The ratings for General Mills, Inc. and General Mills Canada Inc., which are guaranteed and based upon the parent General Mills, Inc. (“General Mills”), are confirmed as indicated above, all with Stable trends. The ratings are confirmed following the announcement by General Mills that its early experience with the integration of the Pillsbury acquisition (completed October 31, 2001) has been more challenging than originally expected. Disruptions to Pillsbury’s operations were encountered following the transition of its broker-based business into General Mills’ internal sales team, the management of which subsequently caused one-time disruptions to General Mills’ core operations. As such, volume trends for the entire U.S. retail business were significantly below plan for December 2001 and January 2002 and are anticipated to result in a 3%-4% decline for the third quarter of F2002 versus original low single digit gains. This will result in a notable earnings disruption for the current period and a subsequent moderate decline in operating cash flow for F2002 as a whole.
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Going forward, these initial problems are anticipated to be temporary in nature and should be improved upon as management continues the Pillsbury integration process. Nevertheless, integration difficulties are now seen to be more apparent and will take longer than originally anticipated, with commensurate revenue and synergy savings more challenging. Furthermore, while DBRS is comfortable with the higher debt levels (considered in the October 2000 downgrade of all of the above ratings when the acquisition was originally announced), the greater leverage would be considered more problematic if operational and integration challenges were to continue.
Balance sheet concerns are offset to a degree through the previously announced management commitments for extensive debt reduction concessions (including a gradual reduction in the high dividend payment ratio and cessation of share repurchases) and, as expected, proceeds from the sale of certain Pillsbury assets, including the US$640m sale of the North American retail ice-cream business to Nestlé SA in December 2001. With these concessions and the expected level and stability of pro forma operating cash flow, General Mills is being credited for an anticipated recovery of the currently much weaker balance sheet and lower coverage ratios to acceptable levels within a reasonable period of time.
Operationally still Pillsbury holds many positive aspects for General Mills and will raise the sales base to about US$13bn. The aggregate brand portfolio is considered stronger and more balanced with the majority of sales in categories where General Mills has a leading position. A large portion of profits are still produced domestically but international sales are now higher and, along with better category diversification, should aid results’ longer-term stability. Low category growth, mature markets and product lines, intense competition, and consolidation of global food retailers continues to limit growth opportunities.
Note: The corporate rating represents the highest rating applicable to the direct obligations of the Company.
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