Morningstar DBRS Assigns an Issuer Rating of BBB, Stable Trend, to Metso Oyj

DBRS Ratings GmbH (Morningstar DBRS) assigned an Issuer Rating of BBB with a Stable trend to Metso Oyj (Metso or the Company).

KEY CREDIT RATING CONSIDERATIONS
Metso's credit rating is supported by its leading market position in midstream and downstream mining and aggregates machinery manufacturing and related services. The Company is well diversified geographically; end market sales are generated in more than 50 countries with limited concentration. The credit rating is also supported by strong financial metrics that have improved since the merger with Outotec in 2020. Fairly low leverage for the rating category will allow the Company to digest any negative effects from a cyclical downturn. Morningstar DBRS' credit rating on Metso also takes into consideration that services revenue will help to partially offset a decline in machinery revenue, limiting the negative effects of a downturn in the Company's end markets.

Conversely, the Company's exposure to highly cyclical end-markets constrains its credit rating; 75% of Metso's revenues are related to the mining sector, in which investment decisions are largely based on the future prices of commodities. In a low pricing environment, mining companies may delay their investments, thus affecting the Company's top line. The remaining 25% of revenues are related to the construction and infrastructure end-markets, which are also cyclical. Morningstar DBRS notes that operating in both segments may provide some protection against downturns in any of the end-markets; however, the drivers of these end-markets are not necessarily countercyclical with each other. Despite the Company having publicly stated its commitment towards maintaining an investment-grade credit rating, there is no explicit financial policy, while we note that its dividend policy is set at 50% of net income. .

CREDIT RATING DRIVERS
Morningstar DBRS may consider a positive credit rating action if cash flow-to-debt remains well over 50% and debt-to-EBITDA is kept well under 1.5 times (x) assuming no changes in the business risk. Although currently unlikely, Morningstar DBRS may consider a negative credit rating action in the case that cash flow-to-debt were to weaken towards 30% levels or if debt-to-EBITDA converges towards 3.0x. This situation could arise from softness in the demand for precious or industrial metals, which would in turn weaken the demand for mining machinery and its related services. A large acquisition of a less profitable or largely debt-funded company may also weaken key credit metrics and cause Morningstar DBRS to take a credit rating action. Future changes in the contribution from services may also influence the credit rating outcome.

EARNINGS OUTLOOK
Revenues in 2022 and 2023 have been supported by new order levels above EUR 5.6 billion in 2021 and 2022. However, new orders in 2023 declined to EUR 5.4 billion and to EUR 4.9 billion over the last 12 months (LTM) ended June 2024, signalling lower revenues for the 2024 fiscal year; in fact, LTM revenues have declined by 5% compared with those of 2023. Given the softening in demand, Morningstar DBRS estimates that the revenues in 2024 will decline by a mid-single digit, not recovering positive growth until 2025. Additionally, Morningstar DBRS expects the EBITDA margin to drop by close to 150 basis points on average over the next two years as a further result of softening demand.

FINANCIAL OUTLOOK
The cash flow from operations as calculated by Morningstar DBRS will decline compared with that of 2023, resulting from lower profit margins and increased average interest payments on outstanding debt. In spite of this expected deterioration, the key financial metrics will remain strong. Morningstar DBRS estimates that the debt-to-EBITDA ratio over the forecast period will remain under 2.0x and the cash flow-to-debt will remain within the low 40% range, strongly positioned within the assigned credit rating category.

CREDIT RATING RATIONALE
Metso's Issuer Rating is supported by the following key factors: (1) leading market position in its segment, (2) good geographical diversification, and (3) strong financial metrics. However, the following factors constrain Metso's Issuer Rating: (1) earnings evolution that is dependent on cyclical industries, (2) large dividend distributions, and (3) lack of a publicly stated financial policy. The Stable trend reflects Morningstar DBRS' view that Metso's credit metrics will remain supportive of a BBB Issuer Rating for the foreseeable future.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Metso Oyj, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Metso Oyj, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Metso Oyj, the BRA carries greater weight than the FRA.

Notes:
All figures are in euros unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:

-- Global Methodology for Rating Companies in the Industrial Products Industry (15 April 2024),
https://dbrs.morningstar.com/research/431173
-- Global Methodology for Rating Companies in the Services Industry (15 April 2024),
https://dbrs.morningstar.com/research/431185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodology has also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include annual reports, the Company's presentations, quarterly results, and industry reports. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

This credit rating concerns a newly rated issuer. This is the first Morningstar DBRS credit rating on this issuer.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: No
With Access to Internal Documents: No
With Access to Management: No

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/436934.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Pablo Santin, Assistant Vice President, European Corporate Ratings.
Rating Committee Chair: Anke Rindermann, Managing Director, European Corporate Ratings.
Initial Rating Date: 31 July 2024
Last Rating Date: Not applicable as there is no last rating date.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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