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Rating action

Scope Ratings GmbH (Scope) has today affirmed the A-/Stable issuer rating on Norwegian dairy producer and consumer products company Tine SA. Scope has also affirmed the A- senior unsecured debt rating and the S-1 short-term debt rating.

Rating rationale

The rating affirmation is driven by Tine’s very strong financial risk profile assessed at A+ and the strong business risk profile of BBB. The financial risk profile continues to be driven by conservative credit ratios with Scope-adjusted debt/EBITDA in the 1.0-1.5x range and solid free operating cash flow. Considering the high stability in Tine’s operating performance, Scope believes the main factor that could cause a deterioration of leverage is much higher growth investments than included in our base case scenario. At the same time, Tine has a strong track-record of keeping high financial flexibility versus its established target of having net debt/EBITDA below 2.0x, which provides comfort that any material growth spending will be weighed against the credit profile. The business risk profile is mainly driven by Tine’s strong market shares domestically in Norway within its core dairy segments, which are partly protected from import tariffs and agricultural regulations. It is further supported by sole exposure to non-durable consumer products industry which has low cyclicality.

While Tine enjoys strong market positions and a significant brand name in Norway, Scope’s assessment of Tine’s business risk profile continues to be somewhat constrained by i) its modest geographical diversification with 81% of revenue and close to 100% of EBIT being generated domestically; ii) some pressure on market shares; and iii) its lower profitability compared to some of its peers. Scope continues to consider the stability of profitability margins as a positive factor, while diversification in terms of product offering, suppliers and customers is adequate.

Tine’s operating performance was weaker in 2022 than in 2020-2021 driven by cost inflation and a decline in volumes which were not fully offset by price increases. Revenues increased to NOK 24.9bn (NOK 24.0bn in 2021) while the Scope-adjusted EBITDA decreased to NOK 2.8bn (NOK 3.2bn in 2021). In addition to rising costs of production input, energy and transportation, the lower EBITDA is also explained by a normalisation of grocery consumption after the Covid-19 years (2020-2021), as illustrated by a 6.3% fall in the volume of dairy products sold through domestic grocery chains in 2022. Further, Scope expects that Tine will continue to experience pressure on retail volumes, including from: i) increasing competition from the larger chains’ own brands; ii) lower purchasing power among end-consumers, which tilts the preference towards cheaper alternatives; and iii) slowly decreasing consumer demand for milk in Norway. While this could make domestic EBITDA growth more challenging and limit upside in market shares, Tine is expected to maintain its strong position in the Norwegian dairy industry.

Scope expects that Tine will continue to deliver stable operating results driven by price increases and an evolving product portfolio, as well as efforts to improve cost efficiency. As a result, Scope estimates that Scope-adjusted EBITDA will stay in the NOK 2.9bn-3.0bn range throughout 2023-2025. This incorporates the improved financials reported for the first four months of 2023, with operating performance as measured by reported EBTIDA increasing by 12% YoY (to NOK 910m). Further, Scope assumes that the international division will continue to show limited profitability in the foreseeable future, as Scope expects any material upside from Tine’s increasing focus on profitable growth in foreign markets to come after 2025. Taking into account increasing capex towards 2025, some growth in net working capital, and up to NOK 200m-300m yearly for strategic investments, Scope expects that Tine’s credit metrics will remain very strong with leverage of 1.2x-1.3x and Scope-adjusted free operating cash flow/debt of 25-40%. Thus, Tine is foreseen to continue having significant financial flexibility versus its target of keeping net debt/EBITDA below 2.0x.

Debt protection as measured by Scope-adjusted EBITDA interest cover is expected to stay strong at around 7.0x throughout 2023-2025. The forecasted weakening compared to 7.8x in 2022 is driven mainly by a higher interest burden with rising interest rates feeding through to the cost of existing and refinanced debt. This is partly offset by a sizeable share of debt being fixed rate or hedged. Under Scope’s base case assumptions, Tine is not expected to have any material external financing need with gross debt estimated to stay in the 3.6bn-4.0bn range through the forecast period.

At end-2022, Tine had NOK 644m in unrestricted cash plus NOK 808m in unused credit lines. The company’s NOK 1.2bn committed credit line does not expire until mid-2026, and the company should be able to add additional credit facilities if needed. Scheduled debt maturities of NOK 679m in 2023 and NOK 1,045m in 2024 can likely be covered by available liquidity sources, as indicated by solid coverage, standing at well above 200%. Scope therefore expects liquidity to remain solid.

Tine’s stable and prudent financial policy is assessed to have no impact on the rating. In addition, Scope views positively Tine’s conservative credit ratio goals, such as net debt/EBITDA below 2.0x and an equity ratio of above 45%. While Tine’s payout ratio of 50-75% can cause relatively large dividend payouts, it should also be seen in the context of the cooperative structure and its history of having a high capacity to pay dividends. Scope concludes that no supplementary rating adjustments are justified based on ownership, governance or structure.

Outlook and rating-change drivers

The Stable Outlook reflects Scope’s expectation that Tine will continue to hold strong market positions in its key segments and maintain good dairy product diversification. It also reflects a continuation of conservative Scope-adjusted leverage in the 1.0-1.5x range and strong cash flow metrics, driven by a stable financial performance and stable operating environment (i.e. with no adverse changes to agricultural protection and regulations), in the absence of any major new growth investment plans.

A positive rating action could occur if even more conservative financial targets were introduced in tandem with a move towards a net cash position, which would likely require reduced investment ambitions. Alternatively, a higher rating could also be warranted if the company materially improved its diversification and/or profitability.

A negative rating action could occur if Scope-adjusted debt/EBITDA moved to around or above 2.0x on a sustained basis. It could also be triggered by a deterioration of the business risk profile through weaker market shares and/or falling profitability (as measured by the EBITDA margin).

Long-term and short-term debt ratings

The senior unsecured debt rating is in line with the issuer rating of A-. Tine (Tine SA) is also the bond-issuing entity.

The short-term rating of S-1 is backed by adequate liquidity, strong bank relationships and Tine’s well-established domestic 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 Outlooks, (General Corporate Rating Methodology, 15 July 2022; Consumer Products Rating Methodology, 4 November 2022), 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, third parties 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: Per Haakestad, Senior Specialist
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 16 June 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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