OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) for ConAgra Foods, Inc. (ConAgra) and its subsidiary, Ralcorp Holdings, Inc. (Ralcorp) at 'BBB-' and has affirmed ConAgra's Short-term IDR at 'F3'. The Rating Outlook has been revised to Negative from Stable given slower than expected pace of operating earnings improvement and prolonged volume declines. As a result, Fitch expects that gross leverage (total debt to EBITDA) is likely to be in the mid 3x range for fiscal 2015 and the pace of deleveraging thereafter is uncertain.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Leverage Reduction Slower than Expected: The Negative Outlook reflects the company's slower than anticipated pace of leverage reduction following the primarily debt-financed \$6.8 billion acquisition of Ralcorp two years ago. Current leverage remains high for the rating level and slightly behind Fitch's prior expectations due primarily to weak operating performance, including volume declines in its branded and private label businesses. Total debt to EBITDA was 3.8x for the latest 12 months (LTM) ended Nov. 23, 2014, operating EBITDA to gross interest expense was 6.2x, and funds from operations (FFO) adjusted leverage was 5.3x. After the company completes its targeted \$2 billion debt reduction between fiscal 2013 through 2015, ConAgra plans to consider dividend increases, share repurchases and growth investments, in addition to some debt repayment. Leverage could remain in the mid- 3x level over the near term, instead of reaching the low 3x level, depending on the pace of any further deleveraging or earnings improvement.

ConAgra's ample free cash flow (cash flow from operations less capital expenditures and dividends) generation -- expected to average more than \$500 million annually over the forecast period -- and strong liquidity support the ratings. ConAgra has maintained its current dividend and kept share repurchases and acquisitions modest in order to focus on debt reduction. However the company intends to have a more balanced use of cash flow beginning in fiscal 2016. If ConAgra materially extends its debt reduction commitment beyond fiscal 2015 it could provide support to current ratings. The magnitude and sustainability of earnings improvement will also be considered. Near term expectations and timing are uncertain with new CEO Sean Connelly starting in April, prolonged weakness in the private brands business and tentative beginnings of recovery in Consumer Foods volumes.

Another Downward Earnings Revision Tempers Expectations: ConAgra's current ratings factor in a gradual and sustained improvement in operating performance. Fitch is looking for the company to achieve annual sequential improvement to flat volume this fiscal year in Consumer Foods, versus a three percent volume decline in fiscal 2014. This factors in volume improvement in core brands including Healthy Choice, Chef Boyardee and Orville Redenbacher, which struggled in fiscal 2014, along with expansion in faster growing channels. As discussed below, ongoing problems with private brands are expected to result in lower sales and profits in that segment in 2015. In the Commercial Foods segment ConAgra expects lower costs with a more normal potato crop, versus weather-reduced yields last year. The West Coast Labor dispute negatively impacted results for Lamb Weston, which exports potato products to international markets, but should only have a short term impact.

Synergies Achievable: ConAgra expects to generate Ralcorp-related annual pre-tax cost savings of \$300 million by the end of fiscal 2017, driven by supply chain and other efficiencies. The savings seem achievable based on other industry transactions. The company is making meaningful progress on Ralcorp related productivity and synergies in fiscal 2015 estimated at \$125 million to \$150 million, mostly driven by procurement. Nonetheless, profitability in this segment is expected to be below Fitch's and the company's original expectations over the next few years, as reflected by the \$605 million goodwill impairment taken in fiscal 2014. The company intends to evaluate another potential impairment in the fiscal third quarter of 2015.

Private-Label Weighs on Results, Improvement Pushed Out: ConAgra is one of the largest packaged food companies in North America, with \$16 billion annual net sales. In addition to a sizeable branded food presence, ConAgra could benefit over the long term from greater private-label scale, as \$4 billion in annual sales (approximately 25% of total revenue) makes it the largest private-label food producer in the U.S. However, profitability in the company's private brands business is weaker than expected due to a highly competitive bidding environment, combined with recent service-related issues and execution shortfalls, which have negatively impacted results and near term expectations for volume, pricing and margins. By improving execution and strengthening customer relationships the company plans for improved results beginning in fiscal 2016. However, Fitch believes the private brands business will continue to be highly competitive over the near-to intermediate term and the visibility on a turnaround remains low.

Ample Liquidity, Manageable Maturities: ConAgra maintains an undrawn \$1.5 billion revolving credit facility expiring Sept. 14, 2018 that provides backup to its commercial paper (CP) program. The company had \$536 million CP and \$122 million cash, which was mainly outside the U.S., at Nov. 23, 2014. The revolving credit facility contains covenants that consolidated debt must not exceed 70% of consolidated capital during the first four quarters commencing Jan. 29, 2014, then 65% thereafter, and the company's fixed charge coverage ratio must be greater than 1.75x on a rolling four quarter basis. ConAgra's long-term debt maturities primarily consist of \$1 billion due in fiscal 2016 and approximately \$550 million due in fiscal 2017.

KEY ASSUMPTIONS:

The following assumptions would support current ratings:
--Consumer Foods improvement to at least flat volume in fiscal 2015 and modest growth thereafter.
--Top line and operating improvement in private brands beginning fiscal 2016.
--FCF over forecast period averages more than \$500 million annually.
--Fiscal 2015 leverage in the mid-3x range but improving to the low 3.0x range over the next 12-18 months assuming further debt reduction.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include:
--If weak top line and operating trends continue without material offset from debt reduction, such that gross leverage (total debt-to-operating EBITDA) remains at or above the mid-3.0x range. Deteriorating FCF or a sizeable leveraged transaction would also support a downgrade.

Future developments that may, individually or collectively, lead to a positive rating action include:
--the Outlook could be revised to Stable if there is a sustained operational improvement in fiscal 2016 and beyond, including at least stable volume in Consumer Foods and improvement in private brands volume. In addition, further debt reduction beyond the targeted \$2 billion that demonstrates a financial strategy to maintain leverage in the low 3.0x range could also support stabilization of the Outlook.
--A positive rating action is not anticipated in the near to intermediate term due to the company's high acquisition related leverage and ongoing operational issues.
--In the long term, a positive rating action could be supported by substantial and growing FCF generation, consistent positive volume growth in all segments demonstrating that operational issues have been resolved, along with maintaining leverage in the mid-2x range.

Fitch affirms ConAgra's ratings as follows:

ConAgra Foods, Inc.

--Long-term Issuer Default Rating (IDR) at 'BBB-';
--Senior unsecured notes at 'BBB-';
--Bank credit facility at 'BBB-';
--Subordinated notes at 'BB+';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.

Ralcorp Holdings, Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is revised to Negative from Stable.