S&P Global Ratings revised its debt ratings outlook on Newell Brands, Inc. to negative from stable. The revision follows Newell’s move to lower its earnings and cash flow guidance significantly for the remainder of the year because of weak macroeconomic conditions, volume declines due to orders pullback from key customers and continued inflationary pressures.
The company is also issuing $1 billion in new senior unsecured notes to refinance its outstanding 3.85 percent, $1.1 billion notes due in 2023.
S&P revised its outlook on Newell to negative from stable and affirmed its ‘BBB-‘ issuer credit rating because it no longer expects the company to generate $500 million of free operating cash flow (FOCF) and leverage to rising above 4x. At the same time, S&P assigned a ‘BBB-‘ rating to the proposed senior unsecured notes. S&P will withdraw the ratings on the 3.85 percent notes due in 2023 after they are repaid.
The negative outlook reflects the possibility that it could lower the ratings on Newell over the next 18-24 months if it sustains leverage above 4x.
S&P said in its analysis, “The negative outlook reflects our expectation that operating performance will be weaker than our prior forecast and that leverage will rise above 4x in 2022 and fall to the mid-3x area in 2023. We project leverage will be about 4.2x for the fiscal year ended 2022, which is above our prior expectation of 3x-3.5x and above our 4x downgrade threshold. Given the macroeconomic environment and the company’s recent performance, we believe leverage could remain elevated above 4x through the first half of fiscal 2023 if a decline in consumer demand and continued orders pullback by retail customers keeps inventory high. Additionally, we now expect FOCF of about $83 million for fiscal 2022, below our prior expectation of about $500 million. The lower cash flow forecast includes the impact of the loss of profits from the divestiture of the connected home and security business and tax payments on the transaction.
“While consumption remains strong in the writing and commercial products businesses, the revised guidance is driven by significantly higher-than-expected retail destocking in the home appliances, home solutions, home fragrance, food, and outdoor products businesses in July and August, which we expect to continue over the next few months. Additionally, consumer spending continues to decline as a result of inflationary pressures, which could significantly decrease sales volumes in the company’s outdoor and recreation and appliance and cookware segments.
“We expect benefits from Newell’s investments in innovation, improved penetration, and higher volumes to offset pressures if retail destocking persists in fiscal 2023; however, leverage headroom is limited. In recent years, the company has streamlined its operations, renewed the market positioning of its core brands, improved its supplier and customer relationships, increased the efficiency of its operations, and improved the synergies between its various divisions. The cleaner portfolio also makes it easier for management to better plan for demand, manage inventory and reduce excess and obsolete inventory. Newell has leading brands in some essential categories such as baby and cleaning products, which tend to be less volatile during economic downturns. As a result, we believe Newell is better positioned to sustain an economic downturn. Nonetheless, the company enters an increasingly weaker economic environment with leverage at the higher end of its stated target range. We expect leverage to rise above our 4x downside scenario threshold. Its leverage headroom is limited. While we believe the company’s investments in innovation such as the Friday Collective candles, City Turn and Turn2Me car seats, and efforts to increase penetration will strengthen its market position, they leave Newell exposed amid high economic uncertainty.
“We believe Newell’s management will continue to allocate capital prudently. Leverage for the past 12 months ended June 30, 2022, is about 3.6x, down from its peak of 5.6x in 2018. The company has made $325 million in share repurchases in fiscal 2022 under its authorization of $375 million. We expect Newell to continue to assess its capital allocation plans such that leverage significantly shifts from its targets and it can comfortably maintain an investment-grade rating. We expect the company to repay its smaller maturities as needed to maintain leverage near the S&P Global Ratings-adjusted 3x-3.5x range, maintain its dividend, and buy back shares only when leverage is lower than its targets. Therefore, we do not expect Newell to repurchase more shares in 2022 and into 2023 until leverage declines. Lastly, we do not expect the company to pursue large, transformational, debt-funded acquisitions given its difficulties integrating Jarden.
“The negative outlook reflects that we could lower our ratings on Newell over the next 18-24 months if it maintains leverage above 4x and does not make progress in normalizing its free operating cash flow generation towards $500 million.”
Newell’s Outdoor & Recreation segment brands include Campingaz, Coleman, Contigo, ExOfficio, and Marmot. Smaller brands include Aerobed, Bubba, and Stearns. Newell’s brand portfolio also includes Rubbermaid, FoodSaver, Calphalon, Sistema, Sharpie, Paper Mate, Dymo, Expo, Elmer’s, Yankee Candle, Graco, Nuk, Rubbermaid Commercial Products, Spontex, Oster, Sunbeam, and Mr. Coffee.
Photo courtesy Newell Brands
