November 10, 2011

Summary:

Metso Corp.
Primary Credit Analyst: Anna Stegert, Frankfurt (49) 69-33-999-128; anna_stegert@standardandpoors.com Secondary Credit Analyst: Michael Andersson, Stockholm +46 8 440 59 30; michael_andersson@standardandpoors.com

Table Of Contents
Rationale Outlook

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Summary:

Metso Corp.
Credit Rating: BBB/Stable/A-2

Rationale
The ratings on Finnish capital goods producer Metso Corp. reflect Standard & Poor's Ratings Services' view of the group's business risk profile as "satisfactory" and its financial risk profile as "intermediate." We consider the business risk profile to be supported by Metso's leading market positions in rock and mineral processing and pulp and paper machinery, its geographically diverse earnings base, and its high share in the relatively less-cyclical aftermarket business. Offsetting these strengths are Metso's exposure to cyclical demand, price competition in its core business areas, and its profitability, which is below that of its peers. The financial risk profile reflects what we see as the group's good ability to generate free operating cash flow, moderate debt leverage, and strong liquidity, which are offset by its relatively shareholder-friendly dividend policy.

Key business and profitability developments

We believe Metso's reported order intake growth will slow down from the levels of the past two years. This belief reflects not only a tougher comparison period, but also current economic uncertainties in Europe that could cause Metso's customers to delay investment decisions, especially for large orders. Conversely, we see continuously strong conditions across several end markets, including mining and power, where we expect demand to continue increasing at a stable rate. In the first nine months of 2011, Metso continued its strong order intake growth, at about 50%, year on year, following a 36% increase for 2010, whereas reported net sales increased by 18%, compared with flat organic revenue growth in 2010 (reportedly up by close to 11%). The group's order backlog at the end of September 2011 stood at 5.9 billion, which equates to about 95% of last-12-month net sales. We believe this supports near-term visibility. Metso's reported EBITA margin before nonrecurring items increased only slightly to 8.4% for the first nine months of 2011, from 8.1% a year earlier. We note that Metso's EBITDA margin, as adjusted by Standard & Poor's, reached 11.1% for the 12 months ended Sept. 30, 2011, from trough levels of about 8.6% at the end of the third quarter of 2009 This is still well below levels for major peers, such as 19% for Atlas Copco AB (A/Stable/A-1) and 24% for Sandvik AB (BBB+/Stable/A-2). However, Metso's profitability was significantly less volatile than Sandvik's in 2008-2010. We believe that Metso should be able to further improve its operating margin toward its targeted 12%, should volume growth continue, allowing the group to better spread its fixed costs.

Key cash flow and capital-structure developments

Metso's strong financial performance in 2010, which was well above what we consider commensurate with the ratings, continued into the first nine months of 2011, thanks to tight control over working capital and capital expenditures. We believe, however, that Metso will need to reinvest in working capital and capital expenditures, following its disciplined approach throughout the economic downturn in 2009. We believe the group managed to contain working capital and display strong growth by securing customer advances from a substantial number of large orders over the first nine months of 2011. This might not be sustainable in a more difficult operating and funding environment. The group's funds from operations (FFO) to debt of 82% and debt to EBITDA of 1.1x for the 12 months ended Sept. 30, 2011, reflect significant headroom to accommodate expansionary investments and

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Summary: Metso Corp.

acquisitions, in our view. We could revise our financial risk profile assessment to "modest" if the group's metrics exceeded what we see as commensurate with the ratings, for example, FFO to debt of more than 50% and debt to EBITDA of less than 1.5x, on a sustained basis. A significant increase in dividend payments or a large debt- or cash-funded acquisition exceeding 500 million, would likely set back such a revision. We view FFO to debt of about 35% as commensurate with the ratings.

Liquidity
Metso has strong liquidity, in our view. We estimate that the ratio of sources of liquidity to uses will comfortably exceed 1.5x. As of Sept. 30, 2011, the group's key sources of liquidity include: 789 million of cash and equivalents and 203 million of other interest-bearing assets that we understand can be easily converted into cash; Access to an 500 million undrawn committed credit facility maturing in December 2015. This facility is subject to one capital structure financial covenant. This covenant applies only at a lower rating level and currently would leave ample headroom; and Positive free operating cash flow in 2011 of more than 300 million under our base case, on the assumption that the group does not significantly increase working capital. The key potential uses of liquidity over the coming 12 months include: Short-term debt of 478 million. Considering the group's sound operating performance in 2011, we assume in our scenario, a gradual increase of the dividend payout from 2011 figures of 232 million.

Outlook
The stable outlook incorporates our base-case expectations for the next two years and reflects our opinion that Metso will maintain credit ratios well above what we consider ratings commensurate, including FFO to debt of about 35%. This, in our view, is likely to be supported by continuously sound trading conditions in several of Metso's end markets and the group's strong order backlog, which should allow Metso to achieve a solid operating performance and potentially offset cash outflows for dividend payments and small- to midsize acquisitions. We expect to see some moderation in the group's credit metrics, stemming from investments in working capital and capital expenditures to accommodate higher demand, as well as increased dividends. We could raise the ratings if the group developed a stronger-than-anticipated financial profile over the longer term. However, we think this would also require a more conservative financial policy. Ratings downside could materialize if the currently favorable operating trends reversed, resulting in significant pressure on the group's profitability, and if the group failed to control investments in working capital. Absent a significant moderation of the group's operating performance, the ratings could come under pressure if Metso engaged in a significant debt-funded acquisition of more than 500 million, coupled with more aggressive shareholder distributions. This could trigger a substantial deterioration in credit measures to what we consider incommensurate with the current ratings. The likelihood of rating downside is only moderate, in our view.
Additional Contacts:

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Summary: Metso Corp.

Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com Additional Contacts: Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com Infrastructure Finance Ratings Europe; InfrastructureEurope@standardandpoors.com

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