NEW YORK — A problem-riddled SAP implementation has created a cascade of operational and financial difficulties for the North American operations of CSM Bakery Solutions Ltd., according to Moody’s Investors Service.
Disruptions from the enterprise resource planning system transition have “led to declining sales, significantly higher operating costs and strained relationships with customers, suppliers and employees,” the ratings agency said.
The rating downgrades reflect further deterioration in CSM’s operating performance stemming from a problem-plagued SAP implementation in its North America operations that negatively impacted third-quarter results.
With the company’s deteriorating financial picture, CSM Bakery System’s family credit rating was downgraded to Caa1 from B2. Moody’s Caa family of ratings are “judged to be speculative of poor standing and are subject to very high credit risk.” About $1 billion in debt are affected by the downgrade. The credit outlook is described by Moody’s as “stable.”
Despite the troubles, CSM is confident in its outlook.
"The Moody's downgrade is based on dated information and does not reflect what’s currently taking place at CSM," said Dennis J. Murphy, vice-president of global communications at CSM Bakery Solutions. "We’re confident we have addressed our recent challenges and take great pride in bringing our strong portfolio of products backed by some of the most talented people in the industry to help our customers succeed. We’re looking forward to a strong close to 2016 and a successful 2017."
Moody's said CSM Bakery’s problems were reflected in poor third-quarter results. As a result, the company’s debt-to-EBITDA ratio is expected by the ratings agency to end the year at 9:1, versus 5.4:1 at the start of 2016.
“In addition, CSM’s liquidity profile is currently inadequate in Moody’s view, based on the company’s limited availability under external liquidity sources,” Moody’s said. “The company has used over 80% of its $150 million A.B.L. (asset-based lending) facility, which is near the maximum amount that is available without the company becoming subject to a springing financial covenant that it likely could not meet. Free cash flow is currently negative.”
Moody’s said CSM in October was able to “partly shore up its liquidity” through a €25 million term loan, due in July 2020 and provided by an affiliate of its private equity sponsor, Rhône Capital.
“Finally, Moody’s visibility on the company’s future performance is not clear,” the agency said. “The company has taken aggressive steps to improve performance and believes that its operating challenges have bottomed out; however, because of CSM’s past struggles in meeting its forecasts, uncertainty remains. The company has curtailed its I.T. and capital spending projects to preserve cash and in the near term will focus on strengthening operations in North America and improving customer service levels.”
Moody’s said the CSM bakery operations in Europe, which account for about 40% of total sales, have been more stable than the North America business.
“I.T. integration challenges are not uncommon in the packaged goods industry and are generally resolvable over time,” said Brian Weddington, a Moody’s senior credit officer. “However, CSM’s SAP implementation has been especially troubled due to poor execution that exacerbated customer service problems. Because of the extended period of disruptions in North America and the wide range of CSM stakeholders that have been negatively impacted, financial and business risks are likely to remain very high over the next year.”
Detailing the decision to give CSM Bakery a Caa1 rating, Moody’s cited the company’s “high financial leverage, declining profit margins, weak liquidity and low future earnings visibility.” On the other hand, Moody’s credited CSM for its “leading positions” in both North America and Europe in premium bakery supply categories, including icing, glazes and pastry ingredients.
A further downgrade is considered possible if operational performance at CSM Bakery does not stabilize over the next several months or the company looks unlikely to generate positive free cash flow in 2017, Moody’s said. By contrast, the agency called a rating upgrade “unlikely in the foreseeable future.” “However, if the company is able to turn around its operating performance such that debt/EBITDA falls below 8 times, adequate liquidity is restored and free cash flow turns positive, an upgrade could occur,” Moody’s said.Headquartered in Sandy Springs, Ga., CSM Bakery produces and distributes ingredients and bakery products for artisan and industrial bakeries, and for in-store and out-of-home markets, mostly in Europe and North America. The company supplies bakery products finished or semi-finished. Sales in 2015 were €2.7 billion. The company is owned and controlled by investment funds associated with Rhône Capital, which purchased CSM Bakery in July 2013 from The Netherlands-based CSM n.v. for €1,050 million.