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Rating action

Scope Ratings GmbH (Scope) has affirmed the A/Stable issuer rating on German specialty chemicals and consumer goods conglomerate Henkel AG & Co. KGaA. Scope has also affirmed the A senior unsecured debt rating along with the S-1 short-term rating.

Rating rationale

The rating affirmation reflects a still very strong financial risk profile (rated AA-), with leverage of 1.0x as of December 2022, and a strong business risk profile (rated A), benefitting from Henkel’s leading market position, particularly in adhesive technologies, strong brands and business diversification. The business risk profile is constrained by some medium-term deterioration in profitability amid the record-high input cost inflation in 2022 and by the moderate geographical concentration of operating profits in Europe.

The business risk profile (rated A-) continues to be primarily supported by Henkel’s top position within the global adhesives industry, benefiting from a strong ability to set prices and participation in key megatrends (e.g. electrification within mobility, circular economy within plastics) thanks to its innovation and sustainability focus (ESG factor). Conversely, the position of Henkel’s non-durable consumer product entities is weaker, especially for beauty care in North America, where local competitors dominate. Nevertheless, Henkel’s market position in Europe is much stronger based on its German roots and the popularity of its brands in the region. The main acquisition in 2022 was the Shiseido Hair salon business in the Asia-Pacific for around EUR 80m, which added to the geographical diversity in the professional hair care business.

In January 2023, the Beauty Care and Laundry & Home Care divisions were merged into a new division called Consumer Brands. The restructuring of the consumer products divisions started in 2022 and involved portfolio pruning (executed 40% of the targeted EUR 1.0bn of revenues under review) that saw the group exit oral care and skin care and selected businesses within body care.

Diversification remains a supporting factor for the rating, positively impacted by Henkel’s conglomerate structure with the equal balance between specialty chemicals and non-durable consumer products (in terms of 2022 revenues), and the proportionate mix between B2B and B2C. The adhesives portfolio benefits from a wide product portfolio and a varied end-market mix, although the diversification is weakened by the estimated 40% of the portfolio deriving from cyclical industries. Henkel’s non-durable consumer products business benefits from a diverse brand portfolio focused on few selected consumer goods categories (oral care and skin care were exited last year). Despite the global reach, however, around half of group sales and around 60% of operating profits are from Europe, yet these are expected to decline moderately after the disposal of the Russian business (which represented around 5% of Group sales in 2021). Suppliers and customers are broadly diversified and the distribution network is well-established.

Profitability is currently a constraining factor for the rating. In 2022, the massive input cost increase coupled with higher restructuring expenses and portfolio optimisation within Consumer Brands caused Scope-adjusted EBITDA to drop to EUR 2.6bn from EUR 3.1bn despite a 11.6% top-line growth (organic growth was 8.8%, of which +12.6% pricing, -3.8% volumes). Although Henkel was able to pass-through most of the higher input costs on an absolute basis, the Scope-adjusted EBITDA margin went down to 12% from 16% a year before. The exceptional surge in oil and gas prices directly impacted the cost for petrochemical feedstock, but other raw materials also saw significant cost increases, including inorganic substances, synthetic resins, surfactants and packaging. Overall, reported cost of sales increased by 17% in 2022, with prices for direct materials having risen in the mid-twenties’ percentage range on average during the year. Already in 2021, profitability was below the pre-Covid EBITDA margins of 18-19% due to the accelerating raw material and logistics cost inflation.

Scope expects further selling price increases to support low-to-mid single-digit organic growth in 2023, as evidenced in the 6.6% revenue increase in Q1. Even so, we expect full-year revenues to slightly decline amid softening consumer and industrial demand, the sale of the Russian business in April 2023 (which Scope estimates generating around EUR 1.0bn revenues a year) and further portfolio pruning within Consumer Brands. Whilst raw materials inflation eased in early 2023, Scope expects only a slight EBITDA margin recovery in 2023 and a broadly stable Scope-adjusted EBITDA at around EUR 2.7bn. This is because input costs remain high compared to pre-war levels, particularly for energy in Europe, combined with salary inflation assumed in the mid-to-high single-digits. Restructuring costs in 2023 will remain elevated as Henkel enters the second phase of the consumer products merger (focused on supply optimisation) while completing the first phase (EUR 290m spent in 2022 for the first phase out of the envisioned total of EUR 350m). From 2024, we assume a gradual margin improvement, on the back of normalising trading conditions, a recovery in demand, and realised cost savings from the Consumer Brands merger, expected at EUR 250m a year from the first phase and EUR 150m from the second in the long term.

Henkel’s very strong financial risk profile (rated AA-) continues to support the issuer rating. Leverage measured as Scope-adjusted debt/EBITDA deteriorated to 1.0x as of December 2022 compared to 0.4x a year earlier due to lower profitability and higher working capital costs, yet it still remains strong. Scope expects the gradual improvement in profitability and working capital to benefit the leverage metric over time and keep it below 1.0x. Scope assumes net inflows of around EUR 400m from M&A in 2023. This is based on the disposal of the Russian business for EUR 600m and the further sale of non-core brands that will more than compensate for any bolt-on acquisitions. Going forward, the rating base scenario assumes only bolt-on acquisitions (up to EUR 500m) and the absence of transformational deals. The associated risk of potential multi-billion-euro acquisitions is mitigated by Henkel's commitment to the single A rating category and ability to deleverage thanks to sound discretionary cash flow generation. Scope-adjusted free operating cash flow/debt hit a temporary low of 24% in 2022, but Scope sees a quick recovery to well above 35% already from 2023. This will be thanks to some relief from working capital due to the safety stock built in the previous year as well as easing raw material costs, which will compensate for the increase in net capex to around EUR 700m (or around 3.0%-3.5% of sales) from EUR 566m in 2022 (or 2.5% of sales). Last year Henkel launched its first share-buyback programme, acquiring around EUR 800m of treasury shares in 2022 and EUR 200m in Q1 2023.

Liquidity is adequate. Besides ample recurring free operating cash flow, liquidity is supported by EUR 1.3bn of cash and equivalents as of December 2022 – down from EUR 2.4bn in December 2021 – and an undrawn revolving credit facility of EUR 1.5bn (extendable until 2025). Liquidity is therefore well above the amount of short-term maturities, namely the CHF 330m bond that matured in April 2023. Scope does not see the need for bond issuances in the short term.

The most relevant supplementary rating drivers for Henkel remains 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 consistently sound credit metrics in past year, the commitment to a single A rating category and a prudent dividend policy with pay-outs targeted at 30%-40% of adjusted net income after minority interests.

One or more key drivers of the credit rating action are considered an ESG factor. 

Outlook and rating-change drivers

The Outlook is Stable and reflects the expectation that Henkel will keep Scope-adjusted debt/EBITDA at around or below 1.0x. This will be despite short-term pressure on profitability from unfavourable economic conditions (weaker demand and high input costs) and the effects of the portfolio optimisation and reorganisation within Consumer Brands. The rating base scenario assumes no large multi-billion-euro acquisitions in the medium term, but rather bolt-on deals.

A positive rating action could be evaluated if the business risk profile improved, including through a persistently higher EBITDA margin, or if financial targets became more creditor-friendly with a net cash position on a sustained basis.

A negative rating action is possible if more shareholder-friendly policies were adopted while Scope-adjusted debt/EBTIDA persisted at close to or above 2.0x. A break with the conservative financial policy is an example that could leading to a negative rating action. 

Long-term and short-term debt ratings

All senior unsecured debt has been affirmed at A, at the level of the issuer rating. Scope has also affirmed the S-1 short-term rating based on Henkel’s issuer rating of A and the better-than-adequate internally and externally provided liquidity cover, banking relationships and standing in capital markets.

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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Consumer Products Rating Methodology, 4 November 2022; Chemicals Rating Methodology, 17 April 2023), 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 25 May 2022.

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
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