** Moody's adjusted retained cash flow/ net debt to start trending towards mid 10s or** Moody's adjusted gross debt/EBITDA to remain above 4x or** Moody's adjusted free cash flow becomes negative over several years.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Buiding Materials published in May 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158917. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Paris, Imerys S.A. (Imerys) is a leading industrial minerals and building materials company. With industrial sites in 40 countries on five continents, Imerys provides its products to a great variety of end markets such as renovation, construction, iron and steel, automotive, publishing, energy and many others. The group reported E3.8 billion revenue in 2020. Imerys is publicly listed, but majority owned by the Belgian investment holding company Groupe Bruxelles Lambert that holds 54.5% of share capital.REGULATORY DISCLOSURESThe List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL443200 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items: ** EU Endorsement Status ** UK Endorsement Status ** Rating Solicitation ** Issuer Participation ** Participation: Access to Management** Participation: Access to Internal Documents ** Disclosure to Rated Entity ** Lead Analyst ** Releasing Office For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Vitali Morgovski, CFA Asst Vice President - Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anke Rindermann Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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