Frankfurt am Main, May 06, 2022 -- Moody's Investors Service ("Moody's") has today changed the outlook on the ratings of Vestas Wind Systems A/S (Vestas) and its subsidiary Vestas Wind Systems Finance B.V. to negative from stable. Concurrently, Moody's has affirmed all ratings of Vestas and its subsidiary, including the long-term issuer rating of Baa1 and the (P)P-2 other short term rating.
A full list of affected ratings can be found at the end of this press release.
"The change in outlook to negative reflects the continuation of unprecedented raw material cost increases seen since February, which puts a strain on Vestas' profitability and led management to a downward revision of their margin guidance for 2022, since a majority of price increases can only be gradually passed on to customers in the context of new orders," said Oliver Giani, Moody's VP- Senior Analyst and lead analyst for Vestas. "The rating affirmation balances the current challenges to defend profitability in an environment of cost inflation against the further strengthened mid- to longer term market outlook for wind turbines, which will benefit Vestas, the clear market leader," Mr. Giani added.
RATINGS RATIONALE
The rating reflects (1) the company's leading market and technology position for onshore wind turbines; (2) strong fundamental growth of demand for renewable energy and a good revenue visibility evidenced by an order book for wind turbines of around €18.9 billion; (3) broad product and services offering across platforms and technologies in onshore segment; (4) the recent consolidation of 100% ownership in its former offshore joint venture MHI Vestas Offshore Wind, which is exposed to the younger and faster growing offshore wind market and (5) the conservative financial policy.
These strengths are partly counterbalanced by (1) a challenging market environment with structural changes and pricing pressure in some markets which lead to declining margins over the last years; (2) intensified by logistical challenges and unprecedented input cost inflation affecting all wind turbine manufacturers; (3) the need for ongoing investments to continuously improve technology efficiency and products offerings to remain competitive; (4) volatility in cash flow and earnings and (5) potentially increased competition from Chinese competitors in international markets.
On 1 May 2022 Vestas published its interim financial report for the first quarter 2022. While a 27% increase in revenue and a 16% increase in onshore order intake year-on-year indicate a good start into the year – the first quarter is usually the weakest quarter of a year - Vestas reported a material profit decline. Results were materially affected by one-time items of €760 million in total, driven primarily by impairments and provisions booked in response to the changes in Russia / Ukraine (€401 million impact) as well as by strategic decisions regarding the business in China and India (€183 million) and the current offshore platform V164/V174 which reached the end of its economic lifetime (€176 million). At the same time Vestas reduced its guidance for 2022 towards a revenue range of €14.5 - 16 billion (€500 million lower than before), EBIT margin before special items in a range between -5% to 0% and total investments of €1 billion (unchanged).
Important to note is that the majority of the extraordinary items booked in Q1 2022 – Moody's estimates a minimum of €500 million – has no cash impact and relates to write-downs and impairments. During the twelve months ending March 2022 Vestas recorded an EBITA Margin of -1.5% (down from 2.1 % in 2021), a leverage of 4.7x debt/EBITDA (which compares to 1.7x as per December 2021) and a negative free cash flow of €-396 million (all figures Moody's-adjusted) leaving the rating weakly positioned. A turnaround of negative free cash flow generation is one of the key drivers for a stabilization of the rating outlook.
While full-year results for 2022 will be negatively affected by the current market challenges, the mid-to-long-term outlook for the industry improved further. In addition to the global efforts to reduce CO2 emissions, demand for wind turbines will benefit from the political decision to reduce reliance on Russian energy deliveries, which overcompensates for lost business opportunities in Russia.
OUTLOOK
The rating is currently weakly positioned.
The Baa1 rating takes comfort from Vestas' ability to increase its prices in response to the current market disruptions as reflected in the increase of the average selling price per Megawatt (MW) capacity in the order intake in Q1 2022 to €0.89 million from €0.86 million in Q4 2021. While the project nature of the wind turbine business with lead times of 1-2 years in the onshore and up to 6 years in the offshore business requires some time until the effect of these price increases becomes visible in the P&L, the price increases reflect Vestas' conservative financial policy and pricing power and should support the preservation of credit metrics in line with the requirements for the Baa1 rating category.
The negative outlook mirrors the challenge for Vestas to sustainably strengthen profitability and free cash flow generation so that it meets the criteria set for a stable Baa1 rating by year-end 2023. Any indication that this might not be achievable could increase downward pressure.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS (ESG)
Moody's takes into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. In the case of Vestas, the main ESG-related drivers are as follows:
In terms of environmental and social impact, we expect Vestas, together with its industry peers, to benefit from the increasing efforts to reduce carbon emissions and move energy production towards renewables. Given the leading market position and its broad product offering, Vestas should be able to benefit from this trend. The strong order intake supports this expectation.
The company adheres to publication and corporate governance practices in line with its listing requirements. The company has a distribution policy of 25% - 30% of net earnings in place in combination with additional share buy-backs depending on free cash flow generation. In addition, leverage as defined as reported net interest-bearing debt / EBITDA before special items should remain below 1.0x (-0.0x as of 31 March 2022).
LIQUIDITY
Vestas has a strong liquidity profile supported by the company's consistently high balance of cash and marketable securities over the last years with close to €2 billion as of 31 March 2022, and by funds from operations and €1.2 billion availability under a €2 billion sustainability-linked revolving credit facility signed in April 2021. The facility which replaced the former €1.15 billion revolving credit facility which had a sublimit of €550 million for cash drawings, only, has a term of 5 years with two one-year extension options.
In addition, we understand that, while working capital is negative and therefore a source of financing, a working capital increase may reduce this source of financing.
Beyond these cash resources, Vestas has access to short-term guarantee facilities at several banks which are used for the issuance of bank guarantees in favor of its customers in line with market standard. In case of need, given the strong liquidity position, the revolving credit facilities could be used as an additional source for the issuance of bank guarantees to its clients, providing additional comfort in this regard.
As per our liquidity risk assessment these sources are well covering expected liquidity needs for the next twelve months, including around €1 billion capital expenditures, working cash and working capital swings as well as €53 million dividend for 2021 as agreed during the annual general meeting early April.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Downward pressure would develop in case of (1) signals of Vestas not being able to sustainably improve its EBITA margin towards 6% by year-end 2023; (2) leverage sustainably exceeding 2.0x debt/EBITDA or 0.0x net debt/EBITDA; or (3) continued negative free cash flow weakening the liquidity profile.
Albeit currently unlikely, a positive rating action would require further business profile improvements, in particular a sustained and profitable expansion of the offshore business. Furthermore, a return to credit metrics seen during 2015 – 2017 evidenced by (1) an EBITA margin sustainably above 10%; (2) a sustained positive FCF generation through the cycle with only modestly offsetting share buy backs; (3) leverage below 1.0x debt/EBITDA while preserving a strong liquidity profile.
LIST OF AFFECTED RATINGS:
..Issuer: Vestas Wind Systems A/S
Affirmations:
.... LT Issuer Rating, Affirmed Baa1
....Other Short Term, Affirmed (P)P-2
....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1
Outlook Actions:
....Outlook, Changed To Negative From Stable
..Issuer: Vestas Wind Systems Finance B.V.
Affirmations:
....BACKED Other Short Term, Affirmed (P)P-2
....BACKED Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1
....BACKED Senior Unsecured Regular Bond/Debenture, Affirmed Baa1
Outlook Actions:
....Outlook, Changed To Negative From Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287885. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Headquartered in Aarhus, Denmark, Vestas Wind Systems A/S (Vestas or the company) is a leading manufacturer and service provider for onshore and offshore wind turbine generators. The company is present in more than 85 countries across the world with an installed base of more than 154 Gigawatt (GW). In 2021 turbines equivalent to 16.6 GW were delivered, while Vestas generated €15.6 billion in revenue.
Vestas is publicly listed at Nasdaq Copenhagen and part of the OMX C25 index with a market capitalization of €23.7 billion as of 3 May 2022.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Oliver Giani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
