Rating Action: Moody's downgrades WEI Sales LLC to B1; outlook is stable
Global Credit Research - 21 Dec 2020
New York, December 21, 2020 -- Moody's Investors Service, ("Moody's") downgraded WEI Sales LLC's ("WEI") Corporate Family Rating (CFR) to B1 from Ba3 and its Probability of Default Rating to B1-PD from Ba3-PD. At the same time Moody's downgraded the company's first lien term loan due 2025 to B2 from B1. WEI's rating outlook is stable. WEI is owned by Wells Enterprises, Inc.
The downgrade reflects WEI's increasing credit risk as the company continues to invest in additional plant capacity build-out while also pursuing an aggressive shareholder policy. The company's financial leverage remains elevated at 3.5x debt to EBITDA as of September 30, 2020 following several debt-financed acquisitions over the past two years including Halo Top, Fieldbrook Foods Corporation, and a Nevada-based manufacturing facility. Additionally, Moody's believes that the company no longer has the ability to deleverage to below 3.0x debt to EBITDA by the end of 2021 as originally anticipated following these acquisitions.
Moody's expects the company's operating profits to improve to approximate $110 million in 2021 from about $95 million in 2020 as the company continues to benefit from stay-at-home demand for ice cream related to the pandemic and improved operating margins from synergies realized from recent acquisitions. Despite this improvement, Moody's expects the company's free cash flows to remain negative over the next two years due to continued outsized investment on capacity buildout and increasing shareholder dividends. Moody's expects debt to EBITDA to remain around 3.5x over the next 12 to 18 months.
The stable outlook reflects Moody's expectation that WEI's operating profits will grow modestly as the company expands its capacity and that the company will maintain adequate liquidity. The stable outlook also reflects Moody's expectation for negative free cash flow in 2021 and 2022 due to a higher dividend payout and increased capital investment, but that the reinvestment will enhance long-term earnings prospects through capacity expansion and operating efficiency. These operating benefits and eventual moderation of capex will restore positive free cash flow by 2023 and maintain debt-to-EBITDA in a mid 3x range.
The following ratings/assessments are affected by today's action:
..Issuer: WEI Sales LLC
.... Corporate Family Rating, Downgraded to B1 from Ba3
.... Probability of Default Rating, Downgraded to B1-PD from Ba3-PD
....Senior Secured 1st Lien Term Loan, Downgraded to B2 (LGD4) from B1 (LGD4)
Outlook Actions: ..Issuer: WEI Sales LLC
....Outlook, Changed To Stable From Negative
WEI's B1 CFR reflects its participation in the low growth and highly competitive ice cream industry and modest scale relative to the two global ice cream market leaders, Nestlé and Unilever. The company's credit profile also reflects high financial leverage with debt to EBITDA of 3.5x as of last-twelve-months ending September 30, 2020. Leverage is elevated following several debt-financed acquisitions over the past year and a half and is not declining as much as expected despite an uplift in ice cream demand because of the coronavirus. Revenue and earnings are growing more slowly than the industry and Moody's projects debt-to-EBITDA leverage will remain in a mid 3x range in 2021 despite an anticipated 15% increase in operating profits because debt (including leases) will also increase to fund the sizable capital spending program and dividends. Additionally, WEI's practice of distributing the bulk of operating cash flow less capital expenditures to shareholders is aggressive and diminishes financial flexibility. The company benefits from solid positions in both private label and branded ice cream for novelty and packaged ice cream products.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the company's performance from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around Moody's forecasts is unusually high leading to wide potential variations in demand for high-priced discretionary consumer durables products. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Ratings could be upgraded if the company improves profitability, investments translate into market share gains, and free cash flow sustainably improves to a comfortably positive level. The company will also need to maintain good liquidity. Debt to EBITDA would need to be sustained below 3.0x.
Ratings could be downgraded if WEI's market position erodes, operating performance deteriorates, or if acquisitions and investments fail to translate into meaningful growth to sustain the higher leverage. Ratings could also be downgraded if liquidity deteriorates, free cash flow does not improve after a period of heavy growth investments, or if debt to EBITDA is sustained above 4.0x.
The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Le Mars, Iowa, family-owned Wells Enterprises, Inc. manufactures ice cream for sale to customers throughout the United States. The company sells both branded products and private label products. The company manufactures its products in five facilities located in Iowa, New York and New Jersey, and Nevada, providing it with national manufacturing capabilities. Annual sales were $1.6 billion for the last-twelve-months ending September 30, 2020.
For 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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.
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Maria Iarriccio Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 John E. Puchalla, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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