Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and outstanding debt ratings for ConAgra Foods, Inc. (ConAgra) (NYSE: CAG):
--Long-term IDR 'BBB';
--Senior unsecured notes 'BBB';
--Bank credit facility 'BBB';
--Subordinated notes 'BBB-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
The Rating Outlook is Stable. ConAgra's total debt was $3.5 billion at Nov. 29, 2009.
ConAgra's credit ratings recognize the company's diversified product portfolio and balanced financial strategy. During the course of the past several years, ConAgra has transformed itself into primarily a branded, packaged foods company after completing the divestitures of its commodity businesses. Moderation of input costs, cost savings from productivity initiatives and adjustments to merchandising programs have led to significant operating earnings and margin improvement. As a result, ConAgra's leverage is materially lower within the past year and margins have begun to show progress in narrowing the gap versus packaged food industry peers.
In addition, the packaged food sector has benefited from the increase in consumers preparing meals at home during the current weak economic environment. While there is also heightened risk of consumers switching from branded to private label products, ConAgra participates in certain private label food categories, so it can also benefit from this trend. ConAgra's positive rating factors are balanced with its relatively small international exposure, which may limit longer term growth. Also, it has a large presence in the frozen meals category, which has been extremely price competitive during the weak economy. Nonetheless, ConAgra's revamp of its Healthy Choice line of frozen meals and innovation within the category have driven market share growth.
Year-to date net sales decreased 3% to $6.1 billion for the first six months of fiscal 2010, primarily due to the pass-through of lower wheat costs in Commercial Foods. Consumer Foods net sales increased 2% in the first half to $3.9 billion (2% from pricing/mix, flat volume and currency impact). However, factoring 1% lower volume from short Slim Jim supply and 1% lower from low margin SKU rationalization, adjusted net sales were up 4%. Consumer Foods operating profit increased a very strong 32% in the first half to $580 million, driven by lower input costs, particularly vegetable oils, and cost savings initiatives.
Given the strong recent performance, Fitch expects moderation in operating earnings growth in the second half of fiscal 2010. Despite significant price increases taken during fiscal 2009 to offset rising input costs, ConAgra has maintained positive sales and volume growth in its core Consumer Foods segment in fiscal 2010, adjusting volume for the Garner, North Carolina Slim Jim plant being temporarily out of service. Fitch anticipates positive sales and volume trends to continue. Commercial Foods net sales fell 10% in the first half to $2.2 billion, reflecting the pass-though of lower wheat prices in the milling division. Commercial Foods results also reflect lower volume as a result of the difficult economic environment in foodservice. Operating profit rose 3% to $301 million for Commercial Foods.
ConAgra's EBITDA margin has improved to 14.3% for the six months ending Nov. 29, 2009 from 11.1% for the same period in fiscal 2009. Free cash flow (cash flow from operations minus capital expenditures and dividends) was $242 million for the six month period ending Nov. 29, 2009, versus negative $285 million in the prior year period. The improvement was due to higher income from continuing operations, successful working capital management and lower commodity cost in flour milling. Fitch expects that fiscal 2010 free cash flow will exceed $100 million and may be utilized for acquisitions and/or share repurchases.
For the latest 12 months ended Nov. 29, 2009, ConAgra's total debt-to-operating EBITDA was 2.1 times (x), operating EBITDA-to-gross interest expense was 6.3x and Funds From Operations adjusted leverage was 2.5x. Current metrics allow room for moderate share repurchases and/or acquisitions. A slight weakening of credit metrics could be accommodated within the rating category. If credit measures remain consistent or improve from current levels, and free cash flow remains ample, a positive rating action could occur.
ConAgra maintains solid liquidity with $490 million cash at Nov. 29, 2009 and an undrawn $1.5 billion multiyear revolving credit facility maturing December 2011 that provides backup to its commercial paper (CP) program. As of Nov. 29, 2009, there was no commercial paper outstanding. ConAgra does not have any significant debt maturing during the remainder of fiscal 2010. Upcoming debt maturities include $260 million in fiscal 2011 (September 2010) and $364 million in fiscal 2012 (September 2011). ConAgra successfully extended its upcoming maturities during April 2009 when it completed a tender offer and repaid approximately $900 million of aggregate principal of senior notes with maturities in 2010, 2011 and 2027. It also issued $1 billion of senior unsecured notes consisting of $500 million 5.875% notes due April 2014 and $500 million 7.0% notes due April 2019.
The following applicable criteria reports are available at www.fitchratings.com:
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Rating Food Companies' (Nov. 5, 2008).
Additional information is available at www.fitchratings.com
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