S&P Global Ratings lowered its debt ratings on Newell Brands, Inc. due to its expectations that the company’s debt leverage would remain higher for longer after a weak first half of 2023 and finish the year at well over 5.5x.
Newell’s outdoor lifestyle brands include Coleman, Marmot, Ex Officio, Stearns, Bubba, and Contigo. Its other brands include Rubbermaid, Sharpie, Graco, Rubbermaid Commercial Products, Yankee Candle, Paper Mate, FoodSaver, Dymo, EXPO, Elmer’s, Oster, NUK, Spontex, and Campingaz.
S&P lowered its long-term issuer credit rating on Newell Brands to ‘BB’ from ‘BB+’. It also reduced its issue-level rating on the company’s unsecured notes to ‘BB’ from ‘BB+’ and affirmed its ‘3’ (30 percent-50 percent; rounded estimate: 55 percent) recovery rating and ‘B’ commercial paper rating. The outlook remains negative, reflecting S&P’s expectation for leverage over 5x and a tight covenant cushion over the next 12 months.
S&P said in its analysis, “The rating action reflects our expectation for credit metrics to be weaker than expected over the next 12 months. Newell’s operating performance for the first half of fiscal 2023 is below our prior expectations due to a larger sales decline, inflation in costs of goods sold, and restructuring charges. Leverage increased to 7x for the last twelve months (LTM) ended June 30, 2023 (compared to 3.6x for the same period last year).”
“Our forecast is still heavily weighted for a rebound in the second half of 2023, but it will not be enough to reduce leverage below 5x over the next 12 months. Sales declined 13 percent in the second quarter, and we now forecast sales declining about 12 percent for the year due to weaker demand and the impact of the Buy,Buy,Baby bankruptcy.
“EBITDA margins fell to 9.8 percent for the second quarter of 2023 from 14.9 percent for the same time last year, though we forecast a rebound in 2024 as Newell recognizes cost-savings from its several restructuring projects. The company’s ability to reduce inventory is a large driver of our base case. Free operating cash flow (FOCF) turned positive for the six months ended June 30, 2023, and our forecast is for $582 million by the end of the fiscal year 2023 as inventory reduces. We project leverage of about 5.5x-6.0x for fiscal year 2023, improving to below 5x in 2024, above its leverage of 4.6x in fiscal 2022.
“Newell has made credit-positive capital allocation decisions. In early 2023, Newell reduced the size of its dividend to free up cash flow to repay debt. The dividend cut will reduce its previous $400 million annual dividend to about $120 million and free up about $280 million of cash flow that it can use to reduce its $597 million short-term debt balance as of June 2023. Given this change, Newell could repay $255 million of short-term debt in the second quarter of 2023. This will put the company in a better position to address its upcoming debt maturities of $200 million of 4 percent senior unsecured notes due in 2024 and $500 million of 4.875 percent senior unsecured notes due in 2025.
“Given the policy change, we project $800 million of discretionary cash flow generation (after dividends and capital expenditures [capex]) over the two-year period. We expect the company to largely repay these smaller maturities and continue to permanently reduce its debt burden and improve its credit ratios. However, if Newell chooses to refinance these maturities or borrow to repay them, its likely to increase its interest burden, which could put pressure on its ability to meet its interest coverage covenant.
“Newell has a publicly stated 2.5x net leverage financial policy target, but its capital allocation decisions, combined with weaker demand for its products from a challenging macroeconomic backdrop, have increased its debt burden over the last year. These dynamics raised leverage higher than our previous expectations and may potentially keep it elevated through 2024. We expect all discretionary cash flow to be applied to debt reduction until the company gets back in its target range, which will take some time.
“Newell’s new management announced a new strategy focused on restoring profitability. Given recent underperformance, Newell’s newer management team has shifted its strategy to focus on investing in its largest and most profitable brands (discontinuing some of the smallest), expanding distribution in its fastest-growing channels and healthy retailers, and disproportionately investing in mid and high-price point products with a focus on the U.S. and its top 10 markets and younger consumers.
“Currently, 25 of the company’s 80 brands account for 90 percent of its sales and profits, with two-thirds holding leading positions in the home market. Newell will invest in consumer insights and marketing to create products for the younger demographic that spends more on Newell’s major categories. Whether this strategy will be successful remains to be seen. At this time, it is unclear if it will result in further restructurings, which hindered the company’s EBITDA. Despite weak performance, management plans to invest in capability building and brand support to accelerate the goals of this new strategy. The strategy continues to focus on simplification of its manufacturing footprint (distribution center reduction to 20 from 30) and leveraging its scale to drive improvements in profitability resulting in 3 percent tp 4 percent of cost of goods sold savings per year and 50 basis points margin improvement on low-single-digit revenue growth. If the company can achieve these savings, it could help mitigate volatility during weaker economic cycles.
“Newell’s discretionary product portfolio will continue to experience volatility over economic cycles. We believe Newell’s recent volatile performance stems partly from the discretionary nature of its product portfolio. However, if weak demand for its brands persists outside of economic cycles and we expect its portfolio to be less resilient, we could reassess our view of the business. The company has a long history of restructuring charges. Nevertheless, prior to its recent earnings degradation, Newell streamlined its operations, renewed the market positioning of its core brands, improved its supplier and customer relationships, increased its operational efficiency, and expanded the synergies between its various divisions. We previously believed the cleaner portfolio would make it easier for management to better plan for demand, manage inventory, and reduce excess and obsolete inventory. However, in 2022, a combination of inflation, supply chain challenges, and inventory realignment at U.S. retailers kept management from making these improvements.
“The negative outlook reflects that we could lower our ratings over the next 12 months if leverage does not improve to below 5x and the cushion under its interest coverage covenant does not improve.”
Photo courtesy Newell Brands/Coleman
