(The following statement was released by the rating agency) CHICAGO, April 07 (Fitch) Fitch Ratings has affirmed General Mills Inc.’s (General Mills) Long-Term Issuer Default Rating (IDR) at ‘BBB+’ and short-term IDR at F2. The ratings apply to approximately $ 9.7 billion of total outstanding debt. The Rating Outlook has been revised to Negative from Stable. A full list of rating actions follows at the end of this release. The Outlook revision to Negative reflects the potential risk that that General Mills is unable to stabilize revenue and grow EBITDA after two years of declining organic growth in key categories such as cereal, yogurt and convenient meals. Fitch currently expects EBITDA to remain flat within the $ 3.4 billion to $ 3.5 billion range over the next three years, with adjusted leverage remaining around the current 2.8x level. This assumes that revenue trends improve to negative 1% by fiscal year 2019. A rating downgrade could occur if General Mills’ revenue continues to be under pressure, resulting in EBITDA declining to less than $ 3.2 billion and leverage trending above 3x. The revision also reflects General Mills concurrent increase in share repurchases. The rating continues to reflect the strong brand equity within General Mills’ product portfolio, the company’s geographic diversification, strong cash flow and above industry margins, and generally strong credit measures. KEY RATING DRIVERS Strong Brands, Challenged Growth: General Mills has one of the more diversified product portfolios in the industry, with strong brand equity 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. There has been pressure on many of these categories over the past few years. Industry sales in the United States for the cereal category have declined steadily at a low- to mid-single-digit rate since peaking in 2011. Yogurt sales have also declined over the past year. The category had been one of the faster growing categories due to its healthy food perception, and the popularity of Greek yogurt began to decline over the past year. New competition and lack of growth is taking a toll on the sector. These two categories are considered focus brands and make up approximately one-third of General Mills’ sales. General Mills has reported sales declines for six out of the past seven quarters since fiscal second quarter 2014. Furthermore, sales for all of General Mill’s product categories fell from fiscal 2015 to fiscal 2016. Some of this decline is attributable to secular changes in food preferences, some is a result of execution issues by General Mills and some is a function of the effect that a strong U.S. dollar has on international operations. For example, the decline in cereal (16% of fiscal 2016 sales) appears to be a function of changing customer preferences. General Mill’s U.S. Cereal sales’ decline is in line with the industry, whereas the double-digit decline in General Mill’s yogurt sales (17% of sales) over the past year, is much greater than the low-single-digit industry sales decline. The yogurt decline can be attributed to innovation that did not work and price increases that were out of line with the industry. Aggressive price increases can also be blamed for recent volume weakness in soups and dough. To address changing preferences, the company is renovating its brands to meet wellness and simplification trends and re-adjusting its portfolio. The company has had success in innovation with some of its smaller brands, such as the new Larabar snack bars, the Old El Paso Mexican food business and Annie’s branded organic products, but other areas such as yogurt continue to struggle. Fitch expects the company will continue shaping its portfolio with dispositions of slow- or negative-growth brands and acquisitions in faster-growing categories. In the near- to intermediate-term, Fitch expects organic growth to be challenged and trend negative in the low single-digit range beyond fiscal 2017 given the continued declines in the cereal and yogurt business. Reasonable Leverage, but Edging Higher: Historically General Mills has maintained a leverage (gross debt/EBITDA) ratio comfortably below 3x. Occasionally the company would lever up to a low 3x level for an acquisition and then use its free cash flow (FCF) and asset sales to quickly delever. However, leverage has crept up to 2.8x over the past 12 months as a result of increases in debt for share buybacks and flat EBITDA due to top line challenges. General Mills generates enough FCF to delever if necessary, but that cash flow is currently being returned to shareholders. Over the last 12 months, General Mills bought back $ 1.4 billion of net shares and paid out $ 1.1 billion in dividends, while generating $ 2.3 billion in funds from operations and spending $ 727 million in capital expenditures. The company has an annual share buyback target of 2% of outstanding shares. The quarterly dividend currently approximates $ 280 million and is typically increased annually. In February 2017, General Mills communicated its financial policy at the February 2017 Consumer Analyst Group of New York (CAGNY) conference where it highlighted having paid out to shareholders 110% of FCF over the past three years. Fitch expects debt balances to remain roughly flat over the next two years with FCF being directed to shareholders versus debt paydown. However, debt-financed share buybacks that take leverage towards 3x would be a rating concern. Credit Protection Measures Benefitting from Cost Restructuring Programs: 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 and offset top-line weakness, resulting in EBITDA remaining flat in the $ 3.5 billion range. In December 2016, General Mills reiterated its confidence in increasing EBIT margins to 20% by fiscal 2018, from the current 2017 target of 18%. Fitch views the 2018 goal as ambitious given the current revenue challenges. Fitch’s current 2018 forecast is for an EBIT margin in the mid-18% range. Fitch does expect FCF to remain strong at greater than $ 700 million annually beyond fiscal 2017(ending May 2017). KEY ASSUMPTIONS Fitch’s assumptions in its base case projections are as follows: –Mid-single-digit sales declines for fiscal 2017 and low-single-digit decline in fiscal 2018, improving gradually towards flat to -1% thereafter, reflecting continuing challenges within the cereal and yogurt business. –EBIT margin (adding back approximately $ 100 million of non-cash stock-based compensation) of 18.5% in fiscal 2017, gradually increasing to the 19% range by 2019. –EBITDA margin expected to expand by about approximately 200bps from 21% in fiscal 2016 to 23% in fiscal 2019 due to cost management initiatives, resulting in flattish EBITDA of around $ 3.5 billion. –FCF (after dividends) is expected to remain strong, coming in above $ 700 million annually. Fitch expects the cash will be used primarily for share buybacks. –Debt/EBITDA remains in the high-2x range. SENSITIVITIES Fitch could stabilize its Outlook if there is increased confidence in General Mills’ ability to improve organic growth trends as projected above and management’s financial policies do not result in further increases in leverage. Future developments that could potentially lead to a negative rating action include: Organic growth sustained in the negative 3%-5% 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. To reach 3x, EBITDA would have to decline by mid- to high-single digits or debt would have to increase by approximately $ 800 million from current levels. A positive rating action could result if the company commits to maintaining 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. This is not anticipated at this time given recent performance and current leverage. LIQUIDITY Ample Liquidity: As of February 2017, General Mills maintained $ 2.7 billion undrawn of a committed unsecured revolving credit facility which supports its commercial paper (CP) program, and expires in May 2021. CP outstanding totals $ 1.64 billion, netting to $ 1.06 billion of availability under the $ 2.7 billion facility. (Note: Subsequent to the most recent quarter, in March 2017, the company issued Eur300 million in floating-rate notes due March 20, 2019, and the proceeds were used to refinance CP outstanding – increasing availability under the revolver.) In addition, Yoplait SAS has a Eur200 million senior unsecured revolver due June 2019 that is consolidated on General Mills balance sheet. The Yoplait facility is fully drawn. Finally, General Mills has cash of $ 899 million, with the majority held overseas. FULL LIST OF RATING ACTIONS Fitch has affirmed General Mills Inc.’s ratings 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+’. Fitch also assigned a ‘BBB+’ rating be assigned to General Mills’ Eur300 million senior unsecured floating rate notes due 2019. The Rating Outlook is revised to Negative. Contact: Primary Analyst Ellen Itskovitz, CFA Senior Director +1-312-368-3118 Fitch Ratings, Inc. 70 West Madison St. Chicago, IL 60602 Secondary Analyst Monica Aggarwal, CFA Managing Director +1-212-908-0282 Committee Chairperson Carla Norfleet Taylor Senior Director +1-312-368-3195 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. 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 restructuring costs. For example, Fitch added back $ 89.8 million in non-cash stock-based compensation and $ 78.4 million restructuring related costs in 2016. 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