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New York, July 26, 2022 — Moody’s Investors Service (“Moody’s”) downgraded Weber-Stephen Products LLC’s (Weber) ratings, including its Corporate Family Rating (CFR) to Caa1 from B3, its Probability of Default Rating to Caa1-PD from B3-PD, and the rating on the company’s senior secured first lien credit facility to Caa1 from B3. The first lien credit facility consists of a $300 million revolver due 2025, a $1,250 million original amount term loan due 2027, and a $250 million incremental term loan due 2027. Moody’s also downgraded the company’s Speculative Grade Liquidity rating to SGL-4 from SGL-3 and the outlook is negative.
Today’s ratings actions and negative outlook reflects Weber’s continued deterioration of profitability and constrained liquidity amid persistent cost pressures and weaking consumer demand. The company expects to report sales for the third quarter of fiscal 2022 of $525 – $530 million, or a year-over-year decline of around 21%. Weber also expects its company-adjusted EBITDA to be marginally profitable for the same period, which is materially lower than Moody’s previous expectations. This follows Weber’s meaningfully lower revenue and earnings outlook for fiscal 2022 during its second quarter earnings call relative to its prior expectations earlier during the fiscal year.
Ongoing inflationary pressures on consumer spending along with a shift in spending towards categories such as travel is negatively impacting retail traffic and demand for outdoor grills. Despite the company’s price increase initiatives, the high promotional activity in efforts to improve retail sales and reduce inventories is also negatively impacting profitability. In addition, unfavorable foreign exchange is meaningfully and negatively impacting Weber’s operating results and debt service ability since debt is all denominated in US dollars, as well as unfavorable mix, and high freight costs. The company expects these market pressures to persist at least through the fourth quarter of its fiscal year ending September 2022. As a result, Moody’s expects Weber’s credit metrics will materially deteriorate in fiscal 2022 and into fiscal 2023.
The company also reported changes to its executive management team, including the departure of its chief executive office, and that it is pursuing several costs savings initiatives that include workforce reduction and expense controls, as well as improvement in working capital.
However, Moody’s views the company’s capital structure as unsustainable at the current earnings level and the company will need to improve profitability towards historical levels to restore positive free cash flow and to sustain debt service. There is uncertainty around the company’s ability to successfully and timely mitigate ongoing cost pressures to improve profit margin, and Moody’s expects consumer demand for the company’s products to continue to be pressured by high inflation or consumers trading down to lower priced products. Execution risks is heightened by Weber’s high business and cash flow seasonality. Cost inflation or consumer demand trends could worsen during periods of high seasonality and increasing economic uncertainty.
Today’s ratings actions including the downgrade of Weber’s Speculative Grade Liquidity to SGL-4 from SGL-3, which reflects the company’s weak liquidity over the next 12 months due to the limited covenant flexibility on the company’s revolver facility and Moody’s expectations that the company will need more than $105 million of external liquidity to fund highly seasonal cash flow. Free cash flows will be pressured by the expected lower earnings during the second half of fiscal 2022 and anticipated seasonal investments in working capital during the first half of fiscal 2023 ahead of the grilling season. As a result, Moody’s anticipates that the company will need to largely rely on revolver borrowings to fund cash flow seasonality over the next 12 months. Moody’s also projects that the company’s leverage will exceed the revolver’s net first lien leverage springing financial maintenance covenant of less than 7.0x, which is tested if borrowings exceed 35% of the commitment amount or $105 million.
Weber reported it is committed to working with its lender partners to remain in compliance with the covenants. Moody’s believes a covenant amendment will be necessary because the company will need to borrow more than $105 million on the revolver to fund anticipated cash needs during the first half of fiscal 2023. The Caa1 CFR reflects Moody’s expectations that the company will successfully resolve the currently limited covenant flexibility, though an amendment is not assumed in the liquidity framework driving the SGL-4 rating.
The following summarizes today’s rating action:
Downgrades:
..Issuer: Weber-Stephen Products LLC
….Corporate Family Rating, Downgraded to Caa1 from B3
…. Probability of Default Rating, Downgraded to Caa1-PD from B3-PD
…. Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3
….Senior Secured Bank Credit Facility, Downgraded to Caa1 (LGD3) from B3 (LGD3)
Outlook Actions:
..Issuer: Weber-Stephen Products LLC
….Outlook, Remains Negative
RATINGS RATIONALE
Weber’s Caa1 CFR reflects its narrow product focus in the somewhat mature and discretionary outdoor grills product category, high customer concentration, and high seasonality that creates business volatility. Persistent high inflation is pressuring consumer discretionary spending and is negatively impacting consumer demand for outdoor grills with the company reporting meaningful revenue declines in 2022. The company’s profitability faces ongoing costs inflation and supply chain pressures that are only partially offset by pricing initiatives and expense controls, and meaningful unfavorable foreign exchange headwinds given its large international business. Weber’s SGL-4 Speculative Grade Liquidity reflects its weak liquidity driven by its limited financial flexibility to fund highly seasonal cash flows over the next 12 months due to lower earnings and currently limited covenant flexibility. Weber’s rating also reflects its meaningful scale with revenue over $1.5 billion, and its solid market-leading position with a large grill install base. The company benefits from its good brand recognition within the outdoor grill industry, good geographic diversification, and established ecommerce business.
Weber relies on raw materials primarily steel and aluminum as part of its manufacturing process. The company is exposed to the carbon transition and waste and pollution risks related to the very energy intensive metals production, which could increase input costs. However, a portion of cost increases can generally be passed on to the consumer.
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.
Weber has negative exposure to governance risk related to its ownership concentration with financial sponsors having a controlling ownership stake in the company, and the company’s aggressive financial strategy under its controlling shareholder that includes debt-financed shareholder distributions. The company is also exposed to management track record risks given meaningful underperformance relative to its financial targets and recent management changes including the departure of its chief executive officer.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects Weber’s meaningful deterioration in profitability and credit metrics, as well as the company’s constrained liquidity driven by Moody’s expectations of lower earnings and cash flow generation during the second half of 2022, and the company’s limited financial flexibility to fund business seasonality over the next 12 months. The negative outlook also reflects Moody’s view that the capital structure could remain unsustainable and default risk could increase if the company is unable to improve profitability towards historical levels over the next 12 months.
The ratings could be upgraded if the company demonstrates a track record of improving financial operating results including EBITDA margin recovering towards historical levels, and generates positive free cash flows with good levels of reinvestments on an annual basis, while debt/EBITDA is sustained below 8.0x. A ratings upgrade would also require the company to maintain at least adequate liquidity, including lower reliance on revolver borrowings.
Ratings could be downgraded if the company’s operating performance including the EBITDA margin does not improve, or free cash flow remains negative. The ratings could also be downgraded if liquidity deteriorates for any reason including limited availability on the revolver facility, or if the risk of an event of default increases including a distress exchange.
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 LTM period ending 31 March 2022 of $1.9 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. 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”.
The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74987. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/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 https://ratings.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 https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.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.
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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