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Rating action

Scope Ratings GmbH (Scope) has affirmed Hörmann Industries GmbH’s BB/Stable issuer rating. Scope has also affirmed the BB rating on the company’s senior unsecured debt.

Rating rationale

The affirmation reflects the expected solid business performance in 2023, with revenues of around EUR 830m (+21% YoY) and a Scope-adjusted EBITDA of around EUR 52m, slightly above the 2022 level of around EUR 49m. It also reflects the expected solid business development in the Communication division in 2024, the Group's main contributor to earnings and cash flow, which should help to offset the assumed weakness in the Automotive and Intralogistics divisions. In addition, it reflects the agency's expectation that Scope-adjusted debt/EBITDA will remain below 2.0x in 2023-24.

Hörmann’s unchanged BB issuer rating continues to be based on Scope’s unchanged assessment of a B+ business risk profile and a BBB- financial risk profile.

The company’s business risk profile continues to reflect a moderate market position, supported in particular by the good position of subsidiary Funkwerk AG in a profitable niche communications market. The business risk profile is limited by Hörmann’s relatively weak position in Automotive, the group's largest segment with 59% of revenues in 2022, which is evidenced by very weak profitability with an EBIT margin of less than 1% in 2017-22. However, the market positioning is supported by the fact that 30-40% of Automotive revenue is generated with products for which Hörmann is a single- or double-source supplier.

The diversified product range supports the business risk profile. However, diversification is hampered by sizeable concentration in terms of customers and end markets. Furthermore, Hörmann has a weak international presence, with around 67% of 2022 revenues generated in Germany.

Given the relative size of the Automotive division, the division's weak profitability has a significant negative impact on the Group's overall profitability, making profitability a further constraint on the business risk profile. The stronger profitability in Communication, on the other hand, has a supportive effect on Hörmann’s overall profitability. More than 85% of the Communication division's EBIT is attributable to Funkwerk AG, which is also the main contributor to the group's overall profitability.

Hörmann delivered a very solid 9M 2023 revenue (+20.8% YoY to EUR 568.6m), driven by the Automotive (+24.9% YoY) and Intralogistics (+39% YoY) divisions. Based on the strong 9M 2023 revenue, Scope anticipates full year 2023 revenue of around EUR 830m (+21% YoY). For 2024, Scope expects Group revenue to decline to around EUR 765m (-8% YoY), mainly driven by an expected decline in Automotive revenue to around EUR 420m (-12% YoY), which is expected to be partly offset by revenue growth in the Communication division, that itself is supported by consolidation effects from the Funkwerk acquisitions and its good order situation. Overall, the agency believes that the Communication division’s order backlog at YE 2023 is significantly higher than the figure of around EUR 174m in 2022.

At around EUR 49m, the group's Scope-adjusted EBITDA in 2022 was below the previous year's level of around EUR 55m, although the Group's revenue increased by 16% YoY. This was mainly due to a lower contribution from the Communication division and the fact that the 21% increase in revenue in the Automotive division did not lead to a significant profit increase. Adjusted for the one-off expenses of EUR 6.6m from the sale of Hörmann Automotive Eislingen GmbH, Scope expects Scope-adjusted EBITDA to reach around EUR 52m in 2023. The stabilisation of earnings in Automotive after three consecutive years of negative EBIT is a positive development. Adjusted for the one-off expense of EUR 6.6m from the sale of Hörmann Automotive Eislingen GmbH, EBIT in the Automotive division is positive at around EUR 3m in 2023. Scope also expects Automotive EBIT to be positive in 2024. Overall, the agency has factored in a Scope-adjusted EBITDA of around EUR 50m in 2024 due to the expected solid earnings performance of the Communication division, the Group's main earnings and cash flow driver.

Hörmann’s financial risk profile continues to be supported by a leverage as measured by the Scope-adjusted debt/EBITDA ratio at around 1.5x in 2019-21 but constrained by a weak cash flow cover.

Reported financial debt amounted to EUR 56.1m at end-September 2023 (EUR 57.8m at end-December 2022), of which EUR 50.0m were bonds and EUR 6.1m were bank loans. With the exception of a credit line for Hörmann Klatt Conveyors GmbH in the amount of EUR 2.5m, all debt is managed centrally by Hörmann Industries GmbH, which grants loans and other forms of financing to affiliated companies. There are no cross guarantees.

In July 2023, Hörmann Industries GmbH placed its new corporate bond with a total volume of EUR 50m. The bond has a coupon of 7.0% and a term of five years until July 2028. The net issue proceeds of the new bond were used to refinance the outstanding 2019/2024 bond. This new bond has an incurrence covenant that requires leverage to remain below 2.75x.

The EUR 40.0m syndicated loan has a covenant of an adjusted equity ratio of more than 22%, calculated at the level of the parent company Hörmann Holding GmbH & Co. KG. This covenant is reviewed on a quarterly basis. At the end of 2023, the ratio was approximately 33%.

To calculate Scope-adjusted debt, Scope added i) pensions of EUR 19m; and ii) leases of EUR 48m. In addition, Scope assumes that 50% of the Funkwerk’s cash is restricted. The agency expects Scope-adjusted debt to increase slightly from EUR 72m at YE 2022 to around EUR 78m at YE 2023, as Funkwerk's acquisitions will weigh on the group's cash position. Scope has factored in an increase in Scope-adjusted debt to around EUR 95m in 2024.

Scope expects that the Scope-adjusted debt/EBITDA ratio to be roughly flat at YE 2023 compared to 1.5x in 2022, as the expected slight increase in Scope-adjusted debt is likely to be offset by a slightly higher Scope-adjusted EBITDA. The agency expects that the Scope-adjusted debt/EBITDA ratio to deteriorate to nearly 2.0x in 2024 due to the expected increase in Scope-adjusted debt.

The interest coverage ratio remained strong at around 9x in 2022. Scope expects the interest coverage ratio to remain strong at around 8.5x in 2023, supported by the expected higher Scope-adjusted EBITDA. The agency expects interest costs to rise to more than EUR 7m in 2024 and anticipates an interest coverage ratio in the range of 6x-7x in 2024, supporting the company’s solid financial risk profile.

Scope estimates that Scope-adjusted FFO will decrease from around EUR 38m in 2022 to around EUR 26m in 2023 but expects Scope-adjusted FOCF to improve to around EUR 9m in 2023 compared to EUR -17m in 2022 due to the lower burden of NWC. For 2024, Scope expects a slight improvement in Scope-adjusted FFO to around EUR 30m and a Scope-adjusted FOCF of around zero due to higher NWC and capex. It is worth noting that Funkwerk AG has generated most, and at times all, of the group's cash flow over the last four years, which is a credit weakness.

The Scope-adjusted FFO/debt ratio increased from 49% in 2021 to 53% in 2022. Due to the lower Scope-adjusted FFO, the agency expects the Scope-adjusted FFO/debt ratio to deteriorate to around 33% in 2023. For 2024, the agency forecasts that the Scope-adjusted FFO/debt ratio will be in the range of 30%-35%.

Cash flow cover was volatile in the past due to the volatile Scope-adjusted FOCF. With the negative Scope-adjusted FOCF, cash flow cover turned negative in 2022 as expected. Scope expects cash flow cover to remain volatile in 2023-24, improving to around 10% in 2023 and turning negative in 2024.

Hörmann’s capital allocation policy is credit-neutral.

Liquidity is ‘adequate’, which is supported by available sources of liquidity and the absence of major short-term maturities following the refinancing of the EUR 50m bond in 2023.

Scope sees no company-specific ESG factors that have a substantial impact on credit risk.

Outlook and rating-change drivers

The Stable Outlook reflects Scope's expectation that revenue and Scope-adjusted EBITDA will increase and Scope-adjusted FOCF will become positive in 2023; Scope-adjusted debt/EBITDA will remain at below 2.0x in 2023-24; and that the liquidity position will remain adequate after the early refinancing of the EUR 50m bond in 2023. It also reflects the stabilisation of earnings in the Automotive division and the solid business development in the Communication division, supported by Funkwerk, which should help to largely compensate for the assumed weakness in the Automotive and Intralogistics divisions in 2024.

A positive rating action is possible if Hörmann’s financial risk profile improved, e.g. driven by a Scope-adjusted debt/EBITDA ratio moving to around 1.5x, bolstered by higher profitability in the Automotive division or a return to significantly positive and steady free operating cash flow. Alternatively, a positive rating action could be justified by an improved business risk profile, e.g. through an improved profitability on the group level.

Scope may consider a negative rating action if Scope-adjusted debt/EBITDA were sustained at around 2.5x, which could result from lower profitability, the aggressive use of liquidity for M&A or a deterioration of Funkwerk’s strong market position.

Long-term debt rating

Scope has affirmed the BB rating on the senior unsecured debt, In line with the issuer rating. The debt rating is based on an ‘average’ recovery prospect in a simulated default event. Scope’s recovery analysis incorporates a distressed going-concern enterprise value of around EUR 50m in a simulated event of default in 2025.

Hörmann’s debt instruments totalled around EUR 98m at end-September 2023, comprising a bond, a corporate loan with the German development bank KfW, a syndicated loan and credit line at the level of Hörmann Klatt Conveyors GmbH, of which EUR 56m had been drawn.

Hörmann Industries has provided a guarantee for the credit line of Hörmann Klatt Conveyors GmbH. As this line was established at the level of the operating company, we consider this line to be structurally senior. The other debt instruments are unsecured and rank pari passu.

Scope expects Hörmann to repay the KfW loan in full by the end of 2025. The agency also assumes that the EUR 40.0m syndicated loan and the credit line of EUR 2.5m made available to Hörmann Klatt Conveyors GmbH will be fully utilised at the simulated point of default. In 2024, Hörmann Industries raised around EUR 18m in promissory notes. This promissory note is unsecured and ranks pari passu with Hörmann’s other unsecured debt.

Beyond this, Scope assumes that the business plan will be executed as planned with no additional bank debt or other financing.
 
Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (General Corporate Rating Methodology, 16 October 2023; European Automotive Suppliers Rating Methodology, 6 February 2024), are 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 these 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 and/or Outlook 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: Sebastian Zank, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 28 March 2023.
 
Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.
 
Conditions of use/exclusion of liability
© 2024 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Fund Analysis GmbH, and Scope ESG Analysis 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.