Market Overview

Fitch: Free Cash Flow Efficiency Declining For FBT & Consumer Product Issuers

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings expects free cash flow (FCF) efficiency to decline for more than 30% among a sample group of issuers in the food, beverage, tobacco (FBT) and consumer products sectors in 2011 as commodity cost increases diminish margins and increase working capital usage.

In a report published today, Fitch analyzed the FCF from 2006-2010 for 41 companies in the FBT and consumer products sectors (except restaurants). The report provides a top-10 list for leaders and laggards in FCF efficiency. There are some surprises among the leaders and very little among the laggards. The top two leading issuers converting more than 100% of net income to free cash flow on average over five years are Church & Dwight and Dean Foods Company (rated 'B'; Stable Outlook by Fitch). Companies with a high degree of exposure to agricultural commodities or undergoing structural changes or financial stress comprise the laggard group. Currently, the companies most likely to improve over the next several years are those who have finished their restructuring programs such as Revlon, Inc. and Constellation Brands, Inc. (rated 'BB'; Positive Outlook).

Leaders in Fitch's group of rated companies tended to have net margins of 8% or more and FCF efficiency metric in the 75%-plus range. Consistently low metrics are more likely to result in negative rating actions.

Several key interrelated items drive FCF efficiency: profitability, working capital management, and the wildcards of taxes and the commodity cycle. Foreign exchange and fixed-asset intensity (capital expenditures/sales) also play a role, but tend to be specific to certain issuers. Also important is the degree of management's focus on cash flow.

Fitch notes that the wave of commodity cost increases experienced through mid-2008 has returned, with a sharp spike in input inflation across agricultural, energy and industrial companies.

'The direction of commodity prices is the key wildcard influencing cash flow efficiency and its direction for individual issuers,' said Grace Barnett, Director, Fitch Ratings. 'Fitch expects free cash flow efficiency to decline for 13 companies in 2011. Higher commodity costs are driving the decline for 11 of the 13.'

The full report 'FBT and Consumer - FCF Efficiency Leaders and Laggards,' is available at 'www.fitchratings.com.'

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug 13, 2010)

Applicable Criteria and Related Research: FBT and Consumer ¬タヤ FCF Efficiency Leaders and Laggards

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=638784

Corporate Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Grace Barnett, +1-212-908-0718
Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Wesley Moultrie, +1-312-368-3186
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com

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