Rating Action Overview

• CSL Ltd.'s (CSL) dominant position in the specialty biotechnology plasma-derived industry, earnings diversity, and favorable barriers to entry underpin the credit quality of the global biotechnology company.
• We expect a rebound in earnings to drive CSL's S&P Global Ratings adjusted debt to EBITDA to below 2.0x in the next 12-18 months. In addition, we project CSL's earnings margins will recover from the previous year's sub-par performance, and a reduction in capital expenditure (capex) will enable other credit metrics to strengthen.
• We are revising our outlook on the long-term rating on CSL to stable from negative. At the same time, we are affirming our 'A-' long-term and 'A-2' short-term issuer credit ratings on CSL, as well as the related issue ratings.
• The stable outlook reflects our view that CSL's deleveraging efforts and established record of operating within moderate financial leverage targets will continue to provide rating stability. We expect CSL to operate with its debt-to-EBITDA ratio below 2x and absorb any future debt-funded strategic initiatives at about this level.

Rating Action Rationale

CSL's business position has strengthened, enabling greater financial leverage tolerance at the 'A-' level. CSL's earnings diversity, size, and scale have meaningfully improved following the acquisition of Vifor in August 2022. The plasma-derived business, CSL Behring, is the group's largest and strongest business, operating in a concentrated industry with three major players and benefits from a dominant position.

However, the CSL Seqirus and CSL Vifor divisions add meaningful earnings diversification to the group. CSL and Vifor's expertise in therapeutics complement each other, especially in the anemia and nephrology fields. CSL is using Vifor's competencies in complex manufacturing and supply-chain operations. The addition of Vifor has also broadened CSL's product pipeline.

Management remains committed to adopting a financial stance that supports the 'A-' rating. Management seeks to maintain financial leverage below 2.0x over the long-term. Although financial leverage has remained above this level for the past two years, this is tenable at the 'A-' rating due to the company's competitive strengths and our expectation that it will prioritize near-term deleveraging over shareholder returns. Our base-case assumptions do not incorporate any further debt-funded acquisitions or share repurchases until such time that leverage is sustainably below 2.0x.

The path to financial deleveraging is achievable. Financial leverage peaked at 2.8x following the completion of the Vifor transaction. In addition, CSL had to absorb a surge in its inventory balance as it replenished plasma volumes that had been depleted during the pandemic. As a result, financial leverage has remained elevated and was about 2.4x as of Dec. 31, 2023. The combination of improved earnings, an unwind of its inventory balance, reduced capex, and debt repayment should see debt-to-EBITDA fall to about 2.2x in fiscal 2024 (year end June 30) and below 2.0x in the next 12-18 months. CSL funded the US$11.7 billion Vifor acquisition with a mix of new debt of about US$6.0 billion, existing cash balances, and equity issuances.

CSL's strong competitive position should enable it to protect its plasma-derived earnings. CSL Behring's blood collection and fractionation capacity, alongside its expansive global manufacturing and collection infrastructure, positions the company favorably to capitalize on the projected sustainable growth in global demand for immunoglobulin (Ig), albumin, and specialty products. The CSL Seqirus influenza vaccine business has the technical and manufacturing capability to produce targeted vaccines for each Northern and Southern hemisphere flu season and deliver them on schedule in the volumes required. CSL Vifor provides a platform for the company to build on its expertise in iron deficiency therapy and grow their presence in nephrology, with a focus on dialysis and rare disease.

While there are competing treatments and drugs on the market, we expect CSL will be able to successfully adapt its product mix. New competing products that seek to reduce Ig demand are a competitive threat. However, we do not expect this to materially erode the group's competitive position as we expect that plasma-derived therapy will remain a cornerstone treatment with a solid growth profile.

CSL's effective management and governance support its credit profile. CSL continues to identify, monitor, and mitigate risks within its business operations. It illustrated this during the pandemic by overcoming significant supply-chain disruptions and associated challenges. Although the group has conducted acquisitions throughout its history, including the recent Vifor transaction, we considered such acquisitions have generally been strategically appealing, well executed, and prudently funded.

Outlook

The stable outlook reflects our view of CSL's dominant position in the specialty biotechnology plasma-derived industry, favorable barriers to entry, and the company's record of operating within moderate leverage targets. The company's competitive strengths and our expectation that management will prioritize near-term deleveraging over shareholder returns, will allow its debt-to-EBITDA ratio to drop below 2x in the next 12-18 months.

Downside scenario

We could lower the rating if CSL maintains its debt-to-EBITDA ratio above 2.25x for a prolonged period. We believe this would most likely occur because of additional large-scale debt-funded acquisitions. We consider this as unlikely in the next two years. We could also downgrade CSL if its performance and cash generation materially deteriorate because of operational or competitive issues that meaningfully erode the company's market position.

Any significant product recall that impairs CSL's ability to generate strong cash flow could also weigh on the rating. However, we believe this scenario is unlikely given the company's strong risk-management standards and no incidents of product contamination.

Upside scenario

A rating upgrade is unlikely, given the company's financial policy and growth objectives. The group's credit metrics would need to display a significant and sustained improvement before we would contemplate a positive rating action. Such an action would also need management to commit to a more conservative financial policy. This could include its debt-to-EBITDA ratio remaining sustainably below 1.75x, and its ratio of free operating cash flow (FOCF) to debt remaining greater than 40% while it executes its growth objectives.

Company Description

CSL is a global biotechnology company that specializes in the development, manufacture, marketing, and distribution of a diverse range of biotherapies. CSL operates in more than 40 countries with more than 31,000 employees and competes as one of the largest protein-based biotechnology businesses. Following the acquisition of Vifor Pharma, CSL has three core businesses:

• CSL Behring, a provider of protein biotherapeutics for the treatment of rare and serious diseases;
• CSL Seqirus, specializing in influenza and other vaccines and other biologics; and
• CSL Vifor, specializing in the therapeutic areas of iron deficiency and nephrology.

CSL has nine manufacturing facilities across Australia, Germany, Switzerland, China, the U.K., and the U.S. The company is headquartered in Melbourne, Australia.

Our Base-Case Scenario

Assumptions

• U.S. real GDP growth of 2.5% in 2024 and 1.5% in 2025. Unemployment rate of 3.9% in 2024 and 4.2% in 2025.
• Western Europe real GDP growth of 0.8% in 2024, and 1.5% in 2025.
• Australia real GDP growth of 1.4% in 2024, and 2.3% in 2025.
• China real GDP growth of 4.6% in 2024, and 4.8% in 2025.
• Revenue growth of 11% in fiscal 2024, and for it to normalize around the 7% range in fiscal 2025 and 2026.
• An improved EBITDA margin of 32%-34% during fiscal 2024 and 2025.
• Reduced capex of about US$800 million in fiscal 2024 and to increase to about US$900 million over fiscal 2025 and 2026.
• Dividend payout ratio to be about 60% of net profit after tax.
• No material debt-funded acquisitions in our base case.

Key Metrics

• S&P Global Ratings-adjusted debt to reduce to about US$10.5 billion in fiscal 2024 (from US$11.4 billion in fiscal 2023) and then reduce further to US$9.3 billion in fiscal 2025.
• We expect that debt-to-EBITDA will improve to about 2.2x in fiscal 2024 (from 2.8x in fiscal 2023) and then to 1.7x in fiscal 2025.
• The EBITDA margins will improve to about 33% in fiscal 2024 (from 30.4% in fiscal 2023) and then to about 34% in fiscal 2025.
• The FOCF-to-debt will improve to about 19% in fiscal 2024 (from 7.9% in fiscal 2023) and then to about 33% in fiscal 2025.

Liquidity

We consider CSL's liquidity as strong. We forecast the group's sources of liquidity will exceed uses by more than 1.5x over the 12 months ending Dec. 31, 2024. We also expect net sources and uses of liquidity to remain positive, and the company to remain compliant with financial covenants, even if EBITDA decreases by 30% from our base-case assumption.

In April 2024, CSL issued US$1.25 billion of long-dated, senior unsecured notes that were used to repay short-term maturing debt. This supports our view of CSL's liquidity position, which includes the group's well spread debt maturity profile, its solid banking relationships, and good standing in global debt capital markets.

As of Dec. 31, 2023, we expect CSL to have the following sources and uses of liquidity over the next 12 months:

Sources

• Cash and cash equivalents of about US$1.01 billion as of Dec. 31, 2023;
• US$1.5 billion in undrawn bank lines; and
• Cash funds from operations of about US$4 billion in 2024

Uses

• Capex of about US$825 million-US$875 million in 2024;
• Minimal debt maturing in 2024;
• Working capital outflow of about US$575 million-US$625 million in the period; and
• Dividends of about US$1.4 billion-US$1.6 billion.

Ratings Score Snapshot

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