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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.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

The rating affirmation reflects Orkla’s continued strong credit metrics underpinned by a leverage below 2.0x and an improving yet moderate profitability. 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 as business diversification into specialty chemicals and hydro power, partly offset by limited geographical diversification.

Scope-adjusted EBITDA* increased only slightly to NOK 9.5bn in 2023 (2022: NOK 9.4bn), but EBITDA margin declined around 200bps to 13.5% mainly because of the lower contribution of hydro power. Conversely, the profitability margin of consumer product companies slightly improved thanks to the strong price increases applied since mid-2022 offsetting inflationary cost pressures. No significant restructuring costs were incurred by changing into the new operating model of an industrial investment company. Delays in the construction and ramp-up of the new biscuit factory in Latvia led to higher costs in recent years but are now solved. Scope projects EBITDA to improve to NOK 10.9bn in 2024 on the back of easing input cost pressures (except for some raw materials such as cocoa) and the hefty dividend of NOK 948m (2022: NOK 365m) received from Jotun due to its strong performance (Scope includes Jotun recurring dividend as part of EBITDA but excludes it when calculating the EBITDA margin). Scope anticipates that the EBITDA margin will improve to approximately 14% in 2024 and stabilize between 14% and 15% over time. This outlook is based on increased cost discipline resulting from the new operating model and an assumed mid-single digit percentage organic growth as volumes recover.

In April 2024, Orkla sold 40% stakes in Orkla Food Ingredients (which remains fully consolidated) with proceeds of around NOK 2.5bn, and in June 2024 sold 100% of Lilleborg AS for NOK 600m on a cash and debt free basis. Lilleborg, a provider of cleaning solutions to professional and industrial customers in Norway, was one of the five Orkla portfolio companies which were targeted for transformation or exit under the new strategy outlined in 2023. The sale of Lilleborg is not material since the company only accounted for less of 1% of Group EBITDA in 2023.Additionally, Orkla has initiated a sales process involving the whole or parts of its Hydro Power assets, although no timeline has been communicated. Scope sees the disposal as slightly negative from a diversification perspective, since the hydro power business has different demand patterns and different target customers and acted somewhat as a natural hedge against rising energy prices negatively impacting other portfolio companies. Nevertheless, Scope expects a neutral impact on ratings, considering that the hedging effect is limited on an after-tax basis due to the high effective tax rate (up to around 70%) applied on hydro power profits. This is coupled with the higher cyclicality of the industry compared to the more stable non-discretionary consumer products' core industry.

Business risk profile: BBB+ (unchanged). The rating 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 (via the participation in Jotun), 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 Scandinavian countries generating around 60% of revenues. While profitability has been rather stable over time, the Scope-adjusted EBITDA margin historically averaging 14% is slightly lagging those of its larger international peers and represents a constraint.

Financial risk profile: A- (unchanged). Orkla’s credit metrics remain strong amid gradually improving EBITDA and broadly stable Scope-adjusted debt standing at around NOK 20bn as of September 2024. Cash proceeds from asset disposals and higher dividend received from Jotun in 2024 were largely offset by the payment of an extraordinary dividend of NOK 3.0bn (on top of the ordinary dividend of NOK 3.0bn) and the announcement, in November 2024, of a share buyback up to NOK 600m until April 2025 in connection with the long-term employee incentive programmes. Scope-adjusted debt/EBITDA LTM improved to 1.9x as of September 2024 compared to 2.2x as of YE 2023. Scope expects leverage to remain moderately below 2.0x over the forecasted period based on broadly stable debt and slightly improving EBITDA. After deteriorating to below 40% in 2023 on higher interest expenses and taxes (especially high tax rate on hydro power activities), Scope predicts FFO/debt to gradually recover in the short term and stabilise around 45%. For reference, Orkla has a financial policy target of net debt/EBITDA below 2.5x. Because of Orkla’s debt being entirely at variable rate, the rise in interest expenses led EBITDA interest cover to deteriorate to 9.4x in 2023 (2022: 24x), with more than doubled interest of NOK 1.0bn (2022: NOK 0.4bn). With interest rates slowly declining from 2024, Scope projects EBITDA interest cover to gradually improve over time and remain at solid levels above 10x. Since the 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 then gradually normalised. FOCF/debt is expected to oscillate around 25% going forward (2023: 18%) based on assumed yearly capex of around NOK 2.8bn, approximately 4% of revenues. Scope does not assume further buybacks until 2026.

Liquidity: adequate (unchanged). Liquidity is adequate based on good access to bank and bond markets. As of September 2024, the company had aggregated NOK 11.3bn in cash and undrawn credit lines, well above reported short-term debt of around NOK 3.0bn. Orkla’s liquidity ratios remain sound well above 200%.

Supplementary rating drivers: credit-neutral (unchanged). The rating has no adjustments related to financial policy, peer group considerations, parent support, or governance and structure.

Outlook and rating sensitivities

The Stable Outlook reflects the expectation of gradually improving profitability thanks to easing input cost inflation, with EBITDA margin of above 14% over time and leverage remaining below 2.0x, amid the absence of transformational deals. The Outlook also incorporates Scope’s 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.

The upside scenarios for the ratings and Outlooks are (individually or collectively):

1. Debt/EBITDA improving to below 1.0x.
    
2. (Remote) Improvement of the business risk profile, driven by increased international market presence and global brands and/or improving profitability.

The downside scenario for the ratings and Outlook is:

1. Debt/EBITDA deteriorating to above 2.0x on a sustained basis.

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. Orkla is a frequent issuer of commercial papers, which are seen as a cheaper source of funding compared to using undrawn long-term RCF lines.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Orkla ASA

Issuer rating: A-/Stable, affirmation

Short-term debt rating: S-1, affirmation

Senior unsecured debt rating: A-, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 31 October 2024), 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, Senior 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 10 January 2024.

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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use/exclusion of liability
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