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Announcement:

Moody's revised Scotts Miracle-Gro's outlook to stable

Global Credit Research - 14 May 2012

New York, May 14, 2012 -- Moody's Investors Service revised Scotts Miracle-Gro Company (Scott's") outlook to stable from positive following higher costs and moderating credit metrics. All ratings, including the Ba2 Corporate Family Rating, were affirmed.

"While we recognize the benefits of targeted advertising, we expect operating margins to contract because of increased advertising expenses and higher raw material costs," said Kevin Cassidy, Senior Credit Officer at Moody's Investors Service. "This will preclude Scott's from getting to credit metrics necessary for an upgrade in the near to mid-term," he added.

The following ratings were affirmed/LGD assessments revised:

Corporate Family Rating at Ba2;

Probability of Default Rating at Ba2;

$200 million senior unsecured notes due January 2018 at B1 (LGD5, 88% from 86%);

$200 million senior unsecured notes due December 2020 at B1 (LGD5, 88% from 86%);

Speculative grade liquidity rating at SGL 2

RATING RATIONALE

The Ba2 Corporate Family Rating reflects Scott's strong market position, efficient operational platform, strong customer relationships and commitment to brand support and product development. The ratings are constrained by the seasonality of its earnings and cash flows, weather dependency, exposure to volatile raw materials prices, and by its highly concentrated customer base. In addition, Moody's believes that Scott's will likely use its excess cash flow over the medium term for share repurchases or targeted acquisitions, and will be reliant on its revolver for seasonal working capital needs. Nevertheless, Moody's recognizes the long-term favorable growth trends for lawn and garden products driven by favorable demographic and macro economic trends. The rating incorporates our expectation that higher and more focused marketing expenditures will drive sales growth and that financial leverage over the longer term will be reduced through earnings growth.

The stable outlook reflects Moody's view that Scott's lawn and garden core consumer business will continue to grow close to its historical trends and that it will maintain a good liquidity profile. The outlook also reflects Moody's expectation that Scott's will not materially increase debt in the near term either for acquisitions or to fund shareholder returns.

The rating could be upgraded if financial leverage (debt/EBITDA) excluding seasonal working capital borrowings improves slightly and cash flow credit metrics get much better. Key credit metrics necessary for an upgrade are: adjusted debt/EBITDA, excluding seasonal working capital borrowings, sustained around 2.5 times (currently at a seasonal high of 4.2 times, but 2.7 times at end of fiscal 2011), EBITA margins maintained around 13% (currently 12.4%) and retained cash flow/net debt consistently around 20% (currently 10%). For the debt/ EBITDA upgrade threshold to be met, EBITDA needs to increase by about $45 million from March 31, 2012 levels or debt needs to decrease by around $115 million from September 2011 levels (March includes seasonal revolver borrowings).

A downgrade is not likely in the near to mid-term. If leverage approached 4x other than for seasonal borrowings a downgrade would be likely. EBITA margins falling below 10% for a prolonged period could also trigger a downgrade. For the debt/ EBITDA downgrade threshold to be met, EBITDA needs to decrease by about $145 million from March 31, 2012 levels or debt needs to increase by around $575 million from September 2011 levels.

Moody's subscribers can find further details in the Scott's Miracle Gro Credit Opinion published on Moodys.com.

The principal methodology used in rating Scott's Miracle Gro was Moody's Global Packaged Goods Industry methodology published in July 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Located in Marysville, Ohio, Scott's is a manufacturer and marketer of consumer lawn care and garden products, primarily in North America and in Europe. Scott's also operates the Scotts Lawn Service business and sells professional products. Revenue for the twelve months ending March 31, 2012 approximated $2.9 billion.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Kevin Cassidy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Peter H. Abdill, CFA
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's revised Scotts Miracle-Gro's outlook to stable
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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