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Fitch affirms General Mills' ratings; maintains negative outlook

Fitch Ratings on Feb. 14 affirmed General Mills Inc.'s long-term issuer default rating at BBB but maintained its negative outlook to reflect the risk that the company's gross leverage remains above 3.5x in fiscal 2021.

The rating agency said the affirmation reflects General Mills' position as a leading packaged food and meats producer globally. It also cited the company's strong brands, high EBITDA margin and solid free cash flow offset by elevated leverage following the company's acquisition of Blue Buffalo Co. Ltd. as well as weak volume trends across most business segments.

General Mills posted weak volume trends for the legacy business in the first half of fiscal 2020 ended Nov. 24, 2019, led by declines in its international businesses, excluding Asia and Latin America. Total volume declined 1%, year to date, compared with a 2% drop in the corresponding year-ago period, primarily due to an 8% decline in international volume. Only the company's pet segment reported positive volume growth, helped by the distribution expansion of the acquired Blue Buffalo products into the food, drug and mass-market classes of trade.

Fitch expects the company's organic revenue growth to remain flattish through fiscal 2020 and grow 1% annually in 2020-2021, largely driven by upper single-digit growth for Blue Buffalo and its increasing contribution to General Mills' total revenue.

Based on current EBITDA projections, Fitch said the company would need to continue to pay down debt in the range of $1.5 billion to bring gross debt/EBITDA to 3.5x in fiscal 2021. General Mills improved its gross leverage by around half a turn to 4.1x at year-end fiscal 2019 since the purchase of Blue Buffalo in 2018 when pro forma leverage stood at 4.7x.

Fitch said it could upgrade the ratings of General Mills if it sustains stable volume-led, organic growth at or above market rates for a significant portion of its categories as well as managing to maintain gross debt/EBITDA below 3.0x.

Conversely, a downgrade could happen if General Mills fails to improve volume trends in its legacy business, if there is lower than expected contribution from Blue Buffalo, or if profit margin falls such that EBITDA fails to improve from fiscal 2019 level of $3.6 billion.