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Lost at sea?

05-Aug-2003

Continuing uncertainty and senior management turmoil at cranberry supplier Ocean Spray has led Moody's to downgrade the firm's short-term and preferred stock ratings.

Ocean Spray's short term rating has gone 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, said Moody's, citing the deterioration in the company's operating performance and sales, partly caused by increased competition, as a major factor alongside management problems.

 

The continuing review will focus on whether Ocean Spray is likely to take any actions to improve returns for its co-operative members that could be detrimental to its credit profile, said Moody's. It will also be influenced by Ocean Spray's debt protection measures, which are likely to deteriorate further as competition in its markets continues to squeeze margins and volumes.

 

Ocean Spray has experienced serious disruptions over the past nine months, with its CEO resigning in November 2002, less than three years after the resignation of its prior CEO.

 

In March 2003, the co-operative members voted to replace its entire board of directors and Randy Papadellis - formerly Ocean Spray's chief operating officer - was appointed to head up the business.

 

Better management of its highly-political member-owners will be crucial for the company, said Moody's, pointing to a group of members that may support a sale of the co-operative to see a return on their investment.

 

Even if Ocean Spray remains independent, management will remain under pressure to increase returns for its members, as well as to deal with owner-members who seek to exit the co-operative. This couldinvolve increasing payments or repurchasing equity investments from members, said the investors service, underlining the heightened level of uncertainty surrounding Ocean Spray's future strategic direction and financial policy.

 

The company'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.

 

But it has recently announced that it would change the way that it markets its cranberry sauce products, ending the 'trade-loading' activities which offered customers incentives to purchase such products at its fiscal year end (August) as opposed to nearer the autumn holiday season. Ending this activity this year will reduce its full-year 2003 earnings by approximately $54 million, but increase 2004 earnings by $60 million.

 

A strong brand and market share in its categories, and its modest debt and preferred stock levels, should also stand the firm in good stead in the future.

 

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