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Moody's Investors Service has downgraded cranberry and grapefruit product marketer Ocean Spray's short term rating to Prime-3 from Prime-2, and its preferred stock rating to Ba2 from Baa3. The ratings also remain on review for further possible downgrade.
According to Moody's, the downgrade reflects four main factors. These are the significant senior management turmoil that the co-operative has experienced over the past nine months, the continuing uncertainty regarding the co-operative's future strategic direction, the deterioration in the company's operating performance as a result of increased competition, and the reduction in the company's sales and earnings as it seeks to end past trade loading practices.
The continuing review will focus on whether Ocean Spray is likely to take any actions to enhance returns and liquidity for its co-operative members that could be detrimental to its credit profile, said Moody's, and whether Ocean Spray's debt protection measures could deteriorate further as competition in its markets further compresses margins and volumes. Should such strategic actions or poor performance cause a deterioration in Ocean Spray's debt protection measures, Moody's says its ratings could be further downgraded.
Ocean Spray has experienced serious senior management disruptions over the past nine months. In November 2002, Ocean Spray's CEO resigned less than three years after the resignation of its prior CEO. At the time, an interim CEO was appointed.
In March 2003, Ocean Spray's members voted to replace its entire board of directors. Randy Papadellis - formerly Ocean Spray's chief operating officer - has now been appointed as CEO. Moody's suggests that going forward, Ocean Spray's new board and senior management team must more effectively deal with its highly-political member-owners. This includes a vocal group of members that would like to monetise their investment in Ocean Spray - possibly by supporting a sale of the co-operative.
Even if Ocean Spray remains independent, Moody's believes that management will remain under pressure to take steps to increase returns to its members, as well as to deal with owner-members who seek to exit the cooperative. This couldinvolve increasing payments to or repurchasing equity investments from members. Either way, this heightened level of uncertainty surrounding Ocean Spray's future strategicdirection and financial policy is a key reason for Moody's downgrading its ratings and for considering a possible further downgrade.
Ocean Spray recently announced that it would change the way that it markets its cranberry sauce products. In prior years, the co-operative had engaged in 'trade-loading' activities which offered customers incentives to purchase such product at its fiscal year end (August) as opposed to closer nearer the autumn holiday season. Ocean Spray has announced that it will cease this activity this year, which will reduce its full-year 2003 earnings by approximately $54 million, but increase 2004 earnings by $60 million.
Ocean Spray's operating performance weakened during 2003 due to a combination of weak overall beverage consumption, increased competition from private label white cranberry juice products, and a change in the timing of some promotional activity.
Moody's did however note Ocean Spray's strong brand and market share in its categories, and its modest debt and preferred stock levels.
