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Rating action

Scope Ratings GmbH (Scope) has today assigned an A/Stable corporate issuer rating on German Henkel AG & Co. KGaA. Scope has also assigned an S-1 short-term rating and an A senior unsecured debt rating.

Rating rationale

Given Henkel’s company configuration, Scope has assigned a blended industry profile of A, reflecting specialty chemicals (the Adhesive Technologies division) and non-durable consumer products (the Beauty Care and Laundry & Home Care divisions). Henkel’s issuer rating is based on its business and financial risk profiles of A- and AA- respectively, whereby Scope has overweighted the business risk profile and included Scope’s understanding that Henkel may initiate larger acquisitions in an opportunistic manner. Scope has made no adjustment for supplementary rating drivers.

Henkel’s business risk profile is supported by its leading position in the global adhesive industry, benefiting from a strong orientation towards specialty adhesives, innovation and improving product sustainability. These factors afford good price setting power, which positively impacts the profitability (EBITDA margin) of Adhesive Technologies. In contrast, the position of Henkel’s non-durable consumer product entities is weaker, especially Beauty Care in North America. This region is commanded by non-durable consumer products of US-based companies. Henkel’s market position in Europe is much stronger, based on its roots as a German company and the high popularity of its brands in this geography. The company has sufficient price setting power, albeit lower than some competitors.

The diversification of the Adhesive Technologies division benefits from a stable end-market mix in the context of good overall diversification, including a portfolio of different customer types in multiple industries. However, Scope calculates that roughly 35% of sales are generated in cyclical end-markets. That said, this is only a negative rating factor to a limited extent, as the division’s figures have been less cyclical in the past. Henkel’s non-durable consumer products business is somewhat more diversified, despite more than 45% of sales being generated in Europe. The company has a broadly diversified supplier and customer portfolio as well as a well-established distribution network. Henkel’s conglomerate structure, including unrelated businesses and a broad product portfolio addressing different end-markets and demand drivers, positively affects diversification.

While the EBITDA margin of the Adhesive Technologies division is rating supportive, measured against the thresholds in Scope’s sector methodology on chemicals, the opposite applies to Beauty Care and Laundry & Home Care. Scope sees this as the direct consequence of the company’s market position, especially as regards Beauty Care in North America. That said, the generally low volatility of Henkel’s EBITDA margin is a positive rating factor. In the short term, Scope anticipates that operating profitability for the whole company will be weaker than the figures achieved in the last few years. This is primarily based on one-time expenses related to the merger of Henkel’s Beauty Care and Laundry & Home Care into a new Consumer Brands division. In addition, higher energy and raw materials prices as well as higher logistics costs negatively affected operating profitability. This was especially the case for the company’s non-durable consumer products activities, for which it typically takes longer to pass elevated costs on to customers, compared to Adhesive Technologies.

Henkel’s excellent financial risk profile supports its issuer rating. In addition to tuck-in acquisitions of up to EUR 500m per year, Scope’s rating base case also includes the first share buyback scheme in Henkel’s corporate history and effects from the offloading or discontinuation of non-core brands. By 31 March 2023, Henkel plans to have acquired preferred shares and ordinary shares of up to EUR 800m and EUR 200m in the years 2022 and 2023, respectively. Despite the expectation of weaker operating profitability, free operating cash flow generation should remain sufficient in the context of robust internal and external liquidity coverage. The associated risk of potential jumbo mergers is mitigated by Henkel's commitment to the single A rating category and its ability to deleverage thanks to sound discretionary cash flow generation.

The most relevant supplementary rating drivers for Henkel are financial policy and ownership structure (the Henkel family is the main shareholder, holding roughly 62% of ordinary shares). Henkel’s financial policy is conservative, based on: i) various financial targets, including multiple financial key performance indicators; ii) consistently ample discretionary cash flow generation; and iii) the commitment to a single A rating category. Henkel follows a sound dividend policy with a target dividend pay-out ratio of 30%-40% of adjusted net income after minority interest.

Outlook and rating-change drivers

The Outlook for Henkel’s issuer rating is Stable. In the medium term, Scope foresees SaD/EBITDA of around 0.5x, reflecting: i) the focus on tuck-in and selected large acquisitions instead of jumbo mergers; ii) the continued commitment to a historically conservative financial policy; iii) financial impacts from the merger of Beauty Care and Laundry & Home Care; and iv) the complete execution of the share buyback programme.

A positive rating action could be evaluated through an improved business risk profile, including a persistently higher EBITDA margin. Moreover, if the company indicate stronger credit friendly targets and move into a net cash position on a sustained basis.

A negative rating action might be evaluated if Scope sees indication that more shareholder friendly policies are adapted while SaD/EBTIDA move close to or above 2.0x on a persistent basis. A break with its conservative financial policy represents an example for leading to a negative rating action.

Long-term and short-term debt ratings

Scope has assigned an S-1 short-term rating. This is based on Henkel’s issuer rating of A and better-than-adequate internally and externally provided liquidity cover, banking relationships and standing in capital markets.

All senior unsecured debt has been rated A, the same level as the issuer rating. 

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, (Corporate Rating Methodology, 6 July 2021; Chemical Corporates Rating Methodology, 22 April 2022; Consumer Products Rating Methodology, 30 September 2021) 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 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: Klaus Kobold, 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  25 May 2022.

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
© 2022 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services 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.