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Fitch Rates General Mills' $750MM Sr Unsecured Notes 'BBB+'; Outlook Stable
January 10, 2017 / 4:59 PM / a year ago

Fitch Rates General Mills' $750MM Sr Unsecured Notes 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, January 10 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to General Mills' $750 million 3.2% senior unsecured notes due 2027. Proceeds from the notes along will commercial paper borrowings will be used to refinance the $1 billion 5.7% senior unsecured notes due February 2017. The Rating Outlook is Stable. A full list of ratings follows at the end of this release. KEY RATING DRIVERS Strong Brands, Modest Growth: Fitch considers General Mills to have one of the more diversified product portfolios in the industry, with strong brand equities and marketing expertise in large categories that span a variety of meals and snacks. The company is focused on five categories (Cereal, Ice Cream, Yogurt, Convenient Meals, and Sweet & Savory Snacks) which comprise roughly 75% of its portfolio. Given pressure on a number of categories such as cereal, which declined more than 5% annually over the past several years, the company's organic growth has declined low single digits over the past two years despite growing or maintaining market share in the majority of its categories. Over the past five years, the company has rotated its portfolio moderately towards the snacks and yogurt categories from roughly 25% to 35%. In late 2014, General Mills purchased Annie's, adding to its Natural and Organics portfolio, and, in 2015, sold its Green Giant vegetable brand which had reported a sales decline of 11% in fiscal 2014. Fitch expects the company will continue shaping its portfolio and that dispositions of slow- or negative-growth brands and acquisitions in faster-growing categories will also continue. In the near- to intermediate-term, we expect organic growth to be challenged given the continued declines in cereal and challenges in its yogurt business. Actively Targeting Leverage Below 3x: The company's debt increased to more than $10.5 billion with the $821 million acquisition of Annie's, Inc. in October 2014. Annie's revenues and EBITDA were not material to the consolidated enterprise and leverage peaked at 3.2x in the quarter the acquisition closed. Subsequently, General Mills focused on deleveraging. A combination of internally generated cash flow and approximately half of the $780 million in proceeds received from the Green Giant brand divestiture was used to reduce debt by more than $1.7 billion to $8.4 billion as of May. 29, 2016 (FYE) and leverage fell to just under 2.5x. Recently, leverage stepped up to 2.7x as General Mills bought back $1.35 billion of stock in the first two quarters of the fiscal 2017. Fitch expects debt balances to remain roughly flat over the next two years but that leverage should track down modestly to 2.6x, close to the company's long-term average of 2.4x, with EBITDA growth spurred mainly by several cost-saving efforts. While an acquisition could take leverage above the mid-2x range, the company has shown willingness to pay down debt post-acquisitions to return metrics to mid-2x levels. Consistent Credit Protection Measures: General Mills' 20% EBITDA margin is generally among the sector's top tier and has shown little variability over the past 10 years. Fitch expects the company's cost savings initiatives will lead to a gradual improvement in margins over the next two years. Similarly, FCF is expected to remain strong at greater than $800 million annually over the next few years. KEY ASSUMPTIONS --Mid-single-digit organic sales declines for fiscal 2017 and low-single-digit decline in fiscal 2018; --FCF is expected to remain strong at greater than $800 million annually over the next few years. Fitch expects this will be used mainly for share buybacks; --Debt/EBITDA remains in the mid-2x range. RATING SENSITIVITIES Future developments that may, individually or collectively, lead to a negative rating action include: --If organic growth is sustained in the negative low-single-digit range, as it would indicate that the company is losing share and its renovation programs to spur growth are not working. Additionally, sustained leverage near 3x would be of concern. Future developments that may, individually or collectively, lead to a positive rating action include: --A ratings upgrade is unlikely in the near- to intermediate-term but could occur in the long term if the company commits to maintain leverage near 2x with FCF margins maintained at 4.5% or above. Consistently positive, volume-led, organic growth at or above market rates for a significant portion of its categories will also have to be maintained. FULL LIST OF RATING ACTIONS Fitch currently rates General Mills and its subsidiaries as follows: General Mills, Inc. --Long-Term Issuer Default Rating (IDR) at 'BBB+'; --Senior unsecured debt at 'BBB+'; --Senior unsecured credit facilities at 'BBB+'; --Short-Term IDR at 'F2'; --Commercial paper at 'F2'. General Mills Cereals LLC --Long-Term IDR at 'BBB+'; --Class A limited membership interests at 'BBB+'. Yoplait S.A.S. --Long-Term IDR at 'BBB+'; --Credit facility at 'BBB+' --Senior unsecured debt at 'BBB+'. Contact: Primary Analyst Ellen Itskovitz Senior Director +1-312-368-3118 Fitch Ratings, Inc. 70 W. Madison St. Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Committee Chairperson David Silverman, CFA Senior Director +1-212-908-0840 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Date of Relevant Committee: Feb. 10, 2016 Additional information is available at ''. Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude restructuring charges. For example, in 2016 Fitch excluded $78.4 million in one-time restructuring charges. Fitch added back $90 million in non-cash stock-based compensation to its EBITDA calculation. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. 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As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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