The nation's largest packaged-food companies, including General Mills, should see strong cash flows this year as cost-cutting programs finally pay off, ratings agency Moody's said in a new report.
Food manufacturers have seen their sales slowly drop over the last several years as consumers increasingly shun processed and packaged foods in favor of fresher foods.
This has left Golden Valley-based General Mills and many of its peers with very few options for improving profitability other than cutting costs.
In the report issued Thursday, Moody's said it expects these cuts to result in stronger cash flows over the next 12 to 18 months for key players like Kraft Heinz Co., Mondelez International, Campbell Soup Co., Kellogg Co. and General Mills.
But it's not a long-term solution, Moody's warned, and the most successful cost-cutter, Kraft Heinz, could use that extra cash to buy one of its industry peers.
Many on Wall Street believe Mondelez is the top target for a potential Kraft Heinz acquisition. But the company's strong international presence could overexpose Mondelez to geopolitical turmoil, making it less attractive. A report published last week by Bernstein analyst Alexia Howard suggests General Mills is just as likely a target for Kraft Heinz as Mondelez.
Kraft Heinz, controlled by Berkshire Hathaway and 3G Capital of Brazil, has undergone the most severe cost-cutting efforts, a trademark tactic of 3G. The rest of the industry, likely in an attempt to ward off a takeover bid and meet profit margin goals, has followed suit. General Mills and Mondelez are best positioned to meet their aggressive profitability goals, Moody's said.
Companies have to be careful not to cut too far, Moody's said, adding, "But so far most companies are trimming fat, and not yet muscle." General Mills executives said in December they may have cut too deeply in the wrong places last quarter, but they expected to rebalance with more reinvestment in its business this quarter.
"Longer-term industrywide cost-cutting activity poses some risk of damaging brand strength," Moody's said, adding that the austere approach taken by Kraft Heinz runs the risk of starving the business.
"We also believe that in such an environment, employees can become demoralized, which can lead to erosion of peak productivity and high turnover. To avoid these kinds of pitfalls, most companies tend to pursue more modest and narrowly defined cost cutting programs," Moody's said.
Moody's said General Mills should save $620 million as it approaches the end of its three-year cost-savings initiatives, which were called Project Compass, Project Catalyst and Project Century. The programs streamlined facilities, reduced overhead costs and improved international efficiencies.
The company announced a global-restructuring plan in December, including cutting up to 600 jobs. Moody's believes General Mills will reinvest this additional cash in acquisitions that will accelerate its growth into the "better-for-you" category, much like it did with the purchase of organic-foods company Annie's.
"Acquisition targets in these categories will likely carry high valuations," Moody's said, "But because Mills has a demonstrated ability to extend acquired brands across several attractive categories, we think these high valuations are more affordable to General Mills than for most of its peers."
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