General Mills Reports Fiscal 2017 Third-Quarter Results

Minneapolis / MN. (gm) General Mills Inc. reported results for the third quarter ended February 26, 2017. «Our third-quarter results finished in line with our expectations and keep us on track to deliver the guidance we updated last month», said General Mills Chairman and Chief Executive Officer Ken Powell. «Our net sales declined due primarily to gaps in pricing and promotional activity in key U.S. businesses. Our cost savings efforts helped us expand our adjusted operating profit margin and drive growth in adjusted diluted EPS. Looking ahead, we are highly focused on improving our topline performance while continuing to expand our margins. We’ve added support in the fourth quarter to strengthen key business lines, and we’re pursuing global growth priorities that will further improve our sales trends beyond fiscal 2017».

General Mills is committed to pursuing its strategy of Consumer First and leveraging its five global platforms – cereal, snacks, yoghurt, convenient meals, and super-premium ice cream – along with its new global organizational structure to create market-leading growth. The company believes that generating a balance of topline growth and margin expansion, while maintaining disciplined focus on cash conversion and cash returns, is critical to delivering top-tier shareholder returns.

Third Quarter Results Summary

  • Reported net sales declined 5 percent to 3.79 billion USD. Organic net sales also declined 5 percent, primarily reflecting volume reductions in the North America Retail segment partially offset by benefits from positive net price realization and mix.
  • Gross margin increased 60 basis points to 34.5 percent of net sales, reflecting benefits from cost-savings initiatives and favorable mark-to-market effects. Adjusted gross margin, which excludes certain items affecting comparability, increased 20 basis points to 35.0 percent, driven by cost-savings efforts more than offsetting the impact of volume deleverage and modest input cost inflation.
  • Operating profit totalled 542 million USD, down 7 percent from year-ago levels due to higher restructuring charges related to the recent global reorganization. Operating profit margin of 14.3 percent was down 30 basis points. Adjusted operating profit margin increased 100 basis points to 16.9 percent, reflecting higher gross margins, lower administrative expense, and an 8 percent reduction in media and advertising expense.
  • Total segment operating profit of 662 million USD was down 2 percent in constant currency.
  • Net earnings attributable to General Mills totalled 358 million USD. Diluted EPS of 0.61 USD increased 3 percent, driven by a lower tax rate and 3 percent fewer average diluted shares outstanding.
  • Adjusted diluted EPS, which excludes certain items affecting comparability of results, totalled 0.72 USD in the third quarter, up 11 percent from the prior year. Constant-currency adjusted diluted EPS increased 8 percent.

Nine Month Results Summary

  • Reported net sales declined 7 percent to 11.81 billion USD and organic net sales declined 5 percent.
  • Gross margin increased 70 basis points to 35.9 percent of net sales. Adjusted gross margin increased 40 basis points to 36.4 percent.
  • Operating profit totalled 1.96 billion USD, down 10 percent from the prior year. Operating profit margin of 16.6 percent was down 60 basis points. Adjusted operating profit margin increased 110 basis points to 18.6 percent.
  • Total segment operating profit of 2.28 billion USD was down 2 percent in constant currency.
  • Net earnings attributable to General Mills totalled 1.25 billion USD. Diluted EPS were 2.08 USD, down 3 percent from a year ago.
  • Adjusted diluted EPS increased 4 percent to 2.35 USD. Constant-currency adjusted diluted EPS were also up 4 percent.

Operating Segment Results

In the third quarter of fiscal 2017, General Mills announced a new global organization structure to streamline its leadership, enhance global scale, and drive improved operational agility to maximize its growth capabilities. As a result of this global reorganization, beginning in the third quarter of fiscal 2017, the company is reporting results for its four operating segments as follows: North America Retail; Convenience Stores + Foodservice; Europe + Australia; and Asia + Latin America. Net sales by segment and segment operating profit amounts have been restated to reflect the new operating segments.

Components of Fiscal 2017 Reported Net Sales Growth

Third Quarter Volume Price/Mix Foreign Exchange Reported Net Sales
North America Retail (9) pts 2 pts (7)%
Convenience Stores + Foodservice 1 pt (2) pts (1)%
Europe + Australia 1 pt 1 pt (5) pts (3)%
Asia + Latin America (3) pts 3 pts Flat
Total (6) pts 1 pt (5)%
Nine Months
North America Retail (12) pts 4 pts (8)%
Convenience Stores + Foodservice (4) pts (4)%
Europe + Australia (3) pts 1 pt (5) pts (7)%
Asia + Latin America (1) pt (1)%
Total (8) pts 2 pts (1) pt (7)%

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Components of Fiscal 2017 Organic Net Sales Growth

Third Quarter Organic Volume Organic Price/Mix Organic Net Sales Foreign Exchange Acquisitions + Divestitures Reported Net Sales
North America Retail (10) pts 2 pts (8)% 1 pt (7)%
Convenience Stores + Foodservice 1 pt (2) pts (1)% (1)%
Europe + Australia 1 pt 1 pt 2% (5) pts (3)%
Asia + Latin America (3) pts 1 pt (2)% 3 pts (1) pt Flat
Total (7) pts 2 pts (5)% (5)%
 .
Nine Months
North America Retail (9) pts 3 pts (6)% (2) pts (8)%
Convenience Stores + Foodservice (4) pts (4)% (4)%
Europe + Australia (3) pts 1 pt (2)% (5) pts (7)%
Asia + Latin America (4) pts 5 pts 1% (1) pt (1) pt (1)%
Total (7) pts 2 pts (5)% (1) pt (1) pt (7)%

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Fiscal 2017 Segment Operating Profit Growth

Third Quarter Change as Reported Change in Constant Currency
North America Retail (7)% (7)%
Convenience Stores + Foodservice 3% 3%
Europe + Australia 25% 39%
Asia + Latin America 302% 316%
Total (2)% (2)%
Nine Months
North America Retail (5)% (5)%
Convenience Stores + Foodservice 8% 8%
Europe + Australia (12)% (3)%
Asia + Latin America 45% 48%
Total (3)% (2)%

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North America Retail Segment

Third-quarter net sales for General Mills’ North America Retail segment totalled 2.50 billion USD, down 7 percent from the prior year, driven primarily by double-digit declines in the U.S. Meals + Baking and U.S. Yogurt operating units. Organic net sales declined 8 percent. Segment operating profit of 517 million USD was down 7 percent due to lower volumes partially offset by benefits from cost savings initiatives.

Through nine months, North America Retail segment net sales were down 8 percent to 7.80 billion USD, with declines in the U.S. Meals + Baking, U.S. Yogurt, U.S. Cereal, and Canada operating units. Organic net sales declined 6 percent. Segment operating profit totalled 1.80 billion USD, down 5 percent from a year ago due to lower volumes, currency-driven inflation on products imported into Canada, and the impact of the Green Giant divestiture in fiscal 2016, partially offset by benefits from cost savings initiatives.

Convenience Stores + Foodservice Segment

Third-quarter net sales for General Mills’ Convenience Stores + Foodservice segment were down 1 percent to 448 million USD, with declines on certain frozen dough products partially offset by growth for the Focus 6 platforms, including cereal, biscuits, and yogurt. Organic net sales were also down 1 percent. Segment operating profit increased 3 percent to 94 million USD in the quarter, reflecting benefits from cost savings initiatives and lower input costs.

Through nine months, Convenience Stores + Foodservice segment net sales declined 4 percent to 1.38 billion USD, primarily driven by market index pricing on bakery flour, partially offset by growth for the Focus 6 platforms, including cereal, yogurt, and biscuits. Organic net sales also declined 4 percent. Segment operating profit of 295 million USD was up 8 percent from the prior year due to benefits from cost savings initiatives, lower input costs, and higher grain merchandising earnings.

Europe + Australia Segment

Third-quarter net sales for General Mills’ Europe + Australia segment totalled 424 million USD, down 3 percent from the prior year driven by unfavorable foreign currency exchange offsetting growth in Häagen-Dazs ice cream, Old El Paso Mexican products, and Nature Valley snacks. Organic net sales increased 2 percent. Segment operating profit of 42 million USD increased 25 percent as reported and 39 percent in constant currency, reflecting favorable mix and benefits from cost savings initiatives, partially offset by input cost inflation.

Through nine months, Europe + Australia segment net sales declined 7 percent to 1.34 billion USD, reflecting unfavorable foreign currency exchange and declines on Yoplait yogurt, partially offset by growth in Häagen-Dazs ice cream, Old El Paso Mexican products, and Nature Valley snacks. Organic net sales declined 2 percent. Segment operating profit of 127 million USD was down 12 percent due to unfavorable foreign currency exchange and input cost inflation, including currency-driven inflation on products imported into the U.K., partially offset by benefits from cost savings initiatives. On a constant-currency basis, segment operating profit declined 3 percent.

Asia + Latin America Segment

Third-quarter net sales for General Mills’ Asia + Latin America segment totalled 421 million USD, essentially matching year-ago results. Favorable foreign currency exchange and growth in Häagen-Dazs ice cream were offset by the restructuring of the snacks business in China, the net impact of divestitures and acquisitions in fiscal 2016, and declines in Latin America driven by macro-economic challenges. Organic net sales declined 2 percent. Segment operating profit increased to 10 million USD from 2.5 million USD a year ago, reflecting benefits from currency-driven deflation on raw materials imported into certain markets, as well as the impact of divestitures in fiscal 2016.

Through nine months, Asia + Latin America segment net sales declined 1 percent to 1.29 billion USD, due to unfavorable foreign currency exchange and the net impact of divestitures and acquisitions in fiscal 2016. Organic net sales increased 1 percent. Segment operating profit totalled 61 million USD, up 45 percent as reported and up 48 percent in constant currency.

Joint Venture Summary

Combined after-tax earnings from the Cereal Partners Worldwide (CPW) and Häagen-Dazs Japan (HDJ) joint ventures totalled 11 million USD in the third quarter, down 32 percent due primarily to an asset write-off for CPW and lower volume for HDJ. On a constant-currency basis, after-tax earnings from joint ventures declined 35 percent. Third-quarter net sales for CPW grew 4 percent in constant currency, and constant-currency net sales for HDJ declined 5 percent. Through the first nine months of 2017, after-tax joint-venture earnings totalled 65 million USD, flat to last year as reported and down 3 percent in constant currency.

Other Income Statement Items

Unallocated corporate items totalled 42 million USD net expense in the third quarter of fiscal 2017, compared to 78 million USD net expense in 2016. Excluding mark-to-market valuation effects and other items affecting comparability, unallocated corporate items totalled 22 million USD net expense in this year’s third quarter compared to 44 million USD net expense a year ago.

Restructuring, impairment, and other exit costs totalled 78 million USD in the quarter compared to 17 million USD a year ago. An additional 28 million USD of restructuring and project-related charges were recorded in cost of sales during the quarter compared to 27 million USD a year ago.

Net interest expense totalled 76 million USD in this year’s third quarter, compared to 77 million USD a year ago. The effective tax rate was 23.0 percent in the third quarter, compared to 31.0 percent last year. Excluding items affecting comparability, the adjusted effective tax rate was 24.7 percent compared to 30.8 percent a year ago.

Cash Flow Generation and Cash Returns

Cash provided by operating activities totalled 1.56 billion USD through nine months, down 16 percent from the prior year due to changes in trade and advertising accruals driven by reduced spending and changes in income taxes payable related to the North American Green Giant divestiture in fiscal 2016. Capital investments through the first nine months totalled 475 million USD. Dividends paid year-to-date increased 8 percent to 856 million USD. During the first nine months of 2017, General Mills repurchased 25.4 million shares of common stock for a total of 1.65 billion USD. Average diluted shares outstanding through nine months declined 2 percent to 601 million.

Outlook

General Mills reaffirmed its key full-year fiscal 2017 targets:

  • Organic net sales are expected to decline approximately 4 percent.
  • Constant-currency total segment operating profit growth is expected to be in a range of down 1 percent to up 1 percent.
  • Adjusted operating profit margin is targeted at 18 percent of net sales or higher, which translates to at least 120 basis points of expansion versus year-ago levels.
  • Constant-currency adjusted diluted EPS is expected to increase 5 to 7 percent from the base of 2.92 USD earned in fiscal 2016. The company estimates currency translation will have an immaterial impact on full-year fiscal 2017 adjusted diluted EPS.
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