Fitch revises General Mills outlook to positive

by Eric Schroeder
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CHICAGO — Fitch Ratings has affirmed several credit ratings for General Mills, Inc. and revised the Minneapolis-based company’s rating outlook to “positive” from “stable.” In issuing the positive rating, Fitch said General Mills’ credit metrics displayed more improvement than previously expected due to continuing solid performance, modest input cost deflation and a conservative financial strategy that favored debt reduction over share repurchases.

Among the credit ratings that were affirmed were General Mills’ long-term issuer default rating, senior unsecured debt and senior unsecured credit facilities, all at BBB+. The company’s short term issuer default rating and commercial paper, meanwhile, were affirmed at F2.

During fiscal 2010, General Mills reduced debt by $671 million and completed only a modest level of $303 million net share repurchases, Fitch noted.

“If General Mills demonstrates that it is committed to maintaining leverage (total debt to operating EBITDA) in the low 2 times range, even if leverage rises slightly from the current level, it could lead to a positive rating action,” Fitch said. “In contrast, if debt financed share repurchases, acquisitions and/or material unexpected margin deterioration result in sustained leverage (total debt to operating EBITDA) materially higher than the current range, the outlook may be revised back to stable.”

Additionally, Fitch said the ratings consider General Mills’ operating earnings growth and substantial internally generated liquidity, which provide the company with ample financial flexibility. The ratings also consider the company’s leading market positions and strong brand equity in its major product categories such as cereal, yogurt, soup and snacks.

“While the growth of private label food products remains a risk, average private label market share in General Mills’ major categories remains below the market share of private label in total food categories due to the strong brand equities of many General Mills’ brands,” Fitch said. “Packaged food companies have benefited from the shift toward eating more meals at home as consumers focus on value during weak economic conditions. However, food companies have increased their promotions and advertising to compete for value conscious consumers. Also, sales in food service divisions have suffered along with weak restaurant industry trends.”

Over the past four fiscal years annual free cash flow has averaged more than $750 million and was nearly $900 million in fiscal 2010, according to Fitch. Fitch anticipates that General Mills will utilize its sizeable free cash flow for share repurchases and bolt-on acquisitions.

Net sales at General Mills grew 4% on a comparable basis during fiscal 2010, a growth rate that Fitch said is sustainable.

“General Mills’ margins and operating fundamentals remain among the top tier in the sector,” Fitch said. “Operating margins improved in fiscal 2010 as a result of modest 3% input cost deflation combined with Holistic Margin Management (H.M.M.) efforts, which include cost-savings initiatives, marketing spending efficiencies and sales mix enhancement. In fiscal 2011, sales growth is likely to be primarily volume driven and 4% to 5% input cost inflation is expected to be offset by H.M.M. initiatives.”
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