Flora - Plant-Based Cash Cow - Model Update
All,
Please find our updated analysis on Flora here.
We have had an excellent history with Flora, having invested in the previous Flora “sub” bonds in August and December 2022 at 62% and 72% respectively and taken out over the summer this year. With the new bonds now trading sub 90%, it is time for us to look at the name again. The sub bond issuance over the summer was badly placed, which has led to some market dislocation, and although we are confident in the overall business, we are not taking a position yet.
Investment Considerations:
- We are not taking a position in Flora's capital structure at this moment. However, we are leaning towards a long position in the Senior (sub) notes at 86%, which yields c.13%. We expect the differential to widen to c. 550bps between senior and sub (currently 470bps), and in conjunction with the Q3 results in early November, we will re-examine the investment case.
- The Company issued lukewarm guidance with its Q2 results, but even accounting for this, we expect EBITDA, post-restructuring costs, to remain above €720m this year. This is c.10% down on the prior year, but notwithstanding, FCF after interest remains flat to positive.
- There is limited upside in the coming quarters, explaining our caution in taking a position. The bonds are likely to require two quarters of volume growth before the bonds rally. However, if the Senior Term Loans agree to extend the maturities to October 2030, the bonds may gain a couple of points. Upside on recovery of volume is 5-7 points, pushing yields to 10%.
- In the short term, the risks are more to the downside. The bond was badly placed, and any further reduction in guidance could see the bond trade down to 80 (6pts). However, at 80% the yield is 15%, which is likely to attract buyers given the lack of upcoming maturities and the significant equity cushion beneath the bonds. KRR, the equity sponsor, has not taken any dividends from this deal. KKR paid 10.4x or €2.9bn equity for the business, and on our DCF, we calculate EV at a similar 10x level.
Recent Results:
- Flora's Q1 results came in slightly below expectations. There were a few mitigating factors, including the timing of Easter, but the update also highlighted ongoing challenges faced by the U.S. consumer. The outlook for FY25 points to continued, albeit modest, deleveraging, with EBITDA guidance in the flat to low single-digit growth range.
- However, after raising the bond, the Company changed its forecast during the Q2 conference call to a flat to low single digit organic net sales growth, flat to low single digit EBITDA decline on a constant currency basis, but maintaining the target of further debt reduction.
- The US consumer backdrop remained challenging, with Net Sales down 15% (-9% on an organic basis) driven by 6% decline from volume/mix and 3% from pricing. Americas remains the main problem, and although headline revenue was down in AMEA, sales, on a constant currency basis, were up. Flora has a large exposure to Turkey, with the Turkish Lira a large part of the FX-driven declines.
- Gross profit margins have declined marginally in H1, down 150bps. This is driven by some commodity and input inflation and the impact of negative volume/mix, but in the wider context, margins remain robust at 39% Gross Profit margins.
The Business:
- The business was divested by Unilever, which saw that the underlying spread market was in decline. KKR have rationalised the cost and production base since its ownership in 2017. Despite significant headwinds from raw materials, and to a lesser extent, energy and transportation, inflation, Flora has maintained its Gross Margin levels, demonstrating its relatively strong pricing power and some cost efficiencies post divestment from Unilever.
- However, despite maintaining very healthy Gross Profit margins, the business has not seen any meaningful deleveraging in KKR’s ownership. Some hefty cash restructuring cost partially explains this, but it is still very surprising how little actual cash deleveraging has happened. In 2018, Net Debt was €5.5bn, with the Company drawing down an additional €375 m in December 2020 for an acquisition. The Net Debt as of June 2025 was €5.3bn, implying €500-600m of debt repayment in the 7 years. Leverage has reduced from 7.3x to 6.8x, driven by an expansion in EBITDA. (Leverage peaked at 8.9x in Sept 2021 due to a reduced EBITDA caused by raw material inflation.)
Legal Issues:
- The sub bonds were issued under Norwegian governing law in June 2025. There were rumours that allocations were larger than expected, which has forced some selling in the secondary markets. There are doubts that creditor protection under Norwegian law as it lacks a restructuring framework like Chapter 11 or a UK Scheme of Arrangement.
- The Bonds are relatively small in the capital structure. The security package is weak and shared with the dominant Senior Secured Facilities.
Happy to discuss,
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk