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Rating action

Scope Ratings GmbH (Scope) has affirmed its B+/Stable issuer rating on Waberer’s International Nyrt. The B+ rating for senior unsecured debt has also been affirmed. Simultaneously, Scope has withdrawn all ratings on Waberer’s International Nyrt. and has ceased analytical coverage for business reasons.

Rating rationale

Waberer’s business risk profile continues to be driven by the company’s robust market position. Waberer’s is one of the top 10 players in the highly fragmented European road freight logistics market (the top six companies have a combined market share of under 10%, no company has a market share of over 2%). While high fragmentation makes even large players price-takers in Scope’s view, the rating agency acknowledges that a certain size and the ability to offer additional value-add services is a clear competitive advantage when it comes to competing for larger contracts and/or customers.

As Waberer’s business is centred around road logistics (73% of total revenues in 2021), product diversification continues to be low. Some product diversification is achieved through different trucking services (full truckload services, less than truckload services and groupage), several value-add businesses such as warehousing and e-commerce services as well as car and truck insurance. Scope notes positively that around 25% of revenues are generated from higher margin and less price volatile value-add services like warehousing and insurance services. Waberer’s still has a fair amount of diversification in terms of clients and geographies.

After three years with a relatively low margin level, the profitability of the international transportation segment (ITS), as measured by its Scope-adjusted EBITDA margin, improved significantly to 9.3% in 2021 compared to -1.8% in 2020. The sharp deterioration of the ITS segment profitability between 2018 and 2020 was due to its high exposure to the very competitive and lower margin spot transport market, which proved disadvantageous amid increasing unit costs. In mid-2020, Waberer’s designed a comprehensive restructuring plan, which mainly includes: i) a focus on the most profitable routes/introduction of the ‘trade lane model’; ii) the reduction of the company’s own fleet in ITS from 2,600 to 1,600 trucks; iii) greater sales efforts for higher-margin value-add services in the regional contract logistics (RCL) segment (warehousing, e-commerce services); iv) the renegotiation or termination of all low/negative-margin contracts across segments; and v) the expansion of warehousing capacities and inhouse logistics services with anchor clients. Furthermore, the company was sold back to its founder (Mr. Waberer / High Yield Zrt.) and two business partners (Mr. Jellinek / Indotek and Mr. Mike / MHB Optimum) in March 2021.

In line with the changed ‘trade lane model’, the ITS has shifted its business focus from spot orders to contractual clients, which provides more stable revenues. Moreover, the higher service standards required by large contractual clients ensure greater profitability because low price providers (e.g. from Bulgaria, Russia and Ukraine) do not compete in this market segment. Still, Waberer’s planned stronger use of subcontractors after the reduction of its own fleet might be margin dilutive, given the generally low profit margin, in Scope’s view.

Total revenues in 2021 were around 4% higher YoY. Scope notes positively the increase in revenues per truck by around 15%, which resulted in higher ITS revenues by about 5% despite the 9% lower average number of trucks in 2021. Total EBITDA improved to EUR 74.2m compared to EUR 33.8m in 2020, driven by the improved efficiency of the ITS segment. RCL’s EBITDA margin decreased in 2021 from a very high level in 2020, where it was driven by an increase in higher margin revenues from in-house logistics.

Scope sees increased risks for Waberer’s road logistics business from the deteriorating economic environment, resulting in lower visibility with regard to revenue development. Having said that, Scope deems cyclicality in road logistics as medium. This is because the vast majority of goods are transported by road logistics and a large portion of road logistics cargo consists of essential goods like fresh and packaged food, beverages and healthcare products. The lower ITS segment revenues in 2019 and 2020 largely reflect the reduction in Waberer’s own fleet capacity (the average number of trucks was 11% less in 2019 and 32% less in 2020). Waberer’s direct revenue exposure to Russian and Ukrainian markets is less than 0.13%. Indirect exposure, however, could be higher as some of its customers could include the Russian-Ukrainian markets in their supply chains, or their production could be exposed to these regions, with the result that their transport and logistics needs for Waberer’s services may change. Market consolidation due to the insolvency of smaller companies is a support factor. Scope currently expects revenues of around EUR 640m for 2022 (+8% YoY; +11.6% in Q1 2022), largely driven by the price inflation for truck transport services. Scope believes that a potential European embargo on Russian oil (currently not part of the agency’s base case) would have negative effects on Waberer’s business.

Waberer’s does not engage in hedging activities with respect to oil prices (fuel accounted for around 12.5% of the company’s revenues in 2021). Its strategy is to pass the increases in fuel costs on to its clients. Contracts the company concludes on the spot market, which currently accounts for around 25% in the ITS segment, enable it to immediately pass any increases in fuel costs on to customers. This is because the prices on the spot market reflect current conditions, including fuel prices. Waberer’s has agreed with its long-term contractual clients that from Q2 2022 on it will pass increases in fuel costs on to customers with a delay of one week to one month (previously one to six months).

For 2022, Scope expects EBITDA of EUR 67m (margin 10.5%; EUR 16.3m or 10.3% in Q1 2022). The lower margin is due to Scope’s expectation of inflationary pressure, in particular from higher costs for subcontractors and higher wages.

Scope continues to assess Waberer’s financial risk profile at B+. Waberer’s total financial debt (including operating leases) at end-December 2021 amounted to EUR 178m (EUR 195m at year-end 2020), mainly comprising leases (EUR 132m) and loans (EUR 46m). Waberer’s acquires the trucks for its basic operations using finance leases. The trucks are bought directly from the manufacturers, who provide a repurchase guarantee not only for the end of the term but also during the term. Loans mainly comprise three overdraft lines with a total amount of EUR 22.7m and a five-year bullet loan in the amount of EUR 21m due in 2026. This bullet loan represents an accumulated leasing liability, which was subject to a moratorium on leasing and loan payments until 31 December 2020 (and hence not paid in 2020). As a result of the financing agreement with its Hungarian banks signed in 2021, the unpaid leasing liability was transformed into a five-year bullet loan and reclassified as long-term liabilities from Q1 2021. Taken together, Scope calculates Scope-adjusted debt (SaD) of around EUR 178m at end-December 2021.

In April 2022 Waberer’s issued corporate bonds via a private placement in the value of EUR 111m, with a fixed interest rate and a maturity of 10 years. The bonds will be amortised at 10% per annum between the fifth and ninth year and 50% in the 10th year. According to Waberer’s, it has already used around EUR 45m of bond proceeds to repay its overdraft facilities and the bullet loan from accumulated leasing liabilities. Waberer’s intends to use the remainder of the bond proceeds for investments in a proprietary warehouse (total planned investment: EUR 30-35m), to finance regional acquisitions and for fleet replacement. Scope expects the bond issue to increase SaD to around EUR 245m at year-end 2022 and 2023.

As a result of the refinancing process completed in March 2021, two financial covenants for overdraft facilities have been agreed, referring to net debt/LTM regular EBITDA and LTM EBITDA. Waberer’s complied with both covenants in 2021. As a result of the recent repayment of overdraft facilities, the covenant system will be terminated and most of the related collateral and security interests will be released. However, according to Waberer’s, the bond prospectus requires the company to maintain a net debt/EBITDA level of below 4x, which provides very comfortable headroom compared to a net debt/EBITDA level (based on Waberer’s calculation) of 1.6x at year-end 2021.

Despite higher EBITDA, reported cash flow from operating activities decreased to EUR 48m in 2021 (EUR 76m in 2020) reflecting higher net working capital driven by an increase in trade receivables. Scope also notes that operating cash flow in 2020 benefited from a positive one-off effect in the amount of EUR 27m from the change in current assets in 2020 as well as from significantly lower trade receivable as a result of the changed business strategy and reduced fleet size. Capex remained low at EUR 6.5m or 1.1% of total revenues, given the fact that the majority of the company’s assets are leased. Scope adjusted its free operating cash flow (FOCF) calculations for the full amount of annual lease repayments since it considers these cash costs necessary to maintain the operating business. FOCF was EUR 6m in 2021. The decrease vs. EUR 54m in 2020 reflects lower operating cash flow and higher lease repayments. Scope expects capex to increase to EUR 17m in 2022 and EUR 22m in 2023 driven by the planned investments in a warehouse. Scope expects the increased capex level to result in negative FOCF of around EUR 10m in 2022 and 2023.

SaD/Scope-adjusted EBITDA was 2.7x at year-end 2021. The improvement vs. 4.6x at year-end 2020 reflects higher EBITDA driven by the improved ITS segment’s efficiency. Scope expects the recent bond issuance to result in increased SaD/Scope-adjusted EBITDA of around 3.5x in 2022 and 2023. Furthermore, Scope expects the negative FOCF in 2022 and 2023, due to Waberer’s planned investment programme, to result in negative Scope-adjusted FOCF/SaD ratios in those years.

Scope considers Waberer’s liquidity and financial flexibility to be ‘adequate’, supported by the recent issuance of EUR 111m in corporate notes and the repayment of overdraft facilities. After the refinancing, the company has no meaningful short-term debt besides leasing obligations (all equipped with buyback guarantees from truck manufacturers).

Given the accelerating political efforts to curb greenhouse gas emissions and the relatively poor emission efficiency of road transport today, Scope sees headwinds on the cost/taxation side for the road freight industry going forward. These may range from higher petrol taxes to newly introduced CO2 taxation and/or higher truck toll fees (negative ESG factor).

One or more key drivers of the credit rating action are considered an ESG factor.

Long-term debt rating

The B+ rating on senior unsecured debt is based on recovery prospects for bondholders in a simulated event of default. Scope’s recovery analysis used a distressed enterprise value of EUR 199m in a hypothetical default scenario in 2023. This value is based on a haircut on Waberer’s assets and reflects liquidation costs for the assets of 10%. Scope’s recovery scenario assumes no further secured debt.

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

Methodology
The methodology used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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 Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 10 June 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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