Fitch: 2011 U.S. Packaged Foods Outlook Stable Despite Rising Input Costs & Cutthroat Competition
17 November 2010 - 12:48AM
Business Wire
Fitch Ratings expects the rating outlook for the U.S. Packaged
Foods sector to remain stable in 2011 despite challenges including
rising input costs, cutthroat competition and value conscious
consumers, according to a new report by Fitch.
'Swiftly rising input costs have put packaged food companies in
a situation where margins are being squeezed,' said Judi M.
Rossetti, Senior Director at Fitch. 'It will take time for price
increases implemented by the food companies to catch up with the
commodity cost inflation they are already incurring.'
In addition, with the weak economic environment, consumers are
not likely to be as receptive to the higher retail prices as they
were prior to the recession. Thus, volumes will be negatively
impacted and switching to private label substitutes is expected to
be prevalent. Growth in private label will be driven by consumers'
desire for value, the proliferation of higher quality private-label
food choices available, and the price increases that packaged food
companies are likely to implement to help offset rising commodity
input costs. Even with price increases and cost cutting
initiatives, packaged food companies are not likely to retain the
margin improvement they attained earlier this year. However, flat
or slightly lower profitability in the near term is not anticipated
to have ratings impact.
Although the U.S. economy has shown signs of recovery, it has
been a slow process that has been hampered by weak labor and
housing markets. These factors have led consumers to remain
cautious regarding spending and very value conscious when making
food purchase decisions. Despite the difficulties in the economy,
food remains a necessity for consumers and therefore the packaged
food companies tend to have relatively stable operating results and
credit metrics under various economic conditions. Large,
diversified packaged food companies generally have substantial
positive free cash flow (cash flow from operations less capital
expenditures and dividends), conservative capital structures, and
ample liquidity.
Positive free cash flow is expected to be used for bolt-on
acquisitions and/or share repurchases. Food companies continue to
seek acquisitions and organic growth, particularly in the BRIC
countries (Brazil, Russia, India, and China), to boost their
overall growth rates. Proactive refinancing of upcoming debt
maturities is likely to continue since companies are able to issue
new debt at very low interest rates. Debt reduction is not likely
except for Kraft Foods Inc. and Ralcorp Holdings, Inc., since both
companies increased leverage materially for acquisitions in 2010.
Their ratings and outlooks are forward looking and factor in
significant debt reduction in the near to intermediate term.
The full report '2011 Outlook: U.S. Packaged Foods-Stable Sector
despite Rising Input Costs and Competitive Operating Environment'
is available on the Fitch Ratings web site
'www.fitchratings.com'.
The following is a list of Fitch-rated issuers and their current
Issuer Default Ratings:
--Campbell Soup Co. ('A'; Outlook Stable);
--ConAgra Foods, Inc. ('BBB'; Outlook Stable);
--Flowers Foods, Inc. ('BBB'; Outlook Stable);
--General Mills, Inc. ('BBB+'; Outlook Positive);
--H.J. Heinz Co. ('BBB'; Outlook Stable);
--Kellogg Company ('A-'; Outlook Negative);
--Kraft Foods, Inc. ('BBB-'; Outlook Stable);
--Ralcorp Holdings, Inc. ('BBB-'; Outlook Stable);
--Sara Lee Corp. ('BBB'; Outlook Stable).
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research: 2011 Outlook: U.S.
Packaged Foods
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