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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