Fitch Affirms Heinz's IDRs at 'BBB/F2'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of H.J. Heinz Company (Heinz) and its subsidiaries as follows:

H.J. Heinz Co.

--Long-term Issuer Default Rating (IDR) at 'BBB';

--Bank facilities at 'BBB';

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

H.J. Heinz Finance Co. (HFC)

--Long-term IDR at 'BBB';

--Bank facilities at 'BBB';

--Senior unsecured debt at 'BBB';

--Series B Preferred Stock at 'BB+';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

H.J. Heinz Finance UK Plc.

--Long-term IDR at 'BBB';

--Senior unsecured debt at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

H.J. Heinz B.V.

--Long-term IDR at 'BBB';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

H.J. Heinz Co. of Canada, Ltd.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Concurrently, Fitch assigned a 'BBB' rating to Heinz's three-year 15 billion Japanese Yen denominated credit agreement entered into during the second quarter of fiscal 2010. The proceeds were swapped to USD167.3 million and the interest rate was fixed at 4.084%.

The Rating Outlook is Stable. At fiscal year ended April 28, 2010, Heinz's total debt was $4.6 billion.

Heinz's ratings continue to reflect the company's solid cash flow generating ability, its product and geographic diversification and its leading market positions in major product categories. Heinz generates more than 60% of its sales outside the U.S., so currency fluctuations periodically impact earnings. Approximately 15% of sales were from emerging markets in fiscal 2010, and emerging markets are expected to remain the company's primarily growth driver. Heinz's major product categories include its namesake ketchup, as well as condiments and sauces, frozen food, soup, beans, infant food and other processed foods. Ketchup, condiments and sauces comprise approximately 40% of sales. EBITDA margins have remained in the high teens over the past several years, which is in the top tier for the packaged food industry, despite commodity inflation which peaked at approximately 12% in fiscal 2009 and remained above average at 6% in fiscal 2010. Cost inflation has moderated and is expected to be near 2% in fiscal 2011, which is likely to be offset by productivity gains.

For the fiscal year ended April 28, 2010, Heinz generated above average sales growth of 4.8% to achieve record high sales of $10.5 billion. The sales increase was composed of 1.3% lower volume, 3.4% from price increases, 2.2% from net acquisitions/divestitures and a slight benefit of 0.5% from foreign exchange. Total organic sales growth (volume and price) was 2.1%, nearly all from 15% growth in emerging markets. Developed markets remain challenging due to high unemployment, cost conscious consumers, a proliferation of private label options and branded competitors bolstering promotions. During fiscal 2009 and the first half of fiscal 2010, Heinz's volumes declined as a result of weakness in foodservice and in response to higher pricing actions to offset significant commodity inflation. Overall volume recovered to positive territory in the second half of fiscal 2010, when the impact of higher pricing diminished. Volume remains weak in U.S. food service although profitability has improved due to pricing and productivity gains. Overall gross margin increased 50 basis points to 36.2%, primarily as a result of net pricing and productivity initiatives that offset commodity inflation. Reported operating income, which factored in significantly higher marketing expense, rose nearly 4% to $1.6 billion. Marketing investment has increased 63%, or a 13% CAGR, from fiscal 2006 through fiscal 2010. Fiscal 2011 sales growth in expected to be in the low-to mid single digits, excluding currency impact, primarily driven by volume growth. Emerging markets will again drive the sales growth. Currency fluctuations may have a significant impact due to the global economic environment. Operating earnings growth is anticipated due to continued productivity improvements and modest cost inflation.

Internally generated liquidity is substantial. Cash provided by operating activities reached a record $1.26 billion in fiscal 2010, up from $1.17 billion in the prior year. The improvement in cash flow was achieved despite $540 million of pension contributions, of which $475 million was discretionary. Heinz generated approximately $450 million in free cash flow (after dividends and capital expenditures) for the fiscal year. Fitch expects free cash flow in fiscal 2011 should again exceed $400 million, factoring in much lower pension contributions of less than $50 million. Heinz's pension plan was 111% funded at the PBO level at its 2010 fiscal year end. While maintaining and growing its large dividend remains a high priority for the company, Heinz is expected to keep share repurchases a low priority. The dividend is expected to be $575 million in fiscal 2011, or approximately a 60% payout ratio, which is on the high side for the industry. Free cash flow is anticipated to be used primarily for bolt on acquisitions, which are likely to be in emerging markets or core geographies.

Cash and cash equivalents were $483 million at the fiscal 2010 year end, and there were no borrowings on the company's $1.7 billion committed credit facilities. The facilities are comprised of a $1.2 billion three-year credit facility that expires in April 2012 and a $500 million three-year facility that expires in April 2013. Heinz and HFC are co-borrowers on these facilities, which support the company's CP borrowings. CP, which tends to peak in the fall, was $232.8 million at April 28, 2010. The credit facilities contain a maximum leverage ratio (consolidated total debt/consolidated EBITDA) of 3.75:1.0 through the fiscal quarter ended July 29, 2010 and 3.50:1.0 thereafter. The company's notes indentures do not contain financial covenants. Heinz was in compliance with its covenants at April 28, 2010. In addition, Heinz had $488.6 million of foreign credit lines available at April 28, 2010. It also has a $175 million three year accounts receivable securitization program through June 2012. Receivables sold through this program were $84.2 million through April 28, 2010. Long-term debt maturities are negligible in fiscal 2011. HFC is likely to refinance approximately $1.35 billion of long-term notes that mature in fiscal 2012.

For fiscal 2010, Heinz's total debt-to-operating EBITDA was 2.4 times (x), funds from operations (FFO) adjusted leverage was 3.5x, and operating EBITDA-to-gross interest expense was 6.4x. Cash payments of $306 million related to Heinz's $681 million DRS debt exchange in July 2009 were accounted for according to GAAP as a reduction in the book value of debt and will be amortized to interest expense over the 30-year life of the notes. If the cash payments are added back to total debt for analytical purposes, total debt-to-operating EBITDA was approximately 2.6x for the same period. Credit metrics improved over the past year due to EBITDA growth and slight debt reduction. Leverage is expected to remain near the current level or continue to improve modestly. If the company utilizes free cash flow to repay a portion of the maturing notes, it could be positive for the ratings.

The risk of a more aggressive financial strategy remains, since activist shareholders have occupied two seats on Heinz's Board of Directors since 2006. However, the risk has diminished as the activist shareholder's equity ownership in Heinz has fallen to approximately 1.5% from more than 5%. The Board of Directors has recommended that these two directors be re-elected as part of the slate of Directors at the company's annual meeting in August 2010.

The following applicable criteria reports are available at 'www.fitchratings.com':

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Rating Packaged Food Companies-Sector Credit Factors' (May 12, 2010).

Additional information is available at 'www.fitchratings.com'.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

Rating Packaged Food Companies - Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=526525

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.