Moodys Packaged Goods 2005

Rating Methodology
January 2005
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Rating Methodology:
Global Packaged Goods Industry
Summary
This rating methodology provides detailed guidance on the analytical approach behind Moody’s assigning of credit
ratings to packaged goods companies globally. For the purposes of this rating methodology, we have defined packaged
goods issuers as companies producing packaged consumer goods, including both food and non-food products.
Moody’s publicly rates 80 packaged goods issuers globally (long term rating only), including 52 issuers in North
America, 10 in Europe and 18 in Asia. These issuers cover a wide range of ratings, from Aaa (Nestlé) to Caa3 (Tom’s
Foods). Half of all rated packaged goods issuers are speculative-grade (and dominated by single-B senior implied rat-
ings), with the remaining universe nearly equally split between single-A and Baa.
While these 80 packaged goods issuers cover a variety of sub-segments (from frozen foods to hair care), they do
exhibit similar business fundamentals and face many common credit considerations. There are five broad rating factors
which we use to examine credit risk and assign ratings in the global packaged goods industry. Each of these rating fac-
tors also encompasses a number of sub-factors and specific metrics, which we discuss in detail throughout this report.
The five rating factors are as follows:
1. Scale and diversification
2. Franchise strength and growth potential
3. Distribution environment and pricing flexibility with retailers
4. Cost efficiency and profitability
5. Financial strategy and financial metrics (both historical and projected)
Certain other generic factors (notably corporate governance, management strength and shareholder structure)
remain important inputs into our ratings for packaged goods issuers. However, these factors are not deemed specific to
the sector, but rather are applied across the corporate finance franchise. As a result, we have chosen not to cover these
issues in significant detail within this rating methodology.
In an effort to promote transparency, we have also provided a detailed rating grid which maps each key rating fac-
tor, including sub-factors and financial metrics, to specific letter-ratings. We would nonetheless caution that no com-
pany will match exactly each dimension of the analytical approach; the rating output of the grid will therefore be a
balance of all the factors that we have identified. The purpose of this rating grid is to provide investors, issuers and
intermediaries with a reference tool when comparing credit profiles within the packaged goods sector.
Industry Definition
The products that may be manufactured and distributed under the heading of packaged goods are numerous and
diverse. This methodology covers companies that manufacture packaged goods including food and non-food con-
sumer products that have non-cyclical characteristics.
• This assumes that consumption frequency is high, with consumers typically buying the product more than once
a year.
• Consumer budgets for these products tend to be stable without significant variations caused by fashion trends.
• Manufacturers of more cyclical products — i.e. durable or semi-durable products (e.g. appliances), or more
fashion-affected products (e.g. apparel) — are not included in the scope of this rating methodology.
• Since they are not expensive, essential food products will not be impacted by an economic cycle, whilst
other packaged goods may be somewhat more exposed to economic conditions. As a result, this methodol-
ogy incorporates some assessments of stability of business that should enable these differences to be fac-
tored into the rating.
• The final customer is an individual. For example, we do not cover here commodity or ingredients companies
that process raw materials to sell to other food manufacturers.
• This methodology excludes those industries, such as tobacco, that present specific risks and regulatory
characteristics. In such a case, the specific risks have to be weighted differently and thus require a specific
methodological approach. More generally, individual companies within industries that are covered by this
report may nonetheless face certain specific risks that may exceed the scope of this methodology and that
may result in the final rating varying from what would be suggested by this methodology. However, these
instances remain very few for the packaged goods industry.
Industry Characteristics
The packaged goods industry comprises a significant number of companies in different business lines. A number of
companies are pure food players active in one or a number of segments. Others specialise in consumer goods that may
have different characteristics in terms of price per unit, buy frequency or whether they satisfy a discretionary or an
absolute need. Overall, however, packaged goods issuers share a number of similar characteristics as follows:
• Predictable consumer demand and revenue growth rates, ranging from low levels (2% to 4%) in a number of
mature food segments or home care, to more rapid growth in a number of less mature food market seg-
ments, which benefit from new nutritional trends or a higher standard of living in developed markets. Cer-
tain non-food consumer segments such as personal care may also experience annual growth rates above 4%.
• Predictable and relatively stable profit margins. Profit margins are generally high in the industry compared to
other sectors. Improvements in margins are driven mostly by savings in the supply chain (procurement,
manufacturing and logistics) which benefit gross margins. However, a large portion of cost savings often
ends up being re-invested in additional advertising and marketing expenses.
• The industry is somewhat polarized with global players and more local specialists. For example, non-food compa-
nies tend to be more geographically diversified as a result of fewer differences in local habits. The food mar-
kets present a mixed picture: in a number of food segments, local brands and specific local nutritional habits
may provide opportunities for strong local players. Nevertheless, the globalisation of a number of food seg-
ments has increased in the last 10 years and a number of market segments such as ice-cream, pet food and
cereals are now relatively concentrated.
• Distribution is a key characteristic of the industry. Products are mostly distributed through large retailers,
although some non-food products may use department stores or specialised distribution channels (e.g. hair-
dressers for hair care).
• The packaged goods industry is not heavily capital-intensive. With the business focused on brands, marketing
spending tends to be more important than capital spending. A number of companies are in fact primarily
marketers of branded goods rather than processors. For example, in the confectionery market, a number of
players have outsourced the processing of industrial chocolate to specialists such as Barry Callebaut, which
bear the investment in processing plants and working capital investments required to produce chocolate for
other food manufacturers.
In summary, we assess the overall business risk in this industry as low to moderate, with a significant variance
depending on the breadth of the business profile, the intensity of competition in the sub-sector concerned and the
level of event risk.
2 Moody’s Rating Methodology

Overview of the Global Packaged Goods Rated Universe
Moody’s currently rates 80 companies in the packaged goods industry (long term rating only).
The global median rating for packaged goods issuers is currently Baa3. However, ratings for packaged goods issu-
ers are widely spread across the rating scale, often depending on the financial risk, as noted above. At present, half of all
packaged goods ratings are speculative-grade, with a high concentration in the B1 and B2 categories. The median rat-
ing for speculative-grade issuers in packaged goods is B1. Within the investment-grade universe, single-A ratings
clearly dominate, with a median rating for investment-grade packaged goods companies at A3.
Approximately 64% of ratings have a stable outlook; 20% either have a positive outlook or are on review for pos-
sible upgrade, while the remaining 16% either have a negative outlook or are on review for possible downgrade. These
rating outlooks do not currently correlate to any specific sub-segment or rating ranges, although we note currently
positive trends in Japan’s ratings and about half of all negative outlooks for issuers rated single-A or above, with the
remainder mostly in single-B.
Packaged Goods Global Public Ratings

# of issuers
14
12
10
0
Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3
Approximately 65.0% of issuers are based in North America (and essentially in the US), with the remainder split
between Europe and Asia.
Methodological Principles
Moody’s approach to the packaged goods industry, as outlined in this global rating methodology, incorporates the fol-
lowing steps:
IDENTIFYING KEY RATING FACTORS

Moody’s rating committees for packaged goods companies focus on a number of key rating factors, which we aim to
identify and quantify in this report to the extent possible. For each factor, three types of assessments can be made:
• Pure qualitative assessments.
• Qualitative assessments based on rankings estimated by Moody’s, or broad quantitative measures defined by
Moody’s (e.g. number of market segments).
• Pure quantitative assessments that can be measured by publicly available data (such as EBITA margin or
revenues).
We have identified the following five key rating factors which determine our ratings for global packaged goods issuers:
1. Scale and diversification
2. Franchise strength
3. Distribution environment and pricing flexibility with retail
4. Assessment of cost efficiency and profitability
5. Financial policy and credit metrics
Moody’s Rating Methodology 3

Each of the first four categories contains between one and three sub-factors. The fifth rating factor encompasses our
assessment of an issuer’s financial policy, as well as the five key credit metrics that we apply to packaged goods issuers.
In total, the rating methodology incorporates the 5 key rating factors, which encompass 11 sub-factors, plus the 5
key credit metrics. As a result, we have identified 16 distinct criteria that we consider in rating companies in the pack-
aged goods industry.
MAPPING TO THE RATING CATEGORIES

For each of these 16 sub-factors (including credit metrics), we have determined what we consider appropriate ranges
for broad rating categories, i.e. Aaa, Aa, A, Baa, Ba, B and Caa. These ranges represent in average what are our expec-
tations for each rating category.
Please refer to “Reconciling Rating Factors and the Rating Scale” later in this report for further detail.
ILLUSTRATING THE RATING METHODOLOGY

For the purposes of illustrating our global rating methodology, we have applied it to two representative credits that
span the three broad geographic regions — Europe, Japan and the United States. For each of the selected companies,
we show the 11 qualitative measurements that represent the five key qualitative rating factors and credit metrics, and
how the indicated rating for each measurement compares to the company’s actual rating.
Rating Factor #1: Scale and Diversification
WHY IT MATTERS
Scale and diversification are closely linked to each other (i.e. large scale tends to enable diversification), but have differ-
ent credit implications.
Scale is an important measure that provides insight into a number of rating factors described in this methodology.
In particular, it may affect other rating scores, such as cost efficiency or strength of position with retailers. Moderate
scale can be a limiting factor to the overall rating output. For example, a moderate size (e.g. US$5 billion in revenues,
which we map to a Baa rating category on this dimension, as described below) will mostly prevent the issuer in ques-
tion from reaching an overall Aa rating, because limited size will most likely restrict diversification, cost efficiency and
probably even the strength of franchise. Size allows companies to leverage costs of all kinds, including the all-impor-
tant advertising spend that promotes consumer awareness of brands and products. It also gives companies more clout
with suppliers and retailers, as well as likely making them less susceptible to any problems that may emerge in a specific
part of their business operations. For instance, Hershey’s rating is constrained by its moderate size and limited diversi-
fication despite the very strong financial metrics.
Diversification has three principal dimensions: products, brands and geography. These types of diversification enable
an issuer to offset potential variations in demand in a given product or market.
• Product diversification mitigates the impact of product obsolescence, changes in consumer habits, and the
weakening of an individual brand. In some cases, a company may have only one brand but be diversified by
geography and by product. However, different products do tend to be sold under different brands. For
example, a soap and a shampoo may be sold under the same brands through brand extensions, but Unilever
— for instance — will never sell its ice-cream and its homecare products under the same brand. A breadth
of products in a breadth of categories provides risk mitigation.
• Brand diversification mitigates the risk of a problem with one product becoming associated with a brand and
impacting a range of products under that brand name. In general, we believe that a focused portfolio of 10-
30 solid brands is likely to be a stronger positive credit factor than a portfolio of 1-2 brands, or a portfolio of
several hundred brands. We cover the topic of brand strength in detail in Rating Factor #2 below.
• Geographic diversification is a positive factor because it offsets: (i) the impact of a recession or adverse eco-
nomic shocks affecting some geographies, (ii) the impact of local changes in consumer habits, (iii) changes
in retailer relationships, which remain mostly regional, and (iv) the impact of regional regulatory, product
liability or safety issues.
For example, it is very clear that the exposure of Kamps (B2, on review for downgrade) to the German market,
which is affected by slow growth, price competition and growth of private labels, is a reason for the difficulties cur-
rently being experienced by the German bakery market leader.

We would consider the highest level of geographic diversification that a company can enjoy to be a worldwide
presence, including emerging markets, but without a major dependence on any one region. In this respect, the world-
wide operations developed by Nestlé, Unilever or Procter and Gamble over the last 10 years appear as a strong posi-
tive rating factor. Presence in emerging markets (where this avoids exposure to a single economy) is a positive because
these markets offer more growth potential than developed economies. However, dependence on a restricted number
of countries is not necessarily a particularly negative factor provided the economies in question have demonstrated a
degree of stability, in particular in product segments that are not cyclical.
The rating grid also takes into account the geographies in terms of their size. A company that depends solely on
the US market or solely on the Japanese market — such as in the case of Marudai Food and Meiji Dairies — will be
better placed than a company that has a presence solely in Brazil, because of the respective size and stability of the
regional markets.
HOW DO WE MEASURE IT?

a) We measure product diversification by the number of market segments. In order to make companies
comparable, we have defined among others typical market segments as follows:
– Frozen food, culinary, dressings, ice-cream, pet food, biscuits, cereals, dairy products, water,
confectionery, oral care, skin care, hair care, fragrances, laundry, home care.
Typically, the most diversified companies may be present in up to 10 market segments based on our
definition, whilst smaller companies may depend on only 1 or 2 segments.
However, in considering the number of segments in which a company operates, we only include a cate-
gory if it represents a material proportion of the company’s business. (e.g., in the case of a company that
operates in five segments, four of which each represent 24% of sales and the fifth accounts for 4% of sales,
we would only consider the first four because the fifth one is not material).
b) We have defined categories of geographic diversification, ranging from the worldwide diversification typical of
some multinational companies to the lowest category comprising very local producers.
Rating Grid Mapping

Rating Category Aaa Aa A Baa Ba B Caa
1 - SCALE AND a) Total Sales >$40 billion $20-40 billion $10-20 billion $4-10 billion $1,5-4 billion $500 million - <$500
DIVERSIFICATION $1,5 billion million
b) Geographic Worldwide; Worldwide; Worldwide Continental Pure Regional/niche Very local
Diversification perfectly moderate presence with player mostly continental player within a or regional;
diversified degree of focus degree of (Americas, player country/region Possibly
in some regions concentration Europe, Asia) (Americas, start-up
with some Europe, Asia)
added regions
c) Segmental >8 market 7-8 segments 5-6 segments 3-4 segments 2 segments 1 segment, Single
Diversification segments or 2 but with segment
focus on 1
Rating Factor #2: Franchise Strength and Growth Potential
WHY IT MATTERS
While scale and diversification are drivers of revenue stability and, indirectly, of cost efficiency, the second rating factor
is primarily related to expected growth. Overall, the packaged goods industry displays rather low top-line growth char-
acteristics. A company’s ability to score higher than its competitors on this factor is important as it not only is a sign of
the health of the product offer but also typically provides the company a stronger negotiating position with the distri-
bution channels. In addition, it drives a higher valuation multiple, which serves to reduce financial risk as management
is less incentivised to increase shareholders’ reward by either acquired revenue growth (through M&A) or increased
shareholder distribution. Growth also makes it easier for a company to make use of its supply chain, allows for cost sav-
ings by reducing average costs and increases cash-flow generation over time.
However, high growth may imply volatility in demand and therefore a very high growth rate may equate to risk. In
such a case, a company may not have the infrastructure to handle the planned growth and the projected higher demand
may not materialise. This rating factor also has profitability implications because the strength of the franchise
improves pricing power and hence the company’s future margin potential.

The major components of the franchise strength are the attractiveness of categories and the exposure to changes
in consumer demand, the product offering and the brand equity.
• We approach the attractiveness of categories relative to market potential, primarily in terms of growth poten-
tial and the scale of sustainable demand. Attractive categories with strong growth characteristics include
bottled water, pet care and personal care. In such markets, production capacities will be well employed, and
price pressures might thus be more moderate than in slow-growth markets. However, these categories are
likely to require a high level of Advertising and Promotion budgets.
• The quality of product offering determines the company’s ability to benefit from growth in the segment and
to maintain its market shares.
– If product quality is low, the company may lose market share versus its competitors. If the product range is
narrow, the company may not be able to attract and retain customers and may lose market share.
– Moody’s also assesses whether products are likely to be affected by obsolescence going forward or whether
the company appears to renew its product range and launch innovative products in order to monitor natural
obsolescence. Gillette, for example, has a business model that sets out to convert consumers from its current
shaving products to new, technologically superior, higher-margined products. In this regard, the proportion
of sales generated by products launched in the past three years is a useful indicator. Another example is
Reckitt Benckiser which has been able to outpace the market and its peers’ organic growth in the home care
market thanks to its focus on innovation, with an ongoing capacity to launch new products and support
them adequately through advertising and promotion.
– However, we have to recognise the difficulties in obtaining reliable and consistent information that is
comparable between companies. As a result, we have chosen not to reflect this by a quantitative
measure in our rating methodology.
• The strength of the brand portfolio is also a key factor in driving organic growth, sustaining solid market shares
and maintaining pricing power with retailers and consumers.
– A company may have very good products but no brand equity. In such a case, the company may
struggle to sell its products at a premium or to compete with better-branded companies. Consumers
often tend to buy brands they know well and will not easily switch to unknown brands, except if they
are price-sensitive and prefer to choose the cheaper product. In this case, the lack of a strong brand may
suggest a positioning as an attractively priced product or as a private label supplier. This may ensure
solid positions in a number of markets but will limit profitability.
– Brand equity generally results from a long track record in a given market, with a strong image attached
to the product and adequate advertising support. If companies want to cut advertising expenses, this
may result in immediate savings but is likely to affect organic growth. During 2004, Unilever
recognised that the support it provided to its leading brands needed to be increased because it was
losing market shares versus competitors such as Colgate-Palmolive, for instance, who have preferred to
face some immediate operating profit erosion due to higher spending in order to defend market shares.

In order to assess the franchise strength and growth potential, we use three principal criteria:
a) The first criterion is an estimate of market share position in the various segments. Strong positions — typically
a number one position with a dominant market share — will enable a company to benefit from high pricing
power and favourable cost and margin conditions.
However, Moody’s also takes market shares over time into account. A company having a leading posi-
tion but losing market shares in favour of competitors might not be considered as strongly positioned. We
are also aware that a number of companies claim leading market positions because they measure their posi-
tion on a somewhat narrowly defined market that exactly covers the businesses in which they are present.
We recognise that small companies may have strong positions on a niche market. However, we would not
necessarily recognise this as a leading market share because we have to consider the market as actually being
wider or more global.
As a matter of principle, we generally consider that, in applying our rating grid, the market share has to be
measured in a market segment and not a too narrow category. In general we observe that a company can hardly
get an assessment of its market share in a category that is more than one range above its size. For instance, a
US$1.5 billion company (range Ba) will in general not be assessed higher than category Baa in terms of its market
share. In addition, market share should be also balanced by the concentration of the segment. In other words, a
number one position with a 10% market share where the number two player has a 9.5% share would be consid-

ered as a number two or three position. But, a number two player with 40% of the market where the number one
player has a 42% share could be regarded as having a number one position.
b) The second measure is an assessment of the growth characteristics estimated for organic growth and based on
absolute percentage and by comparison with peers in the same segments. We look at (i) the absolute organic
growth rate, because this is a driver of cash-flow growth and (ii) the comparison versus peers, because this is
an indicator of efficiency and of the strength of the business and portfolio and also the company’s ability to
gain market shares.
c) The third criterion is a pure qualitative assessment of the company’s franchise and the market segment. In
assessing the issuer’s product and brand portfolio, we examine the following compared to peers:
– Innovation capacity
– Product ranges
– Strength of brands
– Quality of support to brands
– Management of brand portfolio
– Attractiveness of categories
– Stability and predictability of demand. The exposure to a degree of cyclicality may also be reflected
in this factor. For instance, Estee Lauder is sensitive to consumers’ disposable income, which may
lead to pressure on the company’s operating income.
Some of these characteristics can be quantitatively measured. Moody’s assesses new products intro-
duced in the last three or five years, advertising spending as a percentage of sales, and sales and earnings vol-
atility. However, given that we have no access to consistent and comprehensive data across the sector, it is
difficult to use such measures for our rating grid. Instead, we base our assessment more on in-depth discus-
sions with the company.
Rating Grid Mapping

2 - FRANCHISE a) Market generally #1 in #1-#2 in key at least #2 often #2 Competes Competes against Small market
STRENGTH Share key markets, in markets; at average sometimes #1 against larger larger players in shares in broad
AND broad categories least market share; but with players, often a broad categories, categories or
GROWTH Top 2 industry maintaining with several some weaker #2 or #3 or #1 generally not a #1 not #1 in
POTENTIAL player worlwide share #1 positions positions in narrow or #2 or leader in narrow
categories narrow categories categories
b) Organic >6%, consistently >5%, above >4%, slightly >3%, in line <3%,In line Uncertain growth <2%, declining
Revenue above peers peers above peers with peers with or below prospects, below growth
Growth peers average peers prospects
c) Qualitative Leading, very-well Very well- Well-known Some well- Limited Commodity-like Few brands,
Assessment of known and very known brands known number of brands, niche not well-
Portfolio innovative brands brands in mostly; brands, well-known categories, recognised,
in attractive attractive innovation moderately brands, less cyclical segments categories not
categories categories, capacity attractive attractive attractive or
strong Some weaker categories; categories; cyclical,
innovation brands moderate vulnerable to commodity like
innovation private labels
may be or to
vulnerable to cycles or
private labels consumtion
trends
Rating Factor #3: Distribution and Pricing Flexibility with Retailers
WHY IT MATTERS
With a few exceptions, packaged goods companies do not own their own distribution channels, but rather rely on
retailers to bring their products to the final consumers. Their ability to keep most of the value they produce, rather
than having to give it back to the distributor, is a key element of their profitability and ultimate success.

This rating factor therefore aims to identify a company’s market power, in particular with retailers, and its ability to
pass on price increases to customers. Note that this rating factor consists of just one sub-factor despite its importance
in assessing the pricing flexibility of the manufacturer and hence the final rating outcome. As noted above, some of the
drivers of retailer exposure are partly captured in other factors such as scale, market share/market position, strength of

brand portfolio, and geographic diversification. Large multinationals with a worldwide business, strong brands and
leading market shares have the capacity to negotiate with the large retailers; even if their share of sales with one retailer
is high, they are in a position to develop a balanced relationship with them in a “win-win” strategy.
As a general comment, we observe that the relationship between manufacturers and retailers is complex and multi-fac-
eted, with some material regional differences. For instance, negotiations may include not only selling price, but also terms
of payment as well as delivery points for the products (i.e. implying transportation costs) and conditions (e.g. delivery logis-
tics). It may also encompass sharing of costs (such as Advertising, Marketing and Promotion) or special payments for shelf
placements, which in turn may depend on annual contracts based on some volume commitments. Hence, gross margins
alone may not always be a sufficient gauge of this relative balance of power because it may vary a lot by market segment.
We also measure the extent to which it may be difficult to pass price increases on to retailers when a market seg-
ment is exposed to price increases in raw materials such as milk, grains, cocoa or coffee.
Moody’s examines the retailer structure in the countries of business activity. Where discounters play a key role in a
country such as in Germany, we also determine whether the producer has sufficiently strong brands to mitigate the risk
of discount channels, or whether it is directly affected by market share gains by discounters. Growth of private labels
may also represent a threat for branded products if the brands are not sufficiently strong.
We should note that the judgment on retailers / producer balance of power cannot always be limited to the analysis of
the number of players in the retail market. For instance, Procter & Gamble may find it attractive to generate around 17%
of its sales through WalMart globally (and even more in the US) and benefit from the strength of the retailer. Procter &
Gamble needs WalMart in the same way as WalMart needs Procter & Gamble products in its stores. However, in the
case of small companies, a concentration of sales on just 1 or 2 retailers may be a negative factor.
Rating Grid Mapping

3 - DISTRIBUTION a) Retailer No Limited Moderate Degree of Concentrated Very high One single
ENVIRONMENT Exposure concentration, concentration, concentration; concentration; retailers with retailer retailer
AND PRICING or concentration or concentration Sustainable retailer has high bargaining concentration represents
FLEXIBILITY WITH evidences very evidences relationship higher power with high more than
RETAILERS efficient partnership bargaining bargaining 50% of sales
partnership power power
Rating Factor #4: Assessing Cost Efficiency and Profitability
WHY IT MATTERS
Because the industry is generally characterised by stable demand and well-established competitive dynamics, a packaged
goods company’s revenue growth and profitability are in large part dictated by its specific market, its brand portfolio, and its
retailer relationships. As a result, there tends to be limited scope for significant margin increases over time.
In this context, a key differentiating factor among competing packaged goods companies is their ability to main-
tain efficient operations (both in manufacturing and in the supply chain), generate constant returns on their asset base,
and cut costs when required.
This rating factor therefore aims to gauge the level of control that a given issuer will have over its profit margins, and to
isolate the historical and projected means which management has at its disposal to preserve competitive profit margins.

Examining cost efficiency requires a combination of qualitative and quantitative assessments. Moreover, we examine
the company’s current cost efficiency, as well as the scope for future cost reductions.
a) Our qualitative assessment focuses mainly on: (i) the company’s manufacturing capabilities, (ii) the efficiency
of internal systems, and (iii) the quality of the issuer’s supply chain and relations with suppliers, including
the company’s outsourcing policy.
– Manufacturing efficiency can take a number of forms, including access to lower-cost production
facilities or locations, appropriately centralised regional processing plants (for example, one plant
by product and by continent), timely reinvestment in up-to-date equipment, and tight capacity
management. As part of our assessment, we examine historical trends for a given company, as well
as policies and procedures in place to ensure appropriate cost controls. We also examine these
points in comparison to peer companies.

– The more integrated internal systems are across the entire organisation, the more efficient they are
likely to be. In particular, managing the relationship between manufacturing, inventories, distribution
and customers requires appropriate IT and reporting structures throughout the entire company.
While there is no single measure for these factors, they will have a significant impact on working
capital management and the ultimate availability of products to retailers and end-customers.
– Relationships with suppliers are examined along the same basic principles as relationships with
retailers (Rating Factor #3 above). We pay particular attention to supplier concentration and
bargaining power, the likely volatility of raw material prices, and who bears these costs (i.e. whether
the company has a track record of passing raw material price changes on to customers). We also
examine the company’s relative importance to suppliers, and the extent to which the company has
been able to negotiate favourable supply terms (e.g. discounts, payment flexibility) when required.
– More generally, we assess the efficiency of the company by looking at days-inventory-on-hand and
the cash conversion cycle.
Embarking on a cost-saving programme is one of the more evident means of enhancing margins, but
can be difficult to achieve on time and on budget. For packaged goods issuers, the most likely sources of
cost reductions are: (i) headcount reductions, and (ii) restructuring of manufacturing capabilities (e.g. shift-
ing towards lower-cost plants or consolidating certain facilities), and (iii) savings in procurement.
We assess the likelihood that proposed cost reductions will yield the anticipated profit improvements in
line with the criteria above. Key points include:
– A successful track record of past cost reductions, including the ability to reduce costs without
eroding growth prospects or brand quality.
– Cash costs tied to the restructuring (e.g. large severance payments), and the extent to which such
restructuring costs become recurring over time.
b) EBITA margins are one of the two main quantitative measures we use in examining cost efficiencies. We
examine EBITA margins both on a trend basis for a single issuer and among comparable issuers. However,
any examination of EBITA margin must incorporate the following:
– Currency differences which may impact reported EBITA performance, either for a single issuer
(with operations in different regions) or when comparing across issuers.
– Differences in business mix, which may cloud immediate comparability between issuers (e.g.
margins on bottled water are much lower than those of cosmetics). In this instance, we would also
compare EBITA performance across comparable business lines.
– Accounting differences, which may again distort comparability. For example, revenue recognition
might differ for certain segments between US GAAP and some European accounting standards.
One key adjustment is for customer rebates, which can be reflected either in the net sales figures or
as an operating expense. While the resulting EBITA figure is the same in either case, the margin
calculation will change depending on where the rebate is allocated above the EBITA line; as a
result, EBITA margins may appear lower for European companies than for US companies. Figures
in our appendix present non-restated margins. However, in its credit assessment, Moody’s strives
to restate margins based on public or non-public information on rebates when available, or makes
estimations of such adjustments.
c) ROAA (return on average assets) is our second main quantitative measure. ROAA utilises EBITA as a starting
point for the calculation, but measures the company’s ability to generate a consistent level of profits from its
asset base. ROAA therefore gives us valuable insight into management’s execution ability, by measuring
their capacity to continue investing in the right assets to derive value from the business.
Importantly, we believe that a company’s ROAA underperformance compared to peers may motivate
shareholders to seek to enhance their returns through opportunistic investments and/or higher debt levels
and may presage asset write-downs or business restructurings. These issues are discussed in further detail in
Rating Factor #5 below.
Our ROAA assessment is also subject to the caveats of EBITA margin assessment noted above, in par-
ticular regarding the book value of assets.

Rating Grid Mapping
4 - COST a) Qualitative Highly Very efficient Efficient Some Reasonably Not very Inadequate
EFFICIENCY AND Assessment efficient operations, operations, efficiency cost efficient; efficient cost
PROFITABILITY operations, systems and systems and improvements Scope for cost operations structure
systems and supply chain supply chain possible in pressure
supply chain operations
b) EBITA margins >20% 16-20% 13-16% 10-13% 7-10% 3-7% <3%
c) Return on >25% 20-25% 15-20% 12-15% 10-12% 7-10% <7%
Average Assets
Rating Factor #5: Financial Strategy and Metrics
WHY IT MATTERS
Financial policy and financial metrics are often the most heavily weighted factor when assessing packaged goods companies.
When assessing credit risk, financial strategy must be examined in the context of current and targeted financial
metrics. Despite limited prospects for significant organic increases in revenues and cash flows, this industry exhibits
very high stability of revenues and predictability of cash-flows. As a result, the fundamental business risk profile of
packaged goods issuers tends to be more favourable than many other rated sectors. Excluding event risk, credit metrics
for investment-grade issuers are therefore unlikely to change very rapidly.
In this context, experience evidences that issuers may choose to apply their free cash flows to seek additional
growth opportunities or to return capital to shareholders. Either scenario may have a material impact on the stability
of credit metrics, and may very well impact the ratings.
We believe that risk-taking is an important part of sound long-term management, but creditors and shareholders will
have different views on what is an appropriate level of risk. Our assessment aims to identify the extent to which financial
policies are likely to favour one investor class over another, and the resulting impact on the issuer’s credit quality.
For an additional discussion of these factors in a speculative-grade context, please refer to “Specific Speculative-Grade Consid-
erations” later in this report.

a) Financial Policy:
Examining the event risk history of an issuer is the first step in our assessment. We tend to focus primarily on
two main types of events:
– Substantial distributions to shareholders, including large dividend payments or share buybacks,
funded through either internal cash flows or debt. If the funding of such distributions is entirely
through free cash flows, we tend not to equate these distributions with a weakening of the financial
profile. However, an acceleration in share buy-back activity or distributions in excess of free cash
flows may signal a change in financial policy.
– A track record of acquisitions made at reasonable multiples and funded with a balance of debt and
equity is most supportive of a company’s rating. Debt-funded acquisitions, if purchased at a
reasonable price, well-executed and integrated, can provide higher future returns through
enhanced growth prospects, scale synergies, and improved efficiencies or bargaining power in
dealing with suppliers and retailers. However, the addition of debt up-front to fund the acquisition,
which increases leverage and weakens coverage, increases the negative impact of challenges in
integration and shortcomings in due diligence (the seller may load the trade to get a better sales
price, and leave the buyer with an underperforming business). Such acquisitions may also signal a
shift in financial policy (as when Cadbury-Schweppes acquired Adams).
Shareholder distributions are likely to remain in line with historical practices, unless there is a material
shift in financial policy. Acquisitions, on the other hand, are likely to be more opportunistic, unless a funda-
mental weakness in the core business requires further diversification and larger scale in order to counter
competitive and retailer pressures.
We also assess the current and expected future financial policy based on our analysis of the management strat-
egy and appetite for risk as well as to which extent the shareholders pressures may influence the financial policy.

Leveraged buy-outs (“LBOs”) are an extreme example of a change in financial policy, where an estab-
lished financial strategy is re-oriented towards rapidly enhancing shareholder values through high debt-lever-
age. We discuss these implications in more detail in “Specific Speculative-Grade Considerations” below.
In balancing the interests of shareholders against those of creditors, management’s stated commitment to a
given rating range and track-record of maintaining a financial profile appropriate to the rating range also provide
us with comfort that financial policies will fall within certain pre-set parameters (e.g. maintaining financial metrics).
Our assessment of management priorities also incorporates a review of financial incentives afforded to senior man-
agement, and specific associated targets (e.g. stock performance, EPS growth, profitability, de-leveraging).
A lack of transparency on financial policy may well prompt us to take a cautious stance when assessing
this specific rating factor.
A major differentiator between investment grade and high-yield issuers is the debt structure. An investment
grade issuer is usually expected not to have secured debt except for some specific asset finance transactions.
b) Financial Metrics:
Financial metrics are key in determining credit risk. LBOs are a case in point. For a variety of other factors,
a typical LBO candidate may be a well-positioned issuer, probably with many investment-grade characteris-
tics, including a solid track record of cash flow generation, a well-established and attractive brand, and a
proven ability to fend off competition. However, the high debt levels in the capital structure will cause the
ratings to fall within the speculative-grade arena.
Moody’s packaged goods methodology primarily uses five credit metrics for our rating assessment.
Although other credit metrics may also be used in the rating analysis, we consider the following metrics as
adequately reflecting the key factors that determine ratings.
– Adjusted Free Funds from Operations (Adj. FFO) / Net adjusted debt: This ratio is not
impacted by working capital movements. It is, however, impacted by exceptional items, so we may
examine “normalised” ratios in our analysis. The higher this measure, the more indicative it is of
the cash generation ability of the business, regardless of management choices to share it between
bondholders and shareholders.
– Adjusted debt / EBITDAR is basically an alternative to the previous ratio but reflects operating
cash-flow available for debt service before interest. This ratio remains a key ratio utilised by
speculative-grade investors, but has limitations for credit analysis because it does not reflect capital
spending or working capital requirements. [The EBITDA measure does not take into account
exceptional items below EBITDA line which will impact each year’s cash-flow.1]
– Adjusted Retained Cash-Flow (Adj. RCF) / Net adjusted debt measures cash flow generation
after dividends, which in this industry may not be truly discretionary as a result of the need for
shareholder returns from low-growth but stable and well-established businesses. We believe that
looking at cash-flow both before and after dividends is a balanced way of reflecting the partially
discretionary character of dividends.
– Total coverage is a measure which has a major advantage: its takes seasonality into account. This
is particularly important in the case of those companies that tend to reduce debt solely at the year-
end for balance sheet presentation purposes, or that end their financial reporting year when debt is
at its annual low point. The major drawback of this measure is that the impact of interest rates may
vary according to the date of debt issuance or the fixed / floating interest mix.
– Adjusted Free Cash-Flow (Adj. FCF) / Total adjusted debt reflects cash flows available after
capital expenditures (which we view as largely non-discretionary in this industry) and is focussed on
the assessment of rapid debt repayment capacity. Paradoxically, issuers in the leveraged arena may
have relatively high free cash flow metrics compared to their investment grade counterparts as they
have weaker franchises with high debt loads and less ability to withstand business challenges. These
companies therefore typically do not pay ongoing dividends, but return capital to shareholders by
selling the enterprise or paying large, discrete debt-funded distributions after de-leveraging.
An additional ratio should be mentioned, although it is not included in the rating grid:
– Debt / Capital is a ratio that is more specifically used in Japan. As a consequence, when using the
grid for Japanese companies, some rating differences between the grid and the actual rating may be
related to this ratio, which is not included in the grid. While Moody’s looks at the other ratios as
well, this ratio is key in the assessment of Japanese companies.
1. Moody’s Special comment: Putting EBITDA in perspective, 31 May 2000.

Rating Grid Mapping
5 - FINANCIAL Financial strategy Very Stable and Predictable fin. Financial policy Strategy History of Unmanageable
STRATEGY, conservative conservative policy, balance favour prioritises debt-funded debt burden,
TARGET AND policy. Stable policy. between shareholder shareholder returns to re-structuring
HISTORICAL metrics, no Commitment shareholder and returns, Possible value and shareholders likely
METRICS "one-off" to Aa rating creditor, no big track-record of acquisitions and paying
movements. range. Track- shifts in metrics, rating migration out financial
Public record of possible event risk following cushion
commitment to stable through debt- acquisitions.
Aaa rating metrics financed Commitment to
acquisitions. investment
Strong grade
commitment to
investment grade
a) Adjusted FFO / >65% 40-65% 30-40% 20-30% 15-20% 10-15% <10%
Net Adjusted Debt
b) Adjusted Debt / <1.2x 1.2-2.0x 2.0-2.7x 2.7-3.5x 3.5-4.5x 4.5-6.5x >6.5x
EBITDAR
c) Adjusted RCF / >45% 30-45% 22-30% 16-22% 12-16% 8-12% <8%
Net Adjusted Debt
d) Total Coverage >16x 11-16x 8-11x 4,5-8x 2.5-4,5x 1.5-2.5x <1.5x
e) Adjusted FCF/ >25% 18-25% 14-18% 12-14% 9-12% 4-9% <4%
Total Adjusted debt
In our rating assessment, we look at both historical ratios and projected ratios. Since the rating often reflects ratio
expectations, the rating grid should be used as much with last available financials as with projected financials. However,
in practice, we would incorporate expected improvement in credit metrics for a two-year time frame in line with our
general practice. In other words, we do not typically base our ratings on credit metrics for a longer horizon given that
business conditions or financial strategy, particularly in response to shareholder pressures, may materially reduce visi-
bility beyond this horizon. In our rating assessment the weighting between management target ratios and actual finan-
cials will depend on the confidence in the management’s capacity or willingness to deliver the expected target ratios.
A number of these ratios are presented on a net debt basis (i.e. gross debt minus cash and equivalents), and others
on a gross debt basis. In fact, Moody’s takes both into consideration:
• Cash balances are partly working cash which needs to remain in the business. In the US in particular, cash
balances are modest and are generally only working cash. In this case, it may make sense to consider only
gross debt.
• In Europe, a number of companies prefer to centralise cash balances on the books of the holding company,
while maintaining debt at the subsidiary level. We also generally observe a higher willingness of European
companies to maintain higher cash balances, which may sometimes be linked to tax considerations, or more
broadly the consequence of a higher level of caution on the availability of funding in the bank or bond mar-
kets. Considering only gross debt may not reflect the real financial strength of these companies and
Moody’s may prefer in this case to focus on net debt. However, in this case we capture the expectation that
these cash balances can be liquidated at least at book value and without tax costs.
• Even if the some of the five ratios above show gross debt, we may consider the equivalent net debt ratio for
companies with significant cash balances (such as Nestlé).
It should be noted that the ranges indicated for each rating category have been defined for the purpose of the grid,
and generally we would expect companies to fall within the ranges indicated. However, they are not normative. This
means that companies with a given overall rating may have a weaker score on some debt metrics than the prescribed
range, but that the other factors — both financial and business — may compensate for this weakness.
Furthermore, relevant model target ratios and actual ratios for a given rating category may sometimes vary, in par-
ticular in the Baa and Ba categories. For example, we have observed empirically that some ratios in particular the free
cash-flow to debt ratio can be comparable for Ba and Baa ratings or even slightly better for Ba. As noted above, this is
first because speculative-grade issuers are often smaller, more fragile companies in less attractive categories which
experience greater cash flow volatility and carry significantly higher debt. As a consequence, lenders generally afford
them less flexibility for paying dividends or investing in additional capital expenditures, thus leaving them with more
free cash-flow. The grid smoothes out these discrepancies and aims to avoid overlaps in the ratio ranges. As a result, we
may find that adjusted FCF/ adjusted debt for Ba-rated issuers may be higher than suggested in the grid in certain
cases and lower for investment grades. Nevertheless taking into account that the FCF may be a primary focus for high
yield and RCF for investment grade, the ranges for the adjusted FCF / adjusted debt are positioned primarily based on
expectations for high yield and the RCF primarily based on expectations for investment grade. As a consequence for a

given rating range the difference between FCF and RCF ratios will appear as smaller than usually observed. For
instance for a Baa company, adjusted RCF /net adjusted debt is expected to be in the 16-22% (it is often acceptable to
have this ratio at 14-15% for issuers with solid qualitative factors) but the adjusted FCF / adjusted debt will be typically
below 10% for Baa while the grid indicates 12-14%. This apparent contradiction is a constraint for avoiding overlap-
ping of ranges and to accommodate the above mentioned use of FCF and RCF ratios.
On the contrary, coverage ratios are much weaker in the Ba range than in the Baa range due to a higher cost of
debt and a higher level of absolute leverage.
METRICS ARE EVOLVING

Moody’s notes that the exact metrics it uses to assist in credit analysis and form rating opinions evolve over time. This
can be due to several reasons. For example, it could be due to changing business practices and behaviours at issuers,
where, over time, different ratios become more informative than others in helping to measure certain elements of
profitability, financial flexibility, or leverage. Such changes may also become necessary due to changes in accounting
practices in various geographic regions.
Changes in metrics and ratios will also surely come about as Moody’s ratings methodologies and procedures
evolve. For example, the publication of this rating methodology for consumer goods and the dissemination of specific
ratio ranges consistent with certain rating categories is another step in the continuous evolution of Moody’s ratings
theory and practices.
With this in mind, we would expect that, over time, the exact ratios and metrics used to perform credit analysis
will change. Some changes to metrics outlined in this methodology, as well as the permissible ranges appropriate to
rating categories, will likely come about for some issuers in the packaged consumer goods industry over the near-to-
intermediate term. We expect, however, that while some changes will occur, we fully expect that any revised ratios or
metrics — as well as ratio ranges by rating category — will be consistent in theory and practice with those outlined in
this methodology, Moody’s will also make every effort to ensure that any changes to ratio definitions or ratio ranges are
clearly disseminated in a timely manner.
Other Risk Factors

The rating assessment also typically factors in other risks that cannot be readily captured in the grid because they are
too specific to certain companies, e.g. food scares or potential product liabilities. Other factors reflected in Moody’s
ratings include:
• Quality of management
• Corporate governance
• Liquidity
These rating considerations are common to all corporate finance issuers and are therefore not specifically cap-
tured in our packaged goods rating methodology. For example, we would expect any investment grade company to
have at least an adequate liquidity. However, the analysis of these factors remains an integral part of our rating process
and is described in a number of separate reports published by Moody’s.
Moody’s publishes a separate liquidity rating for many speculative grade issuers (SGL rating). Ba issuers tend to
have higher SGL ratings than lower rated issuers, and changes in the SGL rating sometimes are indicative of develop-
ing longer term credit trends. A weakening SGL rating, for example, can be an early sign of pressure on the long term
rating.
The impact on the rating of such risks and factors is typically reflected in the form of an uplift or notching-down.
These may typically represent a notch but can occasionally reach multi-notch differences when these issues are
deemed critical.

Specific Speculative-Grade Considerations
GENERAL COMMENTS
Speculative-grade issuers typically share a number of common characteristics that merit separate commentary. Because
speculative-grade ratings reflect a much higher degree of operating and financial risk, these risk elements tend to have
a very strong bearing on the ultimate rating outcome.
As a result, while certain of such companies’ business fundamentals may be commensurate with higher rating cat-
egories, their final rating may be in one of the lower categories thanks to the significant impact of their capital struc-
ture or financial strategy. Alternatively, a company may have very strong credit measurements but significant business
risks, which restrain the company’s rating.
We have strived to capture all of these considerations in our rating grid. However, when examining speculative-
grade packaged goods companies, certain considerations specific to speculative grade may shade our assessment of
individual rating factors. This is particularly true when looking at financial policy, cost efficiency and credit metrics.
A large proportion of speculative-grade packaged goods issuers are leveraged buy-outs with financial sponsors. By
and large, LBOs are characterised by well-established stable businesses from which significant growth in cash flow is
required (often driven by cost savings) to service high debt levels. The high debt levels are used to improve returns for
financial sponsors on businesses with low growth but reliable cash flow generation. As a result, we could characterise a
typical LBO as follows:
• Generally small scale and narrow business focus compared to the rest of the packaged goods universe; mostly
in line with a Ba or B mapping for Rating Factor #1.
• Established market share in a specific segment or region. We must caution here that, while market shares may
appear high, the product categories could be in niche or less attractive segments, or may face specialised
business lines of certain much larger and better-capitalised competitors. Moreover, there may be more lim-
ited financial flexibility to spend on new product development or marketing support for the brand, there-
fore mitigating the strength of the franchise. A weaker brand may also mean that it could be more easily
substituted by the retailer.
• A need for cost improvements in order to preserve margins. Internal systems may be of below-average quality.
• Private label expansion can be an opportunity to grow top-line, but may negatively affect operating margins
through product mix changes.
• Limited negotiating power with retailers restrains pricing flexibility. Moreover, marketing and logistics support
demanded by large retailers may disproportionately impact a smaller company.
• Key managers may be recent hires, or may not be accustomed to working under highly leveraged conditions.
Meeting cash flow targets may require a cultural shift throughout the entire organisation for a new LBO.
• As a result, target financial metrics are subject to significant execution risk.
• Current financial metrics are likely to be weak, with a likely but largely unproven path to future improvements.
• Financial policies are likely to be aggressive, driven by financial sponsors. Debt-funded acquisitions are defi-
nitely possible, and shareholders may well seek to get paid out before creditors. Debt-funded dividends or
significant re-leveraging (i.e. recap) over time cannot be ruled out.
• Debt is generally structured with different classes, the most senior being secured on all available assets.
• Liquidity is likely to be highly contingent on the company’s ability to remain within its debt facility covenants. These
companies may also exhibit other characteristics, such as limited access to the public capital markets, and
little or no residual unencumbered asset value available to secure new financing if required.
Accordingly, LBOs in the packaged goods sector tend to be rated mostly in the low “Ba” or high “single B” cate-
gories on a senior implied basis.
However, LBOs are just an illustration of a specific set of characteristics that are likely to yield a speculative-grade
rating. A packaged goods issuer may be rated speculative-grade for any number of reasons, depending on the interplay
between the different factors in the rating grid. For example, even with favourable metrics, a recently established
player with unproven brands and a need to improve returns through acquisitions and cost-cutting will exhibit many
speculative-grade characteristics, and will likely be rated below Baa3, as will a company with a very concentrated busi-
ness in an unattractive product category or market.

DO WE LOOK AT FINANCIAL METRICS DIFFERENTLY IN SPECULATIVE GRADE?
We use the same credit metrics across the entire rating scale. However, we place additional emphasis on certain met-
rics or changes in metrics:
• The expected ability to de-leverage the business is key. As a result, we would look at existing credit metrics, and
take a stance on where the metrics are likely to be over the medium term, and how likely the issuer is to
achieve these metrics. If we are very comfortable that the fundamental operations of an issuer will allow a
material improvement in metrics over the next 12 to 18 months, this will be factored into our assessment of
the financial metrics in the rating grid.
• A prospective view on metrics can also be more critical in speculative grade, because historical financial statements
may be unrepresentative of current and expected financial performance due to high growth and a series of
acquisitions. We focus on pro forma financials as a starting point for projections. Pro forma is critical for us
because it is based on the most recent, actual performance. Projections incorporate considerably more
assumptions. By starting with pro forma, we can identify positive gaps in assumptions.
• Cash-flow variations are much more critical for speculative-grade issuers than for their investment-grade counter-
parts. As a result, we may choose to focus more on free cash flows than for investment-grade issuers.
• As a company’s rating approaches investment grade, we assign a higher weighting to qualitative factors, par-
ticularly the quality of its franchise and its overall risk appetite. Companies that lack scale and/or diversifica-
tion have a weak market position or operate in unattractive categories may never reach investment grade,
however strong their credit metrics may be at any point in time. If a company’s franchise is moderately weak
in one of these respects or if a management team has historically displayed a high tolerance for risk through
acquisition activity or financial policy, we may expect stronger credit metrics for an upgrade into investment
grade than might otherwise be the case. As a result, some Ba-rated companies have stronger credit metrics
than Baa-rated companies with a more robust franchise and a lower risk appetite.
Regional Differences
UNITED STATES
The universe of rated US packaged consumer products companies covers a broad variety of companies. These include
large, extremely diverse and highly profitable companies with strong brand portfolios in attractive categories, highly
efficient operations, strong cash flow and moderate leverage. However, we also rate many smaller, more volatile com-
panies with weaker product portfolios in less attractive categories and with very high leverage. In addition, there are a
number of companies that fall in between these two profiles. Moody’s rating methodology is therefore applied in a suf-
ficiently flexible manner to take account of the differing credit characteristics of the companies at the two ends of this
spectrum, as well as those that fall somewhere in between.
Additionally, our analysis of US companies takes into account the fact that US corporate bond issuers have a
higher historical default rate than many other developed markets. In part, the higher default rate reflects relentless
shareholder pressure for high returns in the short term that often requires management to have a greater risk toler-
ance. Management compensation also may be a factor driving risk appetite. The financial policy of US companies, for
example, tends to be more aggressive than that of companies domiciled in Europe or Japan.
Investment-grade packaged consumer products companies tend to pay large dividends, deploy share repurchases
(which may exceed free cash flow) to return funds to shareholders, rely significantly on highly confidence-sensitive
funding in the form of commercial paper, and tolerate higher leverage levels than their counterparts in some other
countries. On the high-yield side, significant capital in the hands of financial sponsors in recent years has resulted in
some highly levered companies that are subject to serial leveraged recapitalisations as owners seek to monetise their
returns through dividends or sale of the company (often to another sponsor).
Both investment-grade and high-yield companies have been active acquirers as they pursue ambitious sales and
earnings growth targets that exceed the low organic growth generated by packaged consumer products businesses in
developed markets. Their acquisition appetite has resulted in higher leverage, but also higher execution risk, as man-
agement teams are stretched to integrate the acquired business and to quickly reap returns that justify the often rich
acquisition multiple paid. While the setting of stretch objectives in all areas of a company’s operations has resulted in
significant efficiencies, it has also increased execution risk and has not always resulted in a clear improvement in mar-
gins or returns on capital.
The higher default rate in the US also reflects the size and liquidity of the well-established high-yield market,
whose development has been encouraged by the tax advantages of debt over equity, as well as by the growing amounts

of capital in the hands of financial sponsors that are comfortable with leverage. As a result, at any point in time, there
are a number of rated companies in the US with unsustainably high leverage that will need to reorganise their capital
structures through either a distressed exchange or a Chapter 11 bankruptcy. Additionally, there is in the US an absence
of structural support available in some other countries in the form of special banking relationships and/or government
intervention.
Given this backdrop, Moody’s often expects a US company to demonstrate somewhat stronger cash flow to debt
ratios at a specific rating category than a company whose management is subject to less shareholder pressure and
where there is less event risk.
In the high-yield arena, for example, US companies are typically expected to have an Adjusted FCF/Total
Adjusted Debt ratio of at least 10% to be rated at the Ba level. It is important, in our view, that companies with weaker
franchises and high leverage have sufficient cushion to weather unexpected business challenges that are bound to arise,
and so that they can pay down debt to a more manageable level. Without this cushion, such companies may face a swift
downward slide into default in the event that sales and earnings do not materialise as anticipated.
As noted above, as a company’s rating approaches investment grade, we assign a higher weighting to qualitative
factors, particularly the quality of its franchise and its overall risk appetite. In this context, a material amount of secured
debt may restrain a rating below investment grade because it limits back-door financial flexibility; we typically expect
US investment-grade companies to have senior unsecured bank credit facilities. As a result, reflecting the significant
qualitative differences in the credit profiles of US companies at this point in the rating spectrum, some Ba-rated com-
panies have stronger credit metrics than Baa-rated companies with a more robust franchise and a lower risk appetite.
Wal-Mart and a few other large mass merchandisers increasingly dominate the retailing of packaged consumer
products in the US. As a result, an increasingly large proportion of the sales of most US consumer products companies
are to these customers. Good penetration with large, successful retailers is a credit positive, given that their supply
chain efficiencies can also benefit their suppliers and provide superior growth opportunities, provided that the con-
sumer product company has a portfolio of strong products in attractive categories and can meet the tough service
demands of the mass merchandisers. We do not therefore penalise US consumer product companies with a strong
franchise for such customer concentration.
EUROPE
Operating margins tend to be lower in European countries than in other markets due to a number of factors, including
the cost of operating in a number of smaller countries with local consumption habits and different logistics systems. In
addition, we would caution that, when calculating operating margins, some accounting differences may make margins
less comparable. However, overall margins for European companies are lower than for their US peers.
We believe that the returns expectations from European shareholders may at this time be less oriented to the short
term and may put less pressure on management than in the US if operating margins are moderate. In some cases
where European businesses have low operating margins, the shareholder attitude might enable us to mitigate the neg-
ative impact of this in the grid.
Another important characteristic of the European market is the retailer landscape. European retailers are highly
concentrated in each country in Western Europe, but with limited cross-border concentration. Additionally, private
labels have a high presence in Europe, as do discount retailers. These factors create pricing pressure for those branded
goods companies that do not have the market clout to differentiate their products by brand equity and quality. How-
ever, on the other hand, strong companies may have solid relationships with retailers, hence providing arguably more
stable profitability.
JAPAN
Banks’ behaviour and support framework
The systemic support by banks is arguably higher in Japan, thereby reducing the probability of default for any given
level of credit metrics. As bank financing still represents the dominant part of corporate funding, the attitude of banks
and their approach to credit risk is therefore important in any rating methodology for Japanese issuers. As a matter of
fact banks exhibit a greater tolerance for higher levels of debt and leverage provided the business in question can pro-
duce steady cash flows and positive operating profits. This is true even if these cash flow and operating profit amounts
appear low on any global scale. Also important is that Japanese banks will weigh heavily in their analysis a measure of
debt to capitalization vs purely cash-flow metrics.

Moody’s also notes that the traditional corporate governance structure of cross-shareholdings and main bank sup-
port has exerted a substantial influence on insolvency practices, where the emphasis is often on cooperation as opposed
to confrontation and rescue as opposed to resolution.
Industry’s characteristics
Strong and weak performers typically coexist, whilst both investors and lenders are highly tolerant of the consequent
low profit margin levels. There are very few instances of companies entering into a predatory pricing strategy that kills
off weaker companies. At the same time, the greater commitment to long-term relationships at every stage of a busi-
ness’s development results in a more stable operating environment for rated Japanese companies with a higher level of
stability than that in the US or other developed economies.
The manufacturing and distribution network chain is relatively long in Japan. In addition, profits and losses, or
external shocks — such as unexpected foreign exchange moves and rising material costs — are often vertically shared
throughout an entire chain (for example, by retailers, wholesalers, manufacturers and material suppliers). No single
segment is expected to take on the full impact of such shocks on its own. Consequently, the operating margins of Japa-
nese companies are relatively narrow but stable.
Finally senior managers in Japan tend to prioritise operating continuity to protect and balance the interests of
stakeholders, which are understood to include shareholders, lenders, the local economy, employees and trade partners.
Shareholders share such views and do not request short-term returns.
EMERGING MARKETS
Most of the rated companies in the industry have a significant portion of their business in developed markets. When
applying the rating grid to companies based in emerging economies, additional factors (e.g. legal environment, busi-
ness risk, regulatory changes, hyper-inflation) have to be taken account. The ratings for such companies may thus
result in rating categories other than those suggested by the grid.
LATIN AMERICA
Packaged consumer companies in Latin American markets display very significant disparities in size, penetration and
hence market share. Companies with scale and efficient distribution capability enjoy a significant competitive advan-
tage given the diverse geography of Latin America, the challenge of distribution due to poor communications infra-
structures and the remoteness of certain local markets, as well the fragmentation of the retail trade, including the still
large market share of small, independent retail outlets. A broad and efficient distribution network can provide a signif-
icant barrier to entry. As a result, one or two large companies tend to dominate specific categories, with a significant
disparity between the market share and penetration levels of these leaders and those of the myriad of smaller competi-
tors. For example, some of the large Mexican packaged consumer products companies can, as a result of their superior
distribution capability, reach almost all retail outlets and local markets and are therefore able to dominate their catego-
ries with a higher market share than their counterparts in more developed countries where distribution is more
straightforward.
Scale and distribution capability are therefore given a particularly high weighting in our determination of the rat-
ings of Latin American packaged consumer products companies.
Our rating assessment also takes into account the potential for macro-economic volatility that can impact the sales
and earnings performance of companies based in Latin America, as well as their track record of adjusting their pricing
and other strategies to blunt the negative effect of a sharp drop in the disposable income of consumers. Additionally,
we consider the risk of sudden and unexpected changes in tax laws, tariffs and other regulations, which can significantly
affect consumption and/or companies’ cost structures.
Reconciling Rating Factors and the Rating Scale

The objective of the rating grid is to enable investors, issuers and intermediaries to determine the approximate posi-
tioning of an alphanumerical rating (e.g. A1, A2, A3) with a limited margin for error, although some qualitative factors
may prove at times somewhat difficult to position in the grid without an in-depth knowledge of the company.
The grid presents the typical characteristics presented by an issuer within each rating range (defined as Aaa, Aa
and so on). However, when using the grid, the user should determine which category an issuer would fall into for each
sub-factor. For example, a single-A rated issuer will not fall in the single-A category for each of the 16 rating criteria; it
may well be in other categories for all sub-factors but the average position will be equivalent to a single A.

In averaging up the scores to come to an overall rating approximation, not all factors weigh equally. We would
expect that the five credit metrics factors will typically represent 40% of the rating (each of the five being equal) with
the other 11 sub-factors having a 60% weighting all together (each of the 11 being equal). However, a significant
weakness in one factor or sub-factor often cannot be completely compensated by a strength in another one. For
instance, if a company has a “Aa” result for franchise strength and a “B” for scale and diversification (which would
average a Baa2), this is, in Moody’s view, not as strong as a Baa2 in both franchise and scale/diversification — the risk
posed by a small size would overwhelmingly weaken the company compared to the strength of the franchise.
As a consequence, lower factor scores have a greater impact on the overall rating. If a Aaa factor is reflected in the
rating as 100, we shall weigh Aa and A at 100 but Baa at 115, Ba at 130, B at 160 and Caa at 200. Although there is
some subjectivity to these weightings, they do reflect that a lower score falling in the speculative grade considerably
weakens the overall credit strength of any given issuer. The example in the preceding paragraph would then yield a
Baa3/Ba1 outcome (versus Baa2 with equal weightings). They also reasonably track the current rating universe.
Related Research
Industry Outlooks:
Global Consumer Products Industry Outlook for 2005, December 2004 (90441)
2005 Global Food Industry Outlook: Broadly Stable Overall, Although Some Variation By Geography,
December 2004 (90666)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

APPENDIX 1: Rating Grid for Global Packaged Goods Companies
Rating Grid — Packaged Goods

1 - SCALE AND a) Total Sales >$40 billion $20-40 billion $10-20 billion $4-10 billion $1,5-4 billion $500 million - $1,5 <$500 million
DIVERSIFICATION billion
b) Geographic Worldwide; Worldwide; Worldwide presence Continental player Pure continental Regional/niche Very local or
Diversification perfectly diversified moderate degree of with degree of mostly (Americas, player (Americas, player within a regional; Possibly
focus in some concentration Europe, Asia) with Europe, Asia) country/region start-up
regions some added regions
c) Segmental >8 market segments 7-8 segments 5-6 segments 3-4 segments 2 segments 1 segment, Single segment
Diversification or 2 but with
focus on 1
2 - FRANCHISE a) Market Share generally #1 in key #1-#2 in key at least #2 average often #2 sometimes Competes against Competes against Small market shares
STRENGTH AND markets, in broad markets; at least market share; with #1 but with some larger players, often larger players in in broad categories
GROWTH POTENTIAL categories Top 2 maintaining share several #1 positions weaker positions a #2 or #3 or #1 in broad categories, or not #1 in narrow
industry player narrow categories generally not a #1 or categories
worlwide #2 or leader in
narrow categories
b) Organic Revenue >6%, consistently >5%, above peers >4%, slightly above >3%, in line with <3%,In line with or Uncertain growth <2%, declining
Growth above peers peers peers below peers average prospects, below growth prospects
peers
c) Qualitative Leading, very-well Very well-known Well-known brands Some well-known Limited number of Commodity-like Few brands,
Assessment of Portfolio known and very brands in attractive mostly; innovation brands, moderately well-known brands, brands, niche not well-recognised,
innovative brands in categories, strong capacity Some attractive categories; less attractive categories, cyclical categories not
attractive categories innovation weaker brands moderate innovation categories; segments attractive or cyclical,
may be vulnerable vulnerable to private commodity like
to private labels labels or to
cycles or
consumtion trends
3 - DISTRIBUTION a) Retailer Exposure No concentration, or Limited Moderate Degree of Concentrated Very high retailer One single retailer
ENVIRONMENT AND concentration concentration, or concentration; concentration; retailers with high concentration with represents more
PRICING FLEXIBILITY evidences very concentration Sustainable retailer has higher bargaining power high bargaining than 50% of sales
WITH RETAILERS efficient partnership evidences relationship bargaining power power
partnership
Moody’s Rating Methodology
4 - COST EFFICIENCY a) Qualitative Highly efficient Very efficient Efficient operations, Some efficiency Reasonably cost Not very efficient Inadequate cost
AND PROFITABILITY Assessment operations, systems operations, systems systems and supply improvements efficient; Scope for operations structure
and supply chain and supply chain chain possible in cost pressure
operations
b) EBITA margins >20% 16-20% 13-16% 10-13% 7-10% 3-7% <3%
c) Return on Average >25% 20-25% 15-20% 12-15% 10-12% 7-10% <7%
Assets
19
20
Rating Grid — Packaged Goods

Moody’s Rating Methodology
5 - FINANCIAL Financial strategy Very conservative Stable and Predictable fin. Financial policy Strategy prioritises History of debt- Unmanageable debt
STRATEGY, TARGET policy. Stable conservative policy. policy, balance favour shareholder shareholder value funded returns to burden,
AND HISTORICAL metrics, no "one-off" Commitment to Aa between returns, Possible and acquisitions shareholders and re-structuring likely
METRICS movements. Public rating range. Track- shareholder and track-record of paying out financial
commitment to Aaa record of stable creditor, no big shifts rating migration cushion
rating metrics in metrics, possible following
event risk through acquisitions.
debt-financed Commitment to
acquisitions. Strong investment grade
commitment to
investment grade
a) Adjusted FFO / Net >65% 40-65% 30-40% 20-30% 15-20% 10-15% <10%
Adjusted Debt
b) Adjusted Debt / <1.2x 1.2-2.0x 2.0-2.7x 2.7-3.5x 3.5-4.5x 4.5-6.5x >6.5x
EBITDAR
c) Adjusted RCF /Net >45% 30-45% 22-30% 16-22% 12-16% 8-12% <8%
Adjusted Debt
d) Total Coverage >16x 11-16x 8-11x 4,5-8x 2.5-4,5x 1.5-2.5x <1.5x
e) Adjusted FCF/Total >25% 18-25% 14-18% 12-14% 9-12% 4-9% <4%
Adjusted debt
APPENDIX 2: Industry Rated Issuers and Key Ratios 2003
Credit Metrics Statistics (Ratings and Outlooks as of 27 January 2005)

Adj. FFO / Adj. RCF / Adj. FCF / Return on
Net Adj. Adj. Debt / Net Adj. Total Total Adj. Debt / EBITA average Number
Rating Outlook Name Debt EBITDAR Debt Coverage Debt Capital Margin assets of issuers
Aaa Negative Nestle 51.0% 2.60 37.8% 8.00 9.7% 43.4% 12.5% 12.4%
Aaa Negative Nestle 51.0% 2.60 37.8% 8.00 9.7% 43.4% 12.5% 12.4%
Aaa n/a Mean 51.0% 2.60 37.8% 8.00 9.7% 43.4% 12.5% 12.4%
1
Aaa n/a Median 51.0% 2.60 37.8% 8.00 9.7% 43.4% 12.5% 12.4%
Aa2 Negative Kimberly-Clark 39.8% 1.98 29.5% 11.23 17.4% 34.2% 17.6% 15.6%
Aa3 Stable Colgate 41.4% 1.72 29.2% 12.89 23.3% 69.8% 21.7% 29.5%
Aa3 Positive Gillette 50.3% 1.77 34.1% 20.94 34.4% 53.2% 21.6% 20.2%
Aa3 Stable Procter & Gamble 46.8% 2.14 33.8% 14.02 19.6% 54.7% 19.4% 19.8%
Aa3 U.R.U. Kao 349.6% 0.77 294.1% 50.30 36.0% 9.9% 13.7% 17.1%
Aa n/a Mean 44.6% 1.90 31.6% 14.77 23.7% 53.0% 20.1% 21.3%
5
Aa n/a Median 44.1% 1.87 31.6% 13.46 21.5% 53.9% 20.5% 20.0%
A1 Stable Reckitt Benckiser 687.4% 1.10 477.4% 13.29 44.5% 22.2% 18.5% 18.7%
A1 Stable Ajinomoto 40.9% 2.23 34.5% 23.72 12.8% 24.1% 6.8% 8.1%
A1 Stable Estee Lauder 53.1% 1.95 48.0% 7.65 25.9% 23.6% 11.1% 18.2%
A1 Negative Danone 21.3% 4.16 15.1% 7.87 7.9% 47.7% 12.9% 11.3%
A1 Stable Hershey Foods Corp. 62.8% 1.23 46.6% 10.45 18.6% 37.2% 19.4% 23.0%
A1 Stable Kikkoman 29.8% 3.17 21.9% 24.60 7.3% 19.7% 4.7% 5.7%
A1 Stable Shiseido 31.3% 3.06 23.7% 7.90 5.6% 14.7% 6.3% 6.1%
A1 Negative Unilever 26.9% 2.77 15.8% 5.17 7.9% 69.1% 15.7% 16.3%
A2 Positive Avon 52.8% 1.81 40.2% 16.55 19.4% 72.7% 15.1% 30.2%
A2 Negative Henkel 30.8% 2.81 22.4% 8.14 -1.5% 34.2% 8.6% 9.1%
A2 Stable Hormel 49.5% 1.64 39.6% 7.99 24.9% 24.5% 7.3% 13.2%
A2 Stable Mc Cormick & 31.3% 2.53 24.6% 6.67 5.7% 44.4% 13.3% 14.8%
Company
A2 Positive Q.P. 38.5% 2.41 30.3% 24.07 11.8% 27.1% 4.2% 6.7%
A3 Stable Campbell Soup 26.9% 2.90 20.7% 5.91 5.7% 73.5% 16.0% 17.6%
Company
A3 Stable Clorox 70.8% 1.21 50.8% 16.99 39.4% 30.9% 20.2% 23.3%
A3 Negative H.J. Heinz 20.5% 3.76 13.1% 5.59 13.8% 73.8% 16.1% 14.4%
A3 Stable Kraft 26.9% 2.37 20.4% 7.39 13.4% 28.1% 19.4% 10.3%
A3 Stable Sara Lee 29.0% 3.56 20.0% 5.07 10.8% 64.2% 8.4% 11.0%
A3 Positive Toyo Suisan 43.8% 2.65 24.0% 26.96 13.1% 25.0% 6.1% 8.4%
A n/a Mean 38.2% 2.57 28.4% 12.15 13.5% 40.8% 11.7% 13.8%
19
A n/a Median 31.3% 2.59 23.8% 7.94 12.3% 32.5% 12.0% 12.3%
Baa1 Stable Alberto-Culver 35.9% 2.68 32.8% 5.46 32.7% 22.6% 9.5% 14.9%
Baa1 Negative ConAgra Foods, Inc. 17.9% 3.84 9.9% 4.38 6.0% 54.1% 9.5% 9.4%
Baa1 Stable Itoham 37.1% 3.88 17.4% 9.88 6.9% 24.5% 1.7% 3.8%
Baa1 Stable Kellogg 19.5% 3.10 12.8% 3.92 9.4% 67.3% 17.5% 15.1%
Baa1 Stable Kagome 122.3% 2.14 32.2% 54.81 2.0% 23.4% 3.3% 4.9%
Baa1 Stable Meiji Dairies 12.8% 5.66 12.2% 10.55 0.8% 59.8% 2.4% 4.7%
Baa1 Stable Morinaga Milk 17.1% 3.96 17.4% 12.25 6.8% 50.6% 2.9% 5.2%
Baa2 Stable Cadbury Schweppes 15.7% 5.23 10.9% 3.51 3.3% 60.4% 12.9% 9.1%
Baa2 Positive General Mills 19.6% 3.74 14.8% 3.65 5.5% 54.8% 18.5% 11.1%
Baa2 Negative Grupo Bimbo 35.6% 1.93 32.5% 2.66 27.3% 56.8% 7.7% 11.4%
Baa2 Stable Newell-Rubbermaid 18.7% 3.89 13.2% 4.12 7.5% 59.0% 9.2% 9.6%
Baa2 Positive Nippon Meat Packers 15.9% 5.58 8.6% 7.60 5.9% 40.2% 2.4% 3.7%
Baa3 Stable Blyth 68.1% 1.98 62.6% 7.51 32.9% 32.1% 11.7% 17.8%
Baa3 Positive Nichirei 9.0% 6.24 9.8% 6.45 7.7% 57.7% 2.9% 4.6%
Baa3 Stable Tupperware 29.2% 3.11 18.8% 3.81 6.6% 54.1% 7.6% 10.4%
Baa n/a Mean 31.6% 3.80 20.4% 9.37 10.8% 47.8% 8.0% 9.0%
15
Baa n/a Median 19.5% 3.84 14.8% 5.46 6.8% 54.1% 7.7% 9.4%

Credit Metrics Statistics (Ratings and Outlooks as of 27 January 2005)
Adj. FFO / Adj. RCF / Adj. FCF / Return on
Net Adj. Adj. Debt / Net Adj. Total Total Adj. Debt / EBITA average Number
Rating Outlook Name Debt EBITDAR Debt Coverage Debt Capital Margin assets of issuers
Ba1 Positive American Greetings 30.6% 3.11 30.6% 2.61 24.6% 33.9% 13.0% 10.3%
Ba1 Stable Dean Foods 19.0% 3.85 19.0% 3.01 10.1% 46.5% 7.6% 10.3%
Ba1 Positive Gruma 32.3% 2.24 24.3% 3.29 3.6% 41.1% 7.6% 7.4%
Ba1 Stable Marudai 16.1% 5.80 14.2% 9.00 -5.8% 20.8% 1.0% 1.8%
Ba1 Stable Scotts Company 23.3% 3.36 23.3% 3.34 16.5% 51.0% 13.8% 13.4%
Ba1 Stable Ansell 14.6% 2.86 9.2% 3.60 13.0% 33.9% 12.8% 4.8%
Ba2 Positive Church & Dwight 18.9% 2.77 18.9% 3.76 15.5% 56.0% 33.5% 17.4%
Ba2 Stable Flowers Foods 44.7% 1.94 39.0% 8.06 21.1% 2.5% 5.4% 8.1%
Ba2 Stable NBTY 19.0% 4.12 19.0% 3.61 11.8% 43.5% 11.4% 14.0%
Ba3 Stable Central Garden & Pet 22.6% 3.63 22.6% 3.83 10.8% 37.1% 7.9% 11.6%
Ba3 Stable Chattem 19.5% 3.54 19.5% 2.71 11.9% 63.4% 24.2% 15.7%
Ba3 Positive Del Monte 18.1% 3.64 18.1% 2.70 14.1% 50.4% 12.2% 10.9%
Ba3 Stable Elizabeth Arden 19.9% 3.96 19.9% 1.97 9.5% 59.3% 10.0% 12.3%
Ba3 stable Universal Robina 41.1% 4.80 33.7% 1.30 -6.6% 43.0% 6.4% 3.9%
Corporation
Ba n/a Mean 24.3% 3.54 22.2% 3.77 10.7% 41.6% 11.9% 10.1%
14
Ba n/a Median 19.7% 3.58 19.7% 3.31 11.9% 43.2% 10.7% 10.6%
B1 Stable Amscan 13.5% 4.94 13.5% 1.87 9.4% 96.9% 13.2% 14.1%
B1 Stable Fage Dairy 20.9% 2.91 20.9% 2.52 -10.3% 54.8% 5.8% 9.2%
B1 Stable Birds Eye 15.6% 4.95 15.6% 1.93 19.0% 70.9% 11.0% 10.9%
B1 Positive Burns Philp 8.0% 5.59 8.4% 1.40 3.5% 78.6% 17.3% 9.5%
B1 stable Indofood 15.8% 3.39 10.7% 1.80 9.6% 58.3% 11.2% 13.1%
B1 Stable Leiner 30.8% 2.88 30.8% 3.14 13.2% 65.2% 10.5% 19.1%
B1 Stable Luigino's 25.0% 2.95 18.1% 2.60 3.2% 82.0% 11.7% 16.3%
B1 Stable Pinnacle Foods 7.6% 4.72 7.6% 2.17 5.6% 61.0% 10.2% 7.6%
B1 Stable Rayovac 7.4% 7.45 7.4% 2.47 5.5% 82.8% 10.6% 9.3%
B1 Stable United Biscuits 8.7% 6.16 8.7% 1.91 3.4% 78.7% 8.2% 7.6%
B1 Stable United Industries 11.8% 5.47 11.8% 1.97 2.2% 96.3% 14.6% 18.1%
B1 Stable Wimm Bill Dann 21.6% 3.65 21.6% 2.26 -23.0% 44.7% 5.2% 7.4%
B2 Stable Ames True Temper 23.9% 2.47 23.9% 5.37 4.1% 48.3% 10.8% 21.0%
B2 Stable B&G Foods 8.4% 6.15 8.4% 1.85 6.3% 79.9% 17.8% 11.9%
B2 Stable Hines Nurseries 11.2% 4.86 11.2% 1.77 7.3% 82.3% 13.7% 11.4%
B2 U.R.D. Kamps AG 8.2% 5.39 8.2% 1.18 2.2% 109.3% 4.1% 6.6%
B2 Stable Merisant 10.7% 5.17 10.7% 2.45 11.9% 118.6% 27.7% 16.9%
B2 Negative Playtex Products 6.7% 7.64 6.7% 1.60 4.2% 90.1% 13.8% 8.7%
B2 Positive Snow Brand 7.3% 12.52 5.5% 2.91 1.1% 60.1% 1.7% 1.9%
B3 Stable Eagle Family Foods 4.5% 7.97 4.5% 1.23 6.3% 136.6% 14.9% 10.0%
B3 Negative Revlon -1.5% 14.85 -1.5% 0.18 -7.6% 1255.9% 2.1% 3.0%
B n/a Mean 13.4% 5.36 12.7% 2.22 4.2% 79.8% 11.7% 11.5%
21
B n/a Median 10.9% 5.06 10.7% 1.95 4.9% 79.3% 11.1% 10.5%
Caa1 Stable Interstate Bakeries 15.5% 4.66 14.5% 1.76 11.1% 55.7% 2.5% 5.5%
Caa3 Negative Tom's Foods 7.8% 7.10 7.8% 0.68 6.8% 120.3% 2.2% 4.3%
Caa n/a Mean 7.8% 7.10 7.8% 0.68 6.8% 120.3% 2.2% 4.3%
2
Caa n/a Median 7.8% 7.10 7.8% 0.68 6.8% 120.3% 2.2% 4.3%
Ca n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
C n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a
Total 77
Note: Excluding Interstate Bakeries, Kao, Reckitt and Revlon from Mean and Median computation. L'Oréal is excluded from this table as the company has
no long-term rating. American Razor, Esselte and Prestige Brands are also excluded as they do not publish financials

APPENDIX 3: Key Ratios Definitions
EBITA MARGIN
Operating Profit = Net revenue – operating expenses +/- one-time non recurring charges / (gains)
EBITA = Operating profit before goodwill amortization
EBITA margin = EBITA / net revenue
RETURN ON AVERAGE ASSETS

Average Assets (n) = (Total assets (n) + Total assets (n-1)) / 2
Return on Average Assets = EBITA / average assets
ADJUSTED FFO / NET ADJUSTED DEBT

Cash flow from Operations (CFO) = cash flow from operating activities from the Consolidated Statement of Cash Flow
Funds from Operations (FFO) = CFO before changes in working capital
Adjusted FFO = FFO + 2/3 rents
Adjusted Debt = gross debt + 8*rents + under funded pension liabilities + “basket adjusted” hybrids + share trusts + guar-
antees of debt obligations + accounts receivable securitization outstanding + off-balance sheet debt-like obligations
Net Adjusted Debt = adjusted debt – cash & short term investments (with no haircut on cash)
ADJUSTED RCF / NET ADJUSTED DEBT

Adjusted Retained Cash Flow (Adjusted RCF) = Adjusted FFO – common dividends – preferred dividends
ADJUSTED FCF / ADJUSTED DEBT

FCF = RCF – increase / + decrease in working capital accounts – capital expenditures (gross)
Adjusted FCF = FCF + 2/3 rents
Adjusted Debt = gross debt + 8*rents + under funded pension liabilities + “basket adjusted” hybrids + share trusts + guar-
antees of debt obligations + accounts receivable securitization outstanding + off-balance sheet debt-like obligations
ADJUSTED DEBT / EBITDAR

EBITDA = EBITA + depreciation
EBITDAR = EBITDA + rents
TOTAL COVERAGE
Total Coverage = (EBITA + 1/3 rent) / (gross interest expense + 1/3 rent + (preferred dividends)/ (1-0.33))
DEBT / CAPITAL
Debt / Capital = Gross debt / (gross debt + common shareholders equity + minority interests + other equity + deferred
taxes – cumulative other comprehensive income adjustment)

APPENDIX 4: Examples of Rating Grid
KELLOGG
Public Rating: Baa2 (At 12/31/03)
Model Rating: Baa2 (At 12/31/03)
KELLOGG Comments
1 - Scale and Diversification
Total Sales Baa Between $4 - $10 Billion
Geographic Diversification A Worldwide presence / degree of concentration
Segmental Diversification A Diversified with 5-6 segments
2 - Franchise Strength and Growth Potential

Market share Aa #1 or #2 in key markets
Revenues organic growth A >4%, slightly above peers
Qualitative Assessment of Portfolio Aa Well known brands in attractive categories / Solid innovation
3 - Distribution Environment and Pricing

Flexibility With Retailers
Retailer Exposure A Moderate concentration, sustainable relationships
4 - Assessment of Cost Efficiency and Profitability

Qualitative Assessment A Efficient operating system / supply chain
EBITA Margin Aa Strong at about 17.5%
Return on average assets A / Baa About 15.1%, and should improve further
5 - Financial Policy
Financial strategy Baa Commitment to ratings, but maintains high dividends despite high debt,
resulting in slow leverage reduction.
Credit Metrics
FFO/Net Adj. Debt Baa/Ba Continued high leverage due to Keebler acquisition
Adj. Debt/EBITDAR Baa Ratio just over 3 times at 12/31/03
Adj. RCF/Net Adj. Debt Ba Ratio less than 13%, but improving
Total Coverage Ba Ratio less than 4 times
FCF/Total Adj. Debt Ba / B Although improving, significant debt, operating leases, and
underfunded pensions cause leverage to be high.
WEIGHTED RATING AVERAGE Baa2

United Biscuits
Public Rating: B1
Model Rating: B1
United
Biscuits Comments
1 - Scale and Diversification
Total Sales Ba Between $1.5 billion and $4 billion Total Sales
Geographic Diversification Ba Well-positioned continental player
Segmental Diversification Ba/B Two segments mainly focused on biscuits
2 - Franchise Strength and Growth Potential

Market share Aa/A Number 1 or 2 in most of its market segments
Revenues organic growth Ba Revenue growth below 3% in very mature market segments
Qualitative Assessment of Portfolio Baa Some well-known brands in product categories highly exposed to
private labels
3 - Distribution Environment and Pricing

Flexibility With Retailers
Retailer Exposure Ba High retailer concentration with high bargaining power
4 - Assessment of Cost Efficiency and Profitability

Qualitative Assessment Baa Solid track-record of cost reductions - scope for further synergies,
particularly in light of the Jacob's acquisition
EBITA Margin Ba 8.2% margin for financial year 2003
Return on average assets B 7.6% in 2003
5 - Financial Policy
Financial policy B LBO structure providing debt-funded return to the sharehoders
Credit Metrics
FFO/Net Adj. Debt Caa Ratio expected to remain below 10% over the short- to medium-term
Adj. Debt/EBITDAR B/Caa Pro-forma for the Jacob's acquisition, this is ratio is expected to
approach 6.5x for financial year 2004
Adj. RCF/Net Adj. Debt B/Caa Moody's expects the ratio to remain around 8-9% going forward
Total Coverage B Total coverage likely to be around 2 times
FCF/Total Adj. Debt Caa FCF expected to be below 4%
WEIGHTED RATING AVERAGE B1

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OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any
investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of
each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling.
MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by
MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to $2,400,000. Moody’s Corporation
(MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating
processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly
reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate
Governance — Director and Shareholder Affiliation Policy.”

Moodys Packaged Goods 2005

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Moodys Packaged Goods 2005

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Rating Methodology

2 Moody’s Rating Methodology

Packaged Goods Global Public Ratings

IDENTIFYING KEY RATING FACTORS

Moody’s Rating Methodology 3

MAPPING TO THE RATING CATEGORIES

ILLUSTRATING THE RATING METHODOLOGY

Rating Factor #1: Scale and Diversification

4 Moody’s Rating Methodology

HOW DO WE MEASURE IT?

Rating Grid Mapping

Rating Factor #2: Franchise Strength and Growth Potential

Moody’s Rating Methodology 5

HOW DO WE MEASURE IT?

6 Moody’s Rating Methodology

Rating Grid Mapping

Rating Factor #3: Distribution and Pricing Flexibility with Retailers

HOW DO WE MEASURE IT?

Moody’s Rating Methodology 7

Rating Grid Mapping

Rating Factor #4: Assessing Cost Efficiency and Profitability

HOW DO WE MEASURE IT?

8 Moody’s Rating Methodology

Moody’s Rating Methodology 9

Rating Factor #5: Financial Strategy and Metrics

HOW DO WE MEASURE IT?

10 Moody’s Rating Methodology

1. Moody’s Special comment: Putting EBITDA in perspective, 31 May 2000.

Moody’s Rating Methodology 11

12 Moody’s Rating Methodology

METRICS ARE EVOLVING

Other Risk Factors

Moody’s Rating Methodology 13

14 Moody’s Rating Methodology

Moody’s Rating Methodology 15

16 Moody’s Rating Methodology

Reconciling Rating Factors and the Rating Scale

Moody’s Rating Methodology 17

18 Moody’s Rating Methodology

Rating Grid — Packaged Goods

Rating Grid — Packaged Goods

Credit Metrics Statistics (Ratings and Outlooks as of 27 January 2005)

Moody’s Rating Methodology 21

22 Moody’s Rating Methodology

RETURN ON AVERAGE ASSETS

ADJUSTED FFO / NET ADJUSTED DEBT

ADJUSTED RCF / NET ADJUSTED DEBT

ADJUSTED FCF / ADJUSTED DEBT

ADJUSTED DEBT / EBITDAR

Moody’s Rating Methodology 23

2 - Franchise Strength and Growth Potential

3 - Distribution Environment and Pricing

4 - Assessment of Cost Efficiency and Profitability

WEIGHTED RATING AVERAGE Baa2

24 Moody’s Rating Methodology

2 - Franchise Strength and Growth Potential

3 - Distribution Environment and Pricing

4 - Assessment of Cost Efficiency and Profitability

WEIGHTED RATING AVERAGE B1

Moody’s Rating Methodology 25

Author Contributors Editor Production Specialist

28 Moody’s Rating Methodology

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