DBRS Confirms Ratings of General Mills Inc., Changes Trend to Negative

DBRS has today confirmed the long- and short-term ratings of General Mills Inc. (GMI or the Company) at A (low) and R-1 (low) respectively, but has changed the trend on the long-term rating to Negative from Stable. Debt-financed share repurchases combined with moderating growth in operating income and cash flow have resulted in pressure on the Company’s financial profile (DBRS lease adjusted cash flow-to-debt was 21% for the twelve month period ending November 25, 2007 compared with 25% for the fiscal year ending May 27, 2007).

GMI’s profitability continues to be driven by its strong portfolio of brands (i.e., market positions) and large scale, stabilized by good product and improving geographic diversification. However, input and energy costs have become an increasing source of pressure over the course of H1 F2008. Although top-line increased approximately 7% during this period, operating income increased only 4% (and only 1.8% in Q2 F2008) as efficiency gains and price/mix improvement have begun to lose pace with sharply increasing input and operating costs.

Going forward, DBRS expects GMI’s revenue growth rate to stay in the mid single-digit range in the near-term primarily as a result of further price/mix increases and good momentum in yogurt, grain snacks and the International segment. That said, DBRS is concerned about the Company’s ability to maintain gross and operating margins at recently achieved levels as pricing and further efficiency improvements may not be sufficient to offset sharp increases in input and operating costs. At the same time, DBRS is becoming increasingly concerned about the impact that further price increases will have on volume growth going forward. As such, DBRS expects growth in operating income will be more challenging to achieve, resulting in further pressure on the earnings profile over the near- to medium-term.

In terms of financial profile, DBRS expects that capital expenditures will increase further in F2008 as GMI continues to increase investment in growth and cost savings programs, before moderating in F2009. We also expect the Company to continue with regular increases in its dividend rate that will result in marginally higher overall cash distributed via dividends.

As such, DBRS believes that GMI will be under pressure to reduce its absolute level of net debt and improve cash flow-to-debt in a meaningful way by the end of F2008. DBRS also understands that GMI intends to use free cash flow and some debt for share repurchases in F2009 and beyond.

DBRS is concerned that GMI may pursue its longer-term financial policy objectives without an appropriate improvement in operating income, which would result in further pressure on the current long-term rating. However, should GMI be successful in achieving growth in operating income and/or use a portion of free cash flow to reduce debt such that credit metrics recover (i.e., DBRS lease adjusted cash flow-to-debt toward the 25% level) over the next six to 12 months, the trend on the long-term rating could be revised to Stable.

In terms of liquidity, the Stable trend for the short-term debt rating reflects DBRS’s view that GMI’s cash generating capacity and access to financing sources will continue to meet the capital needs of the Company and remain consistent with the R-1 (low) category in spite of the recently increased pressure on operating income and financial metrics.

Note:
All figures are in U.S. dollars unless otherwise noted.