Moody's Investors Service ("Moody's") has upgraded the long-term senior unsecured debt rating of General Mills, Inc. ("General Mills") to A3 from Baa1. Moody's also affirmed the company's Prime-2 commercial paper rating. The rating outlook is stable.
The one-notch upgrade to A3 recognizes the improved and stable operating performance that General Mills has achieved in recent years through a combination of cost efficiency initiatives that have enhanced cash flow, and a more disciplined business strategy focused on improved product mix and profit margin expansion. The upgrade also reflects the moderation of financial policies that have been more balanced than they were several years ago. Additionally, the A3 rating is supported by the company's diverse portfolio of strong brands including Big G cereals, Pillsbury, Nature Valley, Progresso and Yoplait and its top-tier market share positions in its core food categories.
General Mills's Holistic Margin Management program launched several years ago has produced lasting operating improvements through better product mix, supply chain streamlining, product redesigns and other profit enhancing initiatives.
"Recent initiatives have contributed to stronger profit margins and stronger cash conversion, which have funded successful incremental investments in marketing, promotions, product development and targeted acquisitions," said Brian Weddington a Moody's Senior Credit Officer. "These improvements along with a more predictable financial policy have strengthened Mills's credit profile," added Weddington
Two recent acquisitions -- Brazil-based Yoki Alimentos in August 2012 and the international Yoplait business in July 2011, each around $1 billion -- caused short-term increases in leverage and were both dilutive to General Mills's profit margins. However, in each case, the company scaled back its share repurchases sufficiently to restore its credit metrics within 18 months following the respective transactions. Moody's views both acquisitions as strategic and long-term credit positives based on the greater access to international markets they provide for the company's broad portfolio of branded products.
General Mills is well positioned at the A3 rating category. However, if the company is able to maintain stable operating performance, and strengthen its credit metrics, the ratings could be upgraded. Quantitatively, retained cash flow/net debt would need to be sustained above 23% to warrant an upgrade. Alternately, ratings could be downgraded if operating performance deteriorates materially in one of General Mills' core categories, or financial policy becomes more aggressive in terms of share repurchases or acquisitions such that retained cash flow/net debt falls below 16% or debt/EBITDA is sustained above 3.0 times.
General Mills, headquartered in Minneapolis, MN, is a leading manufacturer of packaged food products. Its leading brands include Betty Crocker, Häagen-Dazs, Pillsbury, Yoplait, Green Giant, Old El Paso, Progresso and Cheerios. For the last twelve months ended February 24, 2013 the company reported net sales of $17.4 billion.
The principal methodology used in this rating was Global Packaged Goods published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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