Fitch Ratings has affirmed the credit ratings of General Mills, Inc. (General Mills), its subsidiary, General Mills Cereals LLC (GMC), and the Yoplait S.A.S. consolidated joint venture as indicated below:
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 (CP) 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+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Leverage Temporarily High for Rating: Fitch estimates that General Mills' fiscal 2015 leverage (total debt-to-operating EBITDA) will be at or near 3x, factoring in the $822 million debt-financed Annie's acquisition in October 2014. The company has also engaged in net share repurchases of $933 million year to date through November 2014, a portion of which were debt financed. Consolidated total debt-to-operating EBITDA was 3.25x, operating EBITDA-to-interest expense was 10x and funds from operations (FFO) adjusted leverage was 4.5x for the latest 12 months ended Nov. 23, 2014. Fitch anticipates that leverage, which is temporarily high for the rating level, has peaked and should decline modestly in fiscal 2016 with EBITDA growth.
Leverage in fiscal 2017 and beyond should be back in the mid-2x range that is in line with the rating level. General Mills has publicly committed to leverage appropriate for 'BBB+' ratings. In light of this goal, Fitch believes that General Mills may reduce debt and/or pull back on share repurchases, particularly if operating earnings improvement is slower than the company anticipates based on second half of fiscal 2015 guidance of high single-digit growth.
Strong Margins, Liquidity, Brands: General Mills' ratings incorporate the company's strong profitability, substantial internally generated liquidity, and leading market positions in key categories. Fitch considers General Mills to have one of the best 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 maintains significant brand equity in major product categories including cereal, yogurt, ready-to-serve soup, and snacks. Margins are among the sector's top tier. Credit strengths are balanced with General Mills' high priority for returning cash to shareholders.
FCF Lower, but Still Significant: General Mills' annual free cash flow (FCF; cash flow from operations less capital expenditures and dividends) averaged approximately $850 million during the past five years. The company generally utilizes its FCF for share repurchases and has also used debt funding as it did in fiscal 2014 and 2015. The company has historically shown discipline to pull back on share repurchases after significant acquisitions. Near-term annual FCF is likely to be below the historical average due to weaker operating performance in 2015 and cash restructuring charges announced to date of approximately $234 million split across fiscal 2015 and 2016. However, meaningful cost synergies of $260 million to $280 million in fiscal 2016 could more than offset the cash charges.
Plans for U.S. Retail Improvement: General Mills has recently incurred weak industry trends and higher merchandising expense in its U.S. Retail segment. In November 2014, General Mills lowered its fiscal 2015 guidance to low single-digit net sales growth (including the 53rd week) and a low single-digit adjusted segment operating profit decline on a constant currency basis. There is no headroom in the ratings for additional operating underperformance without commensurate debt reduction. General Mills believes higher levels of product innovation, continued focus on brand renovation and capitalizing on consumer trends will accelerate growth in its U.S. Retail business, which comprises 59% of net sales and 75% of segment operating profit. Annie's approximately $200 million annual sales are not material to General Mills overall. However, Annie's contributes scale in the higher growth natural and organic category where General Mills now has more than $600 million annual net sales.
Ample Liquidity: The company maintains $2.7 billion of undrawn committed credit facilities that support its CP program, consisting of a $1 billion facility expiring in May 2019 and a $1.7 billion facility expiring in April 2017. In addition, Yoplait SAS has a EUR200 million revolver ($247.7 million) due in June 2019 that General Mills consolidates. Availability as of the most recent quarter end is EUR119.2 million ($147.8 million). Total debt of $10.8 billion at Nov. 23, 2014 includes $1.8 billion CP and $251.5 million Class A Limited Membership Interests. Upcoming debt maturities consist of $750 million notes due in March 2015 (fiscal 2015) and $1 billion notes due in each of fiscal 2016 and 2017. Fitch expects that General Mills will refinance near-term maturities.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
A negative rating action could occur if operating earnings remain under pressure and debt reduction does not occur, resulting in a sustained period of leverage (total debt-to-operating EBITDA) greater than approximately 3x and weakening FCF.
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 in the low 2x range while generating FCF at historical average annual levels or higher. A commitment to refrain from large debt financed share repurchases or acquisitions would also support an upgrade.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=971295
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