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Weber-Stephen Products LLC -- Moody's affirms Weber's B1 CFR; rates incremental first lien term loan B1; outlook changed to negative

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Rating Action: Moody's affirms Weber's B1 CFR; rates incremental first lien term loan B1; outlook changed to negativeGlobal Credit Research - 18 Feb 2022New York, February 18, 2022 -- Moody's Investors Service ("Moody's") affirmed Weber-Stephen Products LLC's ("Weber") ratings, including its Corporate Family Rating (CFR) at B1, its Probability of Default Rating at B1-PD, and the B1 rating on the company's senior secured first lien credit facility consisting of a $300 million first lien revolver due 2025 and a $1,250 million original amount first lien term loan due 2027. At the same time, Moody's assigned a B1 rating to the company's proposed incremental $250 million first lien term loan due 2027. The outlook was changed to negative from stable. Moody's also assigned a Speculative Grade Liquidity of SGL-2.The company plans to use the proceeds from the proposed $250 million incremental first lien term loan due 2027 to repay approximately $161 million of borrowings outstanding on its revolver, pay related fees, and the remainder to cash on the balance sheet.The outlook change to negative reflects the difficulties that Weber faces to reduce its high leverage due to challenges from rising input, labor and freight costs, the recently initiated quarterly dividend, and planned increases in capital spending to expand and geographically diversify production capacity. Weber's weaker than anticipated operating results for the first quarter of fiscal year 2022 weakened credit metrics considerably. The company reported a year-over-year revenue decline of -8% for the first quarter period of fiscal 2022 ending 31 December 2021 compared to very strong revenue growth of 83% during the same period last year. During the first quarter of fiscal 2022, the company's gross margin contracted by about half to 22.6%, and management-adjusted EBITDA was negative -$36 million. Weber's gross margin and EBITDA was materially and negatively impacted by supply chain and commodity cost inflation, particularly freight, steel and aluminum, during a period in which the company typically builds inventory ahead of the grilling season that starts in the spring. As a result, the company's debt/EBITDA leverage increased to 5.4x for the last twelve months (LTM) period ending 31 December 2021 and pro forma for the proposed incremental term loan, up from 3.7x at fiscal year-end 30 September 2021. Moody's debt/EBITDA leverage calculation excludes the historically high non-cash stock compensation, primarily related to the company's August 2021 initial public offering (IPO).Moody's affirmed the ratings because the proposed term loan add on improves Weber's liquidity by increasing revolver availability and balance sheet cash. The liquidity sources will provide much needed financial flexibility to fund business operations over the next 12 months, including continued working capital seasonality ahead of the grilling season and elevated capital expenditures expected in fiscal 2022. In addition, Moody's expects the company's pricing initiatives will help offset cost inflation pressures, resulting in the EBITDA margin recovering during the second half of fiscal 2022, and the company generating positive free cash flow. As a result, Moody's projects Weber's debt/EBITDA leverage will gradually improve to below 5.0x over the next 12 months. However, there is uncertainty around the sustainability of the high levels of consumer demand over the next 12-18 months, and the pricing initiatives could also lead to lower volumes or consumers trading down to lower priced grills. Weber's high financial leverage provides limited cushion to absorb prolonged margin compression or a potential demand pullback and necessitates deleveraging at the B1 CFR.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Weber-Stephen Products LLC.... Speculative Grade Liquidity Rating, Assigned SGL-2....Senior Secured 1st Lien Term Loan, Assigned B1 (LGD3)Ratings Affirmed:..Issuer: Weber-Stephen Products LLC.... Corporate Family Rating, Affirmed B1.... Probability of Default Rating, Affirmed B1-PD....Senior Secured 1st Lien Bank Credit Facility (Revolver and Term Loan), Affirmed B1 (LGD3)Outlook Actions:..Issuer: Weber-Stephen Products LLC....Outlook, Changed To Negative From StableRATINGS RATIONALEWeber's B1 CFR reflects its improving scale with revenue of $2.0 billion, its solid market-leading position and good brand recognition within the outdoor grill industry, its good geographic diversification, and growing ecommerce business. Consumer demand for the company's products has been very strong over the past 18 months, as consumers continue to spend more time at home resulting in increased outdoor grill utilization. Weber has a track record of good free cash flow generation supported by a relatively good EBIT margin. However, free cash flows will be pressured by lower profitability, higher growth capital expenditures and the introduction of a quarterly dividend that is roughly $47 million annually in fiscal 2022. Moody's projects that the company will continue to generate positive free cash flow in fiscal 2022 in the $25-$30 million range, improving to $50 million in fiscal 2023. The company's SGL-2 Speculative Grade Liquidity reflects its good liquidity supported by its relatively healthy cash balance of around $133 million and access to a $300 million undrawn revolver due 2025 as of 31 December 2021, pro forma for the transaction.Weber's rating also considers its narrow product focus in the somewhat mature and discretionary outdoor grills product category and high seasonality that creates business volatility. The company's financial leverage is high with debt/EBITDA at around 5.4x for the LTM period ending 31 December 2021, and pro forma for the term loan add on and excluding the historically high non-cash stock compensation expense associated with the August 2021 initial public offering. Moody's projects debt/EBITDA will improve to 5.0x or lower as the company's EBITDA margin benefit from recent pricing initiatives to offset cost inflation. Moody's believes it will be challenging to sustain the elevated demand levels in fiscal 2021 but that solid US housing market trends and a large installed base will support healthy outdoor grill replacement. These factors along with price increases will support stable revenue over the next 12-18 months. The company has high customer concentration, and its profitability and cash flows are highly seasonal, centered around the summer months. Governance considerations primarily relate to the company's aggressive financial policies under ownership by its controlling shareholder BDT Capital Partners, LLC, highlighted by its history of debt-financed shareholder distributions.Weber relies on raw materials primarily steel and aluminum as part of its manufacturing process. The company is moderately exposed to the carbon transition and waste and pollution risks related to the very energy intensive metals production, which could increase input costs. However, costs increases can generally be passed on to the consumer.Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus outbreak and the government measures put in place to contain it continue to disrupt economies and credit markets across sectors and regions. Although an economic recovery is underway, its continuation will be closely tied to containment of the virus. As a result, there is uncertainty around our forecasts. Social risk factors also consider the company's exposure to changes in consumer discretionary spending power. The company is exposed to health and safety risks typical in a manufacturing environment. Factors such as responsible sourcing and production should help protect Weber's strong brand image and market position.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe negative outlook reflects the downward rating pressure if the company's EBITDA margin fails to recover to historical levels, or if consumer demand for the company's products wanes resulting in debt/EBITDA leverage remaining above 5.0x or weaker than expected free cash flow.The ratings could be upgraded if the company demonstrates consistent organic revenue growth and EBITDA margin expansion, while debt/EBITDA is sustained below 4.0x and retained cash flow (RCF)/net debt is sustained above 17.5%. A ratings upgrade would also require the company to maintain at least good liquidity, and Moody's expectations of more balanced financial policies.Ratings could be downgraded if the company's operating performance including the EBITDA margin does not improve, resulting in debt/EBITDA sustained above 5.0x or weaker than anticipated free cash flow. The ratings could also be downgraded if the company completes a debt-financed acquisition or shareholder distribution that impedes deleveraging. A deterioration in liquidity for any reason, including an inability to complete the proposed financing and high revolver utilization could also lead to a downgrade.The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276767. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Palatine, Illinois, Weber-Stephen Products LLC (Weber) is a global manufacturer, marketer and distributor of barbecue grills and accessories. Weber reported revenue for the fiscal year-end 30 September 2021 of $1.98 billion and its largest market is the Americas (56% of 2021 revenue). Following the August 2021 initial public offering of Weber, Inc., the company remains controlled by its merchant bank financial sponsor BDT Capital Partners, LLC with more than 50% voting power (as of 30 September 2021). Weber, Inc. is the indirect parent of Weber-Stephen Products LLC, and its shares are listed on the New York Stock Exchange under the ticker symbol "WEBR".REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Oliver Alcantara Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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