Fitch Ratings affirms BBB+ ratings to General Mills' long-term issuer default rating, senior unsecured debt. senior unsecured credit facilities; outlook stable
March 17, 2012
– Fitch Ratings has affirmed the credit ratings of General Mills, Inc. (General Mills) and its subsidiary, General Mills Cereals LLC (GMC) 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+'.
The Rating Outlook is Stable.
Concurrently, Fitch has assigned a 'BBB+' IDR and credit facility rating to Yoplait S.A.S.'s EUR300 million fully drawn facility agreement expiring Dec. 15, 2014. General Mills has a 51% controlling interest in Yoplait S.A.S. and consolidates the entity. However, General Mills does not guarantee this debt. Guarantees are provided by certain Yoplait S.A.S. subsidiaries that comprise the vast majority of assets and income of the joint venture. Yoplait S.A.S.'s alignment with General Mills' core business, strategic importance and significant investment support aligning the ratings with General Mills' ratings. This facility is structurally superior relative to the cash flows of Yoplait S.A.S. but is a very modest portion of General Mills' capital structure. The facility has financial covenants that total net debt to EBITDA shall not exceed 3.00:1.00 and EBITDA to net cash interest shall not be less than 7.00 to 1.00.
General Mills' ratings incorporate the company's historical operating earnings growth and substantial internally generated liquidity, which provide the company with ample financial flexibility. The ratings also consider its leading market positions and strong brand equity in major product categories such as cereal, yogurt, ready to serve soup and snacks. General Mills' margins and operating fundamentals have generally ranked among the top tier in the sector, although recent operating performance has weakened. The company's credit strengths are balanced with its historically high priority for returning cash to shareholders.
General Mills' leverage has increased modestly due to its primarily debt financed $1.2 billion acquisition of interests in Yoplait S.A.S. and Yoplait Marques S.A.S. in July 2011. Consolidated total debt to operating EBITDA was 2.6 times (x) for the latest 12-month (LTM) period ended Nov. 27, 2011, operating EBITDA-to-gross interest expense was 8.6x, and funds from operations adjusted leverage was 4.0x. Fitch expects leverage to improve within the rating category as Yoplait's international results continue to be consolidated. Sodiaal, a French dairy cooperative, holds the remaining interests in each of the Yoplait international entities and has the option to put a limited portion of its $831.6 million redeemable interest in Yoplait S.A.S. to General Mills once per year for nine years. If those payments are necessary, Fitch expects General Mills to finance them with free cash flow (FCF) or modest borrowing.
Reported net sales growth of 12% for the six months ended Nov. 27, 2011 was driven by 6% volume growth (including 10% from the Yoplait acquisition), 5% price realization and mix, and 1% from foreign currency exchange. Excluding the acquisition, reported net sales rose 6% and volume fell 4%. U.S. Retail, the company's largest segment, generated a 6% volume decline for the period on continued weakness in its U.S. yogurt business due to General Mills' under-representation in fast-growing Greek yogurt. Total company operating profit fell nearly 14% on higher input costs and advertising. Fitch anticipates that consolidated net sales will grow by a low teens percentage in fiscal 2012, including Yoplait international, but gross margin will be down for the year as higher pricing and productivity initiatives from the company's holistic margin management program will not fully offset the cost headwinds and lower margins at Yoplait S.A.S. Volume will also be down for the year, as evidenced by the company lowering guidance for the fiscal third quarter and 2012 due to recent volume softness across U.S. food categories. General Mills' expects its cost inflation for fiscal 2012 to be 10% - 11%, reflecting the heightened commodity cost environment, and to moderate in fiscal 2013. The magnitude of fiscal 2012 inflation is in line with expectations for other packaged food companies.
Overall liquidity is plentiful and refinancing risk is minimal due to significant FCF generation and undrawn credit facilities. The company maintains $2.9 billion of undrawn, unsecured committed credit facilities consisting of a $1.1 billion facility expiring in October 2013 and a $1.8 billion facility expiring in October 2012 which Fitch anticipates the company will refinance. The credit facilities contain a financial covenant that requires a ratio of earnings to fixed charges of at least 2.5:1.
General Mills remains in compliance with its covenants. Total debt was $8 billion at Nov. 27, 2011, including $707 million of CP and $242 million of Class A Limited Membership interests. Upcoming maturities primarily consist of $520.8 million 5.65% notes due Sept. 10, 2012 and approximately $1.4 billion of notes due in fiscal 2014. Proceeds from the company's $1 billion 3.15% notes issuance in November 2011 were utilized to repay its $1 billion notes that matured Feb. 15, 2012.
General Mills' annual FCF after capital expenditures and dividends averaged more than $600 million annually during the past five years, including fiscal 2011 which was well below average at $149 million. Fiscal 2011 FCF was negatively affected by a $385 million tax payment related to an income tax adjustment from prior years, approximately a $200 million increase in pension contributions and higher inventories reflecting heightened input costs. Year-to-date FCF rebounded strongly to $489 million and Fitch expects FCF to remain above average this fiscal year with the absence of the one-time items incurred last year and significant planned improvement in working capital. Although the company is not required to make a cash pension contribution in fiscal 2012, it may make a voluntary contribution. General Mills has historically utilized its sizeable FCF for share repurchases and bolt-on acquisitions. Given the size of the Yoplait acquisition, General Mills has substantially reduced share repurchases this year, as evidenced by $112 million net share repurchases in the first half, in comparison to $779 million in the same period last year.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011),
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011),
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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