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Rating action

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

Rating rationale

The rating affirmation reflects a very strong financial risk profile (assessed AA-), with leverage of below 0.5x as of December 2023, and a strong business risk profile (assessed A-), benefitting from Henkel’s leading market position, particularly in adhesive technologies, some strong global brands (Persil, Schwarzkopf, Loctite, Technomelt) and business diversification. The business risk profile is constrained by the geographical concentration of operating profits (EBIT) in Europe and by moderate profitability compared to peers, which has deteriorated in recent years but is now on a recovering path.

Henkel’s business risk profile (assessed A-) continues to be primarily supported by its leading position within the global adhesives industry (global leader in bonding, sealing and functional coating), benefitting from a strong ability to set prices, and participation in main megatrends, including mobility, connectivity and the circular economy, thanks to its focus on sustainable product innovation (ESG factor: credit positive). Conversely, the position of Henkel within the consumer products categories in which it operates is weaker on a global scale (number two in Laundry & Home Care as well as in the Professional & Consumer Hair business in active markets). It remains strong in Europe thanks to its German roots and the popularity of its top brands in the region, although competition from innovative local companies and private labels has been intense during the high inflation of recent years.

In 2023, the Beauty Care and Laundry & Home Care businesses merged into one Consumer Brands division as part of the restructuring initiated in 2022. One of the targeted synergies was to enhance advertising efficiency in order to strengthen the brands, while at the same time divesting weaker businesses within Beauty Care (skin, oral, and selected body care businesses were exited) and in Laundry & Home Care, primarily focusing on North America. By December 2023, Henkel had realised EUR 650m from its plan to discontinue or divest brands and categories with sales totalling around EUR 1.0bn. Furthermore, in April 2023, the company completed the sale of its Russian operations for a cash consideration of around EUR 600m, concluding its withdrawal from the country. On the acquisition front, several bolt-on targets have been acquired over the past two years, complementing the existing portfolio, notably in the Hair business (Shiseido Hair salons in Asia-Pacific, Vidal Sassoon brand in China) and the maintenance, repair, and overhaul platform within Adhesive Technologies, by expanding into the attractive adjacent business of solutions for infrastructures (Critica Infrastructure and Seal for Life Industries LLC in the US). Overall, the negative impact of M&A on revenues will be compensated for by expected low-to-mid single-digit organic growth, leading to broadly flat group sales in 2024 at around EUR 21.5bn (2023: EUR 22.4bn).

Diversification continues to support the rating, positively impacted by Henkel’s conglomerate structure with an equal balance between specialty chemicals and non-discretionary consumer products in terms of revenues, and a proportionate mix between B2B and B2C. The adhesives portfolio benefits from a wide product portfolio and a varied end-market mix, although diversification is partly weakened by an estimated 35% of revenues deriving from cyclical industries (primarily automotive and construction). Henkel’s consumer products business benefits from a diverse brand portfolio focused on a few selected non-discretionary consumer categories including Laundry, Home Care and the Hair business (which includes care, styling, and colouring). Despite the global reach, around 40% of group revenues and 60% of EBIT come from Europe.

Profitability still constrains the rating. Scope-adjusted EBITDA rebounded to EUR 3.1bn in 2023 from a low of EUR 2.6bn in 2022, with the EBITDA margin recovering to 14.6% (compared to 11.8% in 2022), though still trailing pre-Covid levels of approximately 18%. Despite lower volumes, increasing advertising spending and the exit from the lucrative Russian business, profitability improved in 2023 driven by pricing actions amid normalising but still elevated input costs. Scope anticipates that EBITDA will range between EUR 3.2bn and EUR 3.6bn over the medium term, with the EBITDA margin gradually growing towards 15%-16%. This improvement will be driven by gradual volume recovery in both divisions, and an enhanced product mix thanks to innovations, portfolio optimisation, as well as the resurgence of the higher-margin Electronics end-market within adhesives. Additionally, cost savings resulting from the Consumer Brands merger have been revised upwards. They are now forecasted to reach EUR 275m annually by the conclusion of the first phase in 2024, primarily focused on organizational setup and portfolio refinement; and an additional EUR 250m by the conclusion of the second phase in 2026, centred on supply optimization. While Scope expects the short-term impact of raw material price movement to remain flat, constraints to a swift profitability recovery include a still challenging market environment, high levels of marketing and R&D investments, wage inflation and restructuring expenses, with the latter anticipated to be around EUR 250-300m in 2024.

Henkel’s very strong financial risk profile (assessed AA-) continues to support the issuer rating. Leverage measured as Scope-adjusted debt/EBITDA improved to 0.3x in 2023 compared to 1.0x a year earlier due to higher profitability and significant releases from working capital and other provisions. Scope expects this leverage metric to remain below 1.0x over time, with recovering profitability partially offsetting the potential risks of negative working capital swings and sizeable acquisitions. Scope’s assumptions conservatively include EUR 1.8bn of acquisitions in 2024, and up to EUR 600m in bolt-on acquisition thereafter. Scope foresees EBITDA interest cover remaining above 40x over time based on assumed interest expenses of around EUR 65m per year. Scope-adjusted free operating cash flow/debt recovered quickly to well above 35% in 2023 after the large net working capital needs in 2022 despite slightly higher capex of EUR 605m (2.7% of sales) in 2023. Scope sees cash flow cover remaining sound going forward despite conservatively forecasting that net capex will increase to around EUR 750m in 2024 and up to 800m per year afterwards (around 3.5% of sales). Henkel launched its first share-buyback programme in 2022, acquiring about EUR 1.0bn of shares in the period to Q1 2023. Scope considers this an exception and hence does not assume further buybacks, while dividends of between EUR 780m and EUR 820m over the medium term are assumed.

Liquidity is adequate. Besides ample recurring free operating cash flow, liquidity is supported by EUR 2.2bn of cash and equivalents as of December 2023, an undrawn long-term revolving credit facility of EUR 1.5bn (maturing in 2025), which Scope expects to be renewed ahead of its expiry, and bilateral loans of EUR 0.1bn with a revolving term of up to one year. Liquidity sources are well above short-term maturities, which mainly comprise commercial papers. There are limited bond maturities over the next two years (EUR 0.1bn maturing in 2025), with larger maturities only starting in 2026.

The most relevant supplementary rating drivers for Henkel remain 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 recent years, the commitment to a single A rating category – which mitigates the risks related to very sizeable acquisitions – 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. Scope sees product innovation as a positive ESG factor in the assessment of Henkel’s business risk profile.

Outlook and rating-change drivers

The Outlook is Stable and reflects the expectation that Henkel will keep leverage, measured by Scope-adjusted debt/EBITDA, at around or below 1.0x over time, while gradually recovering profitability on the back of slowly improving market conditions and cost saving initiatives. The Outlook does not include any large multi-billion-euro acquisitions in the medium term, but rather bolt-on deals.

A positive rating action could be warranted if Henkel's financial policy becomes more creditor-friendly, for example by setting a low leverage target and/or a positively revised rating commitment.

A negative rating action could occur if Scope-adjusted debt/EBITDA were to rise close to or above 2.0x, e.g. due to an increase in shareholder remuneration, a major acquisition, or a sustained deterioration in profitability.

Long-term and short-term debt ratings

All senior unsecured debt has been affirmed at A, the level of the issuer rating. Scope has also affirmed the S-1 short-term debt rating based on Henkel’s issuer rating of A/Stable 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 Outlook, (General Corporate Rating Methodology, 16 October 2023; Chemicals Rating Methodology, 16 April 2024; 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 these 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: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 25 May 2022. The Credit Ratings/Outlook were last updated on 30 May 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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