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November 21, 2007 |
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COTT CORP: Failing Financial Metrics Cues Moody's to Cut Ratings Moody's Investors Service downgraded the CFR rating of Cott Corporation to B1 from Ba3. The outlook is negative. This concludes the review for downgrade initiated on Sept. 21, 2007. These ratings were lowered: * Cott Corporation -- Corporate Family rating to B1 from Ba3 -- Probability of Default Rating to B1 from Ba3 * Cott Beverages, Inc. -- US$275 million 8% senior sub notes due 2011 to B2, LGD5; 74% from B1, LGD 5; 74% The downgrade resulted from deterioration in the company's financial metrics as a result of: (i) a weak carbonated soft drink market in North America due to the ongoing consumer shift away from CSDs, (ii) higher than expected promotional activity from larger national branded competitors, (iii) the pressure on margins due to the rise in input costs including PET, high fructose corn syrup and aluminum, and (iv) delays in recognizing financial benefits from restructuring initiatives and product innovation. Cott's ratings continue to be pressured by adverse effects on revenues and margins due to distribution and manufacturing costs, the weak CSD market in North America and continued intense competition from better capitalized competitors, as well as challenges with the installation of its new aseptic line in the UK, which resulted in a voluntary recall. In addition to the above, the company faces other business challenges such as, historically high input costs, the impact of poor weather on sales and an uncertain interest rate environment. To mitigate these pressures, Cott initiated a restructuring plan in 2005 to reduce its operating costs. There have also been significant senior level management changes. In 2007 the company implemented price increases to offset the rise in commodity costs, and is working on new product launches to meet ongoing customer demand for product innovation. However, these initiatives have so far failed to produce results in the form of improvement in operating performance, cash flow, and credit metrics. Gross margin has been nearly halved in the last three years. The company has failed to turn around performance thus far and is performing at or below the lower end of Moody's earlier expectations. At the same time, the B1 corporate family rating recognizes Cott's strong position in the retailer-brands market. The negative outlook reflects Moody's concern that the above pressures will continue to impact profitability and cash flow as well as uncertainty around the amount and timing of benefits from restructuring initiatives and new product initiatives. Further ratings downgrade could result in the event of continued operating weaknesses such that interest coverage remains below 1 times, or Debt to EBITDA exceeds 4.5 times. Cott has good availability under its US$250 million committed credit facility to cover capital expenditures as well as its cash needs during working capital buildup periods in the next twelve months. Also, it does not have material debt maturities over the next four quarters. However Moody's noted that Cott's liquidity has weakened because of the decreased internal cash generation and Moody's has concerns about covenant compliance. The credit facility has two financial covenants. Moody's believes that the company may fail to be in compliance with its current covenants in upcoming quarters, absent covenant relief, which is likely but not assured. The company has stated that it is monitoring the situation and is in communication with its banks about its expectations. Headquartered in Toronto, Ontario, Cott Corporation is one of the world's largest retailer-brand soft drink suppliers with a leading position in take-home carbonate soft drink markets in the US, Canada, and the UK. Sales in 2006 were nearly US$1.8 billion. |
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