K Krause Fund Research Fall 2016

Consumer Staples

Recommendation: HOLD

Analysts Zachary Denny zachary-denny@uiowa.edu

Benton Peller benton-peller@uiowa.edu

Company Overview General Mills (GIS) started as a simple flour mill 150 years ago and is now a global food producer headquartered in Minneapolis, MN. Their familiar brand names have been around for decades and continuously generate high revenues in a competitive and ever-changing market. GIS attributes its longevity to its ability to adapt to consumer demands. It has adapted successfully via new products and strategic acquisitions. The current management team has been in place since 2007, understands the business, and is dedicated to strong long-term growth and creating shareholder value.

Stock Performance Highlights 52-week High $72.95 52-week Low $53.53 Beta Value 0.65 Average Daily Volume 3.35 m

Share Highlights Market Capitalization $36.1 b Shares Outstanding 591.38 b Book Value per share 9.68 EPS 2016 $2.83 P/E Ratio 17.75 Dividend Yield 4.66% Dividend Payout Ratio 62.9%

Company Performance Highlights ROA 7.91% ROE 28.06% Sales $16.26 b

Financial Ratios Current Ratio 0.785 Debt to Equity 132.6%

General Mills (NYSE: GIS)

November 15th, 2016

Current Price: $61.20 Target Price: $59.00 - 67.00

Restructuring Today for a Better Tomorrow

• Revenues: We expect future revenues to decrease in2017, but rise thereafter as GIS shifts their focus from cuttingcosts to generating new revenue sources.• Margins: Margins are expected to increase, resulting inlow single digit growth in net income. We expect this to helpGIS pay continually higher dividends.• Dividends: GIS has had historically high dividendgrowth and management is dedicated to a continued 6-8%growth in dividends even as revenues continue to slow. Theirdividend yield currently sits at 3.15%, which produces asteady stream of income for shareholders. Management iscommitted to high payout ratios to maximize return toshareholders.• Valuation: Our DCF model realizes an internal price of$63.94, and our DDM model expects a price of $62.81. This is well in line with our relative multiples valuation method which produces a price of $59.74. • Stock Price: GIS realized a jump in their stock at theirfiscal year end in July 2016 due to better than expectedearnings reports. We believe the market overreacted, whichis why the price has been declining since.

One Year Stock Performance

Source: Yahoo Finance

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We believe that General Mills (GIS) is a safe, mature company in which to invest. Currently, there is a major focus on restructuring in attempts to lower costs and raise margins. However, with recent declines in revenues due to changes in consumer preferences, we believe that in the short-run revenues will struggle to create organic growth. General Mills sold their Green Giant brand and acquired Annie’s over the past 5 years with the intent to adjust to consumer demand for more organic foods. GIS is constantly adjusting to meet consumer demand, but we don’t foresee impactful revenue growth. For those reasons, we are issuing General Mills a HOLD rating.

We believe there are five key economic drivers that affect the consumer staples sector. They are gross domestic product, unemployment rates, consumer confidence, interest rates, and inflation.

Gross Domestic Product Real gross domestic product (GDP) is the total monetary value of goods and services produced within a nation’s borders in a given time period, after adjusting for inflation. GDP functions as a primary indicator of economic health.

Consumer staples is a defensive, non-cyclical sector with an average beta of .68, which means their stock prices tend to do well when GDP lags and when GDP is strong.i This is because their products typically have a low price elasticity of demand. However, there are enough substitutes that suppliers have difficulty raising prices. Instead they must focus on differentiating their products. During times when GDP and the overall economy are strong, name brands tend to do better than private labels. When GDP is lower and the overall economy doesn’t perform well, the reverse is true. We saw these trends after the great recession as private label spending decreased 10% from 2009-2012.ii

Source: FRED

Since the great recession, GDP has been on a slow, yet positive growth trajectory, as seen in the graph above. Over the past six years specifically, GDP has grown between 1.5%

and 2.6%, with 2016 third quarter annualized growth at 2.9%, implying a potential economic upswing in the coming quarters.iii We expect GDP to increase at a rate of 2.2% over the next 2-3 years due to recent increases in household income and consumer spending. This equates to slow, but solid, growth for the consumer staples sector.

Unemployment Unemployment, like GDP, is one of the first indicators of economic health. As mentioned above, consumer staples tend to be in high demand regardless of economic strength thanks to the necessity of their products (e.g. food, beverages). However, consumers will shift their spending to low-cost private label brands as unemployment increases.

The graph below shows US civilian unemployment levels over the previous 10 years. Since the great recession, unemployment has been cut by more than half and now lies at 4.9%.iv As unemployment falls, wages tend to increase. Per Bloomberg, wages increased 5.2% over 2015, which has allowed for increased consumption of consumer staples, especially name brand goods. We expect unemployment to remain around 5% over the longer term, thus having little effect to the consumer staples sector.

Source: FRED

Consumer Confidence The consumer sentiment index is based on a phone questionnaire of 5000 U.S. citizens to gauge the health of the U.S. economy from the point of view of the average person. Each caller answers questions on three economic categories: their own situation, their view on the short-term economy and their view on the long-term economy. The data collected in this poll is used to help evaluate the level of consumer optimism or pessimism. If consumer sentiment has increased, it means that consumers are optimistic about the health of the U.S. economy and are more likely to spend more money on discretionary goods, which is typically a good thing for the stock market. If consumer sentiment has decreased, it means that the average consumer is pessimistic about the future of the U.S. economy, which usually results in a decrease in the overall stock market. It is important to note that the overall trend in consumer confidence is what matters, not the specific numerical change.

Historically, the consumer sentiment survey has been a lagging variable behind the general market trend. The index generally falls below 100 during times immediately

Executive Summary

Economic Outlook

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following large drops in the stock market and in the period right after, as people are more cautious about their discretionary spending. Consumer sentiment does not have a large influence on the price of consumer staples stocks due to the necessity of the goods purchased at any time during the business cycle. In other words, when confidence decreases and consumers are shifting their spending behavior, they will still buy consumer staples at a similar rate. This is seen in the below graph, which shows that when the consumer index was above 100, consumer staples prices were primarily stagnant, and following the financial crisis consumer staples increased in value even though consumer sentiment was low.

Source: Yahoo Finance

Barring sudden changes to the overall trend the market has shown, we forecast that consumer confidence will continue to rise as the overall stock market continues to rise. If the consumer confidence index continues above 100 in the zone of economic optimism, we would expect that the consumer staples index to begin to stagnate as we saw between the years of 1998 and 2008. As consumers become more optimistic in the economy and spend more in other sectors of the economy, investors will flock to the areas where the money is flowing.

Interest Rates The Federal Reserve has the ability to change the interest rates at which commercial banks can borrow money. By changing this rate, the Fed can increase or decrease the supply of money in the economy, which has an immediate effect on inflation and slight lagging effect on GDP growth. If commercial banks are able to borrow money more cheaply, it means that they can lend it to consumers at a lower rate as well. This entices consumers and businesses to borrow money to make big purchases like cars, houses or capital investments, which is beneficial for the economy.v

If the Fed believes that the economy is growing too rapidly, then they will raise rates in attempt to reduce the supply of money in the marketplace, which reduces capital investment, and vice versa if the economy is slowing. Historically the federal funds rate has been between 5-10%, but since the great recession the Fed has set the rateat record lows. In December 2015, the Fed raised the rate

from 0.25% to 0.5%, which meant an effective rate of approximately 0.39%.

There is much speculation about another rate hike in December 2016. However, with the recent surprise election of President-elect Trump and the historically conservative nature of Janet Yellen’s decisions, there is more uncertainty about what will occur. We do expect a rate increase in December, which will have hurt the stock market and the consumer staples sector as well. If a rate hike does to occur, firms would be paying more for capital expenditures, which explains why we expect adverse effects of a rate raise.

Inflation Inflation is the rate at which the general level of prices for goods and services is rising, and, consequently, the purchasing power of currency falling.vi Consumer Price Index (CPI) and Producer Price Index (PPI) are both measures of inflation. The CPI represents a weighted average price of a basket of consumer goods and services. CPI is the most reliable indicator of inflation and is under close watch as it shows that inflation is at a 16-year low.vii According to the U.S. Bureau of Labor Statistics, over the last 12 months, the CPI inflation rate rose 0.8 percent before seasonal adjustment.viii

Source: FRED

The PPI is a family of indices that measure the average change in selling prices received by domestic producers of goods and services in the three stages of production: crude goods, intermediate goods, and finished goods.ix Because PPI is reported before CPI, it can show signs of inflation before the CPI index. PPI is important because it affects the input costs, which affects selling prices and revenues. A lower PPI is better for the consumer staples sector because it signifies lower input costs, thus leading to higher margins and higher net income.

A moderate inflation increase is best for the consumer staples sector because when price rises by small amounts, demand will not be significantly influenced, thus companies will realize higher profits. However, if inflation rates rise dramatically, consumer staple firms may have a harder time passing along inflation costs to consumers and must bear a

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larger chunk of the cost themselves. We expect inflation rates to slowly rise over the next couple years to surpass the Fed’s target of 2% annual inflation. This mild inflation would help the consumer staples sector because passing along costs is easier for them considering their products are less price elastic.

Capital Markets Over the past 10 years, the S&P 500 has realized a net 57% return while the consumer staples sector realized a net return of 95%, as shown in the graph below. This is explained by how consumer staples performed during the great recession. Typically, the consumer staples sectors will be less sensitive to the market due to low betas and relative safety. However, this also means that in times of high returns for the market overall, this sector likely won’t realize as strong of returns. Looking at year-to-date data confirms this, as the S&P increased 5.9% and consumer staples decreased -0.12%.x

Source: Fidelity

We predict that the consumer staples sector will not outperform the market going forward because of the prolonged slow growth of the economy. Since the demand for consumer staples is inelastic and low correlation with the market, its performance would not benefit from the recovering market as much as other sectors.

Industry Description The food products industry, an industry within the consumer staples sector, is comprised of 30 companies with two sub-industries: agricultural products and packaged foods and meat.xi Agricultural products include crop growers, owners of plantations, and companies that produce and process foods but do not package and market them. Packaged foods and meat includes producers of packaged foods including dairy products, fruit juices, meats, poultry, fish and pet foods, which is where General Mills is categorized.

Source: S&P Global Market Intelligence. xii

The end-user in this market is the people who ultimately consume the product. However, it is important to remember that for companies like General Mills, their direct customers are retailers such as Wal-Mart, a customer which accounted for approximately 20% of net sales in 2016 alone.xiii

Industry Trends Off brand consumption: Many millennials believe store brands match name brand products in flavor, packing and assortment; 37% of U.S. consumers prefer to buy store brands over premium brands.xiv This could have a large impact on General Mills’ revenues going forward because they rely so heavily on their premium name brand products.

Healthy foods: Also, as consumers become more concerned about their health, food industry companies have been forced to shift their focus to producing organic products. Recently, the organic food market has been growing fast and is expected to continue growing at a rate of 14% between 2013 and 2018.xv The biggest challenge to companies in food product industry like General Mills is meeting the constantly shifting demands of consumers, especially as smaller food producers are able to enter the market and adjust to customer preferences quicker than national brands.

Inorganic growth: With so many small, organic firms popping up and stealing market share, bigger companies such as General Mills are either acquiring or investing in them. General Mills acquired Annie’s in 2014 with hopes of strengthening their organic food lines. However, smaller companies don’t always provide high returns quickly and thus aren’t worth an outright acquisition. Instead, General Mills and some of its competitors such as Kellogg, Campbell’s Soup, and Kraft Heinz, have created a venture capital arm to invest and provide support for the start-ups.xvi This trend has allowed bigger firms to tap into specialized products that they otherwise would not consider.

Consumer demographics: The population of Hispanics in U.S. is growing faster than any other group and their tendency to eat at home more often has had an influence on the food product industry.

Industry Analysis

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Companies have released more Hispanic food products to attract this fast-growing population.

The aging baby boomer generation is becoming concerned about low saturated fat, cholesterol, sodium, and foods that are high in whole grains, protein, and calcium.xvii Also, they are substituting red meat with other protein food products since studies have shown that red meat is closely related to heart disease and cancer. With 76 million baby boomers alive today, their tastes and preferences will continue to be vital to consider going forward.

Porter’s Five Forces Analysis Industry Rivalry: High Because the food products industry is mature, there are several large players in the market. There are several large companies (Nestle, The Kraft Heinz Co., and Danone) and several smaller companies (Kellogg, Hormel Foods Corp., Campbell Soup Co., Conagra Brands Inc, and JM Smucker Co.) that General Mills directly competes with. With so many rivals in the market, it has become rather competitive, especially because they all create similar food products for customers to choose from. This threat of substitutes means that firms try especially hard to create brand loyalty so that customers repeatedly return to their products over competitors’ products. Brand loyalty is something that General Mills has done well in the past and has helped them stay a household name.

Threat of New Entrants: Low New companies must pass the approval from the U.S. Department of Agriculture and Environmental Protection Agency to start business. Both departments have a strict standard to protect and promote public health.xviii Many new companies lack the resources or knowledge to effectively comply with health guidelines and are often exposing themselves to safety violations, which could potentially dismantle their company before it takes off. Also, since current companies have already made contracts with retailers, it is often difficult for new companies to place their products on the shelves.

Threat of Substitutes: High As mentioned above, the treat of substitutes is high in this industry since the market is fully saturated. Customers can easily find substitutes for food products. Even though the food products are differentiated, many still function as substitutes in the eyes of consumers. To reduce the threat, companies have focused on establishing their brand names. General Mills became a household name by doing exactly that. Products such as Cheerios, Lucky Charms, Betty Crocker, and Wheaties have created especially strong followings over the years.

Bargaining power of suppliers: Low Suppliers in the food products industry are the farmers from whom food manufacturers buy the raw materials. Food processors typically consider price and quality when

choosing who to buy from, and because most of these producers are very large and have many options, they maintain most of the power in deciding the price. Also, if a farmer is picky and declines a certain price, they may not be able to sell all their material and will be forced to forego profits. However, the prices they pay also depend upon the end consumer and what they are willing to pay.

Bargaining power of buyers: High As mentioned above, this industry has many substitutes. This means that prices must remain low or else the buyer will find another product. Therefore, companies like General Mills must keep that in mind when pricing products and when buying the raw material from suppliers. However, we must keep in mind that the direct customer of food product companies is the retailer who is buying product in bulk. Take Wal-Mart for example. They have a lot of bargaining power since they make up 20% of General Mills’ revenues.

Catalysts for Growth/Change Food safety and health: More and more people are becoming vegan or vegetarian. In 2009, one percent of the U.S. population reported eating vegetarian or vegan. In 2015, 5% of the United States population is vegetarian and half of those people are vegan, and the number continues to rise. As a result, meat consumption was down a massive 12.2% from 2007.xix

These changes toward fresher, more organic food present a major food safety challenge for food processing companies. They must be cautious about where they’re buying their raw materials from, the processing process, and the shipping. Chipotle, for example, suffered from an E. coli outbreak at one of its Oregon locations, which hurt the brand and is still affecting sales today. General Mills, in an attempt to meet ever-changing demand, decided to make more cereals gluten free even though those who can’t eat gluten is limited to a small percentage. However, a small amount of wheat flour was accidentally used in the production of Cheerios in their Lodi, California plant, leading to a recall of 1.8 million boxes of Cheerios.xx Reputations of companies that fall prey to food safety hazards will suffer.

Emerging markets: Established markets still generate high profits for many package food & meat companies, but are becoming an increasingly difficult area to find organic growth. International and emerging markets account for 80 percent of the population but only 60 percent of global food consumption. Countries like India and China, where land is plentiful and labor is cheap, provide favorable conditions for the food products industry companies to expand.xxi Companies that are able to take advantage of these largely underdeveloped markets may see faster organic growth than those who remain solely in the mature North American market.

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Consumption habits: One of the biggest determinants of demand and revenues in the food product industry is the consumption habits of consumers. If more people are eating out, then the market is going to shrink, and vice versa. According to Bloomberg and shown in the graph below, Americans for the first time ever are spending more on dining out than on groceries. This will have a negative impact on sales for General Mills and its competitors. As well as the overall quantity of food demanded, exactly what consumers are demanding is important. We have mentioned before the growing trend in organic foods, but it is important to note that it remains a major catalyst for growth for companies that are able to adjust. It may require major research and development for some companies, while other approach this dilemma through acquiring organic food producing competitors.

Source: Bloomberg

Investment positives and negatives Positive: The food products industry is a defensive investment during times of low economic growth. It provides a stable, non-cyclical stock that often returns strong dividends to shareholders. The food products industry historically realizes gross margins in the 18%–26% range (22.7% average from 2006 to 2015). Normalized net income for the food products industry increased 40.0% between 2005 and 2015 and rose at a CAGR of 3.4%. Food products industry interest coverage improved from a 10-year low of 4.1x in the third quarter of 2006 to a high of 9.6x in the fourth quarter of 2013.xii This stable growth and ample interest coverage makes the food products industry the safe choice for the investors during major economic and stock market downturns.

Negative: Although the food products industry is a relatively stable market, some situations that will influence growth may be out of their control. For example, agricultural products are extremely susceptible to harsh weather. Furthermore, the food product industry is a mature industry, which makes it difficult for companies to produce major innovation. Another negative is the potential downside of shifting consumer preferences because some companies will not be able to adjust.

Financial Statistics of Leading Competitors

Source: Morningstar

Operating margins and profit margins are the most important statistics to evaluate for companies in Food Product industry since the market is fully saturated. General Mills has higher margins in both areas, which implies they are being more efficient than competitors of similar size with similar products. However, they have a high debt to equity ratio in comparison, which implies higher interest payments on debt than competitors, thus limiting their ability to raise capital in the form of debt. Overall, General Mills’ key financial statistics match up well against its competitors.

Source: Bloomerg

Executive Summary General Mills (GIS) is a mature company whose business model, management decisions and products placement are all forward-looking projects that will enable them to achieve stable growth for a long time. Their familiar brand names have been around for decades and have continuously created high amounts of sales in competitive markets. GIS’s ability to create new products and acquire new ones to add to their portfolio has been a strength for them in the past and has enabled them to expand their offerings to different target consumers. They are working on expanding their international presence in both mature and emerging markets as well.

Even though recent sales numbers for GIS have been stagnating, they are an incredibly stable company that will

Company Analysis

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almost always make a profit, pay back dividends, and repurchase shares for the benefit of their shareholders. With revenues growing at low rates over the past decade, they have become and are continuing to become more efficient in their operations, causing their margins and earnings per share to increase over time.

General Mills is proud to consider itself one of America’s oldest corporations and one that has paid dividends to stockholders for 117 consecutive years, even before it was known as General Mills. The current management team under Kendall Powell attributes GIS’s longevity to its ability to adapt to changing consumer demands. This management team under Powell has been in their current positions since 2007 and have worked many years at GIS.xxii According to senior leadership in the most recent GIS 10-K, current long-term goals to continue steady progress are to: • Grow net sales at a low single-digit annual growth rate.• Grow total segment operating profit at a mid-single-digit

annual growth rate.• Grow diluted EPS at a high single-digit annual growth

rate.• Improve adjusted return on average total capital.• Shoot for free cash flow conversion averaging above 95

percent of adjusted net earnings after tax.• Return cash to shareholders averaging above 90 percent

of free cash flow, including an attractive dividend yield.

Market Overview The U.S. market for processed food is around $750 billion with GIS accounting for about 1.3% of all industry sales in the U.S.xxiii Internationally, processed food is estimated to be around $2 trillion with GIS accounting to around 0.13% of that market. In the most recent fiscal year for GIS, they experienced decent growth in developed counties, but poor growth in emerging markets. Future demand for processed food will be reliant on population growth as well as on economic and infrastructure development in international markets. From the graph below it visible to see how the differing segments compare to each other. In the international sector, there has been a decline in sales and a decline in operating efficiency. This could be due to the early stages of GIS’s entry into these international marketplaces. As their name brand products penetrate the market, we are expecting this margin to improve because relationships with suppliers and customers become stronger and more information is known about their target consumers. GIS management has recently authorized a plan called “Project Compass”, which is a restructuring plan for their international business.xiv This is designed to increase long-term growth by increasing organizational effectiveness and reduce administrative expenses.xxiv

Source: General Mills 2016 10-K

The current market trend has shown that the demand for foods at grocery stores has remained roughly the same since 1993. The graph below shows the gross sales of grocery stores and the CPI at an indexed level. Over the last 20 years, sales for grocery food products has increased at around the same rate of inflation. That would mean that real demand for grocery items has remained about the same over the last 20 years. However, there has been a recent indication in the last 5 years that real demand for grocery items has increased. It is difficult to determine if this trend is to continue as there has been no precedent in history.

Source: FRED

As mentioned before, a popular trend in the food products industry is that organic and environmentally sustainable products are becoming more and more popular. Whole foods grocery stores have expanded operations and existing retail stores have also begun to include health food markets of their own. General Mills is in a strong position to take advantage of this change in consumer habits because they own iconic organic brands such as Annies, Cascadian Farms, Liberte and Larabar.

Source: Statista.com

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Products General Mills has several product lines with major brands in the snack foods, baked goods, and dairy. Their primary brands are their ready-to-eat cereals, Betty Crocker dry baking mixes, Pillsbury refrigerated dough, Nature Valley granola, Yoplait yogurt, Old El Paso Hispanic food, and Haagen-Dazs ice cream. These top brands are either number 1 or number 2 in their respective food segments and are faring very well against their competitors.xiv Most of these existing brands are at a mature level in their life cycle and aren’t expected to grow at high rates anymore. These products will grow by stealing away market share from competitors rather than by targeting consumers who are trying the food segment for the first time.

Source: General Mills 2016 Annual Report

Cereal: The cereal market is mostly dominated by Kellogg and General Mills brand cereals, as the two control over 65% of the $10-billion-dollar market. GIS brands like Cheerios, Lucky Charms, Trix, Total, Wheaties, and Fiber One have strong consumer loyalties associated with them. These cereals are mostly advertised towards children in a variety of different methods, although their whole-grain and high fiber brands are meant to attract healthy food seeking adults. However, this is a declining industry. Americans spent $8.75 billion on read-to-eat sereal last year, down from $9.6 billion in 2012.xxv

Source: Wikiinvest.com

Baking Mixes: Dry baking mixes are dominated by the Betty Crocker brand. This is a category that has seen high consumer loyalty and shows little opportunities for private label and smaller brands to take hold. The Betty Crocker brand is a household name for American families at this point. Generations have grown up understanding the warmth and comfort from Betty Crocker baked goods.

Source: Statista.com/specialtyfood.com

Granola Bars: Granola bars is another segment that is seeing market share domination by General Mills. Through their Nature Valley, Cascadian Farms, and Larabar brands, GIS is able to control the $1.5-billion-dollar market to bring in $625 million dollars in 2015. Nature Valley has been successfully marketed as a healthy snack that gives you energy to do outside activities, targeting health-conscious, on-the-go consumers.

Source: Statista.com

Yogurt: Yoplait yogurt is another successful GIS brand, and they are leading a close battle against the Danone and Chobani brands. Their product is one of the lowest priced yogurt brands sold in stores and is marketed towards adults who are looking to lose weight. Greek yogurt has been an expanding food type for consumer taste buds but Yoplait has recently adapted by creating a Yoplait Greek product.

xxvii

xxvi However, 2017 first quarter sales for yogurt declined 15%, which reinforces Yoplait’s declining market share.

Source: Symphony IRI Group

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Sales and Marketing GIS direct customers are grocery retailers, wholesalers, big-box stores, natural food stores, and convenience stores. General Mills uses both a direct sales force and external brokers to help guide their relationships with their customers. Demand for GIS products is derived from the end consumers who purchase them from the shelves of retailers. When the product is gone from the shelves, more product is ordered from retailer’s warehouses, and when their inventory is low they order more from GIS manufactories.

Thus, to ensure that GIS products are routinely being sold, they advertise in a variety of mediums to attempt to attract new buyers of their goods. Marketing and advertising are key for consumer staples corporations and it is no less important for General Mills.xiv GIS brand names are the most valuable aspect of their business due to the household familiarity with those items, so it is critical for GIS to maintain that brand strength. To preserve or grow their market share, it is necessary for GIS to position their products in a way that creates as much consumer demand as possible. Strategies that GIS routinely uses to market their products are to use bright colors on their packaging, commercialize mascots when advertising to children, and displaying a comforting family strategy when advertising.

GIS has routinely attempted to increase sales by continuously developing new products. Generally, these are not new product inventions, but merely incremental changes that add value to already popular food brands.xxvi As consumer trends change, developing new products and acquiring brands that meet these changes has been essential to the long time growth that GIS has achieved in the past.

Distribution and Manufacturing General Mills operated offices and manufacturing facilities in over 30 countries.xxvi These manufacturing facilities purchase raw materials from suppliers and turn them into finished products before being sent out to customers. The raw goods that GIS purchases is the highest cost that they incur. When prices of commodities like oats, corn, milk, and intermediate products like oil and packaging materials are volatile, it will affect the margins that GIS can achieve. General Mills uses some types of derivative products and long-term contracts with suppliers to help stabilize the costs of these inputs.xiv

Most of the GIS distribution is done directly to retailing warehouses in bulk quantities although there are some instances of distribution to wholesalers. There is also a small segment of their sales that come from direct distribution to convenience stores and food service companies like bakeries, schools or restaurants.xxvi Distribution has been an area of pride for GIS, and they have attributed their efficiency to their employees and their strong relationships with suppliers and customers.xxviii

Catalysts for Growth/Change The catalysts that will affect General Mills are both internal and external. The internal factors can be broken into organic and inorganic growth, while external catalysts are mostly driven by economic and consumer factors.

Internal Factors: According to the 10-K, GIS expects organic net sales to range from no net change to a decrease by 2% for 2017. However, the expectation is to increase net profit through increased cost efficiencies rather than increased revenues. Through increasing operating margin by reducing costs and streamlining operations, they expect to see an increase in constant-currency total segment operating profit of between 6 and 8 percent.xiv We believe that their focus on lean production is a smart strategy after recent acquisitions and divestitures that have required a lot of attention. However, in order to boost long-term growth, they must increase their revenue.

We expect General Mills to target revenue growth through both organic and inorganic means. Due to being a mature company and macroeconomic conditions, we think organic growth will decrease by approximately 2% in 2017, but recover in the long-term. Over the next five years, their biggest source of revenue growth will likely come through inorganic growth such as M&A. After a focus on restructuring in the 2017 fiscal year, we predict General Mills will rely on growth from strategic acquisitions and investments in the segments in which they already operate, which will boost revenues upwards of 1.5% on a CAGR basis.

External Factors: External factors that will affect growth at GIS are the economic conditions and variables which we outlined earlier. To highlight those, we expect GDP to grow at a steady pace of 2.2%, which will make demand for products and revenues increase slightly. However, as consumer confidence grows, it is likely that money will be spent in other sectors, which creates difficulties for General Mills’ revenue streams.

Additionally, to maintain revenues, General Mills’ primary focus will be on the U.S. Retail and International segments, where they will place emphasis on the Convenience Stores and Foodservice segment. Especially their Focus 6 platforms: cereal, yogurt, snacks, frozen meals, biscuits, and baking mixes.xiv We believe that GIS will continue growing in international and emerging markets, which will allow them to grab more market share abroad and increase revenues. Their brands have more room to grow abroad and the recent increases in sales outside of the U.S. indicate that consumers are becoming more familiar with their products. Provided that their brands continue to be well-received, we expect GIS international revenues to continue increasing.

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Source: General Mills 2016 Annual Report

Key Investment Positives/Negatives Positives:

• Non-cyclical sector like consumer staples tend tohave fewer price swings than the market. Also,during economic downturns the consumer staplessector should to outperform the market. With a Betaof 0.65, GIS is a safe investment that is likely towithstand market fluctuations.

• General Mills reported diluted EPS of $2.77 infiscal 2016 and expects a consistent dividend yieldof approximately 3.15% going forward.xxix This actsas a steady source of income from the investment.Part of their 2017 goal is to increase EPS and thepayout ratio, which results in higher income fortheir stockholders.

Source: General Mills 2016 Annual Report

• General Mills is a household name with some of thestrongest brands in their market. Betty Crocker,Cheerios, Fiber One, Lucky Charms, Pillsbury, andYoplait are just a few of General Mills’ strongestofferings. They are well-diversified within thesebrands and offer value for all customers.

• Strong savings projects that will generate $600million in savings annually by 2018 are a great helpto the bottom line and ensuring higher cash flows.xiv

General Mills is also prioritizing capitalinvestments, reducing complexity, and streamlining

operations going forward to combat the effects of being a mature company.

Negatives: • General Mills is a mature company that maintains a

low organic growth and thus must rely on cuttingcosts or inorganic methods to increase profits.Neither cutting costs or M&A is an effective long-term growth strategy, unless the M&A provides acompetitive advantage or creation of synergies.

• With U.S. populations growing at slow rate andconsumers eating out more, there will only be somuch demand for GIS products and limitedopportunity for organic U.S. growth.

• As of May 29th, 2016, General Mills held $9.6billion of debt, which may make it difficult toacquire new financing and to pay back largedividends.xiv It may also limit their ability to quicklyadjust to changes in business and market conditions,making them more vulnerable in a potentialeconomic downturn.

• Because General Mills relies heavily on thepopularity and consumer confidence in their brands,if those brands are hurt by food safety recalls orproduct liability claims, they could see a significantdent in sales of said brands.

• Revenues and costs are subject to foreign exchange,interest rate, and commodity risks. However,General Mills has had the foresight to limit theserisks through derivative products in the past.

Key assumptions Revenue Growth: We have GIS revenues broken up into 9 different segments (snacks, convenience meals, yogurt, cereal, dough, baking mixes, ice cream, vegetables, and others) as they have in their reporting. We predicted 2017 sales mostly on their first quarter results for the period ending August 31, 2016. It was a rough quarter and it witnessed a decline in revenue in almost every segment with the exception of snacks and premium ice cream.

Segment 2017E 2018E 2019E 2020E CV 2021Snacks 3% 3% 3% 3% 3%Convenient Meals -6% 0% 1% 2% 2%Yogurt -10% -2% 2% 3% 3%Cereal -2% 0% 1% 1% 1%Dough -1% 0% 1% 1% 1%Baking Mixes & Ingredients -3% -2% 1% 2% 2%Super-Premium Ice Cream 5% 5% 3% 2% 2%Vegetables -1% 0% 1% 1% 1%Others 0% 0% 0% 0% 0%Total -2.6% 0.4% 1.7% 2.0% 2.0%

Valuation Model

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Although we are predicting that total sales will decrease by 2.6%, we believe that is a conservative estimate when looking at revenue composition of Q1. Corporate GIS is expecting a decreases in sales at 2%, but we believe that slightly is optimistic. After 2017 we believe that most segments will pick up sales and ultimately build back growth to their historical market growth levels. That is with the exception of their premium ice cream brand Haagen-Dazs. This has been a high growth food segment in recent years and we believe that that will bring more competitors into the market.

These revenue projections are mostly in line with other analysts’ and corporate projections in that revenue is expected to decrease and then pick back up again. However, we are a little more conservative than those estimates as we don’t believe that GIS will be able to grow organically that quickly. Our estimates are roughly in line with corporate goals which are aiming for low single digit revenue growth.

COGS/SG&A: We forecasted out cost of sales and selling, general and administrative expenses as a percentage of sales. Over the last 10 years, cost of goods sold have been around 60-64%, with recent years being on the higher end. Thus, we have projected cost of goods sold to decline slightly and hover around its long-term average percentage of revenue. We are expected selling, general and administrative expenses to go in the opposite direction. Those costs have floated around 18-21% of sales and are currently at their lowest in the lastthree years. Consequently, we are expecting these costs toincrease as a percentage of sales closer to their historicalaverage. Due to corporate cost-cutting initiatives, we plannedfor an expected $600 million decrease in cost of goods soldand selling, general and administrative expenses.

Capital Expenditures: Due to the manufacturing of goods from raw materials and the necessary machinery to do so, we expect GIS to continually expand their production levels. We have predicted that GIS will continue to grow their levels of capital (land, buildings, equipment and software) at historical rates.

Debt: GIS in the past has generally used debt to acquire new products, fund corporate strategy or purchase new capital expenditures. We don’t expect these uses to differ, although we are unsure of the timing and amount of future issuances. Thus, we have used historical growth rates of debt over the last 10 years to predict long-term debt which has been about 10% annually. Current portion of long-term debt has been predicted through data provided in the annual 10k on predicted maturing debt.

Dividend/Repurchases: Due to the nature of General Mills’ situation as a mature business in a stable economic sector, GIS is determined to

pay back investors through an increased annual dividend and high stock repurchases. From their historical total payout ratios over 100%, we have concluded that GIS is more interested in giving back to investors rather than in pure economic growth. Because of this we have predicted that General Mills will continue to pay out 100% of their earnings to investors in the future. We projected dividends per share to grow around 4-5% per year using payout ratios around 65-70%, with the remaining earnings to be used to fund stock repurchases. This is in line with corporate goals, which attempt to deliver at least 90% of free cash flows back to shareholders.

WACC The weighted average cost of capital is calculated assuming that similar equity and debt levels remain constant at 80.49% and 19.51%, respectively. This resulted in a WACC of 5.61%.

Cost of equity was calculated to be 6.40% by using the capital asset pricing model. The beta (.65) used was found on Bloomberg as the average of several unadjusted weekly betas of differing years. The risk-free rate (2.5%) was the rate of the 30 year U.S. Treasury, and we simply used a 6% market risk premium.

After tax cost of debt was calculated out to be 2.36%. To find their cost of debt, we used the yield to maturity of their debt maturing in 2043, which was 3.58%. Their marginal tax rate was 34%.

Discounted Cash Flow and Economic Profit Model After completing the discounted cash flow and economic profit model we arrived at an intrinsic value of $63.98 compared to the current market price of $61.04, which implies that the company is undervalued by 4.8%.

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021Free Cash Flow 1,370.1 1,434.2 1,462.5 1,770.3 1,752.6

We have estimated free cash flows to increase slightly year over year. We believe that these forecasts are relatively accurate because they are in line with General Mill’s corporate goals of achieving a free cash flow conversion average around 95% of after tax earnings.

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021Economic Profit 1,171.94 1,300.27 1,319.98 1,313.84 1,348.88

Economic profit is also expected to grow over the next 5 years. There is a larger jump in 2018 over 2017 due to an increase in return on invested capital. This is believed to occur due to decreases to cost of goods sold which increases operating profit and the slight increase in invested capital, which reflects historical growth.

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ROIC Computation: 2017E 2018E 2019E 2020E CV 2021NOPLAT 1,574.3 1,714.1 1,749.5 1,759.4 1,793.9 ÷ by Beginning Invested Capital 7,168.5 7,372.7 7,652.5 7,939.5 7,928.6

Return on Invested Capital 21.96% 23.25% 22.86% 22.16% 22.63%

Dividend Discount Model We found an implied value of all future dividends to equal $62.81 per share, which is not off from the current market price of $61.04. We believe this to be the best indicator for the price of General Mills considering its maturity in the business cycle. Most investors will purchase GIS in the hopes of receiving large dividends and that GIS will continue to expand their dividend payouts.

Historically, the general mills dividend yield has floated around 2.5-4.5% and sits currently at 3.15%, or $1.78 a share annually. One of the most important goals that GIS has is their determination to grow dividends per share by mid-single digits every year. By increasing the dividend payout every year, we are able to achieve this.

Dividends 2017E 2018E 2019E 2020E CV 2021Earnings Per Share 2.82 2.94 3.12 3.24 3.31Dividend Payout Ratio 66% 67% 68% 69% 71%Dividends Per Share 1.86 1.97 2.12 2.23 2.35Dividend Growth 4.4% 5.9% 7.7% 5.4% 5.2%

Relative P/E Walk into any grocery store and there will be thousands of different products owned by countless different companies. The corporations listed below are the most dominant in the food manufacturing industry and, like General Mills, are well diversified in various food segments.

Ticker Company Price Mkt. Cap (B) 2016 EPSNESN Nestle SA $69.30 215.6 3.30 KHC Kraft Heinz Co. $88.50 98.9 3.24 MDLZ Mondalez $42.05 63.6 1.85 BN Danone $63.43 41.6 3.21 K Kellogg $76.46 25.4 3.63 CAG ConAgra Foods Inc. $47.38 15.3 2.46 SJM JM Smucker Co. $134.40 14.8 7.70

GIS General Mills, Inc. $61.04 36.1 2.81

Kellogg is the most similar company to GIS in their product diversification, which is evident when comparing P/E levels. When averaging out the implied P/E ratios of these different firms based on analysts’ expectations and comparing that to our expected earnings, we see that GIS looks slightly overvalued compared to its peers.

Relative P/E (EPS16) 59.74$ Relative P/E (EPS17) 55.47$ PEG Ratio (EPS16) 52.94$ PEG Ratio (EPS17) 48.87$

Actual Market Price 61.04$

Sensitivity Analysis We used tables to see how a high-level view of how changing different variables would affect the implied price of our model. In total, we used 5 different analyses to determine how sensitive our estimated stock price is to different assumptions. We viewed continuous value growth with risk premium, beta and risk premium, WACC and carrying value ROIC, carrying value growth and carrying value ROIC, and carrying value growth and percent of cost of goods sold to sales.

DCF CV Growth and Market Risk Premium: This was a very sensitive test which saw small changes in CV growth and market risk premium to have large effects on the implied price. A 25-basis point increase to the CV growth would increase price by around 10%. We feel this is a good test to do as these two variables are very subject to opinion. There is no real value for either and both were assumed in our model. This shows how if someone has a different opinion on future economic growth, then they could view the table and see how the model would cooperate under different circumstances.

Beta and Market Risk Premium: These are two variables that will both effect the weighted average cost of capital by changing the cost of equity. The current beta is 0.65, according to Bloomberg. This is a data point that has the ability to change in the future as General Mills and the industry change. However, the market risk premium is an opinion.

WACC and CV ROIC: These are two variables that if changed will affect how much value is created by the firm. Firm value and economic profit is only added when the return on capital is greater than the cost of that same capital. Thus, this is an effective tool to demonstrate how the implied value of the firm would change under differing circumstance of economic profit.

CV Growth and CV ROIC: Comparing these two variables is effective when viewing implied stock prices because of the consequence on the amount of continuous value that is estimated. This was one of our most sensitive tests, as CV growth had a big effect on the estimated price.

CV Growth and COGS/Sales: For this analysis we viewed the effects of long-term assumptions for both growth and long-term operating margin. By changing the amounts on these two variables we can effectively determine how much of an effect that quality business operations have on the long-term value of the company. It turns out this is one of the most dynamic of the tables we created. A 1% change in the margin of cost of golds sold has around a $5 change to the implied price of General Mills. It is possible to understand why one of the main corporate strategies is to reduce costs as they probably know that this has a huge effect on future economic profit

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and cash flows. By including CV growth in here we establish the basis for future market growth as well. If the marketplace experiences high long-term growth and GIS is able to cut down their costs in the future, they have the ability to be very profitable.

Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

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i Schmidt, M. (2008, July 07). A Guide To Investing In Consumer Staples. Retrieved September, 2016, http://www.investopedia.com/articles/economics/08/consumer-staples.asp

ii Statista, Any Store Brand or Private Label Food Use. Retrieved from http://www.statista.com/statistics/228419/people-in-household-that-consumed-any-store-brand-or-private-label-food-within-the-last-30-days-usa/

iii GDP growth (annual %). (2016, January). The World Bank. Retrieved November 11, 2016

iv Civilian Unemployment Rate. (n.d.). Retrieved November 11, 2016, from https://fred.stlouisfed.org/series/UNRATE

v Mueller, J. (2016). How Interest Rates Affect The Stock Market. Retrieved September 11, 2016, from http://www.investopedia.com/articles/06/interestaffectsmarket.asp

vi R. (2016). Inflation. Retrieved September 12, 2016, from http://www.investopedia.com/terms/i/inflation.asp

vii The Top 10 Economic Indicators: What to Watch and Why. (n.d.). Retrieved November 12, 2016, from http://www.aaii.com/investing-basics/article/the-top-10-economic-indicators-what-to-watch-and-why.mobile

viii CPI Detailed Report - bls.gov. (n.d.). Retrieved November 12, 2016, from http://www.bls.gov/cpi/cpid1607.pdf

ix Staff, I. (n.d.). Leading Economic Indicators Explained. Retrieved November 12, 2016, from http://www.investorguide.com/article/11599/leading-economic-indicators-explained-igu/

x Fidelity Investments. Retrieved November 12, 2016, from https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=30

xi Agnese, J. (2016) S&P Analysis on Food Products Industry. Retrieved September, 2016, from http://www.netadvantage.standardandpoors.com/NASApp/NetAdvantage/index.do

xiii General Mills Inc. 10-K (2016). Retrieved from http://investors.generalmills.com/

xiv Dennis Salazar, “What’s New in Green Packaging,” May 16, 2013, http://www.environmentalleader.com/2013/05/16/whats-new-ingreen-packaging/, accessed Feb. 9, 2015

xv H. (2016). Food Industry Trends: Top 10 Trends in 2016. Retrieved September, 2016, from https://www.handshake.com/blog/food-industry-trends/

xvi Painter, K. L. (2016, October 15). General Mills: A U.S.-based food company. Our brands - such as Cheerios, Betty Crocker, Pillsbury, Haagen-Dazs and Cascadian Farm, to name a few - are enjoyed in more than 100 countries on six continents. Retrieved October, 2016, from https://www.generalmills.com/

xvii Chief, D. F. (2015, May 7). Five Consumer Trends Shaping the Food Industry. Retrieved September, 2016, from http://www.foodprocessing.com/industrynews/2015/npd-five-consumer-trends/

xviii Industry Reports. (n.d.). Retrieved September, 2016, from http://www.ibisworld.com/

xix Watters, N. (2015). 16 Million People in the US are Now Vegan or Vegetarian! Retrieved September, 2016, from https://news.therawfoodworld.com/16-million-people-us-now-vegan-vegetarian/

xx Hughlett, M. (2015, October 10). General Mills recalls some gluten-free Cheerios. Retrieved November 12, 2016, from http://www.startribune.com/general-mills-recalls-gluten-free-cheerios-because-it-has-some-flour-with-gluten-in-it/330757841/

xxi Winning in Food in Emerging Markets: One Size Does Not Fit All - Consumer Products & Retail Featured Article - A.T. Kearney - A.T. Kearney. (n.d.). Retrieved November 12, 2016, from https://www.atkearney.com/consumer-products-retail/ideas-insights/featured-article/-/asset_publisher/KQNW4F0xInID/content/winning-in-food-in-emerging-markets-one-size-does-not-fit-all/10192

xxii General Mills: Profiles of Ken Powell, CEO, and other senior leadership. (n.d.). Retrieved November 13, 2016, from https://www.generalmills.com/Company/Leadership

xxiii An Overview of the State of the Food Processing Industry | Pollock. (2016). Retrieved September 21, 2016, from http://www.pollockpaper.com/an-overview-of-the-state-of-the-food-processing-industry/

xxiv GENERAL MILLS, INC.|Company Profile|Vault.com. (n.d.). Retrieved September 21, 2016, from http://www.vault.com/company-profiles/food-beverage/general-mills,-inc.aspx

xxv Klara, R. (2016, January 20). How America's Top 2 Breakfast Cereal Makers Are Responding to Soggy Sales. Retrieved November 14, 2016, from http://www.adweek.com/news/advertising-branding/how-americas-top-2-breakfast-cereal-makers-are-responding-soggy-sales-172020

xxvi NEEDLEMAN, S. (2012, June 20). Old Factory, Snap Decision Spawn Greek-Yogurt Craze. Retrieved September 21, 2016, from http://www.wsj.com/articles/SB10001424052702303379204577476974123310582

xxvii General Mills Inc. (2016). Annual report Fiscal 2017 Q1. Retrieved from http://investors.generalmills.com/

xxviii Executive Briefing. (n.d.). Retrieved September 21, 2016, from http://www.supplychainbrain.com/content/nc/videos/2015-videos/supply-chain-insights-2015/general-mills-journey-to-supply-chain-excellence/

xxix Siemon, Jeff. "Financial News Releases." General Mills InvestorRoom. General Mills, 29 May 2019. Web. 21 Sept. 2016.

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General Mills, Inc.Key Assumptions of Valuation Model

Ticker Symbol GISCurrent Share Price $61.20Current Model Date 11/14/2016Fiscal Year End May 31

Pre-Tax Cost of Debt 3.58% YTM of longest GIS bondBeta 0.65Risk-Free Rate 2.50% Current 30 year Treasury rateEquity Risk Premium 6.00%CV Growth of NOPLAT 2.50%CV Growth of EPS 2.00%CV ROE 25.19%

Marginal Tax Rate 34%

Current Dividend Yield 3.2%Annualized St. Dev. of Stock Returns 17.6%

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General Mills, Inc.Revenue Decomposition

Fiscal Years Ending May 31 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021

Revenues by Products:Snacks 3,232.5 3,392.0 3,297.2 3,396.1 3,498.0 3,602.9 3,711.0 3,822.4

6.89% 4.93% -2.79% 3% 3% 3% 3% 3%Convenient Meals 2,844.2 2,810.3 2,779.0 2,612.3 2,612.3 2,638.4 2,691.2 2,745.0

1.47% -1.19% -1.11% -6% 0% 1% 2% 2%Yogurt 2,964.7 2,938.3 2,760.9 2,484.8 2,435.1 2,483.8 2,558.3 2,635.1

1.94% -0.89% -6.04% -10% -2% 2% 3% 3%Cereal 2,860.1 2,771.3 2,731.5 2,676.9 2,676.9 2,703.6 2,730.7 2,758.0

-1.01% -3.10% -1.44% -2% 0% 1% 1% 1%Dough 1,890.2 1,877.0 1,820.0 1,801.8 1,801.8 1,819.8 1,838.0 1,856.4

-2.80% -0.70% -3.04% -1% 0% 1% 1% 1%Baking Mixes & Ingredients 1,996.4 1,867.7 1,704.3 1,653.2 1,620.1 1,636.3 1,669.0 1,702.4

-0.16% -6.45% -8.75% -3% -2% 1% 2% 2%Super-Premium Ice Cream 756.6 769.5 731.2 767.8 806.1 830.3 846.9 863.9

5.51% 1.70% -4.98% 5% 5% 3% 2% 2%Vegetables 1,014.7 937.3 532.3 527.0 527.0 532.2 537.6 542.9

-6.87% -7.63% -43.21% -1% 0% 1% 1% 1%Others 350.2 266.9 206.7 206.7 206.7 206.7 206.7 206.7

-12.19% -23.79% -22.56% 0% 0% 0% 0% 0%Total Revenues 17,909.60$ 17,630.30$ 16,563.10$ 16,126.46$ 16,183.98$ 16,454.18$ 16,789.44$ 17,132.73$

Total Growth 0.76% -1.56% -6.05% -2.64% 0.36% 1.67% 2.04% 2.04%

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General Mills, Inc.Income Statement

Fiscal Years Ending May 31 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021

Net sales 17,909.6 17,630.3 16,563.1 16,126.46$ 16,183.98$ 16,454.18$ 16,789.44$ 17,132.73$ Cost of sales (11,539.8) (11,681.1) (10,733.6) (10,320.9) (10,276.8) (10,407.3) (10,577.3) (10,793.6) Selling, general & administrative expenses (3,474.3) (3,328.0) (3,118.9) (2,983.4) (3,020.8) (3,093.4) (3,173.2) (3,255.2) Divestitures gain 65.5 - 148.2 - - - - - Restructuring, impairment & other exit costs (3.6) (543.9) (151.4) (112.9) (80.9) (24.7) (8.4) (17.1)

Operating profit 2,957.4 2,077.3 2,707.4 2,709.2 2,805.5 2,928.8 3,030.5 3,066.8 Interest, net (302.4) (315.4) (303.8) (383.1) (386.5) (370.9) (381.4) (390.0)

Earnings (loss) before income taxes & after-tax earnings 2,655.0 1,761.9 2,403.6 2,326.1 2,419.0 2,558.0 2,649.1 2,676.8 Income taxes (883.3) (586.8) (755.2) (725.8) (753.3) (795.1) (821.9) (829.0) After-tax earnings (losses) from joint ventures 89.6 84.3 88.4 112.9 105.2 98.7 92.3 102.8

Net earnings (loss), including earnings attributable to red 1,861.3 1,259.4 1,736.8 1,713.3 1,770.8 1,861.5 1,919.5 1,950.6 Net earnings (loss) attributable to redeemable & nonco (36.9) (38.1) (39.4) (40.3) (40.5) (41.1) (42.0) (42.8)

Net earnings attributable to General Mills, Inc. 1,824.4 1,221.3 1,697.4 1,673.0 1,730.4 1,820.4 1,877.5 1,907.7

Shares Outstanding 612.3 598.7 596.8 591.3 586.4 581.8 577.7 574.4 Net earnings (loss) per share - basic 2.90 2.02 2.83 2.82 2.94 3.12 3.24 3.31Dividends per share 1.55 1.67 1.78 1.86 1.97 2.12 2.23 2.35Dividends growth 17.42% 7.74% 6.59% 4.42% 5.93% 7.65% 5.44% 5.22%

Tax RatesU.S. Statutory Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%State & Local Rate 1.4% 0.7% 0.7% 1.0% 1.0% 1.0% 1.0% 1.0%Foreign Rate Differences -0.1% -3.1% -2.2% -2.0% -2.0% -2.0% -2.0% -2.0%Marginal Tax Rate (10K) 36.3% 32.6% 33.5% 34.0% 34.0% 34.0% 34.0% 34.0%

Effective Tax Rate 33.3% 33.3% 31.4% 31.2% 31.1% 31.1% 31.0% 31.0%

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General Mills, Inc.Balance Sheet

Fiscal Years Ending 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

AssetsCash & cash equivalents 867.3 334.2 763.7 613.0 811.4 866.0 1,579.2 2,012.1 Receivables,net 1,483.6 1,386.7 1,360.8 1,259.1 1,279.5 1,363.4 1,364.9 1,377.1 Inventories 1,559.4 1,540.9 1,413.7 1,484.7 1,486.3 1,497.5 1,526.9 1,558.3 Deferred income taxes 74.1 100.1 - - - - - - Other Current Assets 409.1 423.8 399.0 401.4 402.5 407.6 414.0 420.5

Total current assets 4,393.5 3,785.7 3,937.2 3,758.3 3,979.6 4,134.5 4,885.0 5,368.1

Land, buildings & equipment, net 3,941.9 3,783.3 3,743.6 3,844.6 3,923.9 3,975.1 4,001.3 4,001.1 Goodwill 8,650.5 8,874.9 8,741.2 8,741.2 8,741.2 8,741.2 8,741.2 8,741.2 Other intangible assets 5,014.3 4,677.0 4,538.6 4,511.1 4,484.0 4,457.3 4,430.9 4,404.9 Other assets 1,145.5 843.6 751.7 755.6 757.6 767.4 779.4 791.8

Total Long-Term Assets 18,752.2 18,178.8 17,775.1 17,852.5 17,906.7 17,940.9 17,952.9 17,939.0

Total assets 23,145.7 21,964.5 21,712.3 21,610.8 21,886.4 22,075.4 22,837.9 23,307.1

LiabilitiesAccounts payable 1,611.3 1,684.0 2,046.5 1,946.6 1,844.1 1,670.3 1,695.7 1,707.2 Current portion of long-term debt 1,250.6 1,000.4 1,103.4 604.7 1,150.4 1,056.0 555.9 1,000.0 Notes payable 1,111.7 615.8 269.8 536.4 614.6 557.0 595.4 615.9 Other current liabilities 1,449.9 1,589.9 1,595.0 1,652.4 1,553.7 1,584.8 1,609.4 1,602.5

Total current liabilities 5,423.5 4,890.1 5,014.7 4,740.1 5,162.8 4,868.0 4,456.4 4,925.6

Long-term debt 6,423.5 7,607.7 7,057.7 7,358.3 7,085.6 7,387.0 8,380.6 8,207.6 Deferred income taxes 1,666.0 1,550.3 1,399.6 1,266.2 1,269.1 1,330.0 1,367.7 1,419.5 Other liabilities 1,643.2 1,744.8 2,087.6 1,953.4 1,960.3 1,960.5 1,979.7 1,976.9

Total Long-Term Liabilities 9,732.7 10,902.8 10,544.9 10,577.8 10,315.1 10,677.4 11,728.1 11,604.1

Total liabilities 15,156.2 15,792.9 15,559.6 15,318.0 15,477.8 15,545.5 16,184.5 16,529.7

Stockholder's EquityMinority interests - - - - - - - - Redeemable interest 984.1 778.9 845.6 845.6 845.6 845.6 845.6 845.6 Common stock and APIC 1,307.3 1,372.2 1,252.5 1,393.9 1,535.3 1,676.6 1,818.0 1,959.4 Retained earnings 11,787.2 11,990.8 12,616.5 13,185.3 13,756.3 14,338.9 14,920.9 15,474.1 Common stock in treasury, at cost (5,219.4) (6,055.6) (6,326.6) (6,895.4) (7,466.4) (8,049.0) (8,631.0) (9,184.2) Accumulated other comprehensive income (loss), (1,340.3) (2,310.7) (2,612.2) (2,639.7) (2,666.8) (2,693.5) (2,719.9) (2,745.9)

Total stockholders' equity 7,518.9 5,775.6 5,775.8 5,889.7 6,004.0 6,118.6 6,233.7 6,349.0 Noncontrolling interests 470.6 396.0 376.9 403.2 404.6 411.4 419.7 428.3

Total equity 7,989.5 6,171.6 6,152.7 6,292.9 6,408.6 6,530.0 6,653.4 6,777.4

Total Liabilities + Stockholder's Equity 23,145.7 21,964.5 21,712.3 21,610.8 21,886.4 22,075.4 22,837.9 23,307.1

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General Mills, Inc.Cash Flow Statement

Fiscal Years Ending May 31 2014 2015 2016

Cash Flows - Operating ActivitiesNet earnings, including earnings attributable to redeemable & noncontrolling interests 1,861.3 1,259.4 1,736.8 Depreciation & amortization 585.4 588.3 608.1 After-tax losses (earnings) from joint ventures (89.6) (84.3) (88.4) Distributions of losses (earnings) from joint ventures 90.5 72.6 75.1 Stock-based compensation 108.5 106.4 89.8 Deferred income taxes 172.5 25.3 120.6 Tax benefit on exercised options (69.3) (74.6) (94.1) Pension, other postretirement, & postemployment benefit costs - - - Pension & other postretirement benefit plan contributions (49.7) (49.5) (47.8) Pension & other postretirement benefit plan cost (income) 124.1 91.3 118.1 Divestitures loss (gain), net (65.5) - (148.2) Loss (gain) on insurance settlement - - - Restructuring, impairment & other exit costs (income) (18.8) 531.1 107.2 Changes in current assets & liabilities, excluding the effects of acquisitions (32.2) 214.7 258.2 Other operating activities, net (76.2) (137.9) (105.6)

Net cash flows from operating activities 2,541.0 2,542.8 2,629.8

Cash Flows - Investing ActivitiesPurchases of land, buildings & equipment (663.5) (712.4) (729.3) Acquisitions, net of cash acquired - (822.3) (84.0) Disposition of (investments in) affiliates, net (54.9) (102.4) 63.9 Proceeds from disposal of land, buildings & equipment 6.6 11.0 4.4 Proceeds from divestiture of product lines - - - Proceeds from divestiture 121.6 - 828.5 Exchangeable note 29.3 27.9 21.1 Proceeds from insurance settlement - - - Other investing activities, net (0.9) (4.0) (11.2)

Net cash flows from investing activities (561.8) (1,602.2) 93.4

Cash Flows - Financing ActivitiesChange in notes payable 572.9 (509.8) (323.8) Issuance of long-term debt 1,673.0 2,253.2 542.5 Payment of long-term debt (1,444.8) (1,145.8) (1,000.4) Settlement of Lehman Brothers forward purchase contract - - - Repurchase of series B-1 limited membership interests in General Mills Cereals, LLC - - - Repurchase of General Mills Capital, Inc. preferred stock - - - Proceeds from sale of class A limited membership interests in General Mills Cereals, LLC - - - Common stock issued - - - Proceeds from common stock issued on exercised options 108.1 163.7 171.9 Tax benefit on exercised options 69.3 74.6 94.1 Purchases of common stock for treasury (1,745.3) (1,161.9) (606.7) Dividends paid (983.3) (1,017.7) (1,071.7) Addition of noncontrolling interest 17.6 - - Distributions to noncontrolling & redeemable interest holders (77.4) (25.0) (84.3) Other financing activities, net (14.2) (16.1) (7.2)

Net cash flows from financing activities (1,824.1) (1,384.8) (2,285.6)

Effect of exchange rate changes on cash & cash equivalents (29.2) (88.9) (8.1) Increase (decrease) in cash & cash equivalents 125.9 (533.1) 429.5

Cash & cash equivalents - beginning of year 741.4 867.3 334.2 Cash & cash equivalents - end of year 867.3 334.2 763.7

19

General Mills, Inc.Cash Flow Statement

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021

Cash Flows - Operating ActivitiesNet Income 1,673.0 1,730.4 1,820.4 1,877.5 1,907.7

Depreciation and Amortization 619.8 645.8 671.8 697.8 723.7 Deferred Income Taxes (133.4) 2.9 60.9 37.7 51.8

Changes in working capital accountsReceivables 101.7 (20.3) (83.9) (1.5) (12.2) Inventories (71.0) (1.6) (11.2) (29.4) (31.4) Other current assets (2.4) (1.1) (5.1) (6.4) (6.5) Accounts payable (99.9) (102.6) (173.8) 25.4 11.6 Other current liabilities 57.4 (98.7) 31.1 24.6 (6.9)

Net cash flows from operating activities 2,145.1 2,154.8 2,310.1 2,625.7 2,637.8

Cash Flows - Investing ActivitiesPurchases of land, buildings & equipment (Cap Ex) (720.9) (725.1) (723.0) (724.0) (723.5) Increase (decrease) in other liabilities (134.2) 7.0 0.2 19.2 (2.8) (Increase) decrease in other assets (3.9) (2.1) (9.7) (12.1) (12.4)

Net cash flows from investing activities (858.9) (720.2) (732.5) (716.9) (738.7)

Cash Flows - Financing ActivitiesNet change in notes payable 266.6 78.2 (57.6) 38.5 20.4 Net change in long-term debt (198.1) 273.1 206.9 493.6 271.1 Payment of dividends (1,104.1) (1,159.3) (1,237.9) (1,295.5) (1,354.5)Changes in non-controlling interest 26.3 1.4 6.8 8.4 8.6 Proceeds from issuance of common stock 141.4 141.4 141.4 141.4 141.4 Repurchases of common stock (568.8) (571.0) (582.5) (582.0) (553.2)

Net cash flows from financing activities (1,436.9) (1,236.3) (1,523.0) (1,195.7) (1,466.2)

Increase (decrease) in cash & cash equivalents (150.7) 198.3 54.6 713.2 433.0 Cash & cash equivalents - beginning of year 763.7 613.0 811.4 866.0 1,579.2

Cash & cash equivalents - end of year 613.0 811.4 866.0 1,579.2 2,012.1

20

General Mills, Inc.Common Size Balance Sheet

Fiscal Years Ending May 31 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021

% of Total SalesAssetsCash & cash equivalents 4.84% 1.90% 4.61% 3.80% 5.01% 5.26% 9.41% 11.74%Receivables,net 8.28% 7.87% 8.22% 7.81% 7.91% 8.29% 8.13% 8.04%Inventories 8.71% 8.74% 8.54% 9.21% 9.18% 9.10% 9.09% 9.10%Deferred income taxes 0.41% 0.57% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other Current Assets 2.28% 2.40% 2.41% 2.79% 2.72% 2.62% 2.57% 2.57%Total current assets 24.53% 21.47% 23.77% 23.31% 24.59% 25.13% 29.10% 31.33%

Land, buildings & equipment, net 22.01% 21.46% 22.60% 23.84% 24.25% 24.16% 23.83% 23.35%Goodwill 48.30% 50.34% 52.78% 54.20% 54.01% 53.12% 52.06% 51.02%Other intangible assets 28.00% 26.53% 27.40% 27.24% 27.07% 26.91% 26.75% 26.59%Other assets 6.40% 4.78% 4.54% 5.13% 5.13% 5.13% 5.13% 5.13%Total Long-Term Assets 104.70% 103.11% 107.32% 110.70% 110.64% 109.04% 106.93% 104.71%

Total assets 129.24% 124.58% 131.09% 134.01% 135.23% 134.16% 136.03% 136.04%

LiabilitiesAccounts payable 9.00% 9.55% 12.36% 12.07% 11.39% 10.15% 10.10% 9.96%Current portion of long-term debt 6.98% 5.67% 6.66% 3.75% 7.11% 6.42% 3.31% 5.84%Notes payable 6.21% 3.49% 1.63% 3.33% 3.80% 3.38% 3.55% 3.59%Other current liabilities 8.10% 9.02% 9.63% 10.25% 9.60% 9.63% 9.59% 9.35%Total current liabilities 30.28% 27.74% 30.28% 29.39% 31.90% 29.59% 26.54% 28.75%

Long-term debt 35.87% 43.15% 42.61% 45.63% 43.78% 44.89% 49.92% 47.91%Deferred income taxes 9.30% 8.79% 8.45% 7.85% 7.84% 8.08% 8.15% 8.29%Other liabilities 9.17% 9.90% 12.60% 12.11% 12.11% 11.91% 11.79% 11.54%Total Long-Term Liabilities 54.34% 61.84% 63.67% 65.59% 63.74% 64.89% 69.85% 67.73%

Total liabilities 84.63% 89.58% 93.94% 94.99% 95.64% 94.48% 96.40% 96.48%

Stockholder's EquityMinority interests 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Redeemable interest 5.49% 4.42% 5.11% 5.24% 5.22% 5.14% 5.04% 4.94%Common stock + APIC 7.30% 7.78% 7.56% 8.64% 9.49% 10.19% 10.83% 11.44%Common stock in treasury, at cost -29.14% -34.35% -38.20% -42.76% -46.13% -48.92% -51.41% -53.61%Accumulated other comprehensive in -7.48% -13.11% -15.77% -16.37% -16.48% -16.37% -16.20% -16.03%Total stockholders' equity 41.98% 32.76% 34.87% 36.52% 37.10% 37.19% 37.13% 37.06%Noncontrolling interests 2.63% 2.25% 2.28% 2.50% 2.50% 2.50% 2.50% 2.50%Total equity 44.61% 35.01% 37.15% 39.02% 39.60% 39.69% 39.63% 39.56%

Total Liabilities + Stockholder's Eq 129.24% 124.58% 131.09% 134.01% 135.23% 134.16% 136.03% 136.04%

21

General Mills, Inc.Common Size Income Statement

Fiscal Years Ending May 31 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021

Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of sales 64.43% 66.26% 64.80% 64.00% 63.50% 63.25% 63.00% 63.00%Selling, general & administrative expenses 19.40% 18.88% 18.83% 18.50% 18.67% 18.80% 18.90% 19.00%Divestitures gain 0.37% 0.00% 0.89% 0.00% 0.00% 0.00% 0.00% 0.00%Restructuring, impairment & other exit costs 0.02% 3.09% 0.91% 0.70% 0.50% 0.15% 0.05% 0.10%

Operating profit 16.51% 11.78% 16.35% 16.80% 17.33% 17.80% 18.05% 17.90%Interest, net 1.69% 1.79% 1.83% 2.38% 2.39% 2.25% 2.27% 2.28%

Earnings (loss) before income taxes & after-tax earnings from all joint ventures 14.82% 9.99% 14.51% 14.42% 14.95% 15.55% 15.78% 15.62%Income taxes 4.93% 3.33% 4.56% 4.50% 4.65% 4.83% 4.90% 4.84%After-tax earnings (losses) from joint ventures 0.50% 0.48% 0.53% 0.70% 0.65% 0.60% 0.55% 0.60%

Net earnings (loss), including earnings attributable to redeemable & noncontrolling interests 10.39% 7.14% 10.49% 10.62% 10.94% 11.31% 11.43% 11.39%Net earnings (loss) attributable to redeemable & noncontrolling interests 0.21% 0.22% 0.24% 0.25% 0.25% 0.25% 0.25% 0.25%

Net earnings attributable to General Mills, Inc. 10.19% 6.93% 10.25% 10.37% 10.69% 11.06% 11.18% 11.14%

22

General Mills, Inc.Value Driver Estimation

Fiscal Years Ending May 31

EBITA: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Net Sales 17,909.6 17,630.3 16,563.1 16,126.5 16,184.0 16,454.2 16,789.4 17,132.7 Cost of Goods Sold (11,539.8) (11,681.1) (10,733.6) (10,320.9) (10,276.8) (10,407.3) (10,577.3) (10,793.6)Depreciation & Amortization of Non-Goodwill Intangibles (585.4) (588.3) (608.1) (619.8) (645.8) (671.8) (697.8) (723.7)Operating Expenses (3,474.3) (3,328.0) (3,118.9) (2,983.4) (3,020.8) (3,093.4) (3,173.2) (3,255.2)Interest on Operating Leases 43.7 43.0 38.7 46.6 48.5 50.4 52.2 54.1

EBITA 2,353.8 2,075.9 2,141.2 2,248.9 2,289.1 2,332.1 2,393.4 2,414.2

Less Adjusted Taxes: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Provision for Income Taxes (883.3) (586.8) (755.2) (725.8) (753.3) (795.1) (821.9) (829.0)Tax Shield on Interest on Operating Leases 15.9 14.0 13.0 15.9 16.5 17.1 17.8 18.4 Tax Shield on Interest Expense 109.8 102.8 101.8 130.3 131.4 126.1 129.7 132.6 Less: Tax on interest or investment income (5.8) (4.3) (2.7) - - - - - Less: Tax on Divestiture Gain/Loss (23.8) - (49.6) - - - - - Tax Shield on Restructuring Cost 1.3 177.3 50.7 38.4 27.5 8.4 2.9 5.8

Adjusted Taxes (786.0) (297.0) (642.1) (541.3) (577.9) (643.5) (671.6) (672.2)

Plus Changes in Deferred Tax Liability: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Deferred Tax Liability (t) 1,666.0 1,550.3 1,399.6 1,266.2 1,269.1 1,330.0 1,367.7 1,419.5 Deferred Tax Liability (t-1) 1,389.1 1,666.0 1,550.3 1,399.6 1,266.2 1,269.1 1,330.0 1,367.7

Net Changes in Deferred Tax Liability 276.9 (115.7) (150.7) (133.4) 2.9 60.9 37.7 51.8

EBITA 2,353.8 2,075.9 2,141.2 2,248.9 2,289.1 2,332.1 2,393.4 2,414.2 Adjusted Taxes (786.0) (297.0) (642.1) (541.3) (577.9) (643.5) (671.6) (672.2)Net Changes in Deferred Tax Liability 276.9 (115.7) (150.7) (133.4) 2.9 60.9 37.7 51.8 NOPLAT 1,844.7 1,663.2 1,348.4 1,574.3 1,714.1 1,749.5 1,759.4 1,793.9

Fiscal Years Ending May 31

Current Operating Assets: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Normal Cash 358.2 352.6 331.3 322.5 323.7 329.1 335.8 342.7 Accounts Receivable, net 1,483.6 1,386.7 1,360.8 1,259.1 1,279.5 1,363.4 1,364.9 1,377.1 Inventory 1,559.4 1,540.9 1,413.7 1,484.7 1,486.3 1,497.5 1,526.9 1,558.3 Other Current Assets 409.1 423.8 399.0 401.4 402.5 407.6 414.0 420.5

Total Current Operating Assets 3,810.3 3,704.0 3,504.8 3,467.8 3,492.0 3,597.6 3,641.6 3,698.6

Current Operating Liabilities: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Accounts Payable 1,611.3 1,684.0 2,046.5 1,946.6 1,844.1 1,670.3 1,695.7 1,707.2 Other Current Liabilities 1,449.9 1,589.9 1,595.0 1,652.4 1,553.7 1,584.8 1,609.4 1,602.5

Total Current Operating Liabilities 3,061.2 3,273.9 3,641.5 3,599.1 3,397.8 3,255.1 3,305.1 3,309.8

Operating Working Capital 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Total Current Operating Assets 3,810.3 3,704.0 3,504.8 3,467.8 3,492.0 3,597.6 3,641.6 3,698.6 Total Current Operating Liabilities 3,061.2 3,273.9 3,641.5 3,599.1 3,397.8 3,255.1 3,305.1 3,309.8

Net Operating Working Capital 749.1 430.1 (136.7) (131.3) 94.2 342.5 336.5 388.9

Net PPE 3,941.9 3,783.3 3,743.6 3,844.6 3,923.9 3,975.1 4,001.3 4,001.1

Other Long-Term Operating Assets/Liabilities: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021PV of Operating Leases 344.8 357.5 358.9 346.0 353.2 357.8 360.1 360.1 Net Intangibles (non-Goodwill) 5,014.3 4,677.0 4,538.6 4,511.1 4,484.0 4,457.3 4,430.9 4,404.9 Other Long-Term Operating Assets 1,145.5 843.6 751.7 755.6 757.6 767.4 779.4 791.8 Other Long-Term Operating Liabilities (1,643.2) (1,744.8) (2,087.6) (1,953.4) (1,960.3) (1,960.5) (1,979.7) (1,976.9)

Net Other Long-Term Operating Assets/Liabilities 4,861.4 4,133.3 3,561.6 3,659.3 3,634.4 3,621.9 3,590.7 3,579.9

Invested Capital: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Net Operating Working Capital 749.1 430.1 (136.7) (131.3) 94.2 342.5 336.5 388.9 Net PPE 3,941.9 3,783.3 3,743.6 3,844.6 3,923.9 3,975.1 4,001.3 4,001.1 Net Other Long-Term Operating Assets/Liabilities 4,861.4 4,133.3 3,561.6 3,659.3 3,634.4 3,621.9 3,590.7 3,579.9

Invested Capital 9,552.4 8,346.7 7,168.5 7,372.7 7,652.5 7,939.5 7,928.6 7,969.8

Fiscal Years Ending May 31

ROIC Computation: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021NOPLAT 1,844.7 1,663.2 1,348.4 1,574.3 1,714.1 1,749.5 1,759.4 1,793.9 ÷ by Beginning Invested Capital 8,703.6 9,552.4 8,346.7 7,168.5 7,372.7 7,652.5 7,939.5 7,928.6

Return on Invested Capital 21.19% 17.41% 16.15% 21.96% 23.25% 22.86% 22.16% 22.63%

Free Cash Flow Computation: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021NOPLAT 1,844.7 1,663.2 1,348.4 1,574.3 1,714.1 1,749.5 1,759.4 1,793.9 - by Change in Invested Capital 848.8 (1,205.7) (1,178.2) 204.2 279.8 287.0 (10.9) 41.2

Free Cash Flow 996.0 2,868.9 2,526.6 1,370.1 1,434.2 1,462.5 1,770.3 1,752.6

Economic Profit: 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021Beginning Invested Capital 8,703.6 9,552.4 8,346.7 7,168.5 7,372.7 7,652.5 7,939.5 7,928.6 * by (ROIC - WACC) 15.58% 11.80% 10.54% 16.35% 17.63% 17.25% 16.55% 17.01%

Economic Profit 1,356.1 1,127.0 879.8 1,171.8 1,300.1 1,319.9 1,313.7 1,348.8

Invested Capital Computation

Driver Computation

NOPLAT Computation

23

General Mills, Inc.Weighted Average Cost of Capital (WACC) Estimation

Shares Outstanding 596.80 Bond Yield 3.58% Years$ Shares $61.20 Tax Rate 34.00% 1Total Equity 36,524.2 After Tax Cost of Debt 2.36% 2

34

Current Portion of LTD 1,103.4 Risk Free Rate 2.50% 5Long Term Debt 7,057.7 Risk Premium 6.00% 1Notes Payable 269.8 Beta 0.65 2PV of Operating Leases 397.6 Cost of Equity 6.40% 3Total Debt 8,828.5 4

5Total Equity 36,428.7 Equity Percentage 80.49%Total Debt 8,828.5 Debt Percentage 19.51%Total Enterprise Value 45,352.66 After Tax Cost of Debt 2.36%

Cost of Equity 6.40%Equity Percentage 80.53%Debt Percentage 19.47% WACC 5.61%

1

WACC Calculation

Cost of Equity

Cost of Debt

Variable Weights

Variable Weights

24

General Mills, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: Elapsed Time Adjustment: CV Growth 2.50% Today 11/14/2016 CV ROIC 22.63% Most Recent Fiscal Year 5/31/2016 WACC 5.61% Days to FYE 167 Cost of Equity 6.40% Elapsed Year 0.46

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021

NOPLAT 1,574.3 1,714.1 1,749.5 1,759.4 1,793.9 Cap Ex 204.2 279.8 287.0 (10.9) 41.2 Free Cash Flow 1,370.1 1,434.2 1,462.5 1,770.3 1,752.6

Undiscounted Cash Flows 1,370.1 1,434.2 1,462.5 1,770.3 51,239.7 Continuing ValuePresent Value of Cash Flows 1,297.2 1,285.8 1,241.5 1,422.9 41,183.1

Total Future Cash Flows 46,430.4

Value of Operating Assets 46,430.4 + Excess Cash 432.4 - Total Debt (8,430.9) - PV of Operating Leases (358.9) - PV of ESOP (604.8) - Uncertain tax and interest (209.0) - Underfunded Pension (36.0) Value of Equity $37,223.2Shares outstanding 598.9 Implied 5/31/2016 62.15$ Adjusted Price for Today 63.94$

Actual Market Price 61.20$

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021

Beginning Invested Capital 7,168.5 7,372.7 7,652.5 7,939.5 7,928.6 ROIC - WACC 16.35% 17.63% 17.25% 16.55% 17.01%Economic Profit 1,171.82 1,300.15 1,319.85 1,313.71 1,348.75

Undiscounted Economic Profit 1,171.82 1,300.15 1,319.85 1,313.71 43,311.10 Continuing ValuePresent Value of Economic Profit 1,109.53 1,165.60 1,120.37 1,055.87 34,810.60

Total Future Economic Profit 39,261.96 Current Invested Capital 7,168.48 Value of Operating Assets 46,430.44

Value of Operating Assets 46,430.4 + Excess Cash 432.4 - Total Debt (8,430.9) - PV of Operating Leases (358.9) - PV of ESOP (604.8) - Uncertain tax and interest (209.0) - Underfunded Pension (36.0) Value of Equity $37,223.2Shares outstanding 598.9 Implied Value 5/31/2016 62.15$ Adjusted Price for Today 63.94$

Actual Market Price 61.20$

Discounted Cash Flow Model

Economic Profit Model

25

General Mills, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Key Inputs: Elapsed Time Adjustment: CV growth 2.00% Today 11/14/2016 CV ROE 25.19% Most Recent Fiscal Year 5/31/2016 Cost of Equity 6.40% Days to FYE 167

Elapsed Year 0.46

Fiscal Years Ending May 31 2017E 2018E 2019E 2020E CV 2021Earnings Per Share 3.31 Undiscounted Dividends 1.86 1.97 2.12 2.23 69.29 Continuing ValuePresent Value of Dividends 1.75 1.74 1.76 1.74 54.06

Implied Value 5/31/2016 61.05$ Adjusted Price to Today 62.81$

Actual Market Price 61.20$

Dividend Discount Model

26

Share Price63.94 2.00% 2.25% 2.50% 2.75% 3.00%

5.50% 61.19 65.77 71.16 77.58 85.37 5.75% 58.33 62.51 67.39 73.17 80.11 6.00% 55.67 59.50 63.94 69.16 75.38 6.25% 53.20 56.71 60.77 65.50 71.10 6.50% 50.89 54.13 57.84 62.15 67.20

Share Price63.94 0.61 0.63 0.65 0.67 0.69

5.50% 76.85 73.91 71.16 68.57 66.14 5.75% 72.83 70.02 67.39 64.92 62.59 6.00% 69.15 66.46 63.94 61.57 59.34 6.25% 65.76 63.19 60.77 58.49 56.35 6.50% 62.64 60.16 57.84 55.65 53.59

Share Price63.94 5.11% 5.36% 5.61% 5.86% 6.11%

18.63% 76.91 68.84 62.06 56.29 51.31 20.63% 78.17 69.97 63.09 57.24 52.19 22.63% 79.20 70.91 63.94 58.02 52.91 24.63% 80.07 71.69 64.66 58.67 53.51 26.63% 80.80 72.35 65.26 59.23 54.02

Share Price63.94 2.00% 2.25% 2.50% 2.75% 3.00%

18.63% 54.37 57.93 62.06 66.91 72.69 20.63% 55.08 58.79 63.09 68.14 74.16 22.63% 55.67 59.50 63.94 69.16 75.38 24.63% 56.16 60.09 64.66 70.02 76.40 26.63% 56.58 60.60 65.26 70.74 77.27

Share Price63.94 2.00% 2.25% 2.50% 2.75% 3.00%

-65.00% 46.63 49.79 53.46 57.76 62.89 -64.00% 51.15 54.64 58.70 63.46 69.13 -63.00% 55.67 59.50 63.94 69.16 75.38 -62.00% 60.19 64.35 69.19 74.86 81.63 -61.00% 64.71 69.21 74.43 80.56 87.87

DCF CV Growth

CV ROIC

DCF CV Growth

COGS/Sales

DCF CV Growth

Equity Risk Premium

Beta

Equity Risk Premium

WACC

CV ROIC

27

General Mills, Inc.Relative Valuation Models

Ticker Company Price Mkt. Cap (B) 2016 EPS 2017 EPS 2016 P/E 2017 P/E EPS Growth 2016 PEG 2017 PEGNESN Nestle SA $69.30 215.6 3.30 3.63 21.0 19.1 11.4 1.84 1.67 BN Danone $63.43 41.6 3.21 3.50 19.8 18.1 7.6 2.60 2.38 KHC Kraft Heinz Co. $88.50 98.9 3.24 3.94 27.3 22.5 6.4 4.28 3.52 MDLZ Mondalez $42.05 63.6 1.85 2.11 22.7 19.9 14.3 1.59 1.39 K Kellogg $76.46 25.4 3.63 4.01 21.1 19.1 10.0 2.11 1.91 CAG ConAgra Foods Inc. $47.38 15.3 2.46 2.66 19.3 17.8 10.3 1.86 1.72 SJM JM Smucker Co. $134.40 14.8 7.70 8.24 17.5 16.3 9.1 1.92 1.80

21.2 19.0 2.3 2.1

GIS General Mills, Inc. $61.20 36.1 2.81 2.92 21.7 20.9 8.1 2.7 2.6

Implied Value:Relative P/E (EPS16) 59.74$ Relative P/E (EPS17) 55.47$ PEG Ratio (EPS16) 52.94$ PEG Ratio (EPS17) 48.87$

Actual Market Price 61.04$

Relative Valuation Model

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PV of Operating Lease Obligations (2016)

OperatingFiscal Years Ending May 31 Leases2017 107.92018 83.52019 67.22020 49.62021 39.6Thereafter 49.8Total Minimum Payments 397.6Less: Interest 39PV of Minimum Payments 359

PV of Operating Lease Obligations (2015)

OperatingFiscal Years Ending May 31 Leases2016 108.42017 76.22018 56.92019 45.02020 32.4Thereafter 81.6Total Minimum Payments 400.5Less: Interest 43PV of Minimum Payments 357

PV of Operating Lease Obligations (2014)

OperatingFiscal Years Ending May 31 Leases2015 93.92016 73.42017 56.82018 42.42019 33.7Thereafter 88.3Total Minimum Payments 388.5Less: Interest 44PV of Minimum Payments 345

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General Mills, Inc. Key Management Ratios

Fiscal Years Ending May 31 2014 2015 2016 2017E 2018E 2019E 2020E CV 2021

Liquidity RatiosCurrent Ratio Current Assets/Current Liabilities 0.81 0.77 0.79 0.79 0.77 0.85 1.10 1.09Quick Ratio (CA-Inventories)/CL 0.41 0.43 0.35 0.42 0.39 0.40 0.46 0.66Cash Ratio (Cash + Marketable Sec)/CL 0.16 0.07 0.15 0.13 0.16 0.18 0.35 0.41

Activity or Asset-Management RatiosReceivables Turnover Sales/Avg. A/R 12.22 12.28 12.06 12.25 12.50 12.50 12.50 12.50Total Asset Turnover Sales/Avg. Total Assets 0.78 0.78 0.76 0.74 0.74 0.75 0.75 0.74Payable Turnover Inv Purch/Avg. A/P 7.60 7.10 5.82 5.50 5.50 5.75 6.00 6.25

Financial Leverage RatiosDebt to Equity Ratio Total Debt/Shareholders Equity 0.96 1.39 1.33 1.27 1.29 1.29 1.34 1.36Debt Ratio Total Debt /Assets 0.33 0.39 0.38 0.37 0.38 0.38 0.39 0.40Interest Coverage Ratio (NI+Tax+Interest Exp)/Interest Expense 9.78 6.59 8.91 7.07 7.26 7.90 7.95 7.86

Profitability RatiosReturn on Equity Ratio Net Income/Avg. Shareholders Equity 0.23 0.17 0.28 0.27 0.27 0.28 0.28 0.28Return on Assets Net Income/Avg. Total Assets 0.08 0.05 0.08 0.08 0.08 0.08 0.08 0.08Return on Invested Capital Net Income/Invested Capital 0.21 0.17 0.16 0.22 0.23 0.23 0.22 0.23Net Margin Net Income/Sales 0.10 0.07 0.10 0.10 0.11 0.11 0.11 0.11

Payout Policy RatiosPayout Ratio Dividends Per Share/EPS 0.53 0.83 0.63 0.66 0.67 0.68 0.69 0.71Total Payout Ratio (Dividend + Repurchases)/Net Income 1.50 1.78 0.99 1.00 1.00 1.00 1.00 1.00Dividend Coverage Ratio EPS/Dividends Per Share 2.17 1.87 1.21 1.59 1.52 1.49 1.47 1.45

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Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 32Average Time to Maturity (years): 8.50Expected Annual Number of Options Exercised: 3.81

Current Average Strike Price: 37.09$ Cost of Equity: 6.40%Current Stock Price: $61.20

2017E 2018E 2019E 2020E 2021EIncrease in Shares Outstanding: 3.81 3.81 3.81 3.81 3.81Average Strike Price: 37.09$ 37.09$ 37.09$ 37.09$ 37.09$ Increase in Common Stock Account: 141 141 141 141 141

Change in Treasury Stock 569 571 583 582 553Expected Price of Repurchased Shares: $61.20 65.12$ 69.28$ 73.72$ 78.44$ Number of Shares Repurchased: 9.3 8.8 8.4 7.9 7.1

Shares Outstanding (beginning of the year) 596.8 591.3 586.4 581.8 577.7 Plus: Shares Issued Through ESOP 3.8 3.8 3.8 3.8 3.8 Less: Shares Repurchased in Treasury 9.3 8.8 8.4 7.9 7.1 Shares Outstanding (end of the year) 591.3 586.4 581.8 577.7 574.4

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VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol GISCurrent Stock Price $61.20Risk Free Rate 2.50%Current Dividend Yield 3.20% From 10KAnnualized St. Dev. of Stock Returns 17.60% From 10K

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 32.4 37.09 8.50 18.67$ 605$

Total 32.4 37.09$ 8.50 18.67$ 605$

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