SGL Carbon Outlook Revised To Stable On Higher Demand Offset By Rising Capex And Negative Cash Flows; Affirmed At 'B-'

  • SGL Carbon continues to see higher demand for its products and has therefore increased its guidance for 2018; we now expect EBITDA of €135 million in 2018.
  • However, greater capital expenditures, indicating slower deleveraging, and another year of negative free operating cash flows lead us to believe SGL Carbon will take longer than previously expected to strengthen its credit metrics to levels commensurate with a higher rating.
  • We are therefore revising our outlook on SGL Carbon to stable from positive and affirming our 'B-' long-term rating.
  • The stable outlook on SGL Carbon reflects our expectation that healthy end-market demand, notably in batteries and automotive, will translate into higher profitability in the coming 12 months.
PARIS (S&P Global Ratings) Dec. 6, 2018--S&P Global Ratings today revised its 
outlook on Germany-based graphite and carbon materials producer SGL Carbon SE 
to stable from positive. We affirmed the long-term issuer credit rating at 
'B-'.

The outlook revision reflects our expectation that SGL will take longer than 
previously expected to meet the thresholds for a higher rating, namely an S&P 
Global Ratings-adjusted debt to EBITDA of 4x and positive free operating cash 
flows. Under our base case, we project adjusted debt to EBITDA of about 4.5x 
in 2018-2019. We also anticipate another year of negative free operating cash 
flows (FOCF), of about €60 million-€70 million for 2018, excluding the final 
payment received in the first quarter in relation to the disposal of the 
Performance Products business segment for about €50 million. At the same time, 
we continue to assume healthy end-market demand, notably in batteries and 
automotive, will translate into high profitability in the coming 12 months. 

The delay in SGL's deleveraging process stems from greater capital expenditure 
(capex) needs to fuel expansion. In our view, supportive market conditions and 
higher demand for SGL's main products have prompted the company to 
deliberately prioritize growth over deleveraging in the next few years. We 
understand that the company's capex in the coming years will be materially 
above its depreciation level (about €60 million), and that its investments 
will focus on expanding its automotive, LED, and semiconductor businesses. 
These projects should increase the company's utilization rates and therefore 
support higher cash flows going forward. We understand that the capex will be 
on numerous projects that can be shelved if the market turns sour. Although we 
have not factored investments in major projects into our base case, we don't 
rule them out as the company progresses with the current project pipeline.  

We understand that management is committed to maintaining reported net debt to 
EBIDTA of less than 2.5x and gearing below 0.5x in normal industry conditions. 
Using end-September 2018 data as a starting point, under our calculation, 
hypothetical leverage of 2.5x would correspond to adjusted debt to EBITDA of 
about 4.25x. 

We view SGL's two divisions--namely carbon fibers and materials (CFM) and 
graphite materials and systems (GMS)--as more diversified, customer-specific, 
and profitable, with an EBITDA margin of around 12%. We view favorably SGL's 
acquisition of Benteler's and BMW's shares in ACF, the joint venture dedicated 
to establishing the use of carbon as a lightweight construction material in 
the automotive industry. This acquisition will provide growth opportunities 
for SGL through developing new products and solutions for customers, which 
will better utilize ACF's capacity and potentially replace BMW's current 
demand in the medium and long term. 

The stable outlook reflects our expectation that SGL will see higher 
profitability over the coming 12 months, thanks to increasing end-market 
demand, notably in batteries and automotive. 

In our base case, we forecast adjusted debt to EBITDA of about 4.5x in 
2018-2019, which is commensurate with the 4x-5x range for the current rating. 
In addition, we forecast negative FOCF of slightly more than €100 million in 
the coming two years.  

An upgrade is contingent on SGL's ability to translate healthy growth in its 
key markets into stronger demand for its products, higher profitability, and 
ultimately into positive FOCF.

For a 'B' rating, we would expect debt to EBTIDA to stand around 4.0x. Under 
our base-case scenario, we assume the company will reach this level by 
end-2020. In addition, for an upgrade, the company would need to maintain its 
financial policy (namely reported net debt to EBTIDA of 2.5x under normal 
industry conditions) and adequate liquidity.

At this stage, rating pressure is remote. We could lower the rating if we 
classified SGL's capital structure as unsustainable. This would occur if SGL 
experienced a sharp collapse in demand for its products, leading to meaningful 
negative FOCF and leverage ratios well above 5x.