OREANDA-NEWS. February 12, 2016. Fitch Ratings has affirmed General Mills' long-term Issuer Default Rating (IDR) at 'BBB+' and its short-term IDR at 'F2'. The Rating Outlook is Stable.

A full list of ratings follows at the end of this release.

KEY RATING DRIVERS
Strong Brands, Modest Growth:

Fitch considers General Mills to have one of the better 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 is focused on five categories (Cereal, Ice Cream, Yogurt, Convenient Meals and Sweet & Savory Snacks) which comprise roughly 75% of its portfolio. Given pressure on a number of categories such as cereal which declined 5% over the past several years, the company's organic growth has been essentially flat over the past four years despite growing or maintaining market share in 65% of its categories.

Over the past five years, the company has rotated its portfolio moderately towards the faster-growing snacks and yogurt categories from roughly 25% to nearly 40%. These categories are expected to grow in the mid to high single digit range. It has also sold its Green Giant vegetable brand which reported a sales decline of 11% last year. Fitch expects that the company will continue shaping its portfolio and that dispositions of slow or negative growth brands and acquisitions in faster growing categories will place it in a good position to meets its long term public goal of low single digit organic top line improvement.

Leverage Returns to Mid-2x, Expectations Met Early:

The company's debt increased to more than \\$10.5 billion with the \\$821 million acquisition of Annie's, Inc. in October 2014. Annie's revenues and EBITDA were not material to the consolidated enterprise and leverage peaked at 3.2x in the quarter the acquisition closed. Since then, General Mills has been focused on deleveraging. A combination of internally generated cash flow and approximately half of the \\$780 million in proceeds received from the Green Giant brand divestiture was used to reduce debt by more than \\$1.7 billion to \\$8.8 billion at Nov. 29, 2015. Leverage at the last 12 months was just under 2.6x and lower than the 3x Fitch expected at the end of this fiscal year.

Fitch expects debt balances to remain roughly flat over the next two years but that leverage should track down modestly to the company's long-term average of 2.4x with EBITDA growth spurred mainly by several cost saving efforts. While an acquisition could take leverage above the mid 2x range, the company has shown willingness to pay down debt post acquisitions to return metrics to mid 2x levels.

Consistent Credit Protection Measures:

General Mills' 20% EBITDA margin is generally among the sector's top tier and has shown little variability over the past 10 years. Similarly, the free cash flow (FCF) margin has been 4.5% or better after adjusting for a one-time \\$385 million tax settlement in 2011.

KEY ASSUMPTIONS
--Low single-digit organic sales growth for fiscal 2016 and fiscal 2017;
--FCF is expected to be \\$800 million in 2016 and \\$1 billion in 2017, which Fitch expects will mainly be used towards share buybacks;
--Fitch expects leverage will remain in the mid 2x range.

RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:

--A negative rating action could occur if organic growth is negative and sustained in the negative low-single digit range as it indicates 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.

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 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed its ratings on General Mills and its subsidiaries 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 (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+'.