Fitch: 2010 Should be a Turning Point for U.S. Consumer Products Sector

NEW YORK, Nov 18, 2009 (BUSINESS WIRE) --
SWK | Quote | Chart | News | PowerRating -- For 2010, Fitch Ratings expects U.S. consumer products companies to see
modestly rising demand as global economies revive. However, revenue
growth rates will be well below historical levels and price increases
are not expected to be as important as they were during 2009.
Restructuring actions, working capital controls, reduced capital
expenditures and improving liquidity have favorably positioned the
financial posture of most companies. Overall free cash flow (cash from
operations less capital expenditures and dividends) should improve in
2009 despite global economic weakness, allowing most companies
considerable latitude to meet internal capital needs and debt service in
2010.

Fitch says large acquisitions did not play a meaningful part in top-line
growth for the sector in 2009 nor are they projected to do so in 2010
except for The Stanley Works (SWK) merger agreement with Black & Decker
( BDK | Quote | Chart | News | PowerRating). Niche purchases for growth, to support ongoing businesses or to
enhance operations may happen. However, divestment of non-core assets
and brands could also occur in the Household and Personal Care space
given retailer focus on shelf-space rationalization.

"Ratings are not anticipated to change meaningfully for the Household
Products, Personal Care and Toy sectors" said Grace Barnett," Director
at Fitch. "For the Appliances, Home and Hardware, and Tools sector there
is still reason to be cautious but these companies may have reached a
turning point and positive revisions to the currently negative outlooks
could occur," said Tom Razukas, Managing Director at Fitch.

Global economic prospects are looking better for the remainder of 2009
and into 2010 due to large-scale government intervention - both monetary
and fiscal, improving financial conditions, and expectations for a
reversal in inventory contraction. Fitch projects growth in the major
advanced economies (MAEs) in 2010 at 1.2%. With growth in the BRIC
economies (Brazil, Russia, China and India) also expected to pick up,
Fitch expects global growth to reach 2% in 2010. However, the forecasted
gain is from an extremely low base and Fitch expects the pace of
expansion to remain weak compared to former recoveries and vulnerable to
shocks. In the U.S., GDP growth is forecast at 1.8% with consumer
spending up 0.3% reflecting the continuing de-leveraging of the
household sector. U.S. consumers remain focused on the need to repair
household balance sheets, reflecting rising unemployment, constrained
access to credit, and overall wealth still affected by real estate and
equity price declines, although there has been a rebound recently,
particularly for equity. Expenditures on consumer durables steadily
declined over the first five months of 2009, but increased slowly but
consistently in the May-July period, spiked up in August and declined in
September. On a year-over-year basis, every month in 2009 was down
except August, which experienced a slight gain. Earlier in 2009,
spending on non-durables had declined but has been rising over the past
couple of months.

Due to better than anticipated cash flow performance, debt issuances and
extensions of credit facilities, consumer product companies enter 2010
with strong financial flexibility. Debt issuance is not expected to be
material in 2010, reflecting high cash balances and relatively low debt
maturities at about $2.9 billion. Liquidity should remain more than
adequate in 2010, although working capital needs could be somewhat of a
drain. Stock repurchase activity is expected to be relatively light with
rising needs for cash related to capital requirements and debt service
(potentially for debt maturing in 2011). However, clear signals of an
economic upturn and improving operations could cause some cash-heavy
companies to repurchase modest amounts of stock.

KEY 2010 TRENDS

New Baseline for Durable Goods Companies:

Despite generous fiscal stimulus, Fitch believes that the global
economic changes experienced at the end of 2008 after the housing,
credit and other bubbles burst has driven demand for appliances, home
and hardware, and tool companies' products to a new, meaningfully lower
revenue level. Recovery to the high levels of 2007 will not occur for an
extended period of time. In addition, despite major restructuring
actions to lower production to meet reduced demand, earnings and cash
flow are also expected to remain at sharply lower levels from their
highs for the foreseeable future. Nonetheless, in Fitch's view,
companies have positioned themselves to survive and prosper in this
environment.

Subdued Consumer Spending:

Globally, consumers are hurting and subdued spending is likely to
persist. Sustainable consumer spending requires income growth generally
supplied by employment and wage increases. With unemployment remaining
high around the world and wage gains limited, consumer spending is
expected to show only slight growth and this is a major source of
concern going into 2010. Despite a rebound in equity prices and, at
least, a slowing of home price declines, consumers are well aware of the
difficult job market, the need to restrict credit purchases and the
importance of repairing their balance sheets. Only modest spending
increases are anticipated, particularly for necessities and replacement
items.

Housing and Related Expenditures Declines Have Leveled Off:

Fitch's forecast for the U.S. housing sector in 2010 is for improvement,
as statistical and anecdotal information generally support the premise
that a bottom has been reached in the housing market. However, the
projected 14% increase in housing starts, 21% increase in new home sales
and 7.5% increase in existing home sales are off a very low base and
forecasts are for levels that will not yet be equal to those achieved in
2008 - the worst performing year in this decade up until 2009. Any
recovery is expected to be muted reflecting substantial foreclosures and
rising unemployment, although the extension of the national first-time
buyer credit will provide impetus to home sales. Excess home inventory
is troubling. In addition, declining home prices keep potential buyers
on the sidelines and lessen home equity borrowing for existing
homeowners. Home equity borrowing has become harder to obtain, which
will limit repair/remodeling expenditures in 2010. Consequently,
consumer spending on items related to housing turnover and
repair/remodel such as appliances, hard goods, tools and other durable
items are expected to grow slowly.

Commodities Will Be Up, But Modestly in 2010:

Oil, natural gas, and other commodity prices have moderated considerably
through the summer of 2009 but have ticked up recently. Fitch expects
key commodity pricing to increase modestly in 2010 but should be largely
offset by cost containment measures as well as leverage from an increase
in revenues.

Currencies Look to Be a Positive in 2010:

The dollar has strengthened since the lows reached in early 2009 and is
roughly in line with pre-crisis level. The sizeable U.S. current account
deficit and low interest rates are likely to keep the dollar at these
weaker levels. If so, positive foreign currency translation should
provide fuel to revenue growth for multinational companies in fourth
quarter 2009 and into 2010.

SECTOR OUTLOOKS

Appliances, Home and Hardware, and Tools:

For the companies in this sector, repair/remodeling spending is more
important to overall results than residential construction. Improving
residential construction and housing turnover are expected to drive
spending for alterations and repairs up modestly in 2010. While public
construction may have slight growth, the anticipated decline in
commercial spending will more than offset any benefit. Coming off
substantially low volumes and a meaningful sales decline in 2009, an up
tick in 2010 revenue for the five companies rated by Fitch is expected.

Aiding the top line will be a weakened dollar, continued innovative
product introductions, and a pick-up in consumer purchases of less
discretionary items. Earnings should benefit from improving operating
leverage, steps taken in 2009 to reduce costs, and a benign commodity
environment. Considerable working capital contraction and reduced
capital expenditures, which drove cash flow in 2009, is not expected in
2010 with projected inventory building. However, only a moderate change
in free cash flow for 2010 is anticipated. Free cash flow will also
benefit as full-year dividend cuts will be in place for some companies.

Commodity costs are not expected to be the significant drag on profits
they have been in the recent past. Steel represents the largest
commodity for Whirlpool, followed by resin, and base metals as a group.
Steel is also a major cost for several other companies within the space.
All commodities have been relatively flat recently and are expected to
remain well off their highs achieved in 2008. Resin prices may rise but
only modestly. Margin pressure from commodities is expected to be
limited throughout 2010. Pricing actions are not anticipated with benign
commodity costs and thrifty consumer attitudes. Also, productivity
improvements, substantial cost reductions and product innovation, which
have been drivers of operating performance in 2009, will be sustained.

Fortune Brands (FO) continues to benefit from its generally stable
spirits operation, which has been the principal driver of earnings. With
the expectation that repair/remodeling spending will see some
improvement, operating leverage should provide for gains in its home and
hardware segment, enhancing total operating earnings in 2010. Newell
Rubbermaid (NWL) has experienced strengthening gross margins as it has
exited low-margin, commodity-driven businesses and ongoing restructuring
continues to lower costs. Cash flow has also risen with considerable
inventory reduction and reduced dividends. Expectations are for
fundamental improvement and stronger credit metrics for NWL in 2010.
Whirlpool (WHR), after having negative free cash flow in 2008, should
produce solid free cash flow in 2009, which is expected to at least be
as strong in 2010. The company's liquidity is also stronger with sizable
cash balances and it has been able to extend the maturity date of its
revolver. Fitch expects WHR to repay debt in 2010 reflecting its cash
balances and expected free cash flow generation. For BDK and SWK, the
combined company's business risk will increase since more revenues are
dependent on cyclical industries and recurring security revenue becomes
a smaller percentage of combined revenues. Both companies are cyclical,
but BDK, having a good correlation to residential housing (primarily
repair/remodeling) markets and the consumer sector, tends to come out of
recessions earlier than SWK's more industrial/commercial focus. Upon
completion of the merger, which is anticipated in the first half of
2010, Fitch expects to rate the combined entity's long-term IDR 'A-',
its bank facility and senior debt 'A-', and its junior subordinated debt
'BBB+'.

Several negative rating actions within the Appliances, Home and
Hardware, and Tools sector occurred early in 2009 caused by the global
economic downturn, the expected inability of these companies to rapidly
reduce manufacturing capacity to meet declining demand, and liquidity
concerns. Fueling an increase in debt for some companies was the desire
to have more than adequate liquidity in a difficult credit environment
after the global financial meltdown in the latter part of 2008 and the
beginning of 2009.

While Rating Outlooks are predominantly Negative, there is a potential
to stabilize the Outlooks for several companies in 2010. All of the
companies have benefited from severe cost reduction, supply chain
efficiency and improving liquidity. Cash positions, which may be more
than doubled by year-end 2009, are expected to remain at high levels
unless debt can be repurchased economically during the year. Companies
are expected to generate solid free cash flows and remain focused on
debt reduction. Fitch expects credit fundamentals, which have
deteriorated in 2009, to show modest improvement in 2010. Significant
debt issuance is not expected in 2010 in light of the amount of debt
issuance in 2009 and plans to repay debt for many companies. Stock
repurchases are not anticipated and acquisitions are expected to be
strategic and complementary to existing operations.

Household Products and Personal Care:

For the Household and Personal Care sector Fitch believes the worst is
over. The situation between foreign exchange (F/X) and the commodity
environment is better than 2008 and early 2009, and cost containment
efforts should augur well for margins. Nonetheless, revenue growth will
be slower than historical levels with a cautious economic recovery, a
bit more promotional activity, and an expectation that shares might
shift as retailers appear to be more committed to SKU rationalization.

Fitch estimates revenue growth for the group to be in the 5% range in
2010 led mainly by positive F/X translation in the first half and a
modest increase in volume. The consumer staple industry typically is
recession resistant, and for the five public companies rated by Fitch
plus Procter & Gamble Co (P&G) and Church & Dwight, revenue growth
through 2008 has been positive since at least 2003. After collective
growth of about 8.7% in 2007 and 2008, which was led primarily by very
strong volume growth averaging 4.5%, pricing, and F/X translation, the
group's revenues have declined 3.4% for the first three calendar
quarters of 2009. While there has been minimal volume growth in this
time frame, the rapid appreciation of the dollar led to material F/X
translation with a negative impact of about 7.5%. This was the major
cause of the group's negative revenue growth thus far. The dollar
recently retreated to pre-crisis levels but potential positive
translation effects in the fourth quarter are not likely to prevent
calendar 2009 from recording the first down year - in the 1%-2% range -
since at least 2003 for the group. However, if currencies hold at
current levels with some further weakening of the dollar and some
pick-up in volume from a more stable world economy, 2010's revenue
growth should be back in positive territory. Given this more likely
scenario, Avon Products Inc (Avon) and Colgate-Palmolive (Colgate),
which derive more than 75% of their revenues from international markets
and have borne the brunt of the strengthening dollar, should see
stronger contributions to top-line growth in 2010.

Volume growth is expected for 2010 but at much lower levels than 2007
and 2008. Only Alberto-Culver Co (Alberto) and Church & Dwight have seen
consistently positive volume growth since the fourth quarter of 2008.
For the remainder, volume declines basically hit their low point in the
first calendar quarter of 2009 and have been on the upswing since then
with most either flat or positive by the quarter ending Sept. 30, 2009.
Fitch expects the trend to continue, based on the improvement in
consumer confidence levels in the major markets (U.S., Euro area, Japan
and the UK) since March 2009, and high levels of brand support,
innovation and promotional activity. In line with this, P&G reported in
October 2009 that 'volume strengthened through the quarter with
September 2009 being an all-time record shipment month and ahead of a
year ago,' and the company has also seen a slight improvement in
underlying market growth. As a result, P&G raised its guidance for
organic growth to 2%-4% from 1%-3%. A similar refrain was heard from
Kimberly-Clark (Kimberly) which is seeing some volume growth in its
health care category, modest pick-up in volume across the developing and
emerging markets in third-quarter 2009, as well as price realization.
Kimberly also raised its organic sales guidance to about 3% from the
1%-2% range. The industry has long achieved strong growth in the BRIC
markets, whose GDP growth was 3.7% in 2009 but which Fitch expects to
grow to 6.5% in 2010. Economic growth in these markets should support
volume growth, particularly for the more discretionary parts of consumer
staples.

Given the more benign commodity environment in which costs are not
expected to escalate to the levels seen in 2007/2008 and heightened
competition in a much slower market, pricing is not expected to be a
factor in revenue growth in 2010. However, there will be challenges in
categories where private label and value players have a solid position
against premium brands such as paper towels and trash bags - an area in
which Kimberly and Clorox Company participate. In these categories it
may be more difficult to hold on to some of the 2008 price increases,
and some give-back or higher levels of promotion may be needed if
competitive price gaps are to be maintained.

Share gains and losses are likely to be more volatile at the brand level
as retailers appear more committed to rationalizing their shelf space.
This may cause third-tier brands to lose distribution while higher
velocity leading brands gain valuable selling space. Divestment of these
lower tier or non-core brands should occur as companies review their
portfolios of third-tier brands. The Fitch-rated companies have leading
brands and it is not expected that divestments will have a material
impact on revenues or profits.

Gross margins for the group have ratcheted sharply upward since the
trough in the second calendar quarter of 2008. While margins should
experience some pressure from a modest increase in commodity prices and
increased promotional spending, cost containment efforts and less F/X
transaction costs should blunt a portion of the impact. Fitch expects
that industry participants will remain rational in their promotional
efforts as this spending is easily duplicated and could harm overall
margins, for retailers as well, as it did during the battery price wars
earlier in the decade.

Improved profitability, as well as lower pension contributions given
improved equity returns, is positive to cash flows. However, it is less
likely that the strong improvements in working capital can be repeated
at 2009 levels which led to overall modest improvements in free cash
flow. Sharp acceleration in commodity prices is not anticipated but
would likely limit margin improvement with stronger pressure on Clorox
and Kimberly.

Fitch-rated companies in the sector enter 2010 with considerable
liquidity which has risen 65% to $11.4 billion against debt maturities
of $4.7 billion through the end of 2012. Most companies pulled back or
eliminated share repurchases, slightly reduced capital expenditure
levels, improved working capital management, and are exiting the year
with significant financial flexibility. Notably, cash comprises 31% of
their liquidity. Given the strong levels of liquidity and cash on hand
with marginal returns and a low-growth environment, Fitch expects the
group is likely to increase capital expenditures somewhat and may
re-institute or increase share repurchase levels in 2010. Acquisitions
are also likely to increase; several companies such as Avon, Church &
Dwight and Alberto have expressed interest or are actively looking.

Fitch expects the overall ratings for the companies in this sector to be
stable primarily due to rising economic activity - albeit at lower
levels - and very high liquidity. Concerns would be a lack of rational
behavior in the competitive environment, sudden escalation in commodity
prices and shareholder-friendly decisions that result in increased
leverage.

Clorox currently has a Positive Outlook. Catalysts for a rating upgrade
are maintaining operating momentum over a period of time and meeting
public financial goals related to leverage. Avon, which has a Negative
Rating Outlook, suffers from minimal free cash flow and creeping
leverage. The company has significant liquidity encompassing
considerable cash balances and there appears to be a renewed focus on
increasing cash flow. However, the timing of that improvement as well as
stability in leverage would provide the impetus for a rating action.

The wild card for Fitch-rated companies is mainly event driven, and
includes leveraged share repurchases or large debt-financed
acquisitions, which are likely to have negative rating implications for
most issuers. Given the recent crisis in the credit markets, most
companies in the sector have become more mindful of their investment
grade ratings and have publicly stated intentions to operate in a
balanced manner; therefore, leveraged share repurchases are not
contemplated. Fitch expects share repurchases to be funded with cash on
hand or free cash flow. Clorox, Kimberly, Hasbro, Mattel and P&G are
focused on maintaining their ratings and many have publicly stated
leverage, coverage or cash balance targets. For many, large acquisitions
may need to be quickly accretive or partially funded with equity to
maintain strong ratings. Some companies, such as Alberto and Colgate,
have significant financial flexibility and could absorb a modest
debt-financed acquisition with minimal rating implications if leverage
is reduced in a reasonable time frame.

Toys:

Much of the furor over lead-tainted toys has abated with settlements
announced for several toy producers, including Mattel. The settlements
and some level of closure on the Bratz-related lawsuits also remove a
measure of uncertainty for Mattel. Fitch expects low single-digit growth
for toys in 2010 given the more discretionary nature of the business and
a light entertainment slate. While there will be some pressure from
commodities, Chinese labor rates and freight, cost containment efforts
should help to offset these factors. Free cash flow for both Mattel and
Hasbro is expected to be up modestly over 2009.

Hasbro was upgraded in March 2009 and Mattel has a Positive Rating
Outlook. Mattel's rating could move up with stabilizing or improving
operating margins and generation of positive free cash flow.
Additionally, Fitch expects management to meet their public financial
goals for leverage and to maintain high year-end cash balances.

Following is a list of Fitch-rated issuers and their current Issuer
Default Ratings (IDRs) in the U.S. consumer sector.

Household Products and Personal Care:

--Alberto-Culver ('BBB+'; Outlook Stable);

--Avon Products, Inc ('A'; Outlook Negative);

--The Clorox Company ('BBB'; Outlook Positive);

--Colgate-Palmolive Co. ('AA-'; Outlook Stable);

--Kimberly-Clark Corp. ('A'; Outlook Stable);

--S.C. Johnson & Son, Inc. ('A-'; Outlook Stable).

Toys:

--Hasbro, Inc. ('BBB+'; Outlook Stable);

--Mattel, Inc. ('BBB'; Outlook Positive).

Appliances, Home and Hardware and Tools:

--The Black & Decker Corp. ('BBB'; Rating Watch Positive);

--Fortune Brands, Inc. ('BBB-'; Outlook Negative);

--Newell Rubbermaid Inc. ('BBB'; Outlook Negative);

--The Stanley Works ('A'; Rating Watch Negative)

--Whirlpool Corp. ('BBB-'; Outlook Negative)

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

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SOURCE: Fitch Ratings

Fitch Ratings, New York 
Thomas P. Razukas, CFA, +1-212-908-0223 
Cindy Stoller, +1-212-908-0526, 
cindy.stoller@fitchratings.com

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