US: Fitch upbeat on industry outlook
The advantages investment-grade US packaged food manufacturers will gain from the weak economy are likely to outweigh the drawbacks in the coming year, according to ratings agency Fitch.
Packaged food manufacturers in the US are feeling the positive effect of consumers who are increasingly eating at home in order to save money, Fitch said.
However, the agency said input cost inflation in 2009 looks to be a "mixed picture", as it takes several months for lower costs to flow through earnings due to the timing of hedges and contracts.
"Overall input cost inflation in 2009 is likely to exceed 2008 inflation, at least in the first half of the year. As the year progresses, packaged food companies may see some benefit from lower grain-related and energy costs," Fitch suggested.
Medium-to-large-size packaged food companies, with diversified portfolios and relatively steady consumption patterns, have maintained "adequate" liquidity and access to capital during the current instability in the credit markets, Fitch said.
"They are expected to exhibit growth in operating earnings and cash flow, as well as discretionary free cash flow. Therefore, ratings and outlooks for most companies in this sector are likely to remain stable in 2009," Fitch concluded.
However, Fitch warned that companies would have a limited ability to pass costs on to consumers due to the competitive nature of the market.
On pricing, Fitch said: "While many packaged food companies have done a good job with achieving higher pricing recently, there is still more pricing to come in 2009. The magnitude of pricing actions consumers are willing to accept when they are already being squeezed by the shaky economy is a delicate balance. If a packaged food company's volume turns negative, it is a sign that consumers feel that the higher pricing is too much.
"Fully offsetting incremental cost inflation in 2009 will be difficult to achieve because of the magnitude of pricing actions already taken in 2008, pushback from retailers about further increases, and consumers' increased desire to switch to private-label products to reduce their grocery bill."
Nonetheless, Fitch said it expected a number of companies to offset higher costs with pricing actions and efficiency initiatives.
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