Flora Group - Raising More Questions - Model Update

All,

Please find our updated analysis following the FY25 numbers here.

A seemingly innocuous slide in the Q4 presentation has prompted an interesting debate about the underlying business at Flora Group. We have historically viewed Flora Group as a largely mature business, with smaller growth segments contributing to overall sales but remaining secondary to the credit story. Following the Q4 numbers, we have pieced together available disclosures to assess the progression of the spreads business over time.

We suspect management included the slide to further promote a growth narrative that supports value creation for KKR, the equity owner. However, we remain sceptical that such a narrative materially exists. As a result, credit investors must continue to rely on cash conversion and the potential for deleveraging to drive tighter spreads.

Investment Rationale:

- We are retaining our twin position in Flora Bonds, which we initiated in November 2025. We maintain our 6% long position in the 6.875% Senior Secured Notes taken at 96.5%, which still trade at the same level, and our 3% long position in the 8.625% Senior Notes initiated at 83.5% (currently 80%). We waited for the differential to widen to 550bps, our target spread. The spread has since widened further to 700bps, which we continue to view as excessive.

- However, we are not rotating into a larger position in the Senior Notes. We will continue to monitor two key issues in future releases: the level of ongoing restructuring costs and further insight from changes in the shape of the business. In the absence of near-term maturities, alongside ample liquidity and interest coverage, we will maintain our current positioning.

- We see limited downside risk for the Senior Secured Notes (3–4pts) given the lack of near-term refinancing pressure. That said, the Company’s limited cash deleveraging, following substantial restructuring costs during FY19–FY21, continues to constrain credit improvement.

- Similarly, we see limited downside for the Senior Notes due to the absence of upcoming maturities (next debt due in July 2029). The bonds were poorly placed at issuance, offering a c.15% yield for a credit with no near-term maturities and a reasonable equity cushion. KKR has not taken dividends, having invested €2.9bn (10.4x EBITDA), and our DCF implies a comparable 10x enterprise value multiple, which limits downside risk.

- That said, no near-term catalyst exists for a re-rating. The senior bonds are likely to remain range-bound. The differential in yields is unlikely to contract without a couple of quarters of improving leverage stats, which is likely to be driven by lowering restructuring costs.

Evolution of the Spreads Business:

- Based on our calculations (set out below), the “spreads” segment has seen a 35% decline in volume since FY20. This decline exceeds our prior assumptions. While overall sales and Gross Profit have remained broadly flat, the underlying volume erosion has surprised us.

- The Company has not sacrificed pricing or margins to defend volume, but an c.8% p.a. volume decline in the “spreads” segment is concerning.

- In the presentation, Flora Group highlighted that the non “spreads" businesses have grown from 17% of sales in FY17 to 26% currently. Combined with growth in the Emerging Market “spreads" segment, this slide aimed to underline future growth potential. We question the relevance of this slide. In our view, it primarily illustrates the evolution of the spreads business. In FY17, spreads accounted for 83% of sales. Subsequent Annual Reports show that spreads accounted for 87% and 86% of sales in FY19 and FY20, respectively, inclusive of Emerging Markets.

- Using FY20 as a base, total sales stood at €2.8bn, with spreads contributing €2.4bn. Price inflation across the group from FY20–25 totalled c.40% (as disclosed in various reports and presentations). On a steady-state basis, spreads sales should therefore approximate €3.4bn; however, they currently stand at €2.2bn, implying a 35% volume decline.

- Emerging Market sales in FY20 were c.€530m. We assume these sales were entirely attributable to spreads. Current Emerging Market “spreads" sales are c.€590m, which represents a decline in real terms. Inflation-adjusted FY20 sales would equate to c.€750m, implying a 27% reduction in volume.

Restructuring Costs:

- A key pillar of our investment thesis centres on the gradual reduction in restructuring costs over recent years, improving overall cash conversion. However, in H2 2025, Flora incurred c.€55m of restructuring costs, including €30m related to supply chain restructuring. The Company has provided limited detail on this spend.

- We had previously modelled restructuring costs declining to c.€60m p.a. on a forward-looking basis. We have not yet adjusted our model but will keep a close watch on this element of future results.