Packaging Digest

Study finds 2011 U.S. Packaged Foods sector resilient

"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.

Despite rising input costs, cutthroat competition and value-conscious consumers, the U.S. Packaged Foods sector is expected to remain stable in 2011 despite challenges, according to a new study from Fitch Ratings.

The research did find that the weak economic environment is leaving U.S. consumers not as receptive to the higher retail prices as they were prior to the recession and volumes will be negatively impacted and switching to private label substitutes is expected to be prevalent.

One of the factors driving the growth in private label is the proliferation of higher quality private-label food choices available. This is complemented by consumers' desire for value 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. Rossetti explains: "It will take time for price increases implemented by the food companies to catch up with the commodity cost inflation they are already incurring."

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.

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).

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., because 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.