Moody’s Investors Service revised its debt rating outlook on Newell Brands Inc. to positive from stable due to the company’s increased priority on prioritizing reducing leverage.
The ratings agency also affirmed Newell Brands’ Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating, Ba1 unsecured debt instrument ratings, and Not Prime commercial paper rating. It upgraded Newell’s Speculative Grade Liquidity Rating to SGL-1 from SGL-2.
Moody’s wrote in a press release, “The positive outlook reflects Moody’s expectation that Newell will continue to prioritize reducing leverage to their stated target goal and that good and sustained operating execution could position the company for an upgrade over the next 12-to-18 months. Newell’s recent reduction in its target net debt-to-EBITDA leverage ratio to 2.5x from 3.0x (based on the company’s calculation) is a favorable governance development that demonstrates the company’s commitment to reducing and sustaining leverage at a low level. Newell has utilized free cash flow generated in 2020 and 2021 to repay debt, and Moody’s believes the leverage reduction along with good cost management is improving the company’s capacity to reinvest and potential to generate more sustainable growth from its mature product portfolio. Because Newell’s 3.1x net debt-to-EBITDA leverage as of September 2021 (company calculated) is above the 2.5x target, the focus on deleveraging will favorably continue into 2022 . The positive outlook also reflects Moody’s expectation that operating margins will stabilize towards the middle to end of 2022 after several quarters of declines, and that the company will be able to offset the majority of increased costs with pricing actions and ongoing cost rationalization.
“The affirmations reflect Moody’s view that Newell needs to demonstrate sustained improvement in operating execution and performance to be upgraded. Newell executed well to capitalize on higher demand stemming from consumers spending more time at home during the pandemic to generate overall organic sales growth over the past five quarters. Sales nevertheless dropped in three of Newell’s eight broad product categories in the third quarter (core sales growth of 3.2%) and the company is forecasting -2% to +1% core sales growth in the fourth quarter as some of the at-home demand eases. Moody’s believes this creates questions about the sustainability of improved organic revenue growth while consumer activity continues to normalize with less effects from the pandemic. Recent operating margin pressure that started during 3Q 2021 due to supply chain disruptions and rising input costs are also a headwind. Moody’s expects that the volatility in the supply chain and higher input costs will persist into 2022, though Newell will be able to offset some of these headwinds through pricing actions, productivity initiatives and disciplined control over expenses. However, the situation remains volatile and the ability for Newell to fully pass on these costs on mostly discretionary durables products remains unclear. The company plans to reduce its financial leverage through improvement in EBITDA. However, this may be difficult in a rising cost environment and will depend on the company’s ability to pass on higher costs and generate organic revenue growth through product development, effective marketing, and good retail partnership. Moody’s expects financial leverage will remain around 3.75x debt to EBITDA (Moody’s calculated) over the next 12-18 months. Additionally, Moody’s expects annual free cash flows to range between $250 million to $275 million over the next year and management to be prudent with any additional shareholder-friendly activities including no change in Newell’s already high dividend payout ratio until it achieves and maintains its stated leverage target goals.
“The upgrade to the Speculative Grade Liquidity SGL-1 from SGL-2 reflects Newell’s improved liquidity driven by free cash flow and effectively addressing upcoming maturities through 2022. Newell’s very good liquidity is supported by $494 million of cash (as of September 30, 2021), an undrawn $1.25 billion unsecured revolving credit facility expiring in December 2023, more than $200 million of free cash flow anticipated in the fourth quarter, and about $250 million of annual free cash flow projected in 2022. After repayment of the recently announced redemption of the $250 million notes due June 2022 that is expected to take place in November 2021, the company will not have any material debt maturities until April 2023. The company’s undrawn $600 million accounts receivable securitization facility expiring in October 2022 provides additional near-term funding flexibility, but any drawings would present refinancing risk unless the facility term is extended.”
Newell’s Outdoor & Recreation segment includes Aerobed, Bubba, Campingaz, Coleman, Contigo, Marmot, Stearns, and ExOfficio. The company’s other core brands include Rubbermaid, Paper Mate, Sharpie, Dymo, EXPO, Parker, Elmer’s, Oster, Sunbeam, FoodSaver, Mr. Coffee, Rubbermaid Commercial, Products, Graco, Baby Jogger, NUK, Calphalon, First Alert, Mapa, Spontex, and Yankee Candle.
