Moody’s Investors Service upgraded Amer Sports Holding 1 Oy’s debt ratings due to the company’s healthy sales and earnings improvement in 2022 and overall improving performance over the pandemic. Sales grew 22 percent currency-neutral in 2022, led by China.

Amer Sports’ brands include Arc’teryx, Salomon, Wilson, Peak Performance, Atomic, Armada, ENVE Composites, ATEC, DeMarini, EvoShield, Louisville Slugger, and Luxilon.

Amer Sports’ corporate family rating (CFR) was raised to B2 from B3 and its probability of default rating (PDR) to B2-PD from B3-PD. Moody’s has also upgraded to B2 from B3 the ratings on the €1,700 million backed senior secured term loan B (TLB) due March 2026 and on the €315 million backed senior secured revolving credit facility (RCF) due October 2025, both borrowed by Amer Sports’ subsidiary, Amer Sports Holding Oy. The outlook on all ratings has changed to stable from positive.

“The upgrade to B2 reflects the company’s sustained earnings improvement and its positive track record after the pandemic, which led to a marked reduction in financial leverage in 2022 despite the weakening macroeconomic environment, high-cost inflation and supply chain disruptions,” says Giuliana Cirrincione, a Moody’s Analyst and lead analyst for Amer Sports.

In 2019, a consortium led by Anta Sports bought Finland’s Amer Sports for US$5.2 billion in 2018. Under the terms of the offer, Amer Sports remains a separate business entity, while Anta Sports provide R&D and production resources required for expansion on the Chinese market.

“The upgrade to B2 reflects the company’s sustained earnings improvement and its positive track record after the pandemic, which led to a marked reduction in financial leverage in 2022 despite the weakening macroeconomic environment, high-cost inflation and supply chain disruptions,” says Giuliana Cirrincione, a Moody’s Analyst and lead analyst for Amer Sports.

 In 2022, Amer Sports generated revenue of €3.4 billion (2021: €2.6 billion) and company-adjusted EBITDA, that is, excluding non-recurring items and IFRS 16 impact, of €365 million (2021: €295 million).

Rating Rationale
Moody’s said in its analysis, “Amer Sports’ earnings continued to grow at a sustained pace in 2022, as retail expansion, favorable product mix and price increases more than offset the negative impact from higher input and freight costs, supply chain disruptions and the lockdowns  in China.

Despite the weakening consumer sentiment across Europe and the US in the second half of the year, the company’s topline grew by 30 percent (or 22 percent excluding FX) to €3.4 billion in 2022. All regions achieved double-digit growth rates, with a key contribution from China, where sales rebounded strongly after the lockdowns.

While inflation, logistics disruptions and higher opex to fuel expansion into the Direct-to-Consumer (D2C) channel precluded a significant improvement in profit margins, the increase in earnings led to a marked reduction in the company’s Moody’s adjusted gross debt to EBITDA ratio to approximately 6x, as estimated as of end 2022.  This compares to 7.2x the year before and exceeds the expectations when Moody’s changed the outlook on  the ratings to positive in January 2022. Interest coverage metrics, measured as Moody’s-adjusted EBIT to interest expense, improved to 1.7x as of end 2022, from 1.3x in 2021.

Free cash flow, however, remained negative by around €300 million, at a lower level than Moody’s initially expected, primarily due to the extraordinary inventory build-up the company had to face to mitigate the supply chain disruptions during the end of 2021 and in 2022. The negative free cash flow generation also reflected the company’s sustained investments into both marketing and capex to support the ongoing retail expansion mainly in China and the US, which remains a key priority for Amer Sports. The company funded this cash burn with both cash on balance sheet and by drawing €170 million under its RCF, thus maintaining an adequate liquidity.

Although still-high inflation, sluggish consumer sentiment and uncertain macroeconomic environment are key downsides to Amer Sports’ growth potential over 2023, Moody’s expects the company will reduce further its financial leverage to below 5.5x by 2024. This reflects the expectation that Amer Sports’ strong portfolio of globally recognized brands – some of which with premium pricing such as Arc’teryx – together with its good geographical and wide product diversification, will mitigate the risk of earnings volatility even in a recessionary environment.

As the company plans to intensify its expansion efforts into D2C, free cash flow will remain negative in 2023 by around €100 million-€150 million according to Moody’s estimates, and will progressively improve to breakeven by 2024. The forecast of a negative free cash flow generation is also the result of rising interest rates, with an estimated impact of €70 million-€80 million in 2023.

Amer Sports’ B2 rating reflects its large scale and leading market positions, underpinned by a large portfolio of globally recognised brands; its broad diversification across sports segments and geographies; the favourable long-term demand dynamics of the sporting goods market; and the significant growth potential from the company’s expansion into the direct-to-consumer (D2C) channel, especially in the Chinese outdoor apparel market.

The rating also factors in the company’s exposure to discretionary consumer spending, which creates earnings volatility; the expected negative free cash flow (FCF) over the next 12-18 months as a result of sustained expansionary capital spending in the D2C channel, rising interest rates and still-high inventory levels; and the weaker EBIT-to-interest cover ratio compared with similarly rated peers.”

Liquidity
Moody’s said, “While inflation, logistics disruptions and higher Opex to fuel expansion into the With €145 million available under its €315 million RCF and around €380 million of cash on the balance sheet as of December 2022, Amer Sports’ liquidity is adequate. Based on Moody’s forecasts, these liquidity sources will be sufficient to cover the company’s cash needs over the next 12-18 months, which include a planned CAPEX of around €200 million to €250 million annually (i.e., including around €70 million related to leases).

“While inflation, logistics disruptions and higher Opex to fuel expansion into the Amer Sports faces significant EBITDA and working capital seasonality, with the largest cash outflows in Q2 and Q3, respectively. In 2023,  working capital absorption will improve as global supply chain conditions normalize and inventory levels drop. However, account receivables will grow due to topline expansion, and together with the sustained CAPEX plan and rising interest rates, will lead to pressure on free cash flow generation which will remain negative in the range of €100 million – €150 million in 2023 and will likely break-even by 2024 only. Moody’s expects that Amer Sports will need to further draw under the RCF to partially fund the negative free cash flow.

“While inflation, logistics disruptions and higher Opex to fuel expansion into the company’s RCF contains a financial covenant of senior secured net leverage not exceeding 8.0x, tested when (1) the facility is used for more than 40 percent of its committed amount, and (2) the company’s cash balance is below a certain level. Given the reduction in the company’s net leverage and the expected ample cash balance, Amer Sports will maintain sufficient capacity under this covenant.”

Structural Considerations
Moody’s said, “While inflation, logistics disruptions and higher Opex to fuel expansion into the B2 ratings of the €1,700 million backed senior secured TLB due March 2026 and the €315 million backed senior secured RCF due October 2025 are in line with the CFR. This reflects that the two instruments rank pari passu and represent substantially all of the company’s financial debt. The TLB and the RCF are secured by pledges over Amer Sports’ major brands, as well as shares, bank accounts and intragroup receivables, and are guaranteed by the company’s operating subsidiaries representing at least 80 percent of the consolidated EBITDA. The B2-PD probability of default rating of Amer Sports reflects the assumption of a 50 percent family recovery rate, given the limited set of financial covenants comprising only a springing covenant on the RCF.”

Rationale For Stable Outlook
Moody’s said, “The stable outlook reflects Moody’s expectations that Amer Sports will be able to maintain credit metrics commensurate for the B2 rating over the next 18 months on the back of at least stable earnings in 2023 and continued but slower EBITDA growth thereafter, leading to a Moody’s adjusted leverage below 5.5x by 2024. The stable outlook also assumes a slow recovery in free cash flow generation capacity towards break-even by 2024 and an at least adequate liquidity profile with comfortable capacity under its financial covenant.”