Rating action

Scope Ratings affirms its BBB issuer rating for Voith GmbH & Co. KGaA. The S-2 short-term rating remains unchanged. Scope also affirms its Stable Outlook.

Rating rationale

In FY 2017-18 Voith’s revenues of EUR 4,209m decreased slightly (-0.4% YoY) as higher revenues in Voith Paper (+14.3% YoY) and Voith Turbo (+1.5% YoY) could not offset the sharp decline in the Voith Hydro division (-20.1% YoY). In FY 2018-19F Scope expects revenues to increase to about EUR 4,270m (+1.5% YoY) mainly driven by the consolidation of Voith Robotics and FlowLink Systems for a full fiscal year for the first time. Revenues in other divisions are expected to remain roughly stable. Scope expects revenues in 2019-20F to increase to around EUR 4,400m driven by acquisitions. Voith’s profitability measured by its EBITDA margin has decreased to 6.4% for the third year in succession. As in previous years, profitability was impacted by: i) an increase in personnel expenses due to collectively bargained pay rises as well as an increasing headcount of more qualified and more highly paid employees in the Voith Digital Ventures division; and ii) the higher cost of materials, in particular due to the increased sale of material-intensive paper machines in the Paper division. Scope expects the ratio of cost of materials to total output to decrease slightly driven by higher aftermarket sales in the Paper division and increasing revenues in the less material-intensive Voith Digital Ventures division. Having said that, Scope expects this decrease to be eaten up by a further rise in personnel expenses given the company’s intention of expanding its Digital Ventures business. Scope has adjusted its EBITDA margin expectation down to the 6%-7% range, from 7%-8% previously.

Funds from operations of EUR 162m have been rather flat YoY as lower profits have been offset by lower cash interest (minus EUR 17m in FY 2017-18 vs. minus EUR 53m previously) as a result of the redemption of the corporate bond at the end of the 2016/17 fiscal year and lower cash taxes (minus EUR 70m in FY 2017-18 vs. minus EUR 93m previously). Operating cash flow dropped by around EUR 100m to EUR 31m mainly due to the use of warranty provisions and contract-specific provisions. In FY 2018-19, Scope expects operating cash flow to be impacted by payments to pension plans of EUR 15m. Due to the decreased operating cash flow, free cash flow (FCF) turned negative and amounted to minus EUR 57m. The rating agency expects FCF to be around zero in FY 2018-19F.

Scope has changed Voith’s financial risk profile from BBB- to BBB as the agency now has more clarity with regard to the company’s financial policy. Scope understands that Voith has abandoned its plan to build up a fifth mainstay by making a substantial acquisition. Instead, the company now intends to make smaller acquisitions that complement its existing activities. Scope expects Voith to spend EUR 150-200m on acquisitions over the next two fiscal years. This removes the risk of a sudden deterioration in credit metrics which impacted the rating agency’s previous assessment. Voith’s net leverage has increased to 1.7x driven by lower Scope-adjusted EBITDA. Scope expects the company’s SaD/EBITDA ratio to deteriorate into the 2.0-2.5x range, which is still commensurate with the current rating. Furthermore, in view of the anticipated lower EBITDA and higher capex, Scope expects FCF/SaD to remain below 5% in the foreseeable future.

Voith’s cash on the balance sheet has decreased by EUR 240m to EUR 342m at end-September 2018 (EUR 582m at end-September 2017) due to negative FCF and debt repayments. Having said that, Scope still considers Voith’s liquidity to be more than adequate according to the rating agency’s methodology.

Rating-change drivers

The rating could be upgraded if: i) Voith’s SaD-to-EBITDA ratio remains below 2.0x and its FCF-to-net-debt ratio improves to above 10% on a sustainable basis.

A negative rating action could result if the company’s SaD-to-EBITDA ratio increased above 3.0x on a sustainable basis, e.g. due to a deterioration in profitability.

Cash flow analysis & stress testing
Scope performed its standard cash flow forecasting for the company. No stress testing was performed.

Methodology
The methodology used for this rating and rating outlook (Corporate Methodology Jan 2018) is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: the rated entity, third parties, public domain and scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 07.05.2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2019 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.
Scope Ratings GmbH, Lennéstrasse 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Torsten Hinrichs.