The change in outlook to stable reflects (1) the company's stabilising operating performance despite the depressed market environment for its core products; (2) Moody's expectation that future cash flows will be more robust given recent cost savings and restructuring efforts; (3) the recent improvements in working capital management, which are now releasing cash to support operational cash flow (4) the expectation that the company will remain free cash flow positive going forward and (5) the additional comfort provided to the overall credit profile following the successful refinancing of maturing indebtedness; Pilkington has limited maturing debt instruments over the next 4 years.Today's rating action recognises Pilkington's stabilising operating performance despite continued weakness in core markets, Moody's said.The group's building products business continues to be impacted by weak North American commercial construction levels and the protracted downturn in many of continental Europe's markets, despite moderating trends in the UK and Australia. The company's automotive business is also realising some moderate benefits from new model introductions and efficiency improvements from the step change programme.
Although overall capacity utilisation in the industry and demand for glass remain relatively low, Pilkington is now harvesting the results of its restructuring and cost-saving efforts, which were initiated well before those of many of its competitors. Additionally, it has stabilised margins and, to an even greater extent, its cash flows so as to gain financial flexibility. However, Moody's cautioned that Pilkington will have to sustain its cost reduction efforts and efficiency focus going forward in order to counter sluggish demand and potential adverse price trends, with the aim of preserving and further improving operating performance.
The current Baa2 rating recognises the progress Pilkington has made in debt reduction in the period to 30 September 2003. Moody's expects the lower debt levels to be sustainable, thanks to Pilkington's focus on productivity and efficiency, working capital management as well as measured capex.
Through applying free cash flow and one-off disposal proceeds of GBP44 million from the sale of its Aerospace and Defence business to debt repayment, the company significantly reduced net debt levels from their peak in fiscal year ending 31 March 2002. The combined effect of debt reduction and higher level of cash flow led to a rebound in debt protection metrics to levels considered to be commensurate with the mid-Baa rating range. With this year's free cash flow, expected to come in at above GBP100 million, to be applied to debt reduction, debt protection measurements at the fiscal year-end should recover further to show a level of retained cash flow/net adjusted debt of well above 25%, Moody's said.
Given Pilkington's long-dated maturity profile, its significant cash balance and the expectation of a free cash flow, Moody's considers the company's overall liquidity profile as solid. In addition to these sources, the company has committed credit lines from its core relationship banks for short-term funding needs, though with material adverse change clauses. Compared to an actual EBITDA Interest Cover covenant of 6.8x, the company has ample headroom under the covenant limit of 3x. Earlier this year Pilkington successfully refinanced its Hybrid "Outback" structure by means of bilateral credit agreements, thereby considerably terming out its maturity profile.
The Pilkington Group, headquartered in St. Helens, UK, is one of the world's largest manufacturers of flat and safety glass for the building and automotive markets, with group sales of approximately GBP2.8 billion for the year ending 31 March 2003.