Wellness Pet posted disappointing second-quarter results recently, revealing year-over-year revenue and EBITDA declines, according to two sources familiar with the situation.
The Clearlake Capital-owned natural pet food supplier’s revenue fell 7.4% YoY to USD 136m compared to USD 146.9m in 2Q22, the sources said. Meanwhile, pro forma adjusted EBITDA for the period ended 1 July plunged 19.4% YoY to USD 32.9m versus USD 40.8m generated in the same period the prior year, the sources noted.
The earnings weakness comes as Wellness Pet grapples with sluggish sales after the pandemic-era splurge on premium pet food and treats showing signs of cooling, the sources said. Consumers are trading down to cheaper options for pet supplies and cutting down on discretionary spending amid high inflation, the sources noted. Volumes are also declining as a result of retailer destocking, one of the sources added.
On the back of the earnings call held around mid-September and a subsequent downgrade from S&P Global Ratings to CCC+, quotes on the borrower’s USD 750m first lien term loan due 2027 swooned roughly ten points to 83.25/86.75 on 18 September, compared to 93/94 on 11 September, according to Markit. The first lien loan is quoted 79.5/81.5 today. The issuer’s USD 235m second lien term loan due 2028 was last quoted 70/75.
In its single-notch issuer credit downgrade to CCC+, S&P noted weak credit measures and that Wellness Pet's profitability has suffered from lower consumer demand, significant cost inflation, and ongoing higher investments in advertising and promotion.
In December 2022, Wellness Pet upsized its ABL to USD 150m from USD 100m and subsequent to the last quarter-end, the company inked a USD 138.5m incremental first lien term loan due 2027, proceeds from which repaid outstanding borrowings under the revolver and increased its balance sheet cash. With the liquidity-enhancing deal in hand, management noted that pro forma liquidity totaled roughly USD 160m, the second source said.
The company burned roughly USD 10m of cash in the second quarter through negative USD 7.2m operating cash flow in addition to USD 2.8m in capital expenditure, the second source said. Wellness Pet’s burgeoning interest cost has been eating into its free cash flow with interest expense climbing to USD 80.3m on a LTM basis through 2Q23, as compared to LTM interest expense of USD 55.3m incurred through 2Q22, the same source added.
Moody’s Investors Service cut its rating on the company’s first lien term loan to B3 in late July, to reflect a diluting collateral position due to the meaningful increase in size of the first lien debt and the upsized USD 150m ABL. The deal collectively reduced expected first lien term loan recovery in an event of a default, the ratings agency noted in its report.
Representatives from Wellness Pet and Clearlake did not respond to requests for comment.
