Campbell Soup (CPB) Ratings Cut to 'A3' by Moody's

October 6, 2014 3:32 PM EDT

Moody's Investors Service. Inc downgraded the credit ratings of Campbell Soup Company (NYSE: CPB) including its long-term senior unsecured debt to A3 from A2 and short-term debt to Prime-2 from Prime-1. The rating outlook is stable. This action concludes the review for downgrade that began on June 19, 2014.

RATINGS RATIONALE

The rating downgrade reflects continuing soft sales performance in Campbell's core business lines — especially U.S. soups and U.S. beverages that, along with a series of leveraged acquisitions, has eroded the company's profit margins and weakened its liquidity profile. Moody's believes that the operating environment will become more challenging for Campbell over the next 18 months in core segments, which may put further pressure on its ratings. In addition, the company's plans to grow partly through acquisitions and to reinstate share repurchases could lead to a further downgrade if its strategies become aggressive.

Campbell temporarily suspended its share repurchase program following the $1.6 billion Bolthouse acquisition in August 2012, which Moody's expected would allow the company to restore its credit metrics within two years. However, because of soft operating performance in core operations and the effects of two leveraged acquisitions in 2013, improvement in credit metrics has fallen short of the rating agency's expectations. Still, Campbell has stated that it plans to reinstate share repurchases this year.

"Consumer preferences have turned away from the soup category so convincingly that a turnaround in the category is no longer in sight," commented Brian Weddington, a Moody's Senior Credit Officer. "Rather, we expect the volumes in the category to continue to decline gradually, partially offset by the current solid margins in soups that may be further enhanced through product mix shifts to premium varieties," Weddington added.

Deteriorating consumption trends in ready-to-eat and condensed soups are likely to persist for the foreseeable future and competition in broths and premium soup varieties -- areas where Campbell plans to expand its portfolio -- is likely to intensify. In addition, heightened promotional activity in Campbell's snacks and shelf-stable beverage businesses will likely keep pressure on gross margins. As a result, Moody's anticipates that Campbell will partly rely on acquisitions to generate incremental operating profit growth, which would likely bring higher leverage and further profit margin dilution. Operating performance in other key businesses, including Bolthouse Farms and Pepperidge Farms, should remain stable and provide rating support.

Campbell Soup Company

Ratings downgraded:

Senior unsecured debt to A3 from A2;

Senior Unsecured MTN program to (P)A3 from (P)A2;

Senior Unsecured Shelf to (P)A3 from (P)A2

Commercial paper to Prime-2 from Prime-1.

The rating outlook is stable.

Campbell's A3 rating is supported by its strong brand equity, leading market shares in key soup categories and high profit margins. The rating also reflects mixed operating results in core business lines, and weakening cash conversion of operating profits. Campbell has struggled for several years to turn around its U.S. retail soup segment as more consumers have shifted to other value-oriented meals and to fresh foods. The company is also facing challenges in its U.S. Beverages, and Arnott's biscuits businesses due to a combination of heavy competition and a soft global economy.

Deterioration in operating performance or adoption of an aggressive financial policy with respect to share repurchases or acquisitions could result in a downgrade. Quantitatively, if retained cash flow/net debt is likely to be sustained below 18%, the ratings could be downgraded.

Moody's does not expect an upgrade in the near-term. But over time, if Campbell improves its operating performance, profitably expands its portfolio and global reach, and strengthens its credit metrics, an upgrade is possible. Quantitatively, retained cash flow to net debt would need to be sustained in the 25% range before we would consider an upgrade.



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