metso corporation · 5/30/2019 · asia pacific 852-3551-3077 japan 81-3-5408-4100 emea...

CORPORATES

CREDIT OPINION30 May 2019

Update

RATINGS

Metso CorporationDomicile Finland

Long Term Rating Baa2

Type LT Issuer Rating

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Daniel Harlid [email protected]

Daniel Nilsson +46.8.5025.6536Associate [email protected]

Christian Hendker,CFA

+49.69.70730.735

Associate Managing [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

Metso CorporationUpdate to credit analysis

SummaryMetso's Baa2 rating recognizes the company's (1) strong market position in its core activitiesas a major supplier of equipment and related services for the mining, construction, and oiland gas industries, which is also illustrated by its healthy profit margins through the cycle;(2) global and well-diversified footprint, with an extended presence in emerging markets;(3) high proportion of revenue from services and the aftermarket (around 56% at the grouplevel), which is less volatile and more profitable than the revenue from the new equipmentbusiness; (4) flexible operations, with a variable cost base because of the outsourcing of ahigh share of components; and (5) currently low net leverage and solid liquidity.

However, the main constraints on the rating remain (1) the high sensitivity to changes inbusiness sentiment for the mining and, to some extent, the oil and gas sectors; (2) the riskof not being able to pass through increased raw material prices for wear and spare parts, asseen in 2017; and (3) a payout of 50% of net income as dividends and for working capitalmanagement issues, which constrains the company's free cash flow (FCF) generation,although this is expected to improve over the next 12-18 months.

Exhibit 1

Expected lower leverage because of debt retirement

2.5x

3.1x

3.3x

1.7x 1.6x

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2015 2016 2017 2018 Mar-2019(L) 2019F[1] 2020F[1]

Debt/EBITDA What could change the rating - up

(L)= Last 12 months.[1] This represents Moody's forward view, not the view of the issuer.Sources: Moody's Financial Metrics™, Moody's Investors Service estimates

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MOODY'S INVESTORS SERVICE CORPORATES

Credit strengths

» Strong market position in surface mining equipment and in valves for the oil and gas sector

» Globally well-diversified footprint

» High share of aftermarket business and flexible operations

Credit challenges

» High exposure to the mining and aggregates sector, currently representing close to 80% of sales

» Risk of an underinvested asset base, given average capital spending/sales of 1.6% between 2016 and 2018

» High dividend payout ratio of at least 50% of earnings per share, although supported by a high cash balance

Rating outlookThe stable outlook is anchored in our expectations on a continued recovery in mining, oil and gas capital spending, resulting incontinued order intake and revenue growth that supports the company being able to maintain an EBITA margin above 10% over thenext 12-18 months. The outlook is also supported by the company's plans to retire close to 50% of debt as of year-end 2019, which willresult in its Moody's-adjusted debt/EBITDA declining to a comfortable level of below 2x in 2019 from 3.3x in 2017. This will be done byusing the company's high cash balance of €424 million as of March 2019 and expected positive FCF in our forward view.

Factors that could lead to an upgrade

» A sustained double-digit EBITA margin

» Commitment to a conservative financial policy, illustrated by debt/EBITDA remaining close to around 2.0x through the cycle andretained cash flow (RCF)/net debt above 30%, supported by FCF/debt in the high-single digits in percentage terms

Factors that could lead to a downgradeNegative pressure, although currently unlikely in light of the expected deleveraging and more favorable market trends, might be drivenby:

» an EBITA margin below 10% on a sustained basis

» RCF/net debt below the mid-20s in percentage terms, with typically negative FCF/debt

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 30 May 2019 Metso Corporation: Update to credit analysis


Key indicators

Exhibit 2

Metso Corporation

2015 2016 2017 2018 Mar-2019(L)Moody's 12-18 month forward

view[1]

Revenue (USD billion) $3.3 $2.9 $3.0 $3.7 $3.8 $3.8 - $3.9

EBITA Margin 10.7% 8.9% 8.3% 11.7% 11.9% 12% - 12.5%

EBITA / Interest Expense 8.78x 6.37x 7.62x 11.58x 12.69x 20x - 25x

Debt / EBITDA 2.50x 3.13x 3.35x 1.70x 1.64x 1.0x - 1.2x

Net Debt / EBITDA 0.90x 0.54x 0.65x 0.75x 0.59x 0.3x - 0.5x

Retained Cash Flow / Net Debt 36.5% 60.5% 42.8% 52.0% 75.8% 75% - 90%

Free Cash Flow / Debt 11.0% 17.3% -0.4% -5.5% -2.6% 0% - 12%

All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.(L) = Last 12 months.[1] This represents Moody's forward view, not the view of the issuer.Sources: Moody's Financial Metrics™, Moody Investors Service estimates

ProfileHeadquartered in Helsinki, Finland, Metso Corporation (Metso) is among the leading global suppliers of machinery, technology andrelated services, with a focus on the mining, oil and gas, and construction industries. After the spin-off of its Pulp Paper and Power (PPP)business in the beginning of 2014, the company now operates through two business divisions: Minerals (around 81% of group revenue)and Flow Control. In the 12 months ended March 2019, Metso reported revenue of €3.3 billion. Metso is a publicly listed company, witha market capitalization of €4.6 billion as of 24 May 2019.

Detailed credit considerationsStrong market positions in mining, oil and gas, and construction, with a global footprintAfter the spin-off of its PPP business in the beginning of 2014 and the sale of the Process Automation Systems business relatedprimarily to the former PPP activities in the second quarter of 2015 for an enterprise value of around €340 million, Metso now focuseson its core mining, oil and gas, and construction end markets. According to management, Metso is a global market leader in theproduction of grinding mills, mining crushers, crushing and screening equipment, and related services in fairly consolidated markets.The demand for Metso's mining equipment is predominantly driven by the activity levels of mining companies for hard rock minerals,such as iron ore, copper or gold. The company also holds strong positions in selected niches within automation, such as flow controlvalves for the oil and gas industry.

The company exhibits a good and balanced geographic diversification, given its growing market presence in China, Brazil, India andother emerging markets. Metso's extensive global service network, as well as its large installed base, provides effective barriers to entry,enabling customer proximity and making it very difficult for new incumbents to replicate its coverage.



Exhibit 3

Net sales split by customer industryAs of December 2018

Exhibit 4

Net sales split by geographyFor the 12 months ended March 2019

Mining51%

Aggregates26%

Process Industries19%

Recycling4%

Sources: Company Business Review report 2018, Moody's Investors Service

Finland3%

Other Europe24%

North America19%

South and Central America18%

Asia-Pacific27%

Africa & Middle East9%

Sources: Quarterly report March 2019, Moody's Investors Service

Sales and margins are set to increase after a prolonged period of declineMetso's concentration to the mining sector is significant, with sales generated from it amounting to 51% in 2018 (77% if aggregates areincluded). The large decline in investments from the world's largest mining companies had a large negative impact on Metso's Mineralsdivision order intake and revenue in 2012-16. The magnitude was reduced by the division's sizable aftermarket exposure of about 50%in 2012 and 66% in 2017.

Exhibit 5

Order intake fell by 50% for equipment but only 10% for services, while mining capital spending fell 65% from that in 2012-16

0

20

40

60

80

100

120

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

$billio

ns

€m

illio

ns

Metsto Minerals Service Order Intake Metso Minerals Equipment Order Intake Mining Capital Spending (RHS)

Mining capital spending refers to the world's 20 largest mining companies.Sources: Company's annual reports, FactSet, Moody's Financial Metrics™

Despite the turmoil in commodity-related sectors, the Minerals division's reported EBITA margin before extraordinary costs proved tobe relatively resilient, decreasing about 320 basis points from a peak to a trough. This decline is mostly attributed to the equipmentbusiness with a high proportion of outsourced production, thus experiencing limited operational leverage in the margins. Since thetrough, the company has experienced a healthy order intake, with the numbers for the 12 months ended Q1 2019 increasing 19% on adivisional level, supported by 36% growth inr new equipment orders. Together with the elevated book-to-bill ratio, we expect divisionalsales of about 5% in 2019.



With regard to the much smaller Flow Control segment, for which sales fell 13% in 2016, the order intake in 2018 (+12%) and forthe 12 months ended March 2019 (+10%) also point toward continued stable revenue growth for 2019. On a group level, we expectrevenue to increase organically by 5%.

Exhibit 6

We expect sales growth of around 5% in 2019, with limited margin expansionHistorical and projected sales and profitability for Metso

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2015 2016 2017 2018 Mar-19(L) 2019F 2020F

€m

illion

s

Revenue Moody's-Adjusted EBITA Margin (RHS)

Sources: Moody's Financial Metrics™, Moody's Investors Service estimates

Risk of subdued FCF because of low historical capital spending levelsIn recent years, Metso has recorded a relatively low level of capital spending compared with that of other manufacturing companies.This does not necessarily affect the company's credit quality, but in times of big spending in connectivity and machine learning, allcompanies will need to assess their product portfolio's contribution to improve productivity for customers. If the company had spent3% of revenue in capital spending instead of 1.5%, its FCF/debt would have been 4%-5% lower than actually reported. Nevertheless,we expect the company to increase its reported capital spending to around €60 million-€70 million in 2019 and 2020 from around€40 million in 2017.

Exhibit 7

Metso had very low capital spending/sales levels over the last three years compared with those of its peersReported capital spending/sales for peers

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Metso Epiroc Weir Group SKF Sandvik MRT FLSmidth

2016 2017 2018

Sources: Company's annual reports, Moody's Financial Metrics™



Strengthened credit profile because of debt retirement and improved operating performanceMetso used a large part of the high cash balance as of year-end 2017 to pay back debt maturing in 2018, and we expect the companyto repay all of its debt maturing in 2019. This guidance translates into a quite steep deleveraging trajectory, taking reported financialdebt to €424 million as of year-end 2019 from €853 million as of year-end 2017. By taking these measures and de-risking the balancesheet, the company will likely improve significantly its leverage and coverage-based key ratios in the next two years.

Exhibit 8

Metso has used its high cash balance to repay debt2019F reported net debt bridge (in € millions)

853

-255

2 600

-174

424

-338

86

0

100

200

300

400

500

600

700

800

900

Total Debt 2017 Change in debt, net2018

Change in debt, netQ1-2019

Total Debt Q1-2019(excluding leases)

Bond maturing 2019 Total Debt 2019F Cash 2019F Net Debt 2019F

€m

illio

ns

Source: Moody's Investors Service estimates

We expect that the company's key ratios will be commensurate with the current Baa2 rating as of year-end 2019, driven by (1)increased sales, driving higher profitability; (2) lower Moody's-adjusted debt/EBITDA of 1.0x-1.2x in the next 12-18 months from 1.7x in2018; (3) a continued high cash balance, with limited dividend growth, yielding RCF/net debt in the high 70s-80s in percentage terms;and (4) recovered FCF/debt following a return to more normalized capital spending levels and better profitability, as well as improvedworking capital management.

Liquidity analysisWe consider Metso's liquidity profile as solid. As of March 2019, Metso reported around €426 million of cash on the balance sheet,further supported by around €62 million of financial instruments held for trading, and an undrawn committed revolving credit facilityof €500 million due in December 2020, with a one-year extension option. The facility is of high quality, without a repeating materialadverse change clause, and contains one covenant with sufficient capacity, which would become effective only if the credit rating wereto be downgraded below investment grade. Furthermore, we expect Metso to generate positive FCF in the coming 12-18 months. Theintra-year seasonality of the company's cash flow (working capital typically builds up in the first half of a year and is then released;dividends are paid in the second quarter) should also be comfortably covered by internal sources. The next major maturity is a €174million bond due in 2019, which we expect to be repaid.



Rating methodology and scorecard factorsThe principal methodology used in this rating was the Global Manufacturing Companies rating methodology, published in June 2017.The scorecard-indicated outcome of Baa2 for the 12 months ended March 2019 is one notch lower than that in our forward view but inline with the assigned rating. The difference primarily reflects the company's retiring debt coming due in 2019, as well as its improvedmarket conditions.

Exhibit 9

Rating factorsMetso Corporation

Manufacturing Industry Grid [1][2]

Factor 1 : Business Profile (20%) Measure Score Measure Score

a) Business Profile Baa Baa Baa Baa

Factor 2 : Scale (20%)

a) Revenue (USD Billion) $3.8 Ba $3.8 - $3.9 Ba

Factor 3 : Profitability (10%)

a) EBITA Margin 11.9% Baa 12% - 12.5% Baa

Factor 4 : Coverage and Leverage (40%)

a) EBITA / Interest Expense 12.7x Aa 20x - 25x Aaa

b) Debt / EBITDA 1.6x A 1x - 1.2x A

c) Retained Cash Flow / Net Debt 75.8% Aaa 75% - 90% Aaa

d) Free Cash Flow / Debt -2.6% Caa 0% - 12% Ba

Factor 5 : Financial Policy (10%)

a) Financial Policy Baa Baa Baa Baa

Rating:

a) Indicated Rating from Grid Baa2 Baa1

b) Actual Rating Assigned Baa2

Current

LTM 3/31/2019

Moody's 12-18 Month Forward View

As of 5/24/2019 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 3/31/2019(L).[3] This represents Moody's forward view, not the view of the issuer, and unless noted in the text, does not incorporate significant acquisitions and divestitures.Sources: Moody's Financial Metrics™, Moody's Investors Service estimates



Appendix

Exhibit 10

Peer comparison

In $ millionsFYE

Dec-17

FYE

Dec-18

LTM

Mar-19

FYE

Dec-16

FYE

Dec-17

FYE

Dec-18

FYE

Dec-17

FYE

Dec-18

LTM

Mar-19

FYE

Dec-17

FYE

Dec-18

LTM

Mar-19

Revenue $3,050 $3,747 $3,816 $2,500 $2,559 $3,271 $9,136 $9,872 $9,653 $4,363 $5,125 $5,145

EBITDA $345 $526 $538 $320 $480 $590 $1,335 $1,487 $1,449 $346 $413 $414

Total Debt $1,228 $867 $857 $1,756 $1,933 $2,188 $3,968 $3,623 $3,541 $1,422 $1,633 $1,818

Cash & Cash Equivalents $992 $487 $547 $320 $385 $335 $992 $1,190 $1,187 $625 $359 $318

EBITA Margin 8.3% 11.7% 11.9% 7.7% 14.2% 13.7% 11.4% 12.0% 11.9% 5.7% 6.3% 6.3%

EBITA / Interest Expense 7.6x 11.6x 12.7x 2.5x 5.4x 6.5x 7.3x 9.3x 9.4x 2.9x 3.3x 3.1x

Debt / EBITDA 3.3x 1.7x 1.6x 6.0x 3.8x 3.9x 2.9x 2.5x 2.5x 4.1x 4.0x 4.4x

Net Debt / EBITDA 0.6x 0.7x 0.6x 4.9x 3.1x 3.3x 2.1x 1.7x 1.7x 2.3x 3.1x 3.6x

Retained Cash Flow / Net Debt 42.8% 52.0% 75.8% 10.3% 16.4% 14.1% 23.5% 33.6% 33.1% 34.3% 24.0% 20.2%

Free Cash Flow / Debt -0.4% -5.5% -2.6% 5.3% -4.2% 1.4% 5.8% 9.0% 9.8% 3.0% -1.4% -12.3%

Metso Corporation

Baa2/STA

Weir Group Plc (The)

Baa3/STA

SKF AB

Baa1/STA

Terex Corporation

B1/STA

All figures & ratios calculated using Moody’s estimates & standard adjustments. FYE = Fiscal year-end. LTM = Last 12 months. RUR* = Ratings under Review, where UPG = for upgrade andDNG = for downgrade.Source: Moody's Financial Metrics™

Exhibit 11

Historical Moody's-adjusted debt breakdownMetso Corporation

12/31/2015 12/31/2016 12/31/2017 12/31/2018 03/31/2019[1]

As Reported Debt 822 794 854 598 720

Pensions 68 56 41 43 43

Operating Leases 138 124 129 117

Moody's-Adjusted Debt 1,028 974 1,024 758 763

[1] No operating lease adjustment for March 2019 because of the adoption of IFRS16.Source: Moody's Financial Metrics™

Exhibit 12

Historical Moody's-adjusted EBITDA breakdownMetso Corporation

12/31/2015 12/31/2016 12/31/2017 12/31/2018 03/31/2019(L)

As Reported EBITDA 614 279 269 405 432

Pensions 3 1 1 1 1

Operating Leases 46 41 43 39 29

Unusual Items and Non-Standard Adjustments -252 -10 -1 0 2

Moody's-Adjusted EBITDA 411 311 312 445 464

Unusual items relate to impairment and sale of fixed assets, Non-Standard Adjustments related to Equity Accounted Income.(L) = Last 12 months.Source: Moody's Financial Metrics™



Ratings

Exhibit 13Category Moody's RatingMETSO CORPORATION

Outlook StableIssuer Rating Baa2Senior Unsecured -Dom Curr Baa2

Source: Moody's Investors Service



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CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454


metso corporation · 5/30/2019 · asia pacific 852-3551-3077 japan 81-3-5408-4100 emea...

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