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Rating action

Scope Ratings GmbH (Scope) has affirmed its issuer rating of A-/Stable on Orkla ASA. Scope has also affirmed its senior unsecured debt rating of A- and the short-term debt rating of S-1.

Rating rationale

The rating affirmation reflects Orkla’s continued strong credit metrics despite inflationary pressures on profitability and rising interest expenses. Moreover, the rating is supported by Orkla’s good competitive positioning within consumer branded products in its home Nordic markets, presence in numerous product categories as well business diversification into specialty chemicals (via the participation in Jotun) and hydro power.

The business risk profile (assessed BBB+) continues to benefit from Orkla’s strong positions in its main home markets in the Nordics within branded consumer products, boasting market shares generally ranging between 30-80% and highly recognised local brands, albeit without a leading global consumer brand. Support to the rating is provided by Orkla’s moderate business diversification into unrelated investments such as hydropower and specialty chemicals, which have performed well in the past few years, compensating for the decline in branded consumer products companies. Diversification in terms of product offering is also considered robust, as Orkla is present in numerous product categories, predominantly selling non-discretionary consumer products. This compensates to some extent for the geographical concentration, with the Nordics providing about 70% of revenues, although this is set to gradually improve over time, with the further growth of Orkla Health and the European Pizza Company. While profitability has been rather stable over time, the Scope-adjusted EBITDA margin is slightly lagging those of its larger international peers and represents a constraint to the assessment of the business risk profile.

Scope-adjusted EBITDA LTM reached NOK 9.5bn as of September 2023, slightly above NOK 9.4bn posted in 2022. Profitability in Orkla’s branded consumer product companies has been noticeably subdued in the past two years, driven by elevated input cost inflation in the mid-to-high teens in 2022, and persisting, yet moderating, at around 10-12% during 2023. Delays in the construction and ramp-up of the new biscuit factory in Latvia led to higher costs in recent years. Inflationary pressures on raw materials were only partially offset by the strong price increases applied since mid-2022, which came at the expense of lower volumes for consumer products. Despite this, Orkla Group’s Scope-adjusted EBITDA margin of around 15.5% in 2022 was still in line with 2021, thanks to the record performance of the hydro power business, whilst profitability margin in consumer goods businesses declined by around 200 bps. Hydro power reported an 'adjusted' EBIT of NOK 2.3bn (from NOK 0.7bn a year earlier) thanks to high energy prices, compensating for the challenges in branded consumer products. During 9M 2023, however, the Scope-adjusted EBITDA margin declined to around 13.5% because of the lower contribution of hydro power (reported EBIT for hydro power was NOK 0.7bn in the first nine months). Scope notes that the profitability of the branded consumer products companies during 9M 2023 remained in line with 2022, but this - as previously mentioned - was significantly lower than 2021. Conversely, Jotun dividend increased further to around NOK 370m in 2023 from NOK 328m in 2022. All in all, Scope forecasts Scope-adjusted EBITDA to grow from NOK 9.6bn in 2023 to NOK 10.6bn in 2025, with the margin slowly improving and returning above 14% in the medium term.

The financial risk profile of Orkla (assessed at A-) continues to reflect strong credit metrics, despite rising interest expenses and high level of Scope-adjusted debt standing at around NOK 19bn as of September 2023. This figure remained broadly stable compared to the beginning of the year but has more than doubled since December 2020, driven by acquisitions and high net working capital requirements. Scope-adjusted debt/EBITDA LTM remained stable at 2.0x as of September 2023 compared to December 2022. The announced sale of 40% stakes in Orkla Food Ingredients (transaction expected to finalise in Q1 2024) will be beneficial for leverage since Orkla announced that proceeds - calculated at around NOK 2.5bn - will be primarily used for debt reduction. Therefore, Scope expects Scope-adjusted debt/EBITDA to remain moderately below 2.0x over the forecasted period, despite profitability still constrained by inflation and uncertain economic growth prospects. Similarly, Scope-adjusted FFO/debt will continue to oscillate around 40%. For reference, Orkla has a financial policy target of net debt/EBITDA below 2.5x.

After several years of excellent EBITDA interest cover at above 25x, the metric deteriorated to just above 10x as of 9M 2023 due to higher interest expenses from rising rates. This rapid change was caused by the entirety of Orkla’s debt being at a variable rate. Scope projects Scope-adjusted interests to more than double to around NOK 0.9bn-1.0bn during 2023 to 2025, resulting into an interest cover still above 10x. Scope takes comfort from the likely repayment of a material portion of the debt in 2024.

After exceptionally high net working capital needs of NOK 2.6bn in 2022 due to elevated inflation and inventory build-up amid supply chain shortages, the inventory situation has noticeably improved during 9M 2023. Scope forecasts Scope-adjusted FOCF/debt to return towards 20% already in 2023 from 9% in 2022 and to remain at similar levels in the medium terms amid assumed yearly capex investments between NOK 2.8 and 3.0bn.

Liquidity is adequate based on good access to bank and bond markets. As of September 2023, the company had aggregated NOK 10.1bn in cash and undrawn credit lines, well above reported short-term debt of NOK 5.7bn. The fairly high portion of short-term debt is a result of the issuance of several commercial papers, which was a cheaper source of liquidity for the company compared to using undrawn long-term RCF lines.

Scope continues to not apply any adjustment for supplementary rating drivers.

No drivers of the credit rating are considered ESG-related factors with a substantial impact on the overall assessment of credit risk.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that profitability will slowly improve for Orkla’s consumer products companies starting from 2024 amid declining but still elevated input cost prices, with a forecasted Scope-adjusted EBITDA margin returning above 14%. The Stable Outlook also assumes that Scope-adjusted leverage will remain around or below 2x over time, amid the absence of transformational deals. The headroom to the negative rating action remains rather low. The outlook also incorporates our expectation that Orkla will likely not use its leverage potential to the maximum leverage ratio as defined by the company (net debt/EBITDA) of 2.5x over the foreseeable future.

A positive rating action is possible if the company reduced its growth and M&A ambitions and focused on paying down debt, resulting in a Scope-adjusted leverage sustained below 1x. In the longer run, a positive action could stem from increased international market presence and global brands, while at the same time increasing profitability on a sustained basis.

A negative rating action is possible in case of sustained M&A activity beyond Scope’s expectations and/or materially declining margins, which could result in a Scope-adjusted leverage sustained above 2x.

Long-term and short-term debt ratings

The senior unsecured debt rating stands at A- and is in line with the issuer rating. Orkla ASA is also the bond-issuing entity. The short-term debt rating of S-1 is based on the A-/Stable issuer rating and supported by adequate liquidity, strong banking relationships and a well-established capital market standing.

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; Consumer Products Rating Methodology, 3 November 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 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: Eugenio Piliego, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 11 January 2022. The Credit Ratings/Outlook were last updated on 11 January 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
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