Despite the household product category's relative stability and a slight
reduction of pressure from commodity costs, Fitch Ratings believes that,
several factors are likely to hamper revenue and profit growth across
the sector. The North American recovery has long been fragile and crisis
in the euro zone remains intense while the pace of economic contraction
is almost certainly accelerating.
We recently revised our forecast of global economic growth for 2012
downward to 2.2% from 2.3%. We expect Eurozone real GDP to fall 0.4%.
Unemployment rates in Japan, the euro zone and the U.K. are expected to
increase during 2012. In addition, tension within the euro zone has
resulted in the U.S dollar strengthening against the Euro and the Pound,
which will negatively affect U.S. based issuer revenues and earnings
generated within the region.
The Procter & Gamble Co. yesterday took down its organic growth rate
forecasts and expects net sales to be down 1%-2% with F/X a 4% drag this
quarter. Given the uncertainty in the marketplace, the company is
completely pulling back on its share repurchase program after spending
at least $5 billion per year since 2009. There is clearly a heightened
risk to revenues and profits for Fitch-rated names in the consumer
product and toy space.
The effect of European austerity measures, financial tension, and
strengthening dollar are likely to negatively affect the household
product sector with larger translation effects expected to be seen in 2Q
results. For the more recession-resistant companies such as
Colgate-Palmolive Co (Colgate), the effects of austerity measures that
began more than a year ago have been gradual. We believe a larger
negative impact from foreign exchange translation will add to Colgate's
revenue deceleration in the second quarter.
While it remains challenging to determine European revenues and
operating profits (some companies group other regions together or do not
disclose European results separately), we have determined through
discussions with issuers that revenues and/or profits derived from
European countries remain meaningful to most of the sector.
Fitch rated companies, Mattel, Inc. (Mattel), Hasbro, Inc. (Hasbro),
Avon Products, Inc. (Avon), Colgate, ACCO Brands, Inc. (ACCO) and
Kimberly-Clark Corp have publicly disclosed that they generated at least
15% of revenues from Europe in 2011. The toy companies Avon and ACCO
generate roughly 25% of their revenues from Europe. Operating profits
from Europe are likely to be meaningful for these names, although ACCO's
percentage will decline with their recent acquisition.
To be sure, all of the above mentioned companies are likely to
experience at least negative translation effects, but for most at least
partial hedging programs are in place to mute the negative transaction
effects of intercompany or planned cross border purchases of goods or
services on gross profits. More cyclical companies (i.e. ACCO and Newell
Rubbermaid, Inc.) are likely to experience more significant effects of
the European recession with higher volume declines versus noncyclical
companies. Still, we believe lower growth rates in key raw materials
such as oil-based derivatives and pulp could provide some relief. We
believe most issuers have significant financial flexibility to manage
capably through the near term. However, issuer ratings would be reviewed
if the crisis deepens, there is sharp global contraction, and
discretionary activities continue despite pressure on earnings and cash
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article, which may include
hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com.
All opinions expressed are those of Fitch Ratings.
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